UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





TANNUAL REPORT PURSUANT TO SECTION
13


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


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008





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, a non-accelerated filer, or a smaller reporting
company (as defined in Rule 12b-2 of the Exchange Act).


Large
      Accelerated Filer  ̈
                  Accelerated
      Filer  ̈
                  Non-Accelerated FilerR
                  Smaller
      Reporting Company  ̈




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





The
aggregate market value of Common Stock held by non-affiliates based upon the
closing price of $0.47 per share on June 30, 2008, as reported by the OTC -
Bulletin Board, was approximately $987,000.





As of
February 26, 2009, there were 22,745,530 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
                10Item
      2.
                Properties.
                10Item
      3.
                Legal
      Proceedings.
                11Item
      4.
                Submission
      of Matters to a Vote of Security Holders.
                12PART
      IIItem
      5.
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
                13Item
      6.
                Selected
      Financial Data.
                16Item
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                17Item
      7A.
                Quantitative
      and Qualitative Disclosures About Market Risk.
                25Item
      8.
                Financial
      Statements and Supplementary Data.
                25Item
      9.
                Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.
                25Item
      9A(T).
                Controls
      and Procedures.
                25Item
      9B.
                Other
      Information.
                26PART
      IIIItem
      10.
                Directors,
      Executive Officers and Corporate Governance.
                27Item
      11.
                Executive
      Compensation.
                30Item
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
                38Item
      13.
                Certain
      Relationships and Related Transactions, and Director
      Independence.
                39Item
      14.
                Principal
      Accountant Fees and Services.
                40PART
      IVItem
      15.
                Exhibits
      and Financial Statement Schedules.
                42





2





Forward-Looking
Information





This Annual Report on Form 10-K (the
“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.





PART
I





(All
dollar amounts are presented in thousands of U.S. dollars (“USD”), unless
otherwise indicated, except per share amounts)





Item
1. Business.





Overview
and Recent Developments





C2 Global
Technologies Inc. (“C2”, “we” 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, to “Acceris Communications Inc.” in 2003, and to “C2
Global Technologies Inc.” in 2005.  The most recent name change
reflects a change in the strategic direction of the Company following 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 licenses.  Subsequent
to the disposition of its Telecommunications business, licensing of intellectual
property constitutes the primary business of the Company.  C2’s target
market consists of carriers, equipment manufacturers, service providers and end
users in the internet protocol (“IP”) telephone market who are using C2’s
patented VoIP technologies by deploying VoIP networks for phone-to-phone
communications.  The Company has engaged, and intends to continue to
engage, in licensing agreements with third parties domestically and
internationally.  At present, no ongoing royalties are being paid to
the Company.





The
Company’s objective is to obtain ongoing licensing and royalty revenue from the
target market for 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. (“AT&T”), Verizon
Communications, Inc. (“Verizon”), Qwest Communications International, Inc.
(“Qwest”), Bellsouth Corporation (“Bellsouth”), Sprint Nextel Corporation
(“Sprint”), Global Crossing Limited (“Global Crossing”), and Level 3
Communications, Inc. (“Level 3”).  The complaint was filed in the
Marshall Division of the United States District Court for the Eastern District
of Texas, and alleged that these companies’ VoIP services and systems infringe
upon C2’s U.S. Patent No. 6,243,373, entitled “Method and Apparatus for
Implementing a Computer Network/Internet Telephone System” (the “VoIP
Patent”).  The complaint sought an injunction, monetary damages, and
costs.





In June
2007, the complaint against Bellsouth was dismissed without
prejudice.  In February 2008, the Company entered into settlement and
license agreements with AT&T and Verizon, and in May 2008 the Company
entered into a settlement and license agreement with Sprint.  In
September 2008, the Company effectively concluded the litigation by entering
into a settlement and license agreement with Qwest, Global Crossing, and Level
3, which agreement also includes Sonus Networks, Inc.  Under the terms
of the settlement and license agreements, C2 granted each of the parties named
above a non-exclusive, perpetual, worldwide, fully paid up, royalty free license
under any of C2’s present patents and patent applications, including the VoIP
Patent, to make, use, sell or otherwise dispose of any goods and services based
on such patents.





