**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





T **ANNUAL REPORT PURSUANT TO SECTION 13**


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


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2006**





**Commission
      File No. 0-17973**







**C2
      GLOBAL TECHNOLOGIES INC.**


(Exact
      Name of Registrant as Specified in Its Charter)





**Florida**
            **59-2291344**(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 Act: **None.**





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





Indicate
      by check mark if 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 Rule 12b-2 of
      the
      Exchange Act).




Large
      Accelerated Filer £   Accelerated Filer £    Non-Accelerated
      Filer R





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 $1.50 per share on June 30, 2006, as reported by the OTC -
      Bulletin Board, was approximately $2,580,000.





As
      of
      March 1, 2007, there were 23,094,850 shares of Common Stock, $0.01 par value,
      outstanding.








**TABLE
      OF CONTENTS**




PAGEPART
                IItem
                1.
            Business.
            3Item
                1A.
            Risk
                Factors
            9Item
                1B.
            Unresolved
                Staff Comments
            12Item
                2.
            Properties.
            12Item
                3.
            Legal
                Proceedings.
            12Item
                4.
            Submission
                of Matters to a Vote of Security Holders.
            13PART
                IIItem
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities.
            14Item
                6.
            Selected
                Financial Data.
            17Item
                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,
                Executive Officers and Corporate Governance.
            30Item
                11.
            Executive
                Compensation.
            36Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters.
            40Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence.
            41Item
                14.
            Principal
                Accountant Fees and Services.
            44PART
                IVItem
                15.
            Exhibits
                and Financial Statement Schedules.
            46





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. In
      August
      2005, the Company changed its name 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. In the
      second quarter of 2006, the Company opened an office in Texas.





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, l icensing
      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. In this regard, in
      the
      third quarter of 2005, the
      Company retained
      legal counsel with
      expertise in the enforcement of intellectual property rights ,
      and on
      June 15, 2006 C2 Communications Technologies Inc., a wholly-owned subsidiary
      of
      the Company, filed a patent infringement lawsuit against AT&T, Inc., Verizon
      Communications, Inc., Qwest Communications International, Inc., Bellsouth
      Corporation, Sprint Nextel Corporation, Global Crossing Limited, and Level
      3
      Communications, Inc. The complaint was filed in the Marshall Division of the
      United States District Court for the Eastern District of Texas, and alleges
      that
      these companies’ VoIP services and systems infringe the Company’s U.S. Patent
      No. 6,243,373, entitled *“Method
      and Apparatus for Implementing a Computer Network/Internet Telephone
      System”.* The
      complaint seeks an injunction, monetary damages and costs .





On
      December 30, 2006, the Company issued 3,847,475 shares of its common stock
      at
      $0.88 per share to Counsel LLC, an indirectly wholly-owned subsidiary of Counsel
      Corporation (together with its subsidiaries “Counsel”), the Company’s majority
      shareholder. The shares were issued in exchange for Counsel’s conversion of
      $3,386 of debt owing by C2 to Counsel. On the same date, Counsel forgave the
      balance of the debt then owed by C2, which had been scheduled to mature on
      October 31, 2007. The aggregate amount of debt forgiveness to C2 was $80,196,
      including accrued and unpaid interest to that date. As a result of these
      transactions, Counsel’s percentage ownership of C2’s outstanding common stock
      increased from approximately 91% to approximately 92%.





On
      January 10, 2007, the Company and a third party lender holding the convertible
      note payable by the Company (the “Note”), agreed to settle all outstanding
      obligations owed by the Company. In connection with this agreement, the third
      party lender converted a portion of the Note into 10,000 shares, and the Company
      paid $1,388 to discharge the remaining balance of the debt, which had originally
      been scheduled to mature on October 14, 2007. The $1,388 was funded by Counsel
      and added to the related party debt owing to Counsel.




The
      following table presents information about the net
      income, loss and assets of the
      Company as of and for the three years ended December 31, 200 6. 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 (“Report”), have been restated to include the
      Telecommunications operations as discontinued operations, as required by
      accounting principles generally accepted in the United States
      (“GAAP”).  
 3


**For
                the Year Ended December 31,****2006**
            
            **2005**
            
            **2004**Revenues
                from external customers
            
            $
            —
            
            $
            —
            
            $
            540Other
                income, net
            
            
            155
            
            
            1,084
            
            
            1,487Interest
                expense - related party
            
            
            10,390
            
            
            12,154
            
            
            8,488Interest
                expense - third party
            
            
            510
            
            
            658
            
            
            65(Loss)
                from continuing operations
            
            
            (12,046
            )
            
            (14,907
            )
            
            (11,067
            )Income
                (loss)from discontinued operations
            
            
            4,370
            
            
            (3,582
            )
            
            (11,716
            )Totalassets
            
            
            1,386
            
            
            3,490
            
            
            24,009




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, 2004, 2005 and 2006 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, 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.





**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 and hardware, and leased
      telecommunications lines. The goal was to create a platform with the quality
      and
      reliability necessary for voice transmission.





In
      1997,
      we began 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 U.S.
      p atent
      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., 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 property rights and patents.





In
      2003,
      we added to our VoIP p atent 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 related
      international patents
      and patent
      applications, form our international VoIP Patent Portfolio that covers the
      basic
      process and technology that enable 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.




4





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, the vendor is
      entitled to receive 35% of
      the net earnings from our VoIP Patent Portfolio.





Revenue
      and contributions from Technologies operations up to December 31, 2004 were
      based on the sales and deployment of our VoIP solutions, which we ceased
      directly marketing in 2005, rather than on the receipt of licensing fees and
      royalties. 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, as discussed above
      under “Overview and Recent Developments”.





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





**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. The Canadian patent was subsequently
      granted on October 10, 2006. In the third quarter of 2006, the Company was
      awarded a patent for the VoIP Patent from Hong Kong, and in the fourth quarter
      of 2006, the European Patent Office advised that it intends to grant C2 a
      European patent that is equivalent to the VoIP 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 (** **Notice
      of Allowance received** **)
      -** 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 tele conferencing
      problems:




**Delay
      Synchronization in Compressed Audio Systems** - This
      invention eliminates popping and clicking when switching between parties 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 .


5




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
            
            Issued:
                June 5, 2001
              Expires:
                November 1, 2015Australia
                No. 716096
            
            Issued:
                June 1, 2000
                Expires:
                  October 29, 2016People’s
                Republic of China
              No.ZL96199457.6
            
            Issued:
                December 14, 2005
                Expires:
                  October 29, 2016Canada
                No. 2,238,867
            
            Issued:
                October 18, 2005
                Expires:
                  October 29, 2016Hong
                Kong No. HK1018372
            
            Issued:
                August 11, 2006
                Expires:
                  October 29, 2016Europe
            
            Notice
                of intent to grant patent issued October 27, 2006Internet
                Transmission System(“C2
                Patent”)
            
            U.S.
                No. 6,438,124
            
            Issued:
                August 20, 2002
              Expires:
                  July 22, 2018People’s
                Republic of China
              No.
                ZL97192954.8
            
            Issued:
                  May 21, 2004Expires:
                February 5, 2017Canada
                No. 2,245,815
            
            Issued:
                  October 10, 2006Expires:
                February 5, 2017Private
                IP Communication Network Architecture
            
            Pending
            
            Notice
                of Allowance received**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




**Disposition
      of the** **Telecommunication** **s
      Busines** **s**




Commencing
      in 2001, the Company entered the Telecommunications business, acquiring certain
      assets from 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. ( name
      changed to WXC Corp. (“WXCC”) in October 2005) .




The
      Company entered into an Asset Purchase Agreement, dated as of May 19, 2005,
      to
      sell substantially all of the assets and to transfer certain liabilities of WX CC
      to Acceris
      Management and Acquisition LLC (“ AMA ”) ,
      a n
      arm’s
      length Minnesota limited liability company and wholly-owned subsidiary of North Central
      Equity LLC. 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,
      t h e transaction was completed on September 30, 2005.




6




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 Report, have been reported in discontinued
      operations.




On
      September 30, 2005, i n
      conjunction with the closing of the
      asset sale transaction and the
      expir ation 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. At December
      31, 2005, AMA had
      obtained authorization to provide telecommunications services in all states
      except Hawaii. The
      authorization to provide services in Hawaii was subsequently obtained on April
      5, 2006. For the period October 1, 2005 to March 31, 2006, the Company was
      charged a management fee by AMA that was equal to the revenue earned from
      providing these services. Both the revenue and the management fee were recorded
      in discontinued operations. The above is a summary description of the MSA2
      and
      by its nature is incomplete.




On
      February 28, 2006, the Company entered into a stock purchase agreement with
      a
      third party, which agreed to acquire all the shares of WXCC from the Company,
      subject to the Company’s third party lender’s agreement to release its security
      interest in the shares and to certain other closing requirements. As a result
      of
      all closing requirements being completed and the third party lender’s consenting
      to the release of its security interest on March 28, 2006, the Company was
      relieved of $3,763 of obligations that had previously been classified as
      liabilities of discontinued operations. The Company recognized a gain of $3,645
      on the sale, net of closing costs of $118, which is included in income from
      discontinued operations in the Company’s consolidated statement of operations
      for the year ended December 31, 2006.




On
      June
      26, 2006, the Company entered into a stock purchase agreement with the same
      third party involved in the purchase of the WXCC shares, which agreed to acquire
      all the shares of ILC from the Company, subject to certain closing requirements.
      As a result of all closing requirements being completed as of June 30, 2006,
      the
      Company was relieved of $711 of obligations that had previously been classified
      as liabilities of discontinued operations. The Company recognized a gain of
      $665
      on the sale, net of closing costs of $46, which is included in income from
      discontinued operations in the consolidated statement of operations for the
      year
      ended December 31, 2006.





**Employees**





As
      of
      December 31, 200 6, C2 had
      five
      employee s, all
      of who m are also
      employees of Counsel .
      The salaries of four
      of the employees are paid
      by Counsel . Under
      the terms of a management services agreement (the “Agreement”), as described in
      Item 11 of this Report, the Counsel employees provide management and
      administrative services to C2 and the associated costs are allocated to
      C2. The CEO
      has a separate employment arrangement with C2, as discussed in Item 11. The
      Company expects
      to hire additional employees as it pursues its patent licensing
      strategy ,
      although there are no specific plans at this time.





**Industry**




Historically,
      the communications services industry transmitted voice and data over separate
      networks using different technologies. Traditional carriers 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 driven 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, as amended, and·
            
            growing
                deregulation of communications services markets in the United States
                and
                in other countries around the world





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.





7





**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, and 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.




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.


8





**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 made reference to the going
      concern risk.**




In
      each
      of their audit reports for the years ended December 31, 2004, 2005 and 2006,
      our
      independent registered public accounting firm has made reference to substantial
      doubt regarding 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 and
      understood them, and have obtained relevant advice from your financial and
      other
      advisors.





**We
      are dependent upon our majority shareholder to fund all of our capital
      investment, working capital or other operational cash
      requirements.**




At
      December 31, 2006 Counsel owned 92.55% of the equity of the Company. Counsel
      had
      previously committed, by means of a Keep Well agreement (the “Keep Well”) to
      fund the operating cash requirements of the Company through December 31, 2006.
      Although Counsel has indicated that it will continue to fund our minimal cash
      requirements until at least October 31, 2007, the maturity date of the
      outstanding loan payable to Counsel, it has not formally committed to funding
      our operations. We may be unable to meet our obligations as they come due should
      Counsel be unable or unwilling to provide such financial support.  See the
      section entitled “Certain Relationships and Related Transactions and Director
      Independence” in Item 13 of this Report.





**We
      have a very limited ability to obtain third party financing to fund
      operations**




Management
      does not anticipate the Company achieving breakeven cash flows during 2007,
      and,
      as noted above, Counsel has not formally committed to funding our operating
      cash
      requirements. Accordingly, we may need to obtain third party financing in order
      to continue operations. As of the date of this Report, management has not
      attempted to arrange additional financing, and there is no assurance that
      management will be able to obtain financing on favorable financial terms.
      Management, with the assistance of legal counsel, is looking to realize on
      the
      value of our intellectual property in the form of licensing or royalty
      payments from third parties, and thereby reduce the need for financing. There
      is
      no certainty that the Company’s strategy will be successful.





**If
      we were to default on any of our loans, the secured lenders could foreclose
      on
      our assets.**




Our
      assets serve as collateral for our loans. In the event that we defaulted on
      these loans, and the lenders foreclosed on our assets, we would be unable to
      continue our operations as they are presently conducted, if at all. At December
      31, 2006, a third party lender held a $1,471 secured convertible note (the
      “Note”) which was collateralized by a blanket security interest in our assets.
      The Note was scheduled to mature in October 2007, but was repaid in full in
      January 2007. At December 31, 2006, our assets also secured all debt to Counsel,
      and continue to do so **.** While
      the Note was outstanding, all Counsel debt was subordinated in favor of the
      Note. Our aggregate total debt to Counsel at December 31, 2006 was $6, following
      Counsel’s forgiveness of its outstanding debt on December 30, 2006, as discussed
      in Note 9 of the consolidated financial statements provided in Item 15 of this
      Report. We expect this amount to increase during 2007 as Counsel funds our
      ongoing cash requirements, such as the funding received for the repayment of
      the
      Note.





**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
      Report.





**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.




9





**We
      may fail to either adequately protect our proprietary technology and processes,
      or enforce 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 realize value from our
      patents, or to 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 our executive
      officers are employees of Counsel.**




Counsel
      owns approximately 92.55% 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 has four members, three of whom are independent of Counsel.
      The Board establishes corporate policies and has the sole authority to nominate
      and elect officers to carry out those policies. Our Chief Executive Officer,
      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. 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.





**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.
      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.





**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. 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
      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.




10




Prior
      to
      the January 2007 repayment of the Note, discussed above, the Note was
      convertible into approximately 1,671,000 shares of common stock of the Company.
      The third party lender continues to hold a Warrant to acquire 1,000,000 shares
      of 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.




Since
      the
      second quarter of 2004, the last time that the Company reported control
      deficiencies, 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. 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, there
      can
      be no assurance that management will continue 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 our 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.





**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.





**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
      recur. In addition, further restrictions of, reductions in, or expiry of net
      operating loss and net capital loss carryforwards may occur through future
      merger, acquisition and/or disposition transactions or failure to continue
      a
      significant level of business activities. 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.




11





**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, 2006, 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
      the third party lender remained outstanding, we could 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, in connection with its intellectual property licensing business, rents
      approximately 200 square feet of office space in Marshall, Texas on a month
      to
      month basis for a nominal amount . Should
      the Company be required to vacate these premises, ample alternative space is
      available. All accounting
      and reporting functions 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.





**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.





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. In January 2007, a trial date of September
      7,
      2007 was set for both actions.





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 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.




12





On
      June
      15, 2006, C2 Communications Technologies Inc., a wholly-owned subsidiary of
      the
      Company, filed a patent infringement lawsuit against AT&T, Inc., Verizon
      Communications, Inc., Qwest Communications International, Inc., Bellsouth
      Corporation, Sprint Nextel Corporation, Global Crossing Limited, and Level
      3
      Communications, Inc. The complaint was filed in the Marshall Division of the
      United States District Court for the Eastern District of Texas and alleges
      that
      the defendants’ services and systems utilizing VoIP infringe C2’s U.S. Patent
      No. 6,243,373, entitled *“Method
      and Apparatus for Implementing a Computer Network/Internet Telephone
      System”* .
      The
      complaint seeks an injunction, monetary damages, and costs. There is no
      assurance that the Company will be successful in this litigation.





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


13





**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, as
      quoted on the OTCBB, for the calendar quarters from January 1, 2005 through
      December 31, 2006, based on inter-dealer quotations, without retail markup,
      markdown, commissions or adjustments. These prices may not represent actual
      transactions:





**Quarter
                Ended**
            
            **High**
            
            **Low**March
                31, 2005
            
            $
            1.01
            
            $
            0.52June
                30, 2005
            
            
            0.60
            
            
            0.35September
                30, 2005
            
            
            0.51
            
            
            0.26December
                31, 2005
            
            
            1.50
            
            
            0.22March
                31, 2006
            
            $
            0.79
            
            $
            0.40June
                30, 2006
            
            
            1.98
            
            
            0.25September
                30, 2006
            
            
            1.60
            
            
            0.51December
                31, 2006
            
            
            0.60
            
            
            0.35





On
      March
      1, 2007, the closing price for a share of the Company’s common stock was
      $1.01.





**Holders**





As
      of
      March 1, 2007, the Company had approximately 946 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, 200 6,
      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 the third party
      lender remained outstanding, we could not pay any dividends on our common stock.
      The Note was repaid in full in January 2007. Additionally, under the Florida
      Act, we cannot pay dividends while we have negative stockholders’
equity.





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





The
      following table sets forth, as of December 31, 200 6,
      information with respect to equity compensation plans (including individual
      compensation arrangements) under which the Company’s securities are authorized
      for issuance.





During
      the twelve months ended December 31, 2006, 230,000 options were granted to
      employees, officers and directors under the 2003 Employee Stock Option and
      Appreciation Rights Plan. During the twelve months ended December 31, 2006,
      225,000 options were granted to the Company’s CEO under the terms of the 1997
      Recruitment Stock Option Plan. These options were issued with an exercise price
      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”).


14




**Plan
                Category (1)**
            
            **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
            
            
            568,250
            
            
            1.53
            
            
            1,431,7501997
                Recruitment Stock Option Plan
            
            
            239,611
            
            
            2.51
            
            
            130,3891995
                Directors Stock Option and Appreciation Rights Plan
            
            
            —
            
            
            —
            
            
            12,5001995
                Employee Stock Option and Appreciation Rights Plan
            
            
            —
            
            
            —
            
            
            20,000**Equity
                compensation plans not approved by security
                holders:**Issuance
                of non-qualified options to employees and outside
                consultants
            
            
            288,465
            
            
            69.06
            
            
            —Total
            
            
            1,096,326
            
            
            19.51
            
            
            1,594,639





(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.




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





None.





**Issuer
      Purchases of Equity Securities.**





We
      did
      not make any stock repurchases during the last quarter of 2006.





**Performance
      Graph.**





*The
      following Performance Graph and related information shall not be deemed
“soliciting material” or to be “filed” with the Securities and Exchange
      Commission, nor shall such information be incorporated by reference into any
      future filings under the Securities Act of 1933 or Securities Exchange Act
      of
      1934, each as amended, except to the extent that the Company specifically
      incorporates it by reference into such filing.*





The
      following graph compares our cumulative total stockholder return with that
      of
      the Russell 2000 index of small-capitalization companies, our former peer group
      (“Former Group”), and our current peer group ( “Current Group”). The graph
      assumes an initial investment of $100.00 made on December 31, 2001, and the
      reinvestment of dividends (where applicable). We have never paid a dividend
      on
      our common stock.





Following
      the change in our strategic direction in light of the disposition of our
      Telecommunications business in the third quarter of 2005, we reevaluated the
      composition of our Former Group, as previously utilized to assess our stock
      performance, and concluded that it was no longer appropriate. Accordingly,
      we
      constructed a new peer group (“Current Group”). The Current Group includes
      Acacia Technologies Group, Forgent Networks Inc., UTEK Corporation, Patriot
      Scientific Corporation and Network-1 Security Solutions Inc. We selected these
      companies for our Current Group because they are in the business of licensing
      intellectual property in a manner that is similar to our business model. The
      Former Group consists of UCN, Inc. (formerly Buyers United, Inc)., Trinsic,
      Inc.
      (formerly Z Tel Technologies, Inc.), US LEC Corp., Talk America Holdings, Inc.,
      IDT Corporation, and Primus Telecommunications Group, Inc.