3





In the
third quarter of 2007, the Company began investing in Internet-based e-commerce
businesses, when it acquired minority positions in MyTrade.com, Inc., Buddy
Media, Inc. (“Buddy Media”) and LIMOS.com LLC (“LIMOS.com”).  Its
investment in MyTrade.com, Inc. was sold in the fourth quarter of 2007.In the fourth quarter of
2007 the Company acquired a one-third interest in Knight’s Bridge Capital
Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”).  The
additional two-thirds interest in Knight’s Bridge GP was acquired by parties
affiliated with the Company’s majority stockholder, Counsel Corporation
(together with its subsidiaries, “Counsel”).  Knight’s Bridge GP was
formed to acquire the general partner interests in 2007 Fund 1 LLP (the “Fund”,
subsequently renamed Knight’s Bridge Capital Partners Internet Fund No. 1
LP).  The Fund holds investments in several Internet-based e-commerce
businesses.  As the general partner of the Fund, Knight’s Bridge GP
manages the Fund, in return for which it earns a 2% per annum management fee
with respect to the Fund’s invested capital.  Knight’s Bridge GP also
has a 20% carried interest on any incremental realized gains from the Fund’s
investments.  In the second quarter of 2008, the Company increased its
investment in Buddy Media.  Following the purchase, the Company’s
investment in Buddy Media remains less than 5% on an as-converted
basis.





The
Company’s investment in LIMOS.com was sold on October 29, 2008.  The
Company received net proceeds of $781 and realized a gain of $425.





In April
2004, certain shareholders of C2 filed derivative and securities lawsuits in the
Superior Court of the State of California against Counsel, C2 and several
affiliated companies, as well as four present and former officers and directors
of C2.  Counsel and C2 believe that the claims are and were without
merit, and have defended the actions accordingly.  Effective June 18,
2008, in order to settle the litigation, and without any admission of liability
by either C2 or the other defendants, the parties agreed to the following terms:
(i) Counsel and/or certain of its affiliates, other than C2, would pay a total
of $520 to the named plaintiffs; (ii) Counsel and/or a subsidiary other than C2
would give the plaintiffs approximately 370,000 common shares of C2, being five
common shares of C2 for every share of C2 owned by the plaintiffs when the
litigation commenced; (iii) plaintiffs who were also dissenting shareholders in
an appraisal action filed by C2 in Florida in June 2004 would withdraw their
dissent and C2 would return the shares that they tendered; (iv) Counsel and/or
an affiliate would transfer 350,000 common shares to C2 for cancellation to
settle the derivative claims of the litigation.  As a result of the
transfer of common shares to the plaintiffs and the cancellation of the shares
transferred to C2, Counsel’s percentage ownership in C2 decreased from
approximately 92.5% to approximately 90.8%.  The settlement did not
have a material adverse impact on the Company’s business, results of operations,
financial position or liquidity.





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,
2008.  Effective with the sale of the Telecommunications business in
the third quarter of 2005, the Company no longer has distinct operating
segments, as reported in prior years.  The Company’s consolidated
financial statements, included in Item 15 of this Annual Report on Form 10-K
(the “Report”), have been restated to include the Telecommunications operations
as discontinued operations.





For the Year Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Revenues
      from external customers
                          
                          $
                          17,625
                          
                          
                          $
                          —
                          
                          
                          $
                          —Income
      (loss) from continuing operations
                          
                          
                          5,839
                          
                          
                          
                          (639
                          )
                          
                          
                          (12,046
                          )Income
      (loss) from discontinued operations
                          
                          
                          (12
                          )
                          
                          
                          (6
                          )
                          
                          
                          4,370Total
      assets
                          
                          
                          5,443
                          
                          
                          
                          1,796
                          
                          
                          
                          1,386





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.





4





Commencing
in 2001, the Company entered the Telecommunications business.  The
assets of the Company’s Telecommunications segment were owned through a
wholly-owned subsidiary, Acceris Communications Corp. (name changed to WXC Corp.
(“WXCC”) in October 2005).  This business was sold effective September
30, 2005.





In 2002,
the U.S. Patent and Trademark Office issued U.S. patent No. 6,438,124 (the “C2
Patent”) for the Company’s Voice Internet Transmission System.  Filed
in 1996, the C2 Patent reflects foundational thinking, application, and practice
in the VoIP services market.  The C2 Patent encompasses the technology
that allows two parties to converse phone-to-phone, regardless of the distance,
by transmitting voice/sound via the Internet.  No special telephone or
computer is required at either end of the call.  The apparatus that
makes this technically possible is a system of Internet access nodes, or Voice
Engines, which 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.  As part of the sale,
we retained all of our intellectual property rights and patents.