15







16




**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.





**** **2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Statement
                of Operations Data :**Revenues:Technology
                licensing and development
            
            $
            —
            
            $
            —
            
            $
            540
            
            $
            2,164
            
            $
            2,837Operating
                costs and expenses:Selling,
                general, administrative and other
            
            
            1,281
            
            
            2,758
            
            
            4,079
            
            
            4,516
            
            
            4,281Research
                and development
            
            
            —
            
            
            389
            
            
            442
            
            
            —
            
            
            1,399Depreciation
                and amortization
            
            
            20
            
            
            32
            
            
            20
            
            
            —
            
            
            56Total
                operating costs and expenses
            
            
            1,301
            
            
            3,179
            
            
            4,541
            
            
            4,516
            
            
            5,736Operating
                loss
            
            
            (1,301
            )
            
            (3,179
            )
            
            (4,001
            )
            
            (2,352
            )
            
            (2,899
            )Other
                income (expense):Interest
                expense - related party
            
            
            (10,390
            )
            
            (12,154
            )
            
            (8,488
            )
            
            (10,175
            )
            
            (2,397
            )Interest
                expense - third party
            
            
            (510
            )
            
            (658
            )
            
            (65
            )
            
            (875
            )
            
            (2,540
            )Other
                income
            
            
            155
            
            
            1,084
            
            
            1,487
            
            
            1,138
            
            
            37Other
                income (expense), net
            
            
            (10,745
            )
            
            (11,728
            )
            
            (7,066
            )
            
            (9,912
            )
            
            (4,900
            )Loss
                from continuing operations
            
            
            (12,046
            )
            
            (14,907
            )
            
            (11,067
            )
            
            (12,264
            )
            
            (7,799
            )Income
                (loss) from discontinued operations
            
            
            4,370
            
            
            (3,582
            )
            
            (11,716
            )
            
            (19,164
            )
            
            (20,039
            )Net
                loss
            
            $
            (
                7,676
            )
            $
            (18,489
            )
            $
            (22,783
            )
            $
            (31,428
            )
            $
            (27,838
            )Basic
                and diluted weighted average shares outstanding
            
            
            19,258
            
            
            19,237
            
            
            19,256
            
            
            7,011
            
            
            5,828Net
                loss per common share - basic and diluted:Loss
                from continuing operations
            
            $
            (0.63
            )
            $
            (0.77
            )
            $
            (0.57
            )
            $
            (1.75
            )
            $
            (1.34
            )Income
                (loss) from discontinued operations
            
            
            0.23
            
            
            (0.19
            )
            
            (0.61
            )
            
            (2.73
            )
            
            (3.44
            )Net
                loss per common share
            
            $
            (0.40
            )
            $
            (0.96
            )
            $
            (1.18
            )
            $
            (4.48
            )
            $
            (4.78
            )**Balance
                Sheet Data:**Working
                capital deficit
            
            $
            (1,782
            )
            $
            (77,757
            )
            $
            (21,068
            )
            $
            (26,576
            )
            $
            (17,244
            )Intangible
                assets, net
            
            
            40
            
            
            60
            
            
            80
            
            
            100
            
            
            —Goodwill
            
            
            173
            
            
            173
            
            
            173
            
            
            173
            
            
            173Total
                assets
            
            
            1,386
            
            
            3,490
            
            
            24,009
            
            
            39,054
            
            
            41,446Total
                current liabilities
            
            
            1,855
            
            
            79,852
            
            
            36,150
            
            
            50,887
            
            
            40,852Total
                long-term obligations:Related
                party
            
            
            —
            
            
            —
            
            
            46,015
            
            
            28,717
            
            
            43,881Third
                party
            
            
            —
            
            
            1,580
            
            
            3,164
            
            
            —
            
            
            —Discontinued
                liabilities
            
            
            —
            
            
            —
            
            
            645
            
            
            2,403
            
            
            14,529Stockholders’
                deficit
            
            
            (469
            )
            
            (77,942
            )
            
            (61,965
            )
            
            (42,953
            )
            
            (57,816
            )




2003
      Reverse Stock Split





On
      November 26, 2003, C2 stockholders
      approved a 1-for-20 reverse stock split. Accordingly, the earnings per share
      for
      2002 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.


17





Adoption
      of Significant Accounting Pronouncements





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued a
      revision (“SFAS No. 123(R)”) to SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      SFAS
      No. 123(R) superseded Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. The Company was required to adopt SFAS No. 123(R)
      in
      the first quarter of 2006. SFAS No. 123(R) requires that all stock-based
      compensation, including options, be expensed at fair value, as of the grant
      date, over the vesting period. Companies are required to use an option pricing
      model (e.g.: Black-Scholes or Binomial) to determine compensation expense,
      consistent with the model previously used in the already required disclosures
      of
      SFAS No. 148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* .
      The
      effect of adopting SFAS No. 123(R) on the Company’s financial position,
      operations and cash flow is discussed in Note 17 of the consolidated
      financial statements included in Item 15 of this Report.





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* (“SFAS
      No. 154”). SFAS No. 154 superseded APB Opinion No. 20, *Accounting
      Changes* (“APB
      No.
      20”), and related Interpretations, and was 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 of an
      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. The Company’s adoption of SFAS No. 154 in 2006 has
      not had a material effect on its financial position, operations or cash
      flow.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
      109* (“FIN
      48”). FIN 48 is intended to reduce the diversity encountered in practice with
      regard to certain aspects of the recognition and measurement related to
      accounting for income taxes, and to clarify the accounting and disclosure for
      uncertainty in tax positions. FIN 48 introduces a new and more comprehensive
      model of accounting and reporting for a number of tax positions routinely taken
      by corporations when filing their tax returns. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The Company is evaluating the
      application of FIN 48 to its business, and currently believes that the adoption
      of FIN 48 will not have a material effect on its financial position, operations
      or cash flows.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value under GAAP, expands the required disclosures regarding
      fair
      value measurements, and applies to other accounting pronouncements that either
      require or permit fair value measurements. SFAS No. 157 is effective for fiscal
      years beginning after November 15, 2007, and for interim periods within those
      fiscal years, with early adoption encouraged. SFAS No. 157 is to be applied
      prospectively, with a limited form of retrospective application for several
      financial instruments. The Company plans to adopt SFAS No. 157 on January 1,
      2007, and currently believes that its adoption will not have a material effect
      on the Company’s financial position, operations or cash flows.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      No. 108”). SAB No. 108 provides guidance in considering the effects of prior
      year misstatements in the quantification of current year misstatements, for
      the
      purpose of determining whether the current year’s financial statements are
      materially misstated. SAB No. 108 is effective for fiscal years ending after
      November 15, 2006. The adoption of SAB No. 108 has not had a material impact
      on
      the Company’s financial position, operations or cash flows.





In
      December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, *Accounting
      for Registration Payment Arrangements* (“FSP
      EITF 00-19-2”). FSP EITF 00-19-2 clarifies that a registration payment
      arrangement and the financial instrument(s) relating to that arrangement should
      be separately measured and recognized in an entity’s financial statements,
      according to the appropriate GAAP for each, rather than treated as a unit.
      Specifically, FSP EITF 00-19-2 states that the financial instrument(s) should
      be
      recorded in the financial statements using appropriate GAAP without regard to
      contingent obligations in respect of a registration payment arrangement. FSP
      EITF 00-19-2 is effective immediately for registration payment arrangements
      and
      related financial instruments that are entered into or modified after December
      21, 2006. For registration payment arrangements and related financial
      instruments that were entered into prior to December 21, 2006, and that continue
      to be outstanding at the beginning of the period of adoption, transition is
      to
      be achieved by reporting a change in accounting principle through a
      cumulative-effect adjustment to the opening balance of retained earnings as
      of
      the first interim period for the fiscal year in which FSP EITF 00-19-2 is
      adopted. Early adoption of FSP EITF 00-19-2 is permitted for interim or annual
      periods for which financial statements or interim reports have not been issued.
      Retrospective application is not permitted. The Company has evaluated the
      requirements of FSP EITF 00-19-2 and determined that it is applicable to the
      warrant issued in conjunction with the Note issued to a third party lender
      in
      October 2004. The Company has chosen to adopt FSP EITF 00-19-2 in the fourth
      quarter of the year ending December 31, 2006. The impact of adopting FSP EITF
      00-19-2 on the Company’s financial position, operations and cash flow is
      detailed in Note 9 of the consolidated financial statements included in Item
      15
      of this Report.




18





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”.


19




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





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





This
      discussion and analysis should be read in conjunction with our Consolidated
      Financial Statements and Notes thereto included in Item 8 of this Report. Our
      accounting 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.





**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**





Please
      see Item 1, above, of this Report for an overview of the Company’s business and
      development. Please see Item 1A, above, for a discussion of the risk factors
      that may 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 $ 469 (200 5 -
      $ 77 ,9 42 )
      and
      negative working capital of $ 1 , 782 (200 5 -
      $ 77 , 757 )
      at
      December 31, 200 6 . The
      decrease in the working capital deficit is largely due to the elimination of
      the
      $72,022 related party debt that was owing to our majority stockholder, Counsel
      Corporation (collectively, with its subsidiaries, “Counsel”), at December 31,
      2005. At December 29, 2006, the balance of the related party debt had increased
      to $83,582. On December 30, 2006, as discussed in Note 9 of the consolidated
      financial statements included in Item 15 of this Report, Counsel converted
      $3,386 of the debt to common shares, and forgave the balance of $80,196. Another
      factor contributing to the decrease was the elimination of the $4,512 of
      liabilities of discontinued operations outstanding at December 31, 2005,
      primarily due to the disposition of the shares of two of the Company’s
      subsidiaries during the first and second quarters of 2006, as discussed in
      Note
      6 of the consolidated financial statements. The disposition of the shares of
      WXC
      Corp. (“WXCC”, formerly known as Acceris Communications Corp.) during the first
      quarter of 2006 reduced these liabilities by $3,763. The disposition of the
      shares of I-Link Communications Inc. (“ILC”) during the second quarter of 2006
      reduced these liabilities by $711. As well, during 2006, other liabilities
      were
      reduced by $1,224. The de crease
      in
      the working capital deficit was
      partially offset by the use
      of
      $1,506 of restricted cash to reduce third party debt . Both
      c ontinuing and
      discontinued operations in 200 6 were
      primarily financed through advances
      from Counsel.





The
      Company had gross third
      party debt of $ 1 , 471 at
      December 31, 200 6 ,
      a
      reduction from the $ 3 , 516 owed at
      December 31, 200 5 . At
      December 31, 2006 the third party debt consisted of a convertible note payable
      (the “Note”). At December 31, 2005, the balance of the Note was $3,235 and the
      remainder of the debt was a warrant to purchase common stock, which warrant
      had
      an estimated fair value of $281. The warrant was reclassified to stockholders’
equity in the fourth quarter of 2006 when the Company adopted FSP EITF 00-19-2,
      as discussed in Note 9. Throughout 2005 and 2006, the outstanding balance of
      the
      Note was reduced each month via payments of $147. The Note was scheduled to
      mature in October 2007, but was repaid in full in January 2007, as discussed
      in
      Note 18 of the consolidated financial statements. Prior to the repayment, the
      Note was secured by all assets of the Company and guaranteed by Counsel through
      its maturity in October 2007.





Gross
      r elated
      party debt owing to Counsel is
      $6 at
      December 31, 200 6 compared
      to $ 73 , 646 at
      December 31, 200 5,
      due to
      Counsel’s debt forgiveness as noted above . The
      Company expects this amount to increase during 2007 as Counsel funds its ongoing
      cash requirements, such as the funding received for the repayment of the Note.  Interest
      on the related party debt is capitalized, at the end of each quarter, and added
      to the principal amount outstanding. Until December 31, 2006, t his
      debt wa s
      supp or ted
      by
      Counsel’s Keep Well agreement with C2, which require d Counsel
      to fund, through intercompany advances or equity contributions, all capital
      investment, working capital or other operational cash requirements of
      C2 .  The Keep
      Well ha s
      not been
      formally extended
      beyond December
      31, 2006, but Counsel has indicated that it will fund the Company’s minimal cash
      requirements until at least October 31, 2007.




20





Counsel,
      in addition to guaranteeing the Note, also agreed to subordinate all of its
      debt
      owed by the Company, and to subrogate all of its related security interests,
      in
      favor of the third party lender. Counsel further agreed to pledge all of its
      shares owned in C2 as security for its guarantee. In accordance with the
      agreement with the third party lender, C2 could not repay amounts owing to
      Counsel while the Note remained outstanding. Additionally, so long as the Note
      remained outstanding, Counsel could not, without the written consent of the
      third party lender, take any enforcement action to collect its loans owing
      by
      C2. Effective with the January 2007 repayment of the Note, Counsel’s
      subordination agreement was terminated.





The
      Company has not realized revenues from continuing operations since 2004, and
      t here
      is
      significant doubt about the Company’s ability to obtain additional financing to
      fund
      its operations without the support of Counsel .
      Additionally, management
      believes that the
      Company does not have, at this
      time ,  the 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
      Note 1
      to the consolidated financial statements ,
      in
      order to continue as a going concern. Although
      the Company commenced litigation in June 2006 in order to enforce its
      intellectual property rights and to realize this value, t here
      is
      no certainty that the Company ’s  litigation will
      be
      successful.





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





**December
                31, 2006**
            
            **December
                31, 2005****Maturity
                Date**
            
            **Gross****debt**
            
            **Discounts**
            
            **Reported****debt**
            
            **Gross****debt**
            
            **Discounts**
            
            **Reported****debt**Convertible
                note payable1
            
            
            October
                14, 2007
            
            $
            1,471
            
            $
            (172
            )
            $
            1,299
            
            $
            3,235
            
            $
            (392
            )
            $
            2,843Subordinated
                note(s)payable to a related party2
            
            
            October
                31, 2007
            
            
            6
            
            
            —
            
            
            6
            
            
            73,646
            
            
            (1,624
            )
            
            72,022Common
                stock warrant
            
            
            October
                13, 2009
            
            
            —
            
            
            —
            
            
            —
            
            
            281
            
            
            —
            
            
            281Total
                outstanding debt
            
            
            
            
            $
            1,477
            
            $
            (172
            )
            $
            1,305
            
            $
            77,162
            
            $
            (2,016
            )
            $
            75,146





1  This
      Note
      was scheduled to mature in October 2007, but was repaid in full in January
      2007,
      as discussed in Note 18. Prior to the repayment, the Note was secured by all
      assets of the Company and guaranteed by Counsel through its maturity in October
      2007. The repayment was funded by Counsel and added to the subordinated note
      owing to Counsel.





2 The
      Company expects the balance of this note to increase in 2007 as Counsel funds
      its ongoing cash requirements, such as the funding received for the January
      2007
      repayment of the Note.





*Ownership
      Structure and Capital Resources*





·
            The
                Company is approximately 92.55% owned by Counsel. The remaining 7.45%
                is
                owned by public stockholders.





·
            Since
                becoming controlling stockholder in 2001, Counsel has invested over
                $100,000
                inC2to
                fund the development ofC2’stechnology
                and itsTelecommunications
                business, and at December 30, 2006 C2 owed $83,582 to Counsel, including
                accrued and unpaid interest. As discussed above and in Note 9 of
                the
                consolidated financial statements included in Item 15 of this Report,
                on
                December 30, 2006 Counsel converted $3,386 of this debt into 3,847,475
                common shares of C2, and forgave the balance of $80,196. Counsel
                advanced
                a further $6 on December 31, 2006.The
                disposition ofthe
                Telecommunications businessin
                the third quarter of 2005 significantly reduced both the complexity
                and
                the funding requirements of the Company’s operations,
                andCounsel’s
                investment in 2006was
                significantly less thanits investment in prior years.As
                noted above, although Counsel does not have a formal commitment in
                place
                regarding its ongoing financial support of the Company, Counsel has
                indicated that it will fund the Company’s minimal cash requirements until
                at least October 31, 2007.




21




·
            The
                Company had aggregate gross debt of $1,477at
                December 31,2006.
                The Company expects this amount to increase during 2007 as Counsel
                funds
                its ongoing cash requirements




*Cash
      Position*





Cash,
      cash equivalents and restricted cash as of December 31, 200 6  were
      $3  compared
      to $1,833 in 200 5  and
      $44
      in 200 4.





*Cash
      utilized in operating activities*





Our
      working capital deficit decreased to $1,782 at December 31, 2006 from $77,757
      as
      of December 31, 2005. The de crease
      in
      the working capital deficit during
      2006 is primarily due
      to
      the elimination of the $72,022 related party debt that was owing to Counsel at
      December 31, 2005. At December 29, 2006, the balance of the debt owing to
      Counsel had increased to $83,582. As discussed above and in Note 9 of the
      consolidated financial statements included in Item 15 of this Report, on
      December 30, 2006, Counsel converted $3,386 of the debt to common shares, and
      forgave the balance of $80,196. Another factor contributing to the decrease
      was
      the elimination of $4,512 of liabilities of discontinued operations outstanding
      at December 31, 2005, primarily due to the disposition of the shares of two
      of
      the Company’s subsidiaries during the first and second quarters of 2006, as
      discussed above and in Note 6 of the consolidated financial
      statements . As well,
      during 2006, other liabilities were reduced by $1,224. The decrease in the
      working capital deficit was partially offset by the use of $1,506 of restricted
      cash to reduce third party debt. Although Counsel has indicated that it will
      fund the Company’s minimal cash requirements until at least October 31, 2007,
      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 2006 was
      $2,324 (2005 - $3,350; 2004 - $2,624). The net loss from continuing operations
      decreased $2,861 to $12,046 in 2006 compared to $14,907 in 2005. In 2006, income
      from discontinued operations was $4,370, as compared to a loss of $3,582 in
      2005, for a net increase of $7,952. Significant changes in non-cash items
      included a $3,112 decrease in the amortization of debt discounts, from $6,258
      in
      2005 to $3,146 in 2006, and an increase of $1,362 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 or 2006.





*Cash
      provided by investing activities*





Net
      cash
      provided by investing activities (excluding discontinued operations) during
      2006
      was $0 (2005 -$0, 2004 - $3,581). 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. There were no similar transactions in 2005 and
      2006.





*Cash
      provided by financing activities*





Financing
      activities (excluding discontinued operations) provided net cash of $2,142
      (2005
      - $12,092; 2004 - $17,162). The decrease is due to less financing from Counsel,
      the result of the reduced complexity in the Company’s operations following the
      sale of the Telecommunications business in the third quarter of 2005. The
      decrease in 2005 as compared to 2004 is largely due to a reduction in
      third-party financing, and the segregation of $1,506 of cash to provide for
      future payments to the Company’s third party lender. In 2004, the Company
      received net proceeds of $4,773 from the third party lender. There were no
      similar transactions in 2005.




*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, 200 6:




**Payment
                  due by period****Contractual
                  obligations:**
              
              **Total**
              
              **Less
                  than 1****year**
              
              **1-3****years**
              
              **3-5****years**
              
              **More
                  than 5 y****ears**Subordinated
                  note payable to a related party1
              
              $
              7
              
              $
              7
              
              $
              —
              
              $
              —
              
              $
              —Convertible
                  note payable to a third party1
              
              
              1,577
              
              
              1,577
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              1,584
              
              $
              1,584
              
              $
              —
              
              $
              —
              
              $
              —
 
 1 The
        convertible note was repaid in full in January 2007, as discussed in Note
        18 of
        the consolidated financial statements included in Item 15 of this Report.
        At the
        same time, the related party note was increased, as Counsel funded the
        convertible note repayment.
  22





**Consolidated
      Results of Operations**





Key
      selected financial data for the three years ended December 31, 2006, 2005 and
      2004 are as follows:




**Percentage
                Change****2006**
            
            **2005**
            
            **2004**
            
            **2006
                vs. 2005**
            
            **2005
                vs. 2004**Revenues:Technology
                licensing and development
            
            $
            —
            
            $
            —
            
            $
            540
            
            
            N/A
            
            
            N/AOperating
                costs and expenses:Selling,
                general, administrative and other
            
            
            1,281
            
            
            2,758
            
            
            4,079
            
            
            (54
            )
            
            (32
            )Research
                and development
            
            
            —
            
            
            389
            
            
            442
            
            
            N/A
            
            
            (12
            )Depreciation
                and amortization
            
            
            20
            
            
            32
            
            
            20
            
            
            (38
            )
            
            60Total
                operating costs and expenses
            
            
            1,301
            
            
            3,179
            
            
            4,541
            
            
            (59
            )
            
            (30
            )Operating
                loss
            
            
            (1,301
            )
            
            (3,179
            )
            
            (4,001
            )
            
            (59
            )
            
            (21
            )Other
                income (expense):Interest
                expense –
                related
                party
            
            
            (10,390
            )
            
            (12,154
            )
            
            (8,488
            )
            
            (15
            )
            
            43Interest
                expense – third party
            
            
            (510
            )
            
            (658
            )
            
            (65
            )
            
            (22
            )
            
            912Other
                income
            
            
            155
            
            
            1,084
            
            
            1,487
            
            
            (86
            )
            
            (27
            )Total
                other expense, net
            
            
            (10,745
            )
            
            (11,728
            )
            
            (7,066
            )
            
            (8
            )
            
            66Loss
                from continuing operations
            
            
            (12,046
            )
            
            (14,907
            )
            
            (11,067
            )
            
            (19
            )
            
            35Income
                (loss) from discontinued operations, net of $0 tax
            
            
            4,370
            
            
            (3,582
            )
            
            (11,716
            )
            
            N/A
            
            
            (69
            )Net
                loss
            
            $
            (7,676
            )
            $
            (18,489
            )
            $
            (22,783
            )
            
            (58
            )
            
            (19
            )




In
      order
      to more fully understand the comparison of the results of continuing operations
      for 2006 as compared to 2005, and for 2005 as compared to 2004, it is important
      to note the significant changes that occurred in 2005 and 2006. On
      May
      19, 2005, we entered into an agreement to sell substantially all of the assets,
      and to transfer certain liabilities, of WXC
      Corp.
      (“WXCC”, formerly Acceris Communications Corp.) 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 WXCC were
      reclassified as discontinued operations in 2005 and prior years, and accordingly
      are not included in the following analysis of continuing operations. Similarly, in the second quarter of 2006 we entered into a stock purchase
      agreement with a third party, which agreed to acquire all of the shares of
      I-Link Communications Inc. (“ILC”) from the Company. In accordance with GAAP,
      the operational results related to ILC were reclassified as discontinued
      operations in 2006 and prior years, and are not included the following analysis
      of continuing operations.





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 agreement s
      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 ,
      and on
      June 15, 2006 C2 Communications Technologies Inc., a wholly-owned subsidiary
      of
      the Company, filed a patent infringement lawsuit against AT&T, Inc., Verizon
      Communications, Inc., Qwest Communications International, Inc., Bellsouth
      Corporation, Sprint Nextel Corporation, Global Crossing Limited, and Level
      3
      Communications, Inc. The complaint was filed in the Marshall Division of the
      United States District Court for the Eastern District of Texas, and alleges
      that
      these companies’ VoIP services and systems infringe the Company’s U.S. Patent
      No. 6,243,373, entitled *“Method
      and Apparatus for Implementing a Computer Network/Internet Telephone
      System”.* The
      complaint seeks an injunction, monetary damages and costs .




23





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 size of various projects has result ed 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 .
      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.





***2006
      Compared to 2005***





**Technologies
      revenues** were
      $0  in
      both
      2006 and 2005.





**Selling,
      general, administrative and other expense** was
      $1,281 for the year ended December 31, 2006 as compared to $2,758 for the year
      ended December 31, 2005. The significant changes included:





·
            Compensation
                expense was $234 compared to $275 in 2005. The 2005 expense included
                a
                bonus accrual of $69, which was reversed in the first quarter of
                2006 upon
                determination that it was not warranted. After the effects of the
                bonus
                are removed, the comparative expense amounts for 2006 and 2005 are
                $303
                and $206, respectively. On January 1, 2006, as discussed above in
                Item 6,
                the Company adopted SFAS No. 123(R), which resulted in $139 of
                compensation expense being recorded in 2006. No corresponding expense
                was
                recorded in 2005. In 2006, the salary expense for the Company’s
                Technologies employees was $27, but the corresponding compensation
                costs
                in 2005 were included in research and development expense. These
                increases
                in compensation expense recorded in 2006 as compared to 2005 were
                partially offset by a reduction in the annual salary earned by the
                CEO of
                C2. Effective July 1, 2005, the annual salary was reduced from $275
                to
                $138, with the result that the 2006 expense was $69 lower than the
                2005
                expense. The change in salary reflected 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 $225
                in 2006
                and $450 in 2005. See Item 13 of this Report for details regarding
                these
                management fees.





·
            Legal
                expenses in 2006 were $171 compared to $845 in 2005. The decrease
                in legal
                expenses resulted primarily from a reduced level of activity in the
                Company’s patent litigation with ITXC. This litigation had commenced in
                April 2004 and was terminated in March
                2006.





·
            Accounting
                and tax consulting expenses in 2006 were $295 compared to $242 in
                2005.





·
            Travel
                and entertainment expenses in 2006 were $18 compared to $240 in 2005.
                The
                reduced level of expense in 2006 reflects 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 $104 in 2006 compared
                to $168 in 2005. The decrease is attributable to two factors: fewer
                meetings were held during 2006, and the Board was smaller during
                2006,
                having been reduced, at the end of the first quarter of 2005, from
                eight
                members to four members.





·
            Directors
                and officers insurance expense was $150 in both 2006 and
                2005.





·
            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 2006.





**Research
      and development (“R&D”) costs** - In
      2004, the Company resumed R&D activities related to its VoIP technology
      platform. The Company suspended its R&D expenditures 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. There
      was therefore no R&D expense in 2006, compared to $389 in 2005.




24





**Depreciation
      and amortization** - This
      expense was $20 in 2006 compared to $32 in 2005. In 2006, this expense consisted
      solely of amortization of the cost of the VoIP Patent. In 2005, the Company
      also
      incurred depreciation expense on equipment that it acquired in December 2004
      and
      sold in September 2005.





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





·
            Related
                party interest expense - This totaled $10,390 in 2006 compared to
                $12,154
                in 2005. The decrease of $1,764 is attributable to two factors. Interest
                expense on the related party debt with our majority stockholder,
                Counsel,
                increased by $1,362, from $6,180 in 2005 to $7,542 in 2006. This
                was due
                to a larger average loan balance during 2006, including additional
                advances during 2006 of $2,401. The interest expense was partially
                offset
                by a reduction of $3,126 in amortization of the beneficial conversion
                feature (“BCF”) related to Counsel’s ability to convert a portion of its
                debt. In 2006, amortization of the BCF was $2,848 on $19,966 of debt
                convertible at $5.02 per share. In 2005, amortization of the BCF
                was
                $5,974 on $18,270 of debt convertible at $5.02 per share. As discussed
                above, this debt was forgiven by Counsel on December 30, 2006, and
                consequently interest expense during 2007 is expected to be much
                lower
                than the expense incurred during
                2006.





·
            Third
                party interest expense - This totaled $510 in 2006 compared to $658
                in
                2005. The decrease of $148 is due to the fact that the Note with
                the
                Company’s third party lender, entered into on October 14, 2004, had a
                lower average balance during 2006 than during 2005. As discussed
                above,
                this debt was repaid in full in January
                2007.





·
            Other
                income -This
                totaled $155for 2006,
                as compared to $1,084for 2005.In
                the second quarter of 2006,the
                Company entered into settlement agreements with certain carriers,
                which
                resulted in the recovery of $110of
                receivables that were fully reserved against when acquired in 2001
                as part
                of the acquisition of the assets of WorldxChange Communications Inc.
                from
                bankruptcy.
                The remaining income is primarily due to interest earned on cash
                balances,
                including interest on the $1,800 deposit that was placed with the
                Company’s third party lender in October 2005 and subsequently applied to
                the monthly payments of the Note.In
                2005, $1,115 of other income was attributable to settlement agreements
                with certain carriers, similar to those described for 2006. The 2005
                income was partiallyoffset by achargeof
                $38 when fixed assets were transferred to a former employee in return
                for
                future royalty revenues.




***2005*** ***Compared
      to*** ***2004***





**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.





**Selling,
      general, administrative and other expense** was
      $2,758 for the year ended December 31, 2005 as compared to $4,079 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
                fact
                that, effective July 1, 2005, the annual salary earned by the CEO
                of C2
                was reduced from $275 to $138. The change in salary reflected 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 Report 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 reduced level of activity
                in the
                Company’s patent litigation with ITXC. This litigation had commenced in
                April 2004 and was terminated in March
                2006.





·
            Accounting
                and tax consulting expenses in 2005 were $242 compared to $408 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.




25




·
            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 at the end of
                the
                first quarter of 2005, the Board was reduced from eight members to
                four
                members.





·
            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.





**R&D
      costs** - In
      2004, the Company resumed R&D activities related to its VoIP technology
      platform. The Company suspended its R&D expenditures 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.





**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 cost of the VoIP Patent.





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 $5,974 of amortization of the BCF
                related to Counsel’s ability to convert $18,270 of debt at $5.02 per
                share. In 2004, amortization of the BCF was $4,186 on $16,714 of
                debt due
                to Counsel, convertible at $5.02 per
                share.





·
            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
                the
                Company’s third party lender, entered into on October 14, 2004, was
                outstanding for all of 2005.





·
            Other
                income -This
                totaled $1,084for 2005, as compared to $1,487for 2004.Inthe third and fourth quarters of2005,the
                Company entered into settlement agreements with certain carriers,
                which
                resulted in the recovery of $1,115of
                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 waspartiallyoffset by achargeof
                $38 when fixed assets were transferred to a former employee in return
                for
                future royalty revenues.In2004,
                the other income was primarilycomprised
                of gains of $1,376 recognized on the disposition of the Company’s
                BUIsecurities.




**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**





**Use
      of estimates**





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.




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.





**Intangible
      assets and goodwill**





The
      Company accounts for intangible assets in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 141, *Business
      Combinations* and SFAS
      No. 142, *Goodwill
      and Other Intangible Assets* .
      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 200 6  and 200 5.
      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 .





**Investments**





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 the 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, market price of the common stock underlying the preferred
      stock, recent financing rounds of the investee and other investee specific
      information. Impairments, dividends and realized gains and losses on equity
      securities are included in other income in the consolidated statements of
      operations.





**Liabilities**





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.




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.





The
      Company assesses the value of its deferred tax asset, which has been generated
      by a history of net operating and net capital 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, taking into consideration any limitations that may exist on
      its
      use of its net operating and net capital loss carryforwards. The Company is
      evaluating the application of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
      109* (“FIN
      48”) to its business, and currently believes that the adoption of FIN 48 will
      not have a material effect on its financial position, operations or cash
      flow.





**Discontinued
      Operations**





In
      accordance with the provisions of 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.





**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. Due
      to
      the minimal amount of cash and cash equivalents currently on hand, we believe
      that we are not subject to any material interest rate risk as it relates to
      interest income. As to interest expense, at December 31, 2006 we had one debt
      instrument that ha d a variable
      interest rate. This debt instrument was held by a third party lender, and was
      repaid in full in January 2007, as discussed in Note 18 of the consolidated
      financial statements included in Item 15 of this Report. The variable interest
      rate convertible note provided that the principal amount outstanding bore
      interest at the prime rate as published in the Wall St. Journal (“WSJ interest
      rate”, 8.25% at December 31, 200 6)
      plus
      3% (but not less than 7.0% in
      total ),
      decreasing by 2% (but not to 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, 200 6  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  $15  for
      that
      twelve-month period. In respect of the variable interest rate convertible note,
      should the price of our  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 $29  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, 200 6.
      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 Report, our Chief Executive Officer and Chief
      Financial Officer (the “Certifying Officers”) conducted evaluations of our
      disclosure controls and procedures. As defined under Sections 13a-15(e) and
      15d-15(e) of the Securities Exchange Act of 1934, as amended (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 our disclosure controls and procedures
      were effective.




28





Further,
      there were no changes in our internal control over financial reporting during
      the fourth fiscal quarter of 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





**Item
      9B. Other Information.**




None.




29





**PART
      III**





**Item
      10. Directors, Executive Officers and Corporate
      Governance.**





Under
      our
      Articles of Incorporation, as amended, the Board of Directors is divided into
      three classes, with the total number of directors to be not less than five
      and
      not more than nine. Each director is to serve a term of three years or until
      his
      or her successor is duly elected and qualified. As of the date hereof, the
      Board
      of Directors consists of four members: one Class
      I
      director (M r .
      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
            
            58
            
            Chairman
                of the Boardand
                Chief Executive OfficerHal
                B. Heaton
            
            56
            
            Director
                (2), (3), (4), (5)Henry
                Y.L. Toh
            
            49
            
            Director
                (2), (3), (4), (5)Samuel
                L. Shimer
            
            43
            
            Director
                (2)Stephen
                A. Weintraub
            
            59
            
            Executive
                Vice President,
                CorporateSecretaryand Chief Financial Officer





(1)
            As
                of December 31,2006.(2)
            Independent
                Director(3)
            Member
                of the Audit Committee(4)
            Member
                of the Compensation Committee(5)
            Member
                of the Special Committee of Independent
                Directors





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 .
      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
      has served as a director of Four M International Inc, a private investment
      firm,
      since 1992; a director of iDNA, Inc. (previously National Auto Credit, Inc.)
      since December 1998; a director of Teletouch Communications, Inc., a retail
      provider of internet, cellular and paging services, since November 2001; and
      a
      director of Isolagen, Inc., a biotechnology company, since 2003. Mr. Toh
      has been a director and Chief Executive Officer of Amerique Investments since
      1992. Mr. Toh 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. He was appointed Senior Vice President,
      Mergers & Acquisitions and Business Development on February 12, 2003 and he
      terminated his employment with the Company on February 27, 2004 to join Whitney
      & Co., an asset management company. From 1997 to February 2003 he was
      employed by Counsel as a Managing Director. 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.




30





**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. 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 has
      been
      appointed by the Board of Directors and holds his office at the discretion
      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 in Item 3 of this Report.
      No
      director or officer of our company has, during the last five years: (i) been
      convicted of any criminal proceeding (excluding traffic violations or similar
      misdemeanors) or (ii) been a party to a civil proceeding of a judicial or
      administrative body of competent jurisdiction and as a result of such proceeding
      was or is subject to a judgment, decree or final order enjoining future
      violations of, or prohibiting or mandating activities subject to, United States
      federal or state securities laws, or finding any violations with respect to
      such
      laws.





**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, 200 6,
      except
      that Gary Taylor, C2’s Director of Taxation, failed to file a timely Form 3. As
      of the date of filing this Report, Mr. Taylor is in compliance with Section
      16(a) reporting requirements.





**Code
      of Ethics**





C2 has
      adopted a code of ethics that applies to its employees, including its principal
      executive, financial and accounting officers or persons performing similar
      functions. 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 or persons performing
      similar functions by posting such information on its website at the website
      address set forth above.





**Corporate
      Governance**





***Director
      Independence***




In
      determining director independence, C2 defines independent directors in
      accordance with the applicable rules of the SEC and the Nasdaq Marketplace
      Rules. According to this definition, Mr. Toh, Mr. Heaton and Mr. Shimer are
      independent directors. C2 anticipates that the current Board vacancy will be
      filled with an independent director.





***Board
      Meetings and Committees; Annual Meeting Attendance***




The
      Board
      of Directors held four  meetings
      during the fiscal year ended December 31, 200 6.





The
      Board
      has no formal policy regarding attendance at annual shareholder meetings;
      however, directors are encouraged to attend. No annual shareholder meeting
      was
      held during 2006.




31





The
      Board
      of Directors has designated three standing committees: the Audit Committee,
      the
      Compensation Committee, and the Special Committee of Independent Directors.
      C2
      does 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. There are no specific
      criteria for Director nominees; however, the Board looks for individuals who
      are
      independent and knowledgeable with respect to general business matters. There
      has been no material change in the procedures by which our shareholders may
      recommend nominees to our Board of Directors since such procedures were adopted
      and implemented.





***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, with one position vacant. The
      Company anticipates that this position will be filled when the Board vacancy
      is
      filled. The Audit Committee held five meetings during the fiscal year ended
      December 31, 2006. 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 is available on the
      Company’s website *www.c2-technologies.com* .
      The
      Audit Committee Charter is reviewed annually and was last reviewed by the Board
      of Directors on December 9, 2005, at which time no amendments were
      proposed.




***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 407(d) 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. The Compensation Committee Mandate was first approved by C2’s Board
      of Directors on February 12, 2003. It was subsequently revised on December
      9,
      2005. The Compensation Committee Mandate is available on the Company’s website *www.c2-technologies.com* .





According
      to the Compensation Committee’s charter, the majority of the members must be
      independent directors. The membership is currently comprised of Messrs. Heaton
      (Chairman) and Toh, both independent directors. The Compensation Committee
      held
      one meeting during the fiscal year ended December 31, 2006.





*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 which has
                had an
                executive officer who has served on our compensation committee;


·
            as
                a director of another entity which has had an executive officer who
                has
                served on our compensation committee; or


·
            as
                a member of the compensation committee of another entity which has
                had an
                executive officer who has served as one of our
                directors.





***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 no meetings during
      the
      fiscal year ended December 31, 2006.





***Compensation
      Discussion and Analysis***





**Summary**





This
      report is the Compensation Discussion and Analysis of our executive compensation
      program and an explanation and analysis of the material elements of total
      compensation paid to each of our named executive officers. Included in the
      discussion is an overview and description of:


·
              our
                  compensation philosophy and
                  program;


32


·
              the
                  objectives of our compensation
                  program;
  ·
              what
                  the compensation program is designed to
                  reward;
  ·
              each
                  element of compensation;
  ·
              why
                  we choose to pay each element;
  ·
              how
                  we determine the amount for each element;
                  and
  ·
              how
                  each compensation element and our decision regarding that element
                  fit into
                  our overall compensation objectives and affect decisions regarding
                  other
                  elements.




In
      reviewing our executive compensation program, we considered issues pertaining
      to
      policies and practices for allocating between long-term and currently paid
      compensation and those policies for allocating between cash and non-cash
      compensation. We also considered the determinations for granting awards,
      performance factors for our company and our named executive officers, and how
      specific elements of compensation are structured and taken into account in
      making compensation decisions. Questions related to the benchmarking of total
      compensation or any material element of compensation, the tax and accounting
      treatment of particular forms of compensation and the role of executive officers
      (if any) in the total compensation process also are addressed where
      appropriate.





**General
      Executive Compensation Philosophy**





We
      compensate our executive management through a combination of base salaries,
      merit based performance bonuses, and long-term equity compensation that is
      designed to be competitive with similarly situated companies within our
      industry. Our executive compensation program is structured to align management’s
      incentives with the long-term interests of our shareholders, and to maximize
      profitability and shareholder value.





We
      adhere
      to the following compensation policies, which are designed to support the
      achievement of our business strategies:





·
            Our
                executive compensation program should strengthen the relationship
                between
                compensation, both cash and equity-based,and
                performance by emphasizing variable, at-risk compensation that is
                dependent upon the successful achievement ofspecified
                corporate, business unit and individual performance
                goals.




·
            A
                portion of each executive’s total compensation should be comprised of
                long-term, at-risk compensation to focusmanagement
                on the long-term interests of
                shareholders.




·
            An
                appropriately balanced mix of at-risk incentive cash and equity-based
                compensation aligns the interests of our executiveswith
                that of our shareholders. The equity-based component promotes a continuing
                focus on building profitability andshareowner
                value.




·
            Total
                compensation should enhance our ability to attract, retain, motivate
                and
                develop knowledgeable and experiencedexecutives
                upon whom, in large part, our successful operation and management
                depends.




We
      set
      compensation by establishing targeted compensation levels for each senior
      executive and allocating that compensation amount among base salary, merit-based
      compensation bonuses, and long-term equity compensation. At the highest and
      most
      senior levels, we offer incentive based compensation to reward company wide
      performance and to maximize future profitability, stock appreciation and
      shareholder value.





A
      core
      principle of our executive compensation program is the belief that compensation
      paid to executive officers should be closely aligned with our near- and
      long-term success, while simultaneously giving us the flexibility to recruit
      and
      retain the most qualified key executives. Our compensation program is structured
      so that it is related to our stock performance and other factors, direct and
      indirect, all of which may influence long-term shareholder value and our
      success.





As
      a
      result, we have designed our total executive compensation plan to include the
      following elements:




·
              Annual
                  Base Salaries;




·
              Annual
                  Performance-Based Cash
                  Bonuses;




·
              Long-Term
                  Equity -Based Compensation





We
      utilize each of these elements of executive compensation to ensure proper
      balance between our short- and long-term success as well as between our
      financial performance and shareholder return. In this regard, we believe that
      the executive compensation program for our named executive officers is
      consistent with our financial performance and the performance of each named
      executive officer.




33




**Our
      Named Executive Officers for 2006**





This
      analysis focuses on the compensation paid to our “named executive officers,”
which is a defined term generally encompassing all persons that served as our
      principal executive officer or principal financial officer at any time during
      the fiscal year, as well as certain other highly paid executive officers serving
      in such positions at the end of the fiscal year. During 2006, our named
      executive officers consisted of the following officers:





**Allan
      C. Silber** - our
      Chairman of the Board and Chief Executive Officer. Mr. Silber is the Chairman
      and CEO of Counsel Corporation, our majority shareholder, which he founded
      in
      1979.




**Stephen
      A. Weintraub** - our
      Executive Vice President, Corporate Secretary and Chief Financial Officer since
      December 2005. Mr. Weintraub is the Executive Vice President, Corporate
      Secretary and Chief Financial Officer of Counsel Corporation.