In 2003,
we added to our VoIP patent holdings when we acquired the VoIP Patent, which
included a corresponding foreign patent and related international patent
applications.  The vendor of the VoIP Patent was granted a first
priority security interest in the patent in order to secure C2’s obligations
under the associated purchase agreement.  The VoIP Patent, together
with the 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.  The comprehensive nature of the
VoIP Patent 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.





Up to
December 31, 2004, revenue related to our intellectual property was based on the
sales and deployment of our VoIP solutions, which we ceased directly marketing
in 2005.  No revenue was due to the receipt of licensing fees and
royalties.  Revenue in 2008 was the result of entering into the
settlement and license agreements with AT&T, Verizon, Sprint, Qwest, Global
Crossing, Level 3 and Sonus Networks, Inc., as described above.  We
expect to generate ongoing 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 previously conducted research and development activities related to
its patents, most recently in 2005, when it invested $389.  The
Company suspended its investment in research and development in the third
quarter of 2005 in conjunction with its decision to focus on the realization of
licensing fees associated with its intellectual property.





On March
28, 2006, the Company sold all the shares of WXCC to a third
party.  The Company recognized a gain of $3,645 on the sale, net of
closing costs of $118.  On June 30, 2006, the same third party that
had purchased the WXCC shares agreed to acquire all the shares of ILC from the
Company.  The Company recognized a gain of $665 on the sale, net of
closing costs of $46.  Both of these gains were included in income
from discontinued operations in the Company’s consolidated statement of
operations.





As
discussed above under “Overview and Recent Developments”, in the third quarter
of 2007, the Company began investing in Internet-based e-commerce businesses
through its acquisitions of minority positions in MyTrade.com, Inc. (sold in the
fourth quarter of 2007), Buddy Media, Inc. and LIMOS.com LLC (sold in the fourth
quarter of 2008).  It continued its investment activities in the
fourth quarter of 2007 with the acquisition of a one-third interest in Knight’s
Bridge Capital Partners Internet Fund No. 1 GP LLC.  In the second
quarter of 2008, the Company increased its investment in Buddy
Media.  At December 31, 2008 the Company’s investment in these
businesses totaled $242.  The Company’s objective is to realize
long-term capital appreciation as the value of these businesses is developed and
recognized.  In this regard, the Company recognized a gain of $75 on
MyTrade.com, Inc. and a gain of $425 on LIMOS.com LLC in 2007 and 2008,
respectively.





5





Intellectual
Property




Below is
a summary of the Company’s patents:




Type
                      
                      Title
                      
                      Number
                      
                      StatusVoIP
      Architecture
                      
                      Computer
      Network/Internet
                      
                      U.S.
      No. 6,243,373
                      
                      Issued:   June
      5, 2001Telephone
      System (“VoIP Patent”)
                      
                      
                      
                      Expires:  November
      1, 2015Australia
      No. 716096
                      
                      Issued:   June
      1, 2000Expires:  October
      29, 2016People’s
      Republic of
                      
                      Issued:   December
      14, 2005China
      No. ZL96199457.6
                      
                      Expires:  October
      29, 2016Canada
      No. 2,238,867
                      
                      Issued:   October
      18, 2005Expires:  October
      29, 2016Hong
      Kong
                      
                      Issued:   August
      11, 2006No.
      HK1018372
                      
                      Expires:  October
      29, 2016Europe
      No. 0873637
                      
                      Granted
      March 21, 2007 1Voice
      Internet Transmission
                      
                      U.S.
      No. 6,438,124
                      
                      Issued:   August
      20, 2002System(“C2
      Patent”)
                      
                      
                      
                      Expires:  July
      22, 2018People’s
      Republic of
                      
                      Issued:   May
      21, 2004China
      No. ZL97192954.8
                      
                      Expires:  February
      5, 2017Canada
      No. 2,245,815
                      
                      Issued:   October
      10, 2006Expires:  February
      5, 2017South
      Korea No. 847335
                      
                      Issued:   July
      14, 2008Expires:  February
      5, 2017Private
      IP Communication
                      
                      U.S.
      No. 7,215,663
                      
                      Issued:   May
      8, 2007Network
      Architecture
                      
                      
                      
                      Expires:  June
      12, 2017Conferencing
                      
                      Delay
      Synchronization in
                      
                      U.S.
      No. 5,754,534
                      
                      Issued:   May
      19, 1998Compressed
      Audio System
                      
                      
                      
                      Expires:  May
      6, 2016Volume
      Control Arrangement
                      
                      U.S.
      No. 5,898,675
                      
                      Issued:   April
      27, 1999for
      Compressed Information
                        Signal
      Delays
                      
                      
                      
                      Expires:  April
      29,
2016





1 The
European patent has been validated in Austria, Belgium, Denmark, Finland,
France, Germany, Great Britain, Greece, Ireland, Italy, the Netherlands,
Portugal, Spain, Sweden and Switzerland.