Except
      for the CEO, our company had no paid employees during 2006.





**Elements
      of Compensation**





*Base
      Salaries*





Unless
      determined pursuant to their employment agreements, the base salaries of the
      Company’s named executive officers are evaluated annually. In evaluating
      appropriate pay levels and salary increases for such officers, the Compensation
      Committee considers achievement of the Company’s strategic goals, level of
      responsibility, individual performance, and internal equity and external pay
      practices. In addition, the Committee considers the scope of the executives’
responsibilities, taking into account competitive market compensation for
      similar positions, as well as seniority of the individual, our ability to
      replace the individual and other primarily judgmental factors deemed relevant
      by
      our Board of Directors and Compensation Committee.





Base
      salaries are reviewed annually by our Compensation Committee and our Board,
      and
      adjusted from time to time pursuant to such review or at other appropriate
      times, in order to align salaries with market levels after taking into account
      individual responsibilities, performance and experience. For 2007, this review
      will occur by June 30.





Except
      for the CEO, the Company had no paid employees during 2006. As noted above,
      the
      Company’s CEO, Mr. Allan Silber, is also the CEO of Counsel. Mr. Silber’s
      initial annual salary of $275, and a discretionary bonus of up to 100% of his
      base salary, were identical to the compensation being paid to the outgoing
      President and CEO, whom Mr. Silber replaced at the end of 2002. Following the
      finalization, in May 2005, of the agreement to sell our Telecommunications
      business, in the third quarter of 2005 Mr. Silber’s annual salary and bonus were
      reduced by 50%, to $137.5 salary and a discretionary bonus of up to 100% of
      his
      base salary. It is not expected that any bonus will be awarded for 2006.
      However, given the continued involvement of Mr. Silber, as well as the
      involvement of other employees of Counsel who receive no direct compensation
      from the Company, the Compensation Committee made discretionary grants of
      options to purchase common shares to both Mr. Silber and those employees in
      the
      third quarter of 2006.





*Bonuses*





Bonus
      awards are designed to focus management attention on key operational goals
      for
      the current fiscal year. Our company executives may earn a bonus based upon
      achievement of their specific operational goals and achievement by the Company
      or business unit of its financial targets. Cash bonus awards are distributed
      based upon the Company and the individual meeting performance criteria
      objectives. The final determination for all bonus payments is made by our
      Compensation Committee.





We
      set
      bonuses based on certain performance measures in order to maximize and align
      the
      interests of our officers with those of our shareholders. Although performance
      goals are generally standard for determining bonus awards, we have and will
      consider additional performance rating goals when evaluating the bonus
      compensation structure of our executive management. In addition, in instances
      where the employee has responsibility over a specific area, performance goals
      may be directly tied to the overall performance of that particular area. It
      is
      not expected that any bonuses will be awarded for 2006.





*Equity
      Incentive Grants*





In
      keeping with our philosophy of providing a total compensation package that
      favors at-risk components of pay, long-term incentives comprise a significant
      component of our executives’ total compensation package. These incentives are
      designed to motivate and reward executives for maximizing shareowner value
      and
      encourage the long-term employment of key employees. Our objective is to provide
      executives with above-average, long-term incentive award
      opportunities.




34





We
      view
      stock options as our primary long-term compensation vehicle for our executive
      officers. Stock options generally are granted at the prevailing market price
      on
      the date of grant and will have value only if our stock price increases. Grants
      of stock options generally are based upon our performance, the level of the
      executive’s position, and an evaluation of the executive’s past and expected
      future performance. We do not time or plan the release of material, non-public
      information for the purpose of affecting the value of executive
      compensation.





We
      believe that stock options will continue to be used as the predominant form
      of
      stock-based compensation.





***Other
      Benefits***





There
      are
      no other benefits provided to employees at this time, including pension,
      severance or change in control benefits.





***Tax
      Considerations***





Section
      162(m) of the Internal Revenue Code places limits on the deductibility of
      compensation in excess of $1 million paid to executive officers of publicly
      held
      companies. The Compensation Committee does not believe that Section 162(m)
      has
      had or will have any impact on the compensation policies followed by the
      Company.




**Executive
      Compensation Process**





**Compensation
      Committee**





Our
      Compensation Committee oversees and approves all compensation and awards made
      to
      executive officers under our executive compensation program. The Compensation
      Committee reviews the performance and compensation of the Chief Executive
      Officer, without his participation, and establishes his compensation
      accordingly, with consultation from others when appropriate. For the remaining
      executive officers, recommendations are made to the Compensation Committee
      by
      the Chief Executive Officer.





**Compensation
      Committee Report**





The
      following paragraphs in this section constitute information required pursuant
      to
      Section 407(e)(5) of Regulation S-K promulgated under the Securities Act of
      1933, as amended. In accordance with these rules, the information so provided
      is
“”furnished”, not “filed” with the SEC.





1.  The
      Compensation Committee has reviewed and discussed the Compensation Discussion
      and Analysis (“CD&A”) set forth above with the management of the Company;
      and





2.  Based
      on
      the review and discussions, the Compensation Committee recommended to the Board
      of Directors that the CD&A be included in the Company’s Annual Report on
      Form 10-K for the fiscal year ended December 31, 2006, and, as applicable,
      the
      Company’s proxy statement.





*By
      the Compensation Committee* :


/s/
              Hal. B.
              HeatonHal
              B. Heaton, Chairman/s/ Henry Y.L. TohHenry Y. L. Toh




35





**Item
      11. Executive Compensation.**





The
      following table sets forth the aggregate compensation for services rendered
      during the fiscal year ended December 31, 2006 by our Named Executive Officers,
      which included our principal executive officer and principal financial officer.
      We have no other officers or employees whose compensation is $100 or more.
      As
      discussed in Item 13, certain employees of Counsel provide services to C2,
      and
      compensation for those services is provided and paid for under the terms and
      provisions of the certain Management Services Agreement (the “Agreement”)
      entered into between Counsel and C2.




**SUMMARY
                COMPENSATION TABLE**




**Name
                and Principal Position**
            
            **Year**
            
            **Salary**
            
            **Option
                Awards****1******
            
            **Total**Allan
                Silber
            
            
            2006
            
            
            $137.5
            
            
            $14.0
            
            
            
            $151.5Chairman
                of the Board and Chief Executive OfficerStephen
                Weintraub
            
            
            2006
            
            
            —
            
            
            5.1
            
            
            
            5.1Executive
                Vice President, Chief Financial Officer and Corporate
                Secretary





1 The
      amount reported in this column relates solely to compensation expense associated
      with options issued in 2006. Please see the *“Grants
      of Plan-Based Awards for the Year Ended December 31, 2006”* table,
      below, for details of these options.





The
      following table sets forth all grants of plan-based awards to the Chief
      Executive Officer and Chief Financial Officer during the year ended December
      31,
      2006. There were no similar awards during 2005 or 2004.





**GRANTS
                OF PLAN-BASED AWARDS FOR THE YEAR ENDED DECEMBER 31,
                2006**




**Name**
            
            **Grant
                Date**
            
            **Option
                Awards: Number of Securities Underlying Options**
            
            **Exercise
                Price of Option Awards ($/Sh)**
            
            **Grant
                Date Fair Value of Option Awards****3**Allan
                Silber
            
            
            August
                1, 2006
            
            
            225,0001
            
            
            
            $0.66
            
            
            $85.5Allan
                Silber
            
            
            August
                1, 2006
            
            
            75,0002
            
            
            
            1.11
            
            
            48.8Stephen
                Weintraub
            
            
            August
                1, 2006
            
            
            75,0002
            
            
            
            1.01
            
            
            49.5





1 Options
      awarded under the 1997 Recruitment Stock Option Plan.




2 Options
      awarded under the 2003 Stock Option and Appreciation Rights Plan.




3 Please
      see Note 17 of the consolidated financial statements included in Item 15 of
      this
      Report for details of the calculations used in determining the grant date fair
      value of the option awards.





Allan
      Silber, the CEO of C2, is an employee of Counsel. As CEO of C2, he is entitled
      to an annual salary of $137.5, plus a discretionary bonus of 100% of the base
      salary. No bonus was paid for the years ended December 31, 2004 and 2005, and
      none is expected to be paid for the year ended December 31, 2006. Mr. Silber’s
      compensation is expensed and paid by C2.





Stephen
      Weintraub, the CFO of C2, is an employee of Counsel. Mr. Weintraub has no
      employment contract with C2. The cost of Mr. Weintraub’s services to C2 is a
      component of the Agreement between C2 and Counsel. The Agreement was first
      entered into in December 2004. Under the terms of the Agreement, C2 agreed
      to
      make payment to Counsel for the past and future services to be provided to
      the
      Company by certain Counsel personnel for the calendar years 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. In December 2005, C2 entered into a similar agreement with
      Counsel for services to be provided by Counsel in 2006, with the allocation
      determined on the same basis as the Agreement. For the year ended December
      31,
      2006, the cost was $225, as compared to $450 for the year ended December 31,
      2005. The amounts due under the Agreement are payable within 30 days following
      the respective year end, subject to applicable restrictions. Any unpaid fee
      amounts 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 C2,
      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 Company
      expects that Counsel will continue to provide these services in 2007 on the
      same
      cost basis.




36




**OUTSTANDING
                EQUITY AWARDS AT DECEMBER 31,
                2006**




**Name**
            
            **Number
                of Securities Underlying Unexercised Options:
                Exercisable**
            
            **Number
                of Securities Underlying Unexercised Options:
                Unexercisable****1**
            
            **Option
                Exercise Price($/Sh)**
            
            **Option
                Expiration Date**Allan
                Silber
            
            
            0
            
            
            225,000
            
            
            
            $0.66
            
            
            August
                1, 2013Allan
                Silber
            
            
            0
            
            
            75,000
            
            
            
            1.11
            
            
            August
                1, 2013Stephen
                Weintraub
            
            
            0
            
            
            75,000
            
            
            
            1.01
            
            
            August
                1, 2013





1 The
      options vest 25% annually beginning on the first anniversary of the grant
      date.





**Director
      Compensation**





The
      following table sets forth the aggregate compensation for services rendered
      during the fiscal year ended December 31, 2006 by each person serving as a
      director.





**DIRECTOR
                COMPENSATION FOR THE YEAR ENDED DECEMBER 31,
                2006**




**Name**
            
            **Fees
                Earned or Paid in Cash**
            
            **Option
                Awards****1**
            
            **Total**Henry
                Y.L. Toh
            
            
            $43.0
            
            
            $3.4
            
            
            $46.4Hal
                B. Heaton
            
            
            37.0
            
            
            3.5
            
            
            40.5Samuel
                L. Shimer
            
            
            24.0
            
            
            2.9
            
            
            26.9





1 The
      options vest 25% annually beginning on the first anniversary of the grant date.
      The amount reported in this column relates to compensation expense associated
      with options issued in 2004, 2005 and 2006. The table below provides information
      regarding the current year compensation expense and grant date fair value of
      each option award underlying the reported 2006 compensation
      expense.





**DETAIL
                OF DIRECTOR OPTION AWARDS EXPENSE**




**Name**
            
            **Grant
                Date**
            
            **Number
                of Options Awarded**
            
            **Grant
                Date Fair Value of Option Award**
            
            **2006
                Expense**Henry
                Y.L. Toh
            
            
            January
                2, 2004
            
            
            1,500
            
            
            
            $2.1
            
            
            $0.5August
                10, 2004
            
            
            10,000
            
            
            
            5.4
            
            
            1.4April
                1, 2005
            
            
            10,000
            
            
            
            3.6
            
            
            0.9April
                3, 2006
            
            
            10,000
            
            
            
            3.3
            
            
            0.6$3.4Hal
                B. Heaton
            
            
            January
                2, 2004
            
            
            1,750
            
            
            
            $2.5
            
            
            $0.6August
                10, 2004
            
            
            10,000
            
            
            
            5.4
            
            
            1.4April
                1, 2005
            
            
            10,000
            
            
            
            3.6
            
            
            0.9April
                3, 2006
            
            
            10,000
            
            
            
            3.3
            
            
            0.6$3.5Samuel
                L. Shimer
            
            
            August
                10, 2004
            
            
            10,000
            
            
            
            $5.4
            
            
            $1.4April
                1, 2005
            
            
            10,000
            
            
            
            3.6
            
            
            0.9April
                3, 2006
            
            
            10,000
            
            
            
            3.3
            
            
            0.6$2.9





37




Each
      director who is not employed by C2 or by Counsel  receives
      a $20 per year cash retainer, $1 per meeting attended in person or by telephone,
      and an annual grant of stock options to purchase 10,000 shares of common stock,
      which is awarded on March 31 or the next business day. In addition, the Chairman
      of the Audit Committee receives a cash retainer of $10 per year, Audit Committee
      members who are not the chair receive a cash retainer of $5 per year, and other
      committee chairpersons receive an annual cash retainer of $2 per year. The
      directors are 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 the non-employee directors during 2006. 300,000 stock options were
      awarded to Allan Silber during 2006, as disclosed above in the Grants of
      Plan-Based Awards table.





**Stock
      Option Plans**





At
      December 31, 200 6,
      the
      Company has several stock-based employee compensation plans, which are described
      below. 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.





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). If any incentive option,
      non-qualified option or SAR terminates prior to exercise thereof and during
      the
      duration of the 1995 Director Plan, the shares of common stock as to which
      such
      option or right was not exercised will become available under the 1995 Director
      Plan for the grant of additional options or rights to any eligible director.
      Each option is immediately exercisable for a period of ten years from the date
      of grant. The Company has 12,500 shares of common stock reserved for issuance
      under the 1995 Director Plan. No options were granted or exercised under this
      plan in 2006 and 2005, and as of December 31, 200 6,
      no
      options to purchase shares are outstanding. As of December 31, 2005, options
      to
      purchase 7,500 shares of common stock at a price of $2 2.50 per
      share
      were outstanding and exercisable. In
      200 6 , 7 , 5 00
      options expired (200 5 - 1,000 ).





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 for the grant of 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, 2006 and 2005 ,
      there
      were no options outstanding under the 1995 Employee Plan. No options were
      granted or exercised in 200 6 or 2005
      under the 1995 Employee Plan.





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, 200 6,
      there
      were options to purchase 239,611 shares (200 5 - 14 , 611 shares) of the
      Company’s common stock outstanding under the 1997 Plan. 225,000 of these options
      were unvested at December 31, 2006, and will vest over four years at an exercise
      price of $0.66 per share, beginning in 2007. 14,611 of these options were vested
      at December 31, 2006 and are exercisable at prices of $1.40 to $111.26 per
      share
      (2005 - $1.40 to $111.26 per share). The outstanding unvested options, upon
      vesting, must be exercised within seven years of grant date and can only be
      exercised while the option holder is an employee of the Company. The outstanding
      vested options must be exercised within ten years of grant date 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 2006, options to purchase
      225,000 shares of common stock were issued, and no options were forfeited or
      expired. During 200 5,
      no
      options to purchase shares of common stock were issued, and 42,125  options
      were forfeited. There were no exercises during 2006 or 2005.




38





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 incent ives
      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 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 a committee thereof; 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, 2006, there were options to purchase 568,250 shares
      (2005 - 338,250 shares) of the Company’s common stock outstanding under the 2003
      Plan. The outstanding options vest over four years at exercise prices ranging
      from $0.51 to $3.00 per share. During 2006, 230,000 options (2005 - 39,600
      options) were granted, and no options (2005 - 1,060,975 options) to purchase
      shares of common stock were forfeited or expired. There were no options
      exercised during 2006 and 2005, and no SARs have been issued under the 2003
      Plan.




39




**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 1, 2007 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 1, 2007, there are 23,094,850 shares of common stock
      and 612 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
            
            20,010
            (4)
            
            *
            %Henry
                Y.L. Toh
            
            21,038
            (5)
            
            *
            %Samuel
                L. Shimer
            
            12,500
            (6)
            
            *
            %Stephen
                A. Weintraub
            
            0
            (7)
            
            *
            %Catherine
                A. Moran
            
            85
            
            
            *
            %Gary
                H. Taylor
            
            16,400
            (8)
            
            *
            %Counsel
                Corporation and subsidiaries
              40
                King Street West Suite 3200
              Toronto,
                Ontario M5H 3Y2
            
            21,364,744
            
            
            92
            %All
                Executive Officers and Directors as a Group (7 people)
            
            70,033
            
            
            *
            %





*
            
            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/oC2
                Global TechnologiesInc. 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 approximately5,813,976shares or12.2%
                of the outstandingcommonstock(11.7% of the outstanding voting shares)of
                Counsel.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 by Four M International, Ltd., of which Mr. Toh is a
                director.
                Mr. Toh disclaims any beneficial ownership of such
                shares.(6)
            
            Represents
                shares of common stock issuable pursuant to options. Mr. Shimer is
                a
                beneficial owner of 819,011 shares in Counsel, which represents a
                1.7%
                beneficial ownership of Counsel. Mr. Shimer disclaims beneficial
                ownership
                of the shares of C2’s common stock beneficially owned by Counsel.(7)
            
            Mr.
                Weintraub is Executive Vice President, Secretary and Chief Financial
                Officer of Counsel and a beneficial owner of 376,102 shares in Counsel,
                which represents less than 1% beneficial ownership of Counsel. Mr.
                Weintraub disclaims beneficial ownership of the shares ofC2’scommon
                stock beneficially owned by Counsel.(8)
            
            Represents
                shares of common stock owned by a family
                member.




40





**Item
      13. Certain Relationships and Related Transactions, and Director
      Independence.**





**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**





At
      December 30, 2006, C2 was indebted to Counsel in the aggregate amount of
      $83,582, including accrued and unpaid interest to that date. As discussed in
      Note 9 of the consolidated financial statements, on December 29, 2006, C2
      negotiated an agreement with Counsel under which, effective December 30,
      2006, $3,386 of debt was converted into 3,847,475 common shares of C2 at a
      price of $0.88 per common share. At the same time, the $80,196 remaining balance
      of the debt was forgiven by Counsel. In accordance with GAAP and SEC
      requirements, the debt forgiveness has been recorded as a capital contribution
      by Counsel in the consolidated financial statements for the year ended December
      31, 2006. The details of the individual notes comprising the $83,582 are
      presented below.





*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 provided that at any time after September 1, 2002, the
      outstanding debt including accrued interest would automatically be converted
      into common stock using the then current conversion rate, on the first date
      that
      was the twentieth consecutive trading day that the common stock closed at a
      price per share that was equal to or greater than $20.00 per share. The Senior
      Loan Agreement also provided that the conversion price was in certain cases
      subject to adjustment, included traditional anti-dilution protection for the
      lender, and was subject to certain events of default, which could have
      accelerated 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 was amended several times
      and the maturity date of the loan plus accrued interest was extended to October
      31, 2007. As a result of the application of the anti-dilution provisions of
      the
      Senior Loan Agreement, the conversion price was adjusted to $5.02 per common
      share. At December 30, 200 6,
      prior
      to the debt forgiveness discussed above, the total outstanding debt under the Senior
      Loan Agreement (including
      principal and accrued interest) was $19,966  which
      was
      convertible into approximately 3,977,208  shares
      of
      common stock.





In
      connection with the 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.





*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 provide d 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 was amended
      several times, including in connection with the sale of substantially all the
      assets of WXCC to AMA, and was extended to October 31, 2007. There were no
      conversion features associated with this loan.  The
      terms
      of the loan agreement provided that certain events of default would have
      accelerated the repayment of principal plus accrued interest. As of December
      30, 200 6,
      prior
      to the debt forgiveness discussed above, the total outstanding debt under the
      loan (including principal and accrued interest) was $8,291.




41




*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 ofC2at
                $3.77 per share (representing the average closing price ofC2’scommon
                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 ofC2at
                $3.77 per share (representing the average closing price ofC2’scommon
                stock during May 2002).




3)
            Counsel
                would advance toC2all
                amounts paid or payable byC2to
                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 reimburseC2for
                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
                reimbursedC2$132
                and $499, respectively, for certain reimbursable expenses, whichwererecorded as additional paid-in
                capital.




5)
            The
                issuance of common stock byC2pursuant
                to this Agreement would result in a weighted average conversion price
                adjustment pursuant to the provisions of the Senior Loan Agreement.
                Whereas the conversion price for the Senior 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.





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.




42




*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 were 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 October
      31,
      2007 . 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,
      2005 and 2006 of $8,662, $15,365 and $2,401, respectively. The outstanding
      balance at December 30, 2006 (including principal and accrued interest), prior
      to the debt forgiveness discussed above, was $41,897.  At
      December 31, 2006 C2 was indebted to Counsel in the amount of $6, representing
      C2 expenses paid by Counsel on behalf of C2 that had not been recorded in C2’s
      accounts prior to the debt forgiveness. The Company expects this amount to
      increase during 2007 as Counsel funds its ongoing cash requirements, such as
      the
      funding received for the repayment of the Note owing to the Company’s third
      party lender.





*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, 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 w as amended
      several times and the maturity date of the loan plus accrued interest
      was extended
      to October 31, 2007 . Consistent with the terms of the Initial Loan, subject to certain conditions,
      the New Loan provided 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 were not used for an approved
      expanded business plan, the purchase of the Company’s accounts receivable by a
      third party or where C2 sold
      material assets in excess of cash proceeds of $1,000, and certain other events.  The
      New
      Loan was subject to certain events of default which would have accelerated
      the
      repayment of principal plus accrued interest. Pursuant to a Stock Pledge
      Agreement as amended, the New Loan was secured by the common stock held directly
      by C2 in its operating subsidiary. There were no conversion features associated
      with the New Loan. As of December 30, 2006, the total outstanding debt under
      the
      New Loan (including principal and accrued interest), prior to the debt
      forgiveness discussed above, was $13,428.





*Counsel
      Keep Well*





Counsel
      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”). Although Counsel did not extend the
      Keep Well beyond its December 31, 2006 maturity, Counsel has indicated to
      management that it will continue to fund the Company’s minimal cash requirements
      until at least October 31, 2007.





*Counsel
      Guarantee, Subordination and Stock Pledge*





In
      October 2004, Counsel agreed to guarantee the debt that the Company owed to
      its
      third party lender, and also agreed to subordinate all of its debt owed by
      the
      Company, and to subrogate all of its related security interests, in favor of
      the
      third party lender. Counsel further agreed to pledge all of its shares owned
      in
      C2 as security for its guarantee.  In
      accordance with these agreements, amounts owing to Counsel could not be repaid
      while amounts remained owing to the third party lender. In January 2007, when
      the debt was prepaid in full, the subordination, subrogation and guarantee
      agreements were terminated.





*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. In March 2006 C2 entered into a
      similar agreement with Counsel for services to be provided in 2006. The basis
      for such services charged was 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 was $225, reflecting the
      reduced complexity of C2 operations following the sale of the Telecommunications
      business. The foregoing fees for 2004, 2005 and 2006 were due and payable within
      30 days following the respective year ends, subject to any subordination
      restrictions then in effect. Any unpaid fee amounts bore interest at 10% per
      annum commencing on the day after such year-end, and 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, would have become due and payable
      immediately upon the occurrence of such event, subject to any subordination
      restrictions then in effect. The fees for 2004, 2005 and 2006 were forgiven
      on
      December 30, 2006 as part of Counsel’s forgiveness of its outstanding debt from
      C2, as discussed above. Amounts owing to Counsel at December 31, 2006 could
      not
      be repaid while amounts remained owing to the Company’s third party lender. The
      repayment in full of the third party debt in January 2007 removed this
      restriction on payments to Counsel. The Company expects that Counsel will
      continue to provide these services in 2007 on the same cost basis.




43




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





In
      November 2006 the Company’s Audit Committee engaged Mintz & Partners LLP as
      the independent registered public accounting firm of the Company for the fiscal
      year ended December 31, 2006. Previously, the Company’s independent registered
      public accounting firm was BDO Seidman, LLP. Prior to May 5, 2004, the Company’s
      independent registered public accounting firm was PricewaterhouseCoopers LLP.
      All fees paid to independent registered public accounting firms were
      pre-approved by the Audit Committee.





Fees
      expected to be paid to Mintz & Partners LLP, our independent registered
      public accounting firm for the fiscal period ended December 31, 2006, are set
      forth below.




**Year
                Ended**
              **December
                31,**
              **(in
                thousands)****2006**Audit
                fees
            
            $
            67Audit-related
                fees
            
            
            —Tax
                fees
            
            
            20All
                other fees
            
            
            —Total
            
            $
            87





Fees
      paid
      to BDO Seidman, LLP, our independent registered public accounting firm for
      all
      of 2005, and for the period January 1 - November 16, 2006, are set forth
      below.





**Year
                Ended December 31,**
              **(in
                thousands)****2006**
            
            **2005**Audit
                fees
            
            $
            123
            
            $
            423Audit-related
                fees
            
            
            51
            
            
            80Tax
                fees
            
            
            3
            
            
            113All
                other fees
            
            
            —
            
            
            —Total
            
            $
            177
            
            $
            616





Fees
      paid
      in 2005 and 2006 to PricewaterhouseCoopers LLP, our independent registered
      public accounting firm prior to May 5, 2004, are set forth
      below.





**Year
                Ended December 31,**
              **(in
                thousands)****2006**
            
            **2005**Audit
                fees
            
            $
            26
            
            $
            64Audit-related
                fees
            
            
            —
            
            
            —Tax
                fees
            
            
            —
            
            
            2All
                other fees
            
            
            —
            
            
            —Total
            
            $
            26
            
            $
            66





***Audit
      Fees***





Audit
      fees were for professional services rendered for the audit of our annual
      financial statements for the years ended December 31, 2005 and 2006, the reviews
      of the financial statements included in our quarterly reports on Form 10-Q
      for
      the years ended December 31, 2005 and 2006, and services in connection with
      our
      statutory and regulatory filings for the years ended December 31, 2005 and
      2006.
      They amounted to $487 and $216, respectively.




44




***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, 2005 and 2006, 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 $80 and $51,
      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, 2005 and 2006 and included
      preparation of tax returns, review of restrictions on net operating loss
      carryforwards and other general tax services. Tax fees paid amounted to $115
      and
      $23, 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, 2005 and 2006.





**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
      proposals 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 Chairman
      of
      the Audit Committee and 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.





45


**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, 2006 and 2005





Consolidated
      Statements of Operations for the years ended December 31, 2006, 2005 and
      2004





Consolidated
      Statement of Changes in Stockholders’ Deficit for the years ended December 31,
      2006, 2005 and 2004





Consolidated
      Statements of Cash Flows for the years ended December 31, 2006, 2005 and
      2004





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
                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
              
              Form
                  of Asset Purchase Agreement by and between Counsel Springwell
                  Communications LLC and RSL COM U.S.A. Inc. (9)10.4
              
              Form
                  of Amendment No. 1 to Asset Purchase Agreement between Counsel
                  Springwell
                  Communications LLC and RSL U.S.A., Inc. (9)10.5
              
              Amended
                  and Restated Debt Restructuring Agreement, dated October 15, 2002.
                  (8)
  46
 **Exhibit
                      Number**
                  
                  **Title
                      of Exhibit**
 10.6
              
              Form
                  of Asset Purchase Agreement between Buyer’s United Inc., I-Link
                  Communications Inc., and C2, dated December 6, 2002. (8)10.7
              
              C2
                  Convertible Promissory Note for $7,500,000 between C2 and Counsel
                  Corporation (U.S.) dated December 10, 2002. (8)10.8
              
              Securities
                  Support Agreement by and between Counsel Communications, LLC and
                  C2 dated
                  as of March 1, 2001. (3)10.9
              
              Loan
                  Agreement dated as of January 26, 2004 between C2 and Counsel Corporation.
                  (7)10.10
              
              Loan
                  Agreement dated as of October 1, 2003, between C2 and Counsel Corporation
                  (U.S.). (7)10.11
              
              Amended
                  and Restated Stock Pledge Agreement dated as of January 30, 2004
                  between
                  C2 and Counsel Corporation (U.S.). (7)10.12
              
              Amended
                  and Restated Secured Promissory Note dated as of October 1, 2003,
                  for
                  $9,743,479 issued to Counsel Corporation (U.S.). (7)10.13
              
              Amended
                  and Restated Promissory Note dated January 26, 2004 for $7,600,000
                  issued
                  to Counsel Corporation. (7)10.14
              
              Amended
                  and Restated Loan Agreement dated as of January 30, 2004 between
                  C2 and
                  Counsel Corporation (U.S.). (7)10.15
              
              Third
                  Amendment to Senior Convertible Loan and Security Agreement dated
                  as of
                  November 1, 2003 between C2 and Counsel Corporation. (7)10.16
              
              Amended
                  and Restated Stock Pledge Agreement dated January 26, 2004 between
                  C2 and
                  Counsel. (10)10.17
              
              First
                  Amendment to Loan Agreement dated October 1, 2003. (11)10.18
              
              Fourth
                  Amendment to Senior Convertible Loan and security Agreement dated
                  March 1,
                  2001. (12)10.19
              
              First
                  Amendment to Amended and Restated Loan Agreement dated January
                  30, 2004.
                  (11)10.20
              
              First
                  Amendment to Loan Agreement dated January 26, 2004.
                  (11)10.21
              
              Amended
                  and Restated Promissory Note ($2.05 million). (11)10.22
              
              Amended
                  and Restated Promissory Note ($7.6 million). (11)10.23
              
              Securities
                  Purchase Agreement dated as of October 14, 2004. (12)10.24
              
              Secured
                  Convertible Term Note dated October 14, 2004. (12)10.25
              
              Master
                  Security Agreement dated October 14, 2004 by the Company, C2
                  Communications Technologies, Inc. and Acceris Communications Corp.
                  (12)10.26
              
              Registration
                  Rights Agreement dated as of October 14, 2004.
                  (12)
  47
 **Exhibit
                      Number**
                  
                  **Title
                      of Exhibit**
 10.27
              
              Common
                  Stock Purchase Warrant issued October 14, 2004. (12)10.28
              
              Stock
                  Pledge Agreement dated as of October 14, 2004. (12)10.29
              
              Guaranty
                  dated as of October 14, 2004. (12)10.30*
              
              Counsel
                  Management Agreement. (13)10.31
              
              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 (14)10.32
              
              Third
                  Amendment to Loan Agreement between C2 Global Technologies Inc.
                  and
                  Counsel Corporation (US)  dated June 4, 2001, dated as of April 28,
                  2005 (14)10.33
              
              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
                  (14)10.34
              
              Third
                  Amendment to Loan Agreement between C2 Global Technologies Inc.
                  and
                  Counsel Corporation dated January 26, 2004, dated as of April 28,
                  2005
                  (14)10.35
              
              Asset
                  Purchase Agreement, dated as of May 19, 2005 (15)10.36
              
              Management
                  Services Agreement, dated as of May 19, 2005 (15)10.37
              
              Letter
                  from Counsel Corporation dated as of May 16, 2005 (15)10.38
              
              Security
                  Agreement, dated as of May 19, 2005 (15)10.39
              
              Secured
                  Promissory Note, dated as of May 19, 2005 (15)10.40
              
              Irrevocable
                  Proxy, dated as of May 19, 2005 (15)10.41
              
              Guaranty,
                  dated as of May 19, 2005 (15)10.42
              
              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 (16)10.43
              
              Fourth
                  Amendment to Loan Agreement between C2 Global Technologies Inc.
                  and
                  Counsel Corporation (US) dated June 4, 2001, dated as of July 6,
                  2005
                  (16)10.44
              
              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
                  (16)10.45
              
              Fourth
                  Amendment to Loan Agreement between C2 Global Technologies Inc.
                  and
                  Counsel Corporation dated January 26, 2004, dated as of July 6,
                  2005
                  (16)10.46
              
              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 (16)
  48
 **Exhibit
                      Number**
                  
                  **Title
                      of Exhibit**
 10.47
              
              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 (17)10.48
              
              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 (17)10.49
              
              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. (17)10.50
              
              Promissory
                  Note for $6,315.53 dated December 31, 2006 between C2 Global Technologies
                  Inc. and Counsel Corporation. (included herewith)14
              
              C2
                  Global Technologies Inc. Code of Conduct. (7)21
              
              List
                  of subsidiaries. (included herewith)23.1
              
              Consent
                  of Mintz & Partners (included herewith)23.2
              
              Consent
                  of BDO Seidman LLP (included herewith)31.1
              
              Certification
                  of the CEO pursuant to Rule 13a-14(a) under the Securities Exchange
                  Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                  Act
                  of 2002 (included herewith)31.2
              
              Certification
                  of the CFO pursuant to Rule 13a-14(a) under the Securities Exchange
                  Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                  Act
                  of 2002  (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.





(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.




49




(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 Quarterly Report on Form 10-Q for the period
                ended
                March 31, 2005





(15)
            Incorporated
                by reference to our Current Report on Form 8-K filed on May 25,
                2005





(16)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                June 30, 2005





(17)
            Incorporated
                by reference to our Quarterly Report on Form 10-Q for the period
                ended
                September 30, 2005





50





**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 16, 2007
            By:
            /s/
              Allan C. SilberAllan
              C. Silber,Chairman
              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 Executive Officer
            
            March
                16, 2007Allan
                C. Silber/s/
                Stephen A. Weintraub
            
            Executive
                Vice President, Chief Financial Officer and
            
            March
                16, 2007Stephen
                A. Weintraub
            
            Corporate
              Secretary/s/
                Catherine A. Moran
            
            Vice
                President of Accounting and Controller
            
            March
                16, 2007Catherine
                A. Moran/s/
                Hal B. Heaton
            
            Director
            
            March
                16, 2007Hal
                B. Heaton/s/
                Samuel L. Shimer
            
            Director
            
            March
                16, 2007Samuel
                L. Shimer/s/
                Henry Y. L. Toh
            
            Director
            
            March
                16, 2007Henry
                Y.L. Toh





51


(c)
      Financial Statement Schedules





The
      following Schedules are included in our Financial Statements:





Schedule
      of Valuation and Qualifying Accounts





52





**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, 2006 and 2005
            
            
            F-4Consolidated
                Statements of Operations for the years ended December 31, 2006, 2005
                and
                2004
            
            
            F-5Consolidated
                Statement of Changes in Stockholders’ Deficit for the years ended December
                31, 2006, 2005 and 2004
            
            
            F-6Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005
                and
                2004
            
            
            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 sheet of C2
      Global
      Technologies Inc. and its subsidiaries as
      of
      December 31, 2006 and the related consolidated statements of operations,
      stockholders’ deficit, and cash flows for the year then ended. We have also
      audited the financial statement schedule listed in the accompanying index for
      the year ended December 31, 2006. 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 audit 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
      audit
      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 audit provides 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, 2006, and the results of its operations and its cash flows
      for
      the year then ended **,** 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 year ended December 31, 2006.




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/
      Mintz
& Partners LLP


Mintz
        & Partners LLP


Toronto,
      Ontario





March
      1,
      2007





F-2


**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 sheet of C2
      Global
      Technologies Inc. and its subsidiaries as
      of
      December 31, 2005 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 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, except for the effects of the discontinued


operations
      discussed in Note 6, as to which the
      date


is
      March 1, 2007





F-3




**C2
      GLOBAL TECHNOLOGIES** **INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**as
      of December 31,** **200** **6** **** **and** **200** **5**


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





**200****6**
            
            **200****5**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            3
            
            $
            327Restricted
                cash(Note 9)
            
            
            —
            
            
            1,506Non-trade
                accounts receivable
            
            
            —
            
            
            172Other
                current assets
            
            
            70
            
            
            90Total
                current assets
            
            
            73
            
            
            2,095Other
                assets:Intangible
                assets, net (Note 8)
            
            
            40
            
            
            60Goodwill
                (Note 8)
            
            
            173
            
            
            173Investments
                (Note 5)
            
            
            1,100
            
            
            1,100Other
                assets
            
            
            —
            
            
            62Total
                assets
            
            $
            1,386
            
            $
            3,490LIABILITIES
                AND STOCKHOLDERS’ DEFICITCurrent
                liabilities:Accounts
                payable and accrued liabilities(Note 7)
            
            $
            550
            
            $
            1,774Convertiblenote payable,
                net of unamortized discount(Note 9 and 18)
            
            
            1,299
            
            
            1,544Subordinated
                notes payable to a related party, net of unamortized discount(Note 9)
            
            
            6
            
            
            72,022Liabilities
                of discontinued operations (Note 6)
            
            
            —
            
            
            4,512Total
                current liabilities
            
            
            1,855
            
            
            79,852Convertible
                notepayable,
                less current portion andnet
                of unamortized discount(Note 9)
            
            
            —
            
            
            1,299Warrant
                topurchasecommon stock(Note 9)
            
            
            —
            
            
            281Total
                liabilities
            
            
            1,855
            
            
            81,432Commitments
                and contingencies (Note 10 and 11)Stockholders’
                deficit:Preferred
                stock, $10.00 par value, authorized 10,000,000 shares; issued and
                outstanding 612 shares, liquidation preference of $612 at December
                31,
                2006; issued and outstanding 618 shares, liquidation preference of
                $618 at
                December 31, 2005
            
            
            6
            
            
            6Common
                stock, $0.01 par value, authorized 300,000,000 shares; issued and
                outstanding 23,084,850 shares at December 31, 2006 and 19,237,135
                shares
                at December 31, 2005
            
            
            231
            
            
            192Additional
                paid-in capital
            
            
            274,499
            
            
            189,162Accumulated
                deficit
            
            
            (275,205
            )
            
            (267,302
            )Total
                stockholders’ deficit
            
            
            (469
            )
            
            (77,942
            )Total
                liabilities and stockholders’ deficit
            
            $
            1,386
            
            $
            3,490





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




F-4





**C2
      GLOBAL TECHNOLOGIES** **INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**for
      the years ended December 31,** **200** **6,** **200** **5** **** **and** **200** **4**


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




**200****6**
              
              **200****5**
              
              **200****4**Revenues:Technology
                  licensing and development
              
              $
              —
              
              $
              —
              
              $
              540Total
                  revenues
              
              
              —
              
              
              —
              
              
              540Operating
                  costs and expenses:Selling,
                  general and administrative
              
              
              1,281
              
              
              2,758
              
              
              4,079Research
                  and development
              
              
              —
              
              
              389
              
              
              442Depreciation
                  and amortization
              
              
              20
              
              
              32
              
              
              20Total
                  operating costs and expenses
              
              
              1,301
              
              
              3,179
              
              
              4,541Operating
                  loss
              
              
              (1,301
              )
              
              (3,179
              )
              
              (4,001
              )Other
                  income (expense):Interest
                  expense - related party (Note 9)
              
              
              (10,390
              )
              
              (12,154
              )
              
              (8,488
              )Interest
                  expense - third party
              
              
              (510
              )
              
              (658
              )
              
              (65
              )Other
                  income
              
              
              155
              
              
              1,084
              
              
              1,487Total
                  other expense
              
              
              (10,745
              )
              
              (11,728
              )
              
              (7,066
              )Loss
                  from continuing operations
              
              
              (12,046
              )
              
              (14,907
              )
              
              (11,067
              )Income
                  (loss) from discontinued operations (Note 6)
              
              
              4,370
              
              
              (3,582
              )
              
              (11,716
              )Net
                  loss
              
              $
              (7,676
              )
              $
              (18,489
              )
              $
              (22,783
              )Basic
                  and diluted weighted average shares outstanding
              
              
              19,258
              
              
              19,237
              
              
              19,256Net
                  loss per common share - basic and diluted: (Note 3 and 4)Loss
                  from continuing operations
              
              $
              (0.63
              )
              $
              (0.77
              )
              $
              (0.57
              )Earnings
                  (loss) from discontinued operations
              
              
              0.23
              
              
              (0.19
              )
              
              (0.61
              )Net
                  loss per common share
              
              $
              (0.40
              )
              $
              (0.96
              )
              $
              (1.18
              )





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




F-5





**C2
      GLOBAL TECHNOLOGIES** **INC. AND SUBSIDIARIES**


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


**for
      the years ended December 31,** **200** **6,** **200** **5** **** **and** **200** **4**


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





**Preferred
                  stock**
              
              **Common
                  stock**
              
              **Additional
                  paid-**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **in
                  capital**
              
              **Deficit****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 (1)
              
              
              —
              
              
              —
              
              
              (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
              )Conversion
                  of Class N preferred stock to common stock
              
              
              (6
              )
              
              —
              
              
              240
              
              
              —
              
              
              —
              
              
              —Conversion
                  of related party debt to common stock (2)
              
              
              —
              
              
              —
              
              
              3,847,475
              
              
              39
              
              
              3,347
              
              
              —Forgiveness
                  of related party debt (3)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              80,196
              
              
              —Transfer
                  of warrant to equity (4)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              430
              
              
              (227
              )Beneficial
                  conversion feature on certain convertible notes payable to related
                  party
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,225
              
              
              —Compensation
                  cost related to stock options
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              139
              
              
              —Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (7,676
              )**Balance
                  at December 31, 2006**
              
              
              612
              
              $
              6
              
              
              23,084,850
              
              $
              231
              
              $
              274,499
              
              $
              (275,205
              )





(1)
            The
                Company received and cancelled 25,000 common shares of the Company
                pursuant to the partial settlement of a prior claim against a third
                party.