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 (U.S. Patent No. 7,215,663 granted May 8, 2007) -This
invention relates generally to multimedia communications
networks.  The patent’s 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.








6





C2 also
owns intellectual property that solves teleconferencing problems:





Delay Synchronization in Compressed
Audio Systems (U.S. Patent No. 5,754,534 granted May 19, 1998) -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 Signals (U.S. Patent No. 5,898,675 granted April 27,
1999) -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.





Employees





As of
December 31, 2008, C2 had five employees, all of whom 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




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.





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





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





Competition





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





VoIP has
become 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.





7





Government
Regulation





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.  The Company became subject to Section 404 reporting as of
December 31, 2007.  As implementation guidelines continue to evolve,
we expect to continue 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.





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.govthat
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.





Our
investments are particularly subject to risk of loss.


The
Company’s portfolio investment in Buddy Media, Inc. is in a development stage
company that has yet to provide a return to shareholders.  The
Company’s equity investment in Knight’s Bridge Capital Partners Internet Fund
No. 1 GP LLC is in a company whose underlying investments are also primarily in
development stage companies.  Although the Company’s analyses of these
investments as at December 31, 2008 resulted in the conclusion that no
impairment was present, development stage companies are particularly vulnerable
during an economic downturn such as the one currently in
progress.  There can be no assurance that the Company will either
recover the value of its initial investments or earn a positive
return.





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 in which we are involved at this time are detailed in Item 3
of this Report.





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.


The
Company’s VoIP Patent Portfolio consists of United States Patents No. 6,243,373
and No. 6,438,124.  The ultimate 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 either
realize additional value from our patents, or prevent third parties from
benefiting from those patents without benefit to the Company.  Any
currently pending or future patent applications may not result in issued
patents.  In addition, any issued patents may not have priority over
any patent applications of others or may not contain claims sufficiently broad
to protect us against third parties with similar technologies, products or
processes.





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.  These negative trends may become even more significant
during the current economic downturn.  Our potential licensees may
experience increased customer attrition, may have difficulty generating and
collecting revenue, or may even be forced into bankruptcy.  Our
potential revenue could therefore decrease significantly as the licensees become
unable to meet their financial obligations.





Our
principal stockholder, Counsel, has voting control of the Company and our
executive officers are employees of Counsel.


Counsel
owns approximately 91% of our outstanding common stock.  As a result,
Counsel controls all matters requiring approval by the stockholders, including
the election of the Board of Directors and significant corporate
transactions.  Our Board of Directors has five members, four of whom
are not employees or otherwise affiliated with 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.  Counsel’s control over C2 could delay
or prevent a change in control of the Company, impede a merger, consolidation,
takeover or other business combination involving us, or discourage a potential
acquirer from making a tender offer or otherwise attempting to obtain control of
the Company.





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.  The Board 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 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.





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 is authorized to determine the rights and preferences of any additional
series or class of preferred stock.  The Board 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.





9





We
may conduct future offerings of our common stock and preferred stock and pay
debt obligations with our common and preferred stock that 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.  As of the date of this Report, a
third party holds a Warrant to acquire 1,000,000 shares of common
stock.





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 has a limited
public trading market.  Without an active trading market, there can be
no assurance regarding the 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 carry forwards 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 carry forwards 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 carry forwards may expire before we have the ability to utilize such
losses in a particular jurisdiction and there is no certainty that current
income tax rates will remain in effect at the time when we have the opportunity
to utilize reported tax loss carry forwards.





We
have not declared any dividends on our common stock to date and have no
expectation 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.  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, 2008, we do not have any preferred stock
outstanding that has any preferential dividends.





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.





10





Item
3. Legal Proceedings.