(2)
            The
                Company issued 3,847,475 common shares of the Company in exchange
                for
                $3,386 of related party debt, as discussed in Note
                9.





(3)
            Contemporaneous
                with the issuance of common shares described in (2), the remaining
                $80,196
                of related party debt outstanding at December 30, 2006 was forgiven,
                as
                discussed in Note 9.





(4)
            The
                Company adopted FASB Staff Position No. EITF 00-19-2,*Accounting
                for Registration Payment Arrangements*in
                the fourth quarter of 2006, at which time it reclassified the warrant
                to
                purchase common stock from long-term liabilities to equity, as discussed
                in Note 9.





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




F-6


**C2
      GLOBAL TECHNOLOGIES** **INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**for
      the years ended December 31,** **200** **6,** **200** **5** **** **and** **200** **4** ****


**(In
      thousands of dollars)**




**2006**
              
              **2005**
              
              **2004****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (7,676
              )
              $
              (18,489
              )
              $
              (22,783
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Loss
                  (income) from discontinued operations
              
              
              (4,370
              )
              
              3,582
              
              
              11,716Depreciation
                  and amortization
              
              
              20
              
              
              32
              
              
              20Amortization
                  of discount and debt issuance costs on subordinated notes payable
                  to
                  related party
              
              
              2,848
              
              
              5,974
              
              
              4,186Amortization
                  of discount and debt issuance costs on convertible note
                  payable
              
              
              298
              
              
              284
              
              
              68Accrued
                  interest added to subordinated notes payable to a related
                  party
              
              
              7,542
              
              
              6,180
              
              
              4,304Mark
                  to market adjustment of warrant to purchase common stock
              
              
              (78
              )
              
              (41
              )
              
              (108
              )Stock
                  compensation expense
              
              
              139
              
              
              —
              
              
              —Expense
                  associated with issuance of options to purchase common stock to
                  non-employee
              
              
              —
              
              
              1
              
              
              5Loss
                  on disposal of fixed assets
              
              
              —
              
              
              38
              
              
              4Gain
                  on sale of investment in common stock
              
              
              —
              
              
              —
              
              
              (1,376
              )Cancellation
                  of common stock
              
              
              —
              
              
              —
              
              
              (21
              )(1,277
              )
              
              (2,439
              )
              
              (3,985
              )Increase
                  (decrease) in operating assets and liabilities:Accounts
                  receivable
              
              
              —
              
              
              —
              
              
              5Other
                  assets
              
              
              177
              
              
              (185
              )
              
              115Accounts
                  payable and accrued liabilities
              
              
              (1,224
              )
              
              (726
              )
              
              1,241Net
                  cash used in operating activities by continuing operations
              
              
              (2,324
              )
              
              (3,350
              )
              
              (2,624
              )Net
                  cash used in operating activities by discontinued
                  operations
              
              
              (142
              )
              
              (11,490
              )
              
              (6,004
              )Net
                  cash used in operating activities
              
              
              (2,466
              )
              
              (14,840
              )
              
              (8,628
              )**Cash
                  flows from investing activities:**Cash
                  received from sale of investments in common stock, net
              
              
              —
              
              
              —
              
              
              3,581Net
                  cash provided by investing activities of continuing
                  operations
              
              
              —
              
              
              —
              
              
              3,581Net
                  cash used in investing activities of discontinued
                  operations
              
              
              —
              
              
              (127
              )
              
              (731
              )Net
                  cash provided by (used in) investing activities
              
              
              —
              
              
              (127
              )
              
              2,850**Cash
                  flows from financing activities:**Proceeds
                  from issuance of subordinated notes payable to a related
                  party
              
              
              2,401
              
              
              15,365
              
              
              12,584Segregation
                  to restricted cash for future payments of convertible note
                  payable
              
              
              —
              
              
              (1,800
              )
              
              —Use
                  of restricted cash to pay convertible note payable
              
              
              1,506
              
              
              294
              
              
              —Repayment
                  of convertible note payable
              
              
              (1,765
              )
              
              (1,767
              )
              
              —Proceeds
                  from issuance of convertible note payable
              
              
              —
              
              
              —
              
              
              4,773Finance
                  costs on convertible note payable
              
              
              —
              
              
              —
              
              
              (211
              )Costs
                  paid by majority stockholder
              
              
              —
              
              
              —
              
              
              16Net
                  cash provided by financing activities of continuing
                  operations
              
              
              2,142
              
              
              12,092
              
              
              17,162Net
                  cash provided by (used in) financing activities of discontinued
                  operations
              
              
              —
              
              
              3,158
              
              
              (11,335
              )Net
                  cash provided by financing activities
              
              
              2,142
              
              
              15,250
              
              
              5,827Increase
                  (decrease) in cash and cash equivalents
              
              
              (324
              )
              
              283
              
              
              49Cash
                  and cash equivalents at beginning of year
              
              
              327
              
              
              44
              
              
              (5
              )Cash
                  and cash equivalents at end of year
              
              $
              3
              
              $
              327
              
              $
              44





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




F-7





**C2
      GLOBAL TECHNOLOGIES** **INC. AND SUBSIDIARIES**


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


**for
      the years ended December 31,** **200** **6,** **200** **5** **** **and** **200** **4**


**(In
      thousands of dollars)**


**2006**
              
              **2005**
              
              **2004****Supplemental
                  schedule of non-cash investing and financing
                  activities:**Disposition
                  of telecommunications business in exchange for assumption of
                  liabilities
              
              $
              4,324
              
              $
              8,014
              
              $
              —Warrant
                  to purchase common stock issued to convertible note holder
              
              
              —
              
              
              —
              
              
              430Fees
                  to the lender in connection with convertible note payable
              
              
              —
              
              
              —
              
              
              226Discount
                  in connection with convertible notes payable to related
                  parties
              
              
              1,225
              
              
              1,511
              
              
              3,771Conversion
                  of notes payable to a related party to common stock
              
              
              3,386
              
              
              —
              
              
              —Forgiveness
                  of related party debt
              
              
              80,196
              
              
              —
              
              
              —**Supplemental
                  cash flow information:**Taxes
                  paid
              
              
              4
              
              
              4
              
              
              11Interest
                  paid
              
              
              304
              
              
              417
              
              
              136





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




F-8





**C2
      GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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





**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
      subsidiar y 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 in September 2005, as
      discussed in Note 6 to these consolidated financial statements, l icensing
      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**




As
      a
      result of our substantial operating losses and negative cash flows from
      operations, we had a stockholders’ deficit of $ 469 (200 5 -
      $ 77 ,9 42 )
      and
      negative working capital of $ 1 , 782 (200 5 -
      $ 77 , 757 )
      at
      December 31, 200 6 . The
      decrease in the working capital deficit is largely due to the elimination of
      the
      $72,022 related party debt that was owing to our majority stockholder, Counsel
      Corporation (collectively, with its subsidiaries, “Counsel”) at December 31,
      2005. At December 29, 2006, the balance of the related party debt had increased
      to $83,582. On December 30, 2006, as discussed in Note 9 of these consolidated
      financial statements, Counsel converted $3,386 of the debt to common shares,
      and
      forgave the balance of $80,196. Another factor contributing to the decrease
      was
      the elimination of the $4,512 of liabilities of discontinued operations
      outstanding at December 31, 2005, primarily due to the disposition of the shares
      of two of the Company’s subsidiaries during the first and second quarters of
      2006, as discussed in Note 6. The disposition of the shares of WXC Corp.
      (“WXCC”, formerly known as Acceris Communications Corp.) during the first
      quarter of 2006 reduced these liabilities by $3,763. The disposition of the
      shares of I-Link Communications Inc. (“ILC”) during the second quarter of 2006
      reduced these liabilities by $711. As well, during 2006, other liabilities
      were
      reduced by $1,224. The de crease
      in
      the working capital deficit was
      partially offset by the use of $1,506 of restricted cash to reduce third party
      debt . Both
      c ontinuing and
      discontinued operations in 200 6 were
      primarily financed through advances
      from Counsel.





The
      Company had gross third
      party debt of $ 1 , 471 at
      December 31, 200 6 ,
      a
      reduction from the $ 3 , 516 owed at
      December 31, 200 5 . At
      December 31, 2006, the third party debt consisted of a convertible note payable
      (the “Note”). At December 31, 2005, the balance of the Note was $3,235 and the
      remainder of the debt was a warrant to purchase common stock, which warrant
      had
      an estimated fair value of $281. The warrant was reclassified to stockholders’
equity in the fourth quarter of 2006 when the Company adopted FASB Staff
      Position No. EITF 00-19-2, *Accounting
      for Registration Payment Arrangements* (“FSP
      EITF 00-19-2”), as discussed in Note 9. Throughout 2005 and 2006, the
      outstanding balance of the Note was reduced each month via payments of $147.
      The
      Note was scheduled to mature in October 2007, but was repaid in full in January
      2007, as discussed in Note 18. Prior to the repayment, the Note was secured
      by
      all assets of the Company and guaranteed by Counsel through its maturity in
      October 2007.





Gross
      r elated
      party debt owing to Counsel is
      $6 at
      December 31, 200 6 compared
      to $ 73 , 646 at
      December 31, 200 5,
      due to
      Counsel’s debt forgiveness as noted above . The
      Company expects this amount to increase during 2007 as Counsel funds its ongoing
      cash requirements, such as the funding received for the repayment of the Note.  Interest
      on the related party debt is capitalized, at the end of each quarter, and added
      to the principal amount outstanding. Until December 31, 2006, t his
      debt wa s
      supp or ted
      by
      Counsel’s Keep Well agreement with C2, which require d Counsel
      to fund, through intercompany advances or equity contributions, all capital
      investment, workin g
      capital
      or other operational cash requirementsof
      C2.The Keep
      Wellhas
      notbeen
      formallyextended
      beyondDecember
      31, 2006, but Counsel has indicated that it will fund the Company’s minimal cash
      requirements until at least October 31, 2007.




F-9




Counsel,
      in addition to guaranteeing the Note, also agreed to subordinate all of its
      debt
      owed by the Company, and to subrogate all of its related security interests,
      in
      favor of the third party lender. Counsel further agreed to pledge all of its
      shares owned in C2 as security for its guarantee. In accordance with the
      agreement with the third party lender, C2 could not repay amounts owing to
      Counsel while the Note remained outstanding. Additionally, so long as the Note
      remained outstanding, Counsel could not, without the written consent of the
      third party lender, take any enforcement action to collect its loans owing
      by
      C2. Effective with the January 2007 repayment of the Note, Counsel’s
      subordination agreement was terminated.





The
      Company has not realized revenues from continuing operations since 2004, and
      t here
      is
      significant doubt about the Company’s ability to obtain additional financing to
      fund
      its operations without the support of Counsel .
      Additionally, management
      believes that the
      Company does not have, at this
      time ,  the 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
      Note 1
      to these consolidated financial statements ,
      in
      order to continue as a going concern. Although
      the Company commenced litigation in June 2006 in order to realize this value,
      t here
      is
      no certainty that the Company ’s  litigation will
      be
      successful.





Summary
      of Ownership Structure and Capital Resources:





·
            The
                Company is approximately 92.55% owned by Counsel. The remaining 7.45%
                is
                owned by public stockholders.





·
            Since
                becoming controlling stockholder in 2001, Counsel has invested over
                $100,000
                inC2to
                fund the development ofC2’stechnology
                and itsTelecommunications
                business, and at December 30, 2006 C2 owed $83,582 to Counsel, including
                accrued and unpaid interest. As discussed in Note 9 of these consolidated
                financial statements, on December 30, 2006 Counsel converted $3,386
                of
                this debt into 3,847,475 common shares of C2, and forgave the balance
                of
                $80,196. Counsel advanced a further $6 on December 31, 2006.The
                disposition ofthe
                Telecommunications businessin
                the third quarter of 2005 significantly reduced both the complexity
                and
                the funding requirements of the Company’s operations,
                andCounsel’s
                investment in 2006was
                significantly less thanits investment in prior years.As
                noted above, although Counsel does not have a formal commitment in
                place
                regarding its ongoing financial support of the Company, Counsel has
                indicated that it will fund the Company’s minimal cash requirements until
                at least October 31, 2007.





·
            The
                Company had aggregate gross debt of $1,477at
                December 31,2006.
                The Company expects this amount to increase during 2007 as Counsel
                funds
                its ongoing cash requirements.




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





**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, as well as 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 significantly impact 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.





**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.




F-10




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.





**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:





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





**Intangible
      assets and goodwill**





The
      Company accounts for intangible assets in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 141, *Business
      Combinations* and
      SFAS
      No. 142, *Goodwill
      and Other Intangible Assets* .
      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. In that situation,
      the
      Company will measure the goodwill impairment loss based upon the fair value
      of
      the underlying assets and liabilities, including any unrecognized intangible
      assets, and will estimate the implied fair value of goodwill. An impairment
      loss
      would be recognized to the extent that the Company’s recorded goodwill exceeded
      the implied fair value of goodwill.





Goodwill,
      in addition to being tested for impairment annually, will be tested for
      impairment between annual tests if an event occurs or circumstances change
      such
      that it is more likely than not that the carrying amount of goodwill may be
      impaired. No impairment was present upon the performance of these tests in
      2006
      and 2005. 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 and judgments on the validity of the Company’s VoIP Patent
      Portfolio.





**Investments**





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
      interests do 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. Impairments, dividends and realized gains and losses
      on
      equity securities are included in other income in the condensed consolidated
      statements of operations. See Note 5 for further discussion of the Company’s
      current investments.





**Liabilities**





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.




F-11





**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.





The
      Company assesses the value of its deferred tax asset, which has been generated
      by a history of net operating and net capital 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, taking into consideration any limitations that may exist on
      its
      use of its net operating and net capital loss carryforwards. The Company is
      evaluating the application of FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
      109* (“FIN
      48”) to its business, and currently believes that the adoption of FIN 48 will
      not have a material effect on its financial position, operations or cash
      flow.





**Research
      and development costs**





The
      Company suspended its research and development activities in the third quarter
      of 2005. The Company expensed internal research and development costs, which
      primarily consist of salaries, when they were incurred.





**Stock-based
      compensation**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued a
      revision (“SFAS No. 123(R)”) to SFAS No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”), and the Company was required to adopt SFAS No. 123(R) in the first
      quarter of 2006. SFAS No. 123(R) supersedes Accounting Principles Board Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      No. 25”), and related Interpretations, and requires that all stock-based
      compensation, including options, be expensed at fair value, as of the grant
      date, over the vesting period. Companies are required to use an option pricing
      model (e.g.: Black-Scholes or Binomial) to determine compensation expense,
      consistent with the model previously used in the already required disclosures
      of
      SFAS No. 148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* .
      The effect of adopting SFAS No. 123(R) on the Company’s financial
      position, operations and cash flow is discussed in Note 17 of these
      consolidated financial statements.




At
      December 31, 200 6,
      the
      Company has several stock-based compensation plans, which are described more
      fully in Note 17 to these consolidated financial statements. Prior to January
      1,
      2006, the Company accounted for these plans under the recognition and
      measurement principles of APB No. 25, under which stock-based employee
      compensation cost was not reflected in net loss, as all options granted under
      these plans had an exercise price equal to the market value of the underlying
      common stock on the date of grant. In accordance with SFAS No. 123, as amended
      by SFAS No. 148, the Company provided footnote disclosure of the pro forma
      stock-based compensation cost, net loss and net loss per share as if the
      fair-value based method of expense recognition and measurement prescribed by
      SFAS No. 123 had been applied to all employee options.





**Fair
      Value of Financial Instruments**





The
      fair
      value of 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, 2006 and 2005
      for
      the Company’s financial instruments, which include cash, and accounts payable
      and accrued liabilities, approximates fair value. At December 31, 2006, the
      carrying value of the Company’s third party debt is lower than the fair value of
      the debt due to the discounts set out in Note 9. The Company’s planned adoption
      of SFAS No. 157 on January 1, 2007 is not expected to have a material impact
      on
      the fair value of the Company’s financial instruments.





**Segment
      reporting**





The
      Company currently operates in a single business segment, technology
      licensing.





F-12





**Discontinued
      Operations**





In
      accordance with the provisions of 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.





**Reclassifications**





Certain
      balances in the consolidated financial statements as of the years ended December
      31, 2004 and 2005 have been reclassified to conform to current year
      presentation. These changes had no effect on previously reported net loss,
      total
      assets, liabilities or stockholders’ deficit.





**Recent
      accounting pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* (“SFAS
      No. 154”). SFAS No. 154 superseded APB Opinion No. 20, *Accounting
      Changes* (“APB
      No.
      20”), and related Interpretations, and was 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 of an
      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. The Company’s adoption of SFAS No. 154 in 2006 has
      not had a material effect on its financial position, operations or cash flow.





In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
      109* (“FIN
      48”). FIN 48 is intended to reduce the diversity encountered in practice with
      regard to certain aspects of the recognition and measurement related to
      accounting for income taxes, and to clarify the accounting and disclosure for
      uncertainty in tax positions. FIN 48 introduces a new and more comprehensive
      model of accounting and reporting for a number of tax positions routinely taken
      by corporations when filing their tax returns. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The Company is evaluating the
      application of FIN 48 to its business, and currently believes that the adoption
      of FIN 48 will not have a material effect on its financial position, operations
      or cash flows.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value under GAAP, expands the required disclosures regarding
      fair
      value measurements, and applies to other accounting pronouncements that either
      require or permit fair value measurements. SFAS No. 157 is effective for fiscal
      years beginning after November 15, 2007, and for interim periods within those
      fiscal years, with early adoption encouraged. SFAS No. 157 is to be applied
      prospectively, with a limited form of retrospective application for several
      financial instruments. The Company plans to adopt SFAS No. 157 on January 1,
      2007, and currently believes that its adoption will not have a material effect
      on the Company’s financial position, operations or cash flows.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      No. 108”). SAB No. 108 provides guidance in considering the effects of prior
      year misstatements in the quantification of current year misstatements, for
      the
      purpose of determining whether the current year’s financial statements are
      materially misstated. SAB No. 108 is effective for fiscal years ending after
      November 15, 2006. The Company’s adoption of SAB No. 108 has not had a material
      impact on its financial position, operations or cash flows. ****





In
      December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, *Accounting
      for Registration Payment Arrangements* (“FSP
      EITF 00-19-2”). FSP EITF 00-19-2 clarifies that a registration payment
      arrangement and the financial instrument(s) relating to that arrangement should
      be separately measured and recognized in an entity’s financial statements,
      according to the appropriate GAAP for each, rather than treated as a unit.
      Specifically, FSP EITF 00-19-2 states that the financial instrument(s) should
      be
      recorded in the financial statements using appropriate GAAP without regard
      to
      contingent obligations in respect of a registration payment arrangement. FSP
      EITF 00-19-2 is effective immediately for registration payment arrangements
      and
      related financial instruments that are entered into or modified after December
      21, 2006. For registration payment arrangements and related financial
      instruments that were entered into prior to December 21, 2006, and that continue
      to be outstanding at the beginning of the period of adoption, transition is
      to
      be achieved by reporting a change in accounting principle through a
      cumulative-effect adjustment to the opening balance of retained earnings as
      of
      the first interim period for the fiscal year in which FSP EITF 00-19-2 is
      adopted. Early adoption of FSP EITF 00-19-2 is permitted for interim or annual
      periods for which financial statements or interim reports have not been issued.
      Retrospective application is not permitted. The Company has evaluated the
      requirements of FSP EITF 00-19-2 and determined that it is applicable to the
      warrant issued in conjunction with the Note issued to a third party lender
      in
      October 2004. The Company has chosen to adopt FSP EITF 00-19-2 in the fourth
      quarter of the year ending December 31, 2006. The impact of adopting FSP EITF
      00-19-2 on the Company’s financial position, operations and cash flow is
      detailed in Note 9 of these consolidated financial statements.




F-13




**Note
      4 – Net Earnings (Loss) per Share**





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, since they are assumed to be exercised or converted,
      except when their effect would be anti-dilutive. As the Company had a net loss
      from continuing operations for 2006, 2005, and 2004, basic and diluted loss
      per
      share are the same.





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. In May
      2006,
      there was a similar conversion by an unrelated third party of 6 shares of
      preferred stock into 240 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:


**2006**
              
              **2005**
              
              **2004**Assumed
                  conversion of Class N preferred stock
              
              
              24,480
              
              
              24,720
              
              
              24,720Assumed
                  conversion of convertible debt
              
              
              —
              
              
              3,639,412
              
              
              3,329,482Assumed
                  conversion of third party convertible debt(1)
              
              
              1,671,123
              
              
              3,676,471
              
              
              5,681,818Assumed
                  exercise of options and warrant to purchase shares of common
                  stock
              
              
              2,096,329
              
              
              1,727,029
              
              
              3,441,6433,791,932
              
              
              9,067,632
              
              
              12,477,663




(1)
            As
                discussed in Note 18 to these consolidated statements, in January
                2007 the
                note was repaid in full and 10,000 shares of common stock were
                issued.




**Note
      5 – Investments**





The
      Company’s investments as of December 31, 2006 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
      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. Based on the Company’s analysis, there
      has been no impairment in the fair value of the investment as of December 31,
      2006.





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 in 2003. 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.





**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. (name
      changed to WXC Corp. (“WXCC”)in
      October 2005).




F-14




The
      Company entered into an Asset Purchase Agreement, dated as of May 19, 2005,
      to
      sell substantially all of the assets and to transfer certain liabilities of WX CC
      to
      A cceris
      Management and Acquisition LLC (“A MA ”) , an
      arm’s
      length Minnesota limited liability company and wholly-owned subsidiary of North Central
      Equity LLC. 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,
      t h e transaction was completed on September 30, 2005.




The
      sale
      resulted in a gain on disposition of $6,387, net of disposition and business
      exit costs.  In
      accordance with GAAP, this
      gain, as well as the Telecommunications operations for the
      year ended December 31, 2005, and all
      prior periods included in the se consolidated financial statements, 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 were
      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 subject to a holdback, the
      amount of which was $320 at closing, subsequently reduced
      to $ 200 at
      December 31, 2005, relating to recorded liabilities of C2 that had not been
      settled at closing. At
      December 31, 2006, the outstanding loan balance is $200.




On
      September 30, 2005, i n
      conjunction with the closing of the
      asset sale transaction and the
      expir ation 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.
      A t December
      31, 2005, AMA had
      obtained authorization to provide telecommunications services in all states
      except Hawai i. The
      authorization to provide services in Hawaii was subsequently obtained on April
      5, 2006. For the period October 1, 2005 to March 31, 2006, the Company was
      charged a management fee by AMA that was equal to the revenue earned from
      providing these services. Both the revenue and the management fee were recorded
      in discontinued operations. The above is a summary description of the MSA2
      and
      by its nature is incomplete.




On
      February 28, 2006, the Company entered into a stock purchase agreement with
      a
      third party, which agreed to acquire all the shares of WXCC from the Company,
      subject to the Company’s third party lender’s agreement to release its security
      interest in the shares and to certain other closing requirements. As a result
      of
      all closing requirements being completed and the third party lender’s consent to
      the release of its security interest on March 28, 2006, the Company was relieved
      of $3,763 of obligations that had previously been classified as liabilities
      of
      discontinued operations. The Company recognized a gain of $3,645 on the sale,
      net of closing costs of $118, which is included in income from discontinued
      operations.





**Sale
      of Assets** **and Shares** **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 included 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. As 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, due to the receipt in January 2004 of the remaining contingent
      consideration.




On
      June
      26, 2006, the Company entered into a stock purchase agreement with the same
      third party involved in the purchase of the WXCC shares, discussed above. The
      third party agreed to acquire all the shares of ILC from the Company, subject
      to
      certain closing requirements. As a result of all closing requirements being
      completed as of June 30, 2006, the Company was relieved of $711 of obligations
      that had previously been classified as liabilities of discontinued operations.
      The Company recognized a gain of $665 on the sale, net of closing costs of
      $46,
      which is included in income from discontinued operations.




F-15





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





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





**200****6**
            
            **200****5**Regulatoryand legalfees
            
            $
            53
            
            $
            347Accounting,
                auditing and tax consulting
            
            
            126
            
            
            295Accrued
                restructuring costs
            
            
            —
            
            
            201Telecommunications
                and related costs
            
            
            77
            
            
            295Salesand othertaxes
            
            
            72
            
            
            316Remuneration
                and benefits
            
            
            101
            
            
            221Accrued
                interest
            
            
            17
            
            
            32Other
            
            
            104
            
            
            67$
            550
            
            $
            1,774




**Note
      8 – Intangible Assets and Goodwill**





Intangible
      assets consisted of the following at December 31:


******December
                  31, 2006****Amortization**
                **period**
              
              **Cost**
              
              **Accumulated**
                **amortization**
              
              **Net**Intangible
                  assets subject to amortization:Patentrights
              
              
              60
                  months
              
              
              100
              
              
              (60
              )
              
              40Goodwill
              
              
              
              
              
              173
              
              
              —
              
              
              173Total
                  intangible assets and goodwill
              
              
              
              
              $
              273
              
              $
              (60
              )
              $
              213




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




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 was $20 for each of the years ended December
      31, 2006, 2005 and 2004.





**Note
      9 – Debt**





The
      Company’s debt consists of the following at December 31:




F-16


**2006**
              
              **2005****Gross
                  debt**
              
              **Discounts
                  (1)**
              
              **Reported
                  debt**
              
              **Gross
                  debt**
              
              **Discounts
                  (1)**
              
              **Reported
                  debt**Subordinated
                  note(s) payable to Counsel, interest at 10.0%
              
              $
              6
              
              $
              —
              
              $
              6
              
              $
              55,376
              
              $
              —
              
              $
              55,376Subordinated
                  note payable to Counsel, convertible to common stock, interest
                  at
                  9.0%
              
              
              —
              
              
              —
              
              
              —
              
              
              18,270
              
              
              (1,624
              )
              
              16,646Convertible
                  note, convertible to common stock, interest at WSJ plus 3.0% (11.25%
                  at
                  December 31, 2006) (2)
              
              
              1,471
              
              
              (172
              )
              
              1,299
              
              
              3,235
              
              
              (392
              )
              
              2,843Warrant
                  to purchase common stock
              
              
              —
              
              
              —
              
              
              —
              
              
              281
              
              
              —
              
              
              2811,477
              
              
              (172
              )
              
              1,305
              
              
              77,162
              
              
              (2,016
              )
              
              75,146Less
                  current portion
              
              
              1,477
              
              
              (172
              )
              
              1,305
              
              
              75,411
              
              
              (1,845
              )
              
              73,566Long-term
                  debt
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              1,751
              
              $
              (171
              )
              $
              1,580





(1)
      Beneficial conversion feature, detachable warrant, imputed interest and costs
      associated with raising facilities are added to the gross debt balances over
      the
      applicable amortization periods.





(2)
      This
      Note was scheduled to mature in October 2007, but was repaid in full in January
      2007, as discussed in Note 18. Prior to the repayment, the Note was secured
      by
      all assets of the Company and guaranteed by Counsel through its maturity in
      October 2007. The repayment was funded by Counsel and added to the subordinated
      note owing to Counsel.


**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
              
              $
              6
              
              $
              6
              
              $
              —
              
              $
              —
              
              $
              —Convertible
                  note payable to a third party
              
              
              1,471
              
              
              1,471
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              1,477
              
              $
              1,477
              
              $
              —
              
              $
              —
              
              $
              —




Counsel
      is the controlling stockholder of the Company. The convertible note payable
      (the
“Note”) outstanding at December 31, 2006 was held by a third party lender. As
      discussed below, the Note was repaid in full in January 2007. As Counsel funded
      the repayment, the related party note was increased at the same time. At
      December 31, 2006, Counsel had guaranteed the Note through its contractual
      maturity in October 2007, and had also subordinated its debt position and
      pledged its ownership interest in C2 in favor of the third party
      lender.





Subordinated
      notes payable to a related party





The
      related party subordinated notes payable to Counsel were scheduled to mature
      on
      October 31, 2007. At December 30, 2006, the aggregate amount of the outstanding
      related party debt was $83,582, including accrued and unpaid interest to that
      date. On December 29, 2006, C2 negotiated an agreement with Counsel under which,
      effective December 30, 2006, $3,386 of debt was converted into 3,847,475
      common shares of C2 at a price of $0.88 per share. At the same time, the $80,196
      remaining balance of the debt was forgiven by Counsel. In accordance with GAAP
      and SEC requirements, the debt forgiveness has been recorded as a capital
      contribution by Counsel in the consolidated financial statements for the year
      ending December 31, 2006.





While
      any
      amount of the notes is outstanding, 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 or forgiveness.
      During 2006, Counsel advanced $2,401 (2005 - $15,365; 2004 - $12,584) and
      accrued interest added to principal was $7,542 (2005 - $6,180; 2004 - $4,304).
      Historically, 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 which expired on December 31, 2006, had previously agreed
      to fund the cash requirements of C2. Although the Keep Well has not been
      extended, Counsel has indicated that it will fund the Company’s minimal cash
      requirements until at least October 31, 2007.





At
      December 31, 2006 C2 was indebted to Counsel in the amount of $6, representing
      C2 expenses paid by Counsel on behalf of C2 that had not been recorded in C2’s
      accounts prior to December 31, 2006. The Company expects this amount to increase
      during 2007 as Counsel funds its ongoing cash requirements, such as the funding
      received for the repayment of the Note.




F-17





In
      accordance with the agreement with the third party lender, C2 could not repay
      amounts owing to Counsel while the Note remained outstanding. Additionally,
      so
      long as the Note remained outstanding, Counsel could not, without the written
      consent of the third party lender, take any enforcement action to collect its
      loans owing by C2. The Note was prepaid in full in January 2007, at which point
      Counsel’s subordination agreement was terminated.





Prior
      to
      the debt forgiveness discussed above, one of the notes payable to Counsel was
      convertible into common stock. Throughout the term of this note, anti-dilution
      events impacted the conversion price and the number of shares issuable upon
      conversion of this debt. As well, accumulated unpaid interest costs, which
      were
      required by the terms of the debt to be added to the principal balance, were
      also convertible upon the same terms. These anti-dilution events and deemed
      “paid in kind” interest periodically resulted 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* ,
      in 2006
      the Company recorded a BCF of $1,225 (2005 - $1,511; 2004 - $3,771) as paid-in
      capital. The aggregate BCF was amortized over the term of the debt, using the
      effective interest rate method, through a charge to the statement of operations,
      and was fully amortized at December 30, 2006. For further discussion of notes
      payable and other transactions with Counsel, see Note 2, above, and Note 13,
      below.





Convertible
      note payable to a third party





On
      October 14, 2004, the Company issued the Note
      with a detachable
      warrant to a
      third
      party lender ,
      in the
      principal amount of $5,000, due October 14, 2007. The Note provide d that the
      principal amount outstanding b ore interest
      at the prime rate as published in the Wall Street Journal plus 3% (but not
      to
      less than 7% per annum) decreasing by 2% (but not to 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. Interest wa s
      payable
      monthly in arrears. Principal wa s
      payable
      at the rate of approximately $147 per month, in cash or ,
      in
      certain circumstances, in registered common stock. Payment amounts w ere
      to be
      converted into stock if (i) the average closing price for five trading days
      immediately preceding the repayment date wa s
      at
      least 100% of the Fixed Conversion Price, (ii) the amount of the conversion
      d id not
      exceed 25% of the aggregate dollar trading volume for the 22-day trading period
      immediately preceding the repayment date, (iii) a registration statement wa s
      effective covering the issued shares and (iv) no Event of Default
      exist ed and wa s
      continuing. In the event the monthly payment was paid in
      cash, the Company pa id 102% of
      the amount due. The Company ha d 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. Subsequent to December 31, 2006, in January 2007, as a result of negotiations
      between the Company and the third party lender, the lender converted a portion
      of its note into 10,000 common shares of the Company, and the Company prepaid
      the remaining Note in full by paying 105% of the amount then due.





While
      the
      Note was outstanding,  the
      third
      party lender had the right to 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 wa s
      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 wa s
      automatically rendered null and void. The
      third
      party lender may
      also have revoke d the
      4.99% ownership restriction upon 75 days prior notice to the Company. In
      accordance with FASB Standard
      No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* 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* ),
      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 wa s
      reassessed on a quarterly basis on a mark-to-market basis. At the end of
      200 6 and
      2005, the Company concluded that the value of the embedded derivatives remained
      nominal.





The
      embedded derivative elements included: (1) a variable interest rate component
      dependent on the WSJ prime rate, (2) an interest rate forward contract
      component, which adjusted the interest rate downward if certain conditions
      were
      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, occurred,
      (5)
      an equity-forward element, which required the monthly principal, interest and
      other fees to be paid in common stock if certain market conditions related
      to
      the Company’s common stock occurred, and (6) a conversion option permitting the
      third party lender to convert the Note into common stock of the Company. At
      December 31, 2006, the aggregate debt was convertible into 1,671,123 shares
      of
      the common stock of the Company.





F-18


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 the third party lender, which was deducted from the amount advanced on
        closing. The debt discount was amortized over the term of the debt using
        the
        effective interest method through a charge to the statement of operations.
        At
        December 31, 2006, the amount of the debt discount was $172.
 
 Warrant
        to purchase common stock
 
 In
        addition to the
        Note ,
        the
        Company issued a common stock purchase warrant (the “Warrant”) to the
        third
        party lender ,
        entitling the
        lender to
        purchase up to one million shares of common stock, subject to adjustment.
        The
        Warrant entitles the hold er
        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 .
        The
        Exercise Price is 125%,
        135% and 150% of the average closing price for the ten
        trading days immediately prior to the date of the Warrant,
        respectively.
 
 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.
 
 At
        the
        time it was issued in October 2004, the Warrant was classified as a liability
        in
        the consolidated financial statements, as it was linked to a registration
        payment arrangement and thus met the conditions for this classification under
        the GAAP in effect at that date. The details of the registration payment
        arrangement were previously disclosed in the Company’s Report on Form 8-K, filed
        with the SEC on October 20, 2004. At the issuance of the Warrant, the Company
        did not expect to make any payments relating to the registration payment
        arrangement The initial value assigned to the Warrant was $430. The
        value
        of the Warrant wa s then reassessed
        quarterly on a mark-to-market basis ,
        based
        on the price of the Company’s common stock at the end of the quarter. The
        Company adjusted the value of the Warrant to $322 at the end of 2004 , $ 281 at the
        end of 2005, and
        $203
        at September 30, 2006. The Company recorded  $108 , $ 41
        and
        $78 as income in 2004, 2005 and 2006, respectively ,
        representing the diminution in the estimated fair value of the Warrant during
        each of those periods .
 
 In
        December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, *Accounting
        for Registration Payment Arrangements* (“FSP
        EITF 00-19-2”). According to FSP EITF 00-19-2, financial instrument(s) such as
        the Warrant should be recorded in the financial statements using appropriate
        GAAP without regard to the contingent obligation to transfer consideration
        pursuant to a related registration payment arrangement, and any contingent
        obligations under the registration payment arrangement should be separately
        recognized and measured in accordance with GAAP relating to liabilities.
        Adoption of FSP EITF 00-19-2 is permitted for interim or annual periods for
        which financial statements or interim reports have not been issued.
        Retrospective application is not permitted. The Company evaluated the
        requirements of FSP EITF 00-19-2, determined that it is applicable to the
        Warrant, and has chosen to adopt FSP EITF 00-19-2 effective October 1, 2006,
        the
        beginning of the Company’s 2006 fourth quarter. The impact of adopting FSP EITF
        00-19-2 on the Company’s financial position was as follows: long-term
        liabilities were reduced by $203, the fair value of the Warrant at October
        1,
        2006, and stockholders’ equity was increased by $430, the fair value of the
        Warrant when issued at October 14, 2004. The difference between these two
        amounts, $227, was recorded as a charge to opening retained earnings. At
        the
        date of adoption of FSP EITF 00-19-2, and at December 31, 2006, the Company’s
        assessment was that payments relating to the registration payment arrangement
        were not probable, and therefore the Company has not recorded any liability
        in
        connection with such a payment.
 
 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 WXCC pledged their respective
        stockholdings in subsidiary companies, controlled by C2, to the third party
        lender. In addition, C2 Communications Technologies, Inc., WXCC, WebTotel
        Inc.,
        Mibridge Inc., Counsel Corporation, Counsel Communications LLC and Counsel
        Corporation (US) jointly and severally guaranteed the obligation to the third
        party lender. So long as 25% of principal amount of the Note was outstanding,
        the Company agreed, among other things, that it would 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. The restricted cash was fully applied toward scheduled monthly payments
        of the Note during 2005 and 2006.
  F-19





**Note
      10 - Commitments**





At
      December 31, 200 6 ,
      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 2006, 2005 and
      2004.
      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:




**2006**
            
            **2005**
            
            **2004**Expected
                federal statutory tax benefit
            
            $
            (4,096
            )
            $
            (5,068
            )
            $
            (3,763
            )Increase
                (reduction) in taxes resulting from:State
                income taxes
            
            
            (121
            )
            
            (268
            )
            
            (173
            )Foreign
                loss not subject to domestic tax
            
            
            —
            
            
            —
            
            
            2Non-deductible
                interest on certain notes
            
            
            2,841
            
            
            2,560
            
            
            1,893Change
                in valuation allowance attributable to continuing
                operations
            
            
            1,371
            
            
            2,775
            
            
            1,714Other
            
            
            5
            
            
            1
            
            
            327$
            —
            
            $
            —
            
            $
            —





The
      change in the valuation allowance, including discontinued operations, was a
      decrease of $21,186, an increase of $3,123 and an increase of $6,139 for the
      years ended 2006, 2005 and 2004, respectively.





At
      December 31, 2006, the Company had total net operating loss and net capital
      loss
      carryforwards for federal income tax purposes of approximately $110,000 and
      $35,000 respectively. The Company has recorded a full valuation allowance in
      respect of the tax effect of these losses. The net operating loss carryforwards
      expire between 2024 and 2026. The net capital loss carryforwards expire in
      2010
      and 2011.





The
      Company’s utilization of approximately $59,000 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 the 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 recur, resulting in further restrictions on the Company’s income tax loss
      carry forwards existing at a particular time. In addition, further restrictions,
      reductions in, or expiry of net operating loss and net capital loss
      carryforwards may occur through future merger, acquisition and/or disposition
      transactions or failure to continue a significant level of business activities.
      Any such additional limitations could require the Company to pay income taxes
      on
      its future earnings and record an income tax expense to the extent of such
      liability, despite the existence of such tax loss carryforwards.





Due
      to
      the expiry periods for the Company’s net operating loss carryforwards and the
      above usage restrictions, it is estimated that, at most, $90,000 of the total
      $110,000 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.




F-20





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 may, however, 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, 2006
      and
      2005 are as follows:





**2006**
            
            **2005**Deferred
                tax assetsNet
                operating loss carryforwards
            
            $
            41,197
            
            $
            58,923Net
                capital loss carryforwards
            
            
            13,014
            
            
            12,877Acquired
                in-process research and development and intangible assets
            
            
            1,881
            
            
            2,288Stock-based
                compensation
            
            
            48
            
            
            —Accrued
                interest
            
            
            —
            
            
            1,645Accrued
                liabilities
            
            
            7
            
            
            1,342Accrued
                vacation
            
            
            —
            
            
            2Investments
            
            
            —
            
            
            53Reserve
                for accounts receivable
            
            
            2
            
            
            2Other
            
            
            (39
            )
            
            164Valuation
                allowance
            
            
            (56,110
            )
            
            (77,296
            )Total
                deferred tax assets
            
            
            —
            
            
            —Deferred
                tax liabilities
            
            
            —
            
            
            —Net
                deferred tax assets
            
            $
            —
            
            $
            —





As
      the
      Company has not generated taxable income in the past, a valuation allowance
      has
      been provided at December 31, 2006 and 2005 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 the
      application of the forgiveness of debt by Counsel, as more fully described
      in
      Note 9, against the Company’s net operating loss carryforwards.




**Note
      13 - Transactions with Controlling Stockholder**





**Transactions
      with Counsel:**





At
      December 30, 2006, C2 was indebted to Counsel in the aggregate amount of
      $83,582, including accrued and unpaid interest to that date. As discussed in
      Note 9, on December 29, 2006, C2 negotiated an agreement with Counsel under
      which, effective December 30, 2006, $3,386 of debt was converted into 3,847,475
      common shares of C2 at a price of $0.88 per common share. At the same time,
      the
      $80,196 remaining balance of the debt was forgiven by Counsel. In accordance
      with GAAP and SEC requirements, the debt forgiveness has been recorded as a
      capital contribution by Counsel in the consolidated financial statements for
      the
      year ended December 31, 2006. The details of the individual notes comprising
      the
      $83,582 are presented below.





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 provided that at any time after September 1, 2002, the
      outstanding debt including accrued interest would automatically be converted
      into common stock using the then current conversion rate, on the first date
      that
      was the twentieth consecutive trading day that the common stock closed at a
      price per share that was equal to or greater than $20.00 per share. The Senior
      Loan Agreement also provided that the conversion price was in certain cases
      subject to adjustment, included traditional anti-dilution protection for the
      lender, and was subject to certain events of default, which could have
      accelerated 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 was amended several times
      and the maturity date of the loan plus accrued interest was extended to October
      31, 2007. As a result of the application of the anti-dilution provisions of
      the
      Senior Loan Agreement, the conversion price was adjusted to $5.02 per common
      share. At December 30, 200 6,
      prior
      to the debt forgiveness discussed above, the total outstanding debt under the Senior
      Loan Agreement (including
      principal and accrued interest) was $19,966  which
      was
      convertible into approximately 3,977,208  shares
      of
      common stock.





F-21





In
      connection with the 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.





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 provide d 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 was amended
      several times, including in connection with the sale of substantially all the
      assets of WXCC to AMA, and was extended to October 31, 2007. There were no
      conversion features associated with this loan.  The
      terms
      of the loan agreement provided that certain events of default would have
      accelerated the repayment of principal plus accrued interest. As of December
      30, 200 6,
      prior
      to the debt forgiveness discussed above, the total outstanding debt under the
      loan (including principal and accrued interest) was $8,291.





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 ofC2at
                $3.77 per share (representing the average closing price ofC2’scommon
                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 ofC2at
                $3.77 per share (representing the average closing price ofC2’scommon
                stock during May 2002).





3)
            Counsel
                would advance toC2all
                amounts paid or payable byC2to
                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.





F-22





4)
            Counsel
                would reimburseC2for
                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
                reimbursedC2$132
                and $499, respectively, for certain reimbursable expenses, whichwererecorded as additional paid-in capital.





5)
            The
                issuance of common stock byC2pursuant
                to this Agreement would result in a weighted average conversion price
                adjustment pursuant to the provisions of the Senior Loan Agreement.
                Whereas the conversion price for the Senior 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.





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 were 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 October
      31,
      2007 . 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,
      2005 and 2006 of $8,662, $15,365 and $2,401, respectively. The outstanding
      balance at December 30, 2006 (including principal and accrued interest), prior
      to the debt forgiveness discussed above, was $41,897.  At
      December 31, 2006 C2 was indebted to Counsel in the amount of $6, representing
      C2 expenses paid by Counsel on behalf of C2 that had not been recorded in C2’s
      accounts prior to the debt forgiveness. The Company expects this amount to
      increase during 2007 as Counsel funds its ongoing cash requirements, such as
      the
      funding received for the repayment of the Note owing to the Company’s third
      party lender.





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, 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 w as amended
      several times and the maturity date of the loan plus accrued interest
      was extended
      to October 31, 2007 . Consistent with the terms of the Initial Loan, subject to certain conditions,
      the New Loan provided 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 were not used for an approved
      expanded business plan, the purchase of the Company’s accounts receivable by a
      third party or where C2 sold
      material assets in excess of cash proceeds of $1,000, and certain other events.  The
      New
      Loan was subject to certain events of default which would have accelerated
      the
      repayment of principal plus accrued interest. Pursuant to a Stock Pledge
      Agreement as amended, the New Loan was secured by the common stock held directly
      by C2 in its operating subsidiary. There were no conversion features associated
      with the New Loan. As of December 30, 2006, the total outstanding debt under
      the
      New Loan (including principal and accrued interest), prior to the debt
      forgiveness discussed above, was $13,428.





F-23





Counsel
      Keep Well





Counsel
      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”). Although Counsel did not extend the
      Keep Well beyond its December 31, 2006 maturity, Counsel has indicated to
      management that it will continue to fund the Company’s minimal cash requirements
      until at least October 31, 2007.





Counsel
      Guarantee, Subordination and Stock Pledge





In
      October 2004, Counsel agreed to guarantee the debt that the Company owed to
      its
      third party lender, and also agreed to subordinate all of its debt owed by
      the
      Company, and to subrogate all of its related security interests, in favor of
      the
      third party lender. Counsel further agreed to pledge all of its shares owned
      in
      C2 as security for its guarantee.  In
      accordance with these agreements, amounts owing to Counsel could not be repaid
      while amounts remained owing to the third party lender. In January 2007, when
      the debt was prepaid in full, the subordination , subrogation and guarantee
      agreements were terminated.





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. In March 2006 C2 entered into a
      similar agreement with Counsel for services to be provided in 2006. The basis
      for such services charged was 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 was $225, reflecting the
      reduced complexity of C2 operations following the sale of the Telecommunications
      business. The foregoing fees for 2004, 2005 and 2006 were due and payable within
      30 days following the respective year ends, subject to any subordination
      restrictions then in effect. Any unpaid fee amounts bore interest at 10% per
      annum commencing on the day after such year-end, and 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, would have become due and payable
      immediately upon the occurrence of such event, subject to any subordination
      restrictions then in effect. The fees for 2004, 2005 and 2006 were forgiven
      on
      December 30, 2006 as part of Counsel’s forgiveness of its outstanding debt from
      C2, as discussed above. In accordance with the agreement with the Company’s
      third party lender, amounts owing to Counsel at December 31, 2006 could not
      be
      repaid while amounts remained owing to the third party lender. The repayment
      in
      full of the third party debt in January 2007 removed this restriction on
      payments to Counsel. The Company expects that Counsel will continue to provide
      these services in 2007 on the same basis.





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 was
      reported as an expense of the discontinued operations, with an offsetting credit
      to contributed surplus. There were no economic consequences to C2 as the result
      of this conferral of benefit.





**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.




F-24





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.
      In
      January 2007, a trial date of September 7, 2007 was set for both
      actions.





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.





In
      connection with the Company’s efforts to enforce its patent rights, C2
      Communications Technologies Inc., a wholly-owned subsidiary of the Company,
      filed a patent infringement lawsuit against AT&T, Inc., Verizon
      Communications, Inc., Qwest Communications International, Inc., Bellsouth
      Corporation, Sprint Nextel Corporation, Global Crossing Limited, and Level
      3
      Communications, Inc. The complaint was filed in the Marshall Division of the
      United States District Court for the Eastern District of Texas on June 15,
      2006.
      The complaint alleges that these companies’ VoIP services and systems infringe
      the Company’s U.S. Patent No. 6,243,373, entitled *“Method
      and Apparatus for Implementing a Computer Network/Internet Telephone
      System”.* The
      complaint seeks an injunction, monetary damages and costs. There is no assurance
      that the Company will be successful in this litigation.





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 value of each Class
      N
      preferred share is $1,000, and each share is convertible to 40 common shares
      at
      the rate of $25 per common share.




F-25





During
      2006, holders of the Class N preferred stock converted six of those shares
      into
      240 shares of common stock. There
      were no conversions during 2005. As
      of
      December 31, 200 6  and 200 5,
      there
      were, respectively, 612 and 618 shares of Class N preferred stock issued and
      outstanding.





At
      December 31, 200 6  and 200 5,
      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, 200 6,
      the
      Company does not have any preferred stock outstanding which has any preferential
      dividends.





So
      long
      as 25% of principal amount of the Note held by the Company’s third party lender,
      described in Note 9 of these financial statements, remained outstanding, the
      Company could not pay any dividends on its common stock. The Note was repaid
      in
      full in January 2007.





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




**Note
      17 - Stock-Based Compensation**





***Stock-
      Based Compensation Plans***





At
      December 31, 2006, the Company has several stock-based compensation plans,
      which
      are described below. All information presented includes the effect of the
      1-for-20 reverse stock split that was approved by the Company’s stockholders in
      November 2003.





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 stock 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). If any incentive option, non-qualified option or SAR terminates prior
      to exercise thereof and during the duration of the 1995 Director Plan, the
      shares of common stock as to which such option or right was not exercised will
      become available under the 1995 Director Plan for the grant of additional
      options or rights to any eligible director. Each option is immediately
      exercisable for a period of ten years from the date of grant. The Company has
      12,500 shares of common stock reserved for issuance under the 1995 Director
      Plan. No options were granted or exercised under this plan in 2006 and 2005,
      and
      as of December 31, 2006, no options to purchase shares are outstanding. As
      of
      December 31, 2005, options to purchase 7,500 shares of common stock at a price
      of $22.50 per share were outstanding and exercisable. In 2006, 7,500 options
      expired (2005 - 1,000).





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 for the grant of 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, 2006 and 2005, there were no options outstanding under the 1995
      Employee Plan. No options were granted or exercised in 2006 or 2005 under the
      1995 Employee Plan.




F-26




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, 2006, there were options to purchase 239,611 shares (2005 - 14,611
      shares) of the Company’s common stock outstanding under the 1997 Plan. 225,000
      of these options were unvested at December 31, 2006, and will vest over four
      years at an exercise price of $0.66 per share, beginning in 2007. 14,611 of
      these options were vested at December 31, 2006 and are exercisable at prices
      of
      $1.40 to $111.26 per share (2005 - $1.40 to $111.26 per share). The outstanding
      unvested options, upon vesting, must be exercised within seven years of grant
      date and can only be exercised while the option holder is an employee of the
      Company. The outstanding vested options 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 2006,
      options to purchase 225,000 shares of common stock were issued, and no options
      were forfeited or expired. During 2005, no options to purchase shares of common
      stock were issued, and 42,125 options were forfeited. There were no exercises
      during 2006 or 2005.





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.





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 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 a committee thereof; 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, 2006, there were options to purchase 568,250 shares
      (2005 - 338,250 shares) of the Company’s common stock outstanding under the 2003
      Plan. The outstanding options vest over four years at exercise prices ranging
      from $0.51 to $3.00 per share. During 2006, 230,000 options (2005 - 39,600
      options) were granted, and no options (2005 - 1,060,975 options) to purchase
      shares of common stock were forfeited or expired. There were no options
      exercised during 2006 and 2005, and no SARs have been issued under the 2003
      Plan.





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. As of December 31, 2005, there were 78,200 options outstanding
      with
      an exercise price of $78.00, all of which expired in 2006. No options expired,
      were exercised or forfeited during 2005.





F-27





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 2006
      or 2005. The remaining options must be exercised within ten years of the grant
      date. As of December 31, 2006 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 2006 or 2005. No options expired or were exercised
      during 2006 or 2005. As of December 31, 2006 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 2006 or 2005. As of December
      31, 2006 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 2006 or 2005. As of December 31, 2006, 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 2006 or 2005. The fair value of the options issued was recorded as
      deferred compensation of $300,000, which was amortized over the expected period
      the services were to be provided. The options must be exercised within ten
      years
      of the grant date. As of December 31, 2006 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 2006 or 2005. As of December 31, 2006,
      there remained 68,833 options outstanding.





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





**2006**
            
            **2005**
            
            **2004****Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Options**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Outstanding
                at beginning of year
            
            
            727,026
            
            $
            37.50
            
            
            1,791,643
            
            $
            42.46
            
            
            1,807,879
            
            $
            18.20Granted
            
            
            455,000
            
            
            0.82
            
            
            39,600
            
            
            0.54
            
            
            421,350
            
            
            1.73Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Expired
            
            
            (85,700
            )
            
            73.14
            
            
            (1,117
            )
            
            21.98
            
            
            (116
            )
            
            77.50Forfeited
            
            
            —
            
            
            —
            
            
            (1,103,100
            )
            
            4.64
            
            
            (437,470
            )
            
            2.78Outstanding
                at end of year
            
            
            1,096,326
            
            $
            19.51
            
            
            727,026
            
            $
            37.50
            
            
            1,791,643
            
            $
            18.08Options
                exercisable at year end
            
            
            499,701
            
            $
            41.24
            
            
            516,463
            
            $
            53.39
            
            
            696,012
            
            $
            42.46Weighted-average
                fair value of options granted during the year
            
            
            
            
            $
            0.50
            
            
            
            
            $
            0.39
            
            
            
            
            $
            1.34




***Stock-Based
      Compensation Expense***




In
      December 2004, the FASB issued a revision (“SFAS No. 123(R)”) to SFAS No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”), and the Company was required to adopt SFAS No. 123(R) in the first
      quarter of 2006. SFAS No. 123(R) supersedes Accounting Principles Board Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      No. 25”), and related Interpretations, and requires that all stock-based
      compensation, including options, be expensed at fair value, as of the grant
      date, over the vesting period. Companies are required to use an option pricing
      model (e.g.: Black-Scholes or Binomial) to determine compensation expense,
      consistent with the model previously used in the already required disclosures
      of
      SFAS No. 148, *Accounting
      for* *Stock-Based
      Compensation-Transition and Disclosure* .
      The
      effect of adopting SFAS No. 123(R) on the Company’s financial position,
      operations and cash flow is discussed below.




F-28




The
      Company’s stock-based compensation plans are described above. Prior to January
      1, 2006, the Company accounted for these plans under the recognition and
      measurement principles of APB No. 25, under which stock-based employee
      compensation cost was not reflected in net loss, as all options granted under
      these plans had an exercise price equal to the market value of the underlying
      common stock on the date of grant. In accordance with SFAS No. 123, as amended
      by SFAS No. 148, the Company provided footnote disclosure of the pro forma
      stock-based compensation cost, net loss and net loss per share as if the
      fair-value based method of expense recognition and measurement prescribed by
      SFAS No. 123 had been applied to all employee options.




The
      table
      below illustrates the effect on net loss and net loss per share if the Company
      had applied the fair value recognition provisions of SFAS No. 123 to options
      granted under the Company’s stock option plans in the years ended December 31,
      2005 and 2004:.





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





The
      fair
      value of each option grant was 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%), risk free
      rates ranging from 3.73% to 3.75% and 3.10% to 3.83% in 2005 and 2004,
      respectively, expected lives of four years in 2005 and 2004, and dividend yield
      of zero for each year.




As
      a
      result of adopting SFAS No. 123(R) on January 1, 2006, C2’s net loss for the
      year ended December 31, 2006 is $139 more than it would have been if the Company
      had continued to account for stock-based compensation under APB No. 25. Basic
      and diluted net loss per share for the year ended December 31, 2006 was
      increased by $0.01. The adoption of SFAS No. 123(R) had no effect on the
      Company’s Statement of Cash Flows, as there were no exercises of stock options
      during the year ended December 31, 2006 and therefore no stock option-related
      cash flows were generated.




The
      $139
      fair value compensation cost of unvested stock options in 2006 was determined
      using historical Black-Scholes input information at grant dates between 2003
      and
      2006. These inputs included expected volatility between 79% and 98%, risk-free
      interest rates between 3.12% and 5.07%, expected terms of 4.75 years, and an
      expected dividend yield of zero.




As
      of
      December 31, 2006, the total unrecognized stock-based compensation expense
      related to unvested stock options was $328, which is expected to be recognized
      over a weighted average period of approximately 16 months.




In
      April
      2006, 30,000 options were granted to the Company’s non-employee directors under
      the terms of the 2003 Stock Option and Appreciation Rights Plan. In August
      2006,
      75,000 options were granted to the Company’s CEO under the terms of the 2003
      Stock Option and Appreciation Rights Plan, and 225,000 options were granted
      to
      the Company’s CEO under the terms of the 1997 Recruitment Stock Option Plan.
      Also in August 2006, 125,000 options were granted to the Company’s other
      officers and employees under the terms of the 2003 Stock Option and Appreciation
      Rights Plan. No options were forfeited or exercised during the year ending
      December 31, 2006; however, 7,500 options under the 1995 Director Stock Option
      and Appreciation Rights Plan, and 78,200 executive options awarded in 1996,
      expired during the year ending December 31, 2006.




As
      of
      December 30, 2006, the aggregate intrinsic value of options outstanding at
      that
      date was $0, based on the Company’s closing stock price of $0.40 as of the last
      business day of the year ended December 31, 2006. Intrinsic value is the amount
      by which the fair value of the underlying stock exceeds the exercise price
      of
      the options. At December 31, 2006, all of the outstanding options had exercise
      prices greater than $0.40.




F-29




The
      following table presents information regarding unvested stock options
      outstanding at December 31, 2006:




**Options**
            
            **Weighted**
              **Average**
              **Grant
                Date**
              **Fair
                Value**Unvested
                at December 31, 2005
            
            
            226,187
            
            $
            1.16Granted
            
            
            455,000
            
            $
            0.50Vested
            
            
            (84,562
            )
            $
            1.35Forfeited
            
            
            —
            
            
            —Unvested
                at December 31, 2006
            
            
            596,625
            
            $
            0.63




The
      total
      fair value of shares vesting during the year ending December 31, 2006 was
      $114.




The
      following table summarizes information about fixed stock options outstanding
      at
      December 31, 2006:





**Exercise
                price**
            
            **Options**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Remaining**
              **Life
                (years)**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Number**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$
                0.51 to $ 1.39
            
            
            640,000
            
            
            5.92
            
            $
            0.87
            
            
            85,000
            
            $
            1.04$
                1.40 to $ 3.00
            
            
            159,448
            
            
            3.67
            
            
            2.94
            
            
            120,323
            
            
            2.93$
                6.88 to $ 15.62
            
            
            2,965
            
            
            4.02
            
            
            14.99
            
            
            2,965
            
            
            14.99$48.76
                to $ 71.26
            
            
            137,666
            
            
            2.60
            
            
            58.21
            
            
            137,666
            
            
            58.21$78.00
                to $127.50
            
            
            156,247
            
            
            0.66
            
            
            78.76
            
            
            153,747
            
            
            78.771,096,326
            
            
            4.42
            
            $
            19.51
            
            
            499,701
            
            $
            41.24




**Note
      18 - Subsequent Event**




On
      January 10, 2007, the Company and its third party lender settled all outstanding
      obligations owed by the Company to the lender under the Master Security
      Agreement, dated as of October 14, 2004, as subsequently amended, restated
      and
      supplemented. The third party lender converted a portion of the Note described
      above in Note 9, pursuant to its terms, into 10,000 shares of common stock
      of
      the Company. The principal amount of the Note that was outstanding prior to
      the
      conversion of the 10,000 shares was $1,324. The third party lender discharged
      the remaining balance of the Note in consideration of a cash payment in the
      amount of $1,388. The funds required to make the cash payment were loaned to
      the
      Company by Counsel pursuant to the Promissory Note, as described above in Note
      13.




F-30




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





Following
      is a summary of the quarterly results of operations for the years ended December
      31, 2006 and 2005.





**March
                31**
            
            **June
                30**
            
            **September
                30**
            
            **December
                31**Net
                sales
            
            
            2006
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —2005
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Operating
                loss
            
            
            2006
            
            $
            (395
            )
            $
            (356
            )
            $
            (311
            )
            $
            (239
            )2005
            
            $
            (991
            )
            $
            (1,315
            )
            $
            (578
            )
            $
            (295
            )Net
                loss from continuing operations
            
            
            2006
            
            $
            (2,734
            )
            $
            (3,452
            )
            $
            (1,753
            )
            $
            (4,107
            )2005
            
            $
            (3,622
            )
            $
            (4,823
            )
            $
            (2,513
            )
            $
            (3,949
            )Net
                income (loss)
            
            
            2006
            
            $
            958
            
            $
            (2,793
            )
            $
            (1,756
            )
            $
            (4,085
            )2005
            
            $
            (8,108
            )
            $
            (8,108
            )
            $
            1,770
            
            $
            (4,043
            )Basic
                and diluted loss from continuing operations per common
                share
            
            
            2006
            
            $
            (0.14
            )
            $
            (0.18
            )
            $
            (0.09
            )
            $
            (0.22
            )2005
            
            $
            (0.19
            )
            $
            (0.25
            )
            $
            (0.13
            )
            $
            (0.20
            )Basic
                and diluted income (loss) per common share
            
            
            2006
            
            $
            0.05
            
            $
            (0.14
            )
            $
            (0.09
            )
            $
            (0.22
            )2005
            
            $
            (0.42
            )
            $
            (0.42
            )
            $
            0.09
            
            $
            (0.21
            )





F-31





**C2
      GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES**


**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, 2004
            
            $
            6
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            6December
                31, 2005
            
            $
            6
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            6December
                31, 2006
            
            $
            6
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            6





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




S-1