Shareholder
Litigation


In April
2004, certain shareholders of C2 filed derivative and securities lawsuits in the
Superior Court of the State of California against Counsel, C2 and several
affiliated companies, as well as four present and former officers and directors
of C2.  Counsel and C2 believe that the claims are and were without
merit, and have defended the actions accordingly.  Effective June 18,
2008, in order to settle the litigation, and without any admission of liability
by either C2 or the other defendants, the parties agreed to the following terms:
(i) Counsel and/or certain of its affiliates, other than C2, would pay a total
of $520 to the named plaintiffs; (ii) Counsel and/or a subsidiary other than C2
would give the plaintiffs approximately 370,000 common shares of C2, being five
common shares of C2 for every share of C2 owned by the plaintiffs when the
litigation commenced; (iii) plaintiffs who were also dissenting shareholders in
an appraisal action filed by C2 in Florida in June 2004 would withdraw their
dissent and C2 would return the shares that they tendered; (iv) Counsel and/or
an affiliate would transfer 350,000 common shares to C2 for cancellation to
settle the derivative claims of the litigation.  As a result of the
transfer of common shares to the plaintiffs and the cancellation of the shares
transferred to C2, Counsel’s percentage ownership in C2 decreased from
approximately 92.5% to approximately 90.8%.  The settlement did not
have a material adverse impact on the Company’s business, results of operations,
financial position or liquidity.





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, in the
event that C2 does not have sufficient resources to fund the
payments.  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 17th
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.  As a result of the June 2008
settlement of the derivative and securities lawsuits in California, described
above, the stay of the Florida declaratory judgment action is expected to be
lifted shortly.  Subsequent to December 31, 2008, the Company
completed an agreement with the holders of 27,221 of the 27,536 shares held by
the remaining dissenting stockholders, whereby the stockholders agreed to accept
$4.60 per share in full payment for their respective shares, which will be
cancelled by the Company, and a release of any other claims that they may
have against the Company and Counsel. When the declaratory
judgment action resumes with respect to the remaining dissenting stockholders,
who exercised their appraisal rights with respect to the remaining 315
shares, the Company provides no assurance that this matter will be
resolved in its favor; however, the Company's management does not believe
that an unfavorable outcome of this matter would have a material adverse impact
on our business, results of operations, financial position or
liquidity.




Intellectual
Property Enforcement Litigation


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 alleged that these companies’ VoIP services
and systems infringe upon the Company’s U.S. Patent No. 6,243,373, entitled
“Method and Apparatus for
Implementing a Computer Network/Internet Telephone System” and sought an
injunction, monetary damages and costs.





11





In June
2007, the complaint against Bellsouth Corporation was dismissed without
prejudice.  In February 2008, the Company settled the complaints
against AT&T, Inc. and Verizon Communications, Inc. by entering into
settlement and license agreements.  In May 2008 the Company settled
the complaint against Sprint Nextel Corporation by entering into a similar
agreement.  In September 2008, C2 effectively concluded the litigation
by entering into a similar agreement with Qwest Communications International,
Inc., Global Crossing Limited, and Level 3 Communications, Inc., which agreement
also includes Sonus Networks, Inc.





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





12





PART
II





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





Market
Information





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, 2007 through
December 31, 2008, based on inter-dealer quotations, without retail markup,
markdown, commissions or adjustments.  These prices may not represent
actual transactions:





Quarter Ended
                  
                  High
                  
                  
                  LowMarch
      31, 2007
                  
                  $
                  1.49
                  
                  
                  $
                  0.50June
      30, 2007
                  
                  
                  0.90
                  
                  
                  
                  0.35September
      30, 2007
                  
                  
                  0.55
                  
                  
                  
                  0.40December
      31, 2007
                  
                  
                  0.90
                  
                  
                  
                  0.31March
      31, 2008
                  
                  $
                  1.47
                  
                  
                  $
                  0.31June
      30, 2008
                  
                  
                  1.30
                  
                  
                  
                  0.47September
      30, 2008
                  
                  
                  1.01
                  
                  
                  
                  0.35December
      31, 2008
                  
                  
                  0.75
                  
                  
                  
                  0.11





On
February 26, 2009, the closing price for a share of the Company’s common stock
was $0.20.





Holders





As of
February 26, 2009, the Company had approximately 519 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, 2008, we
do not have any preferred stock outstanding which has any preferential
dividends.





Securities
Authorized for Issuance Under Equity Compensation Plans





The
following table sets forth, as of December 31, 2008, 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, 2008, 40,000 options were granted to
directors under the 2003 Employee Stock Option and Appreciation Rights
Plan.  These options were issued with an exercise price of
$0.90/share, which equalled fair market value on the date of the grant, and they
vest over a 4-year period subject to the grantee’s continued service as a
director 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”).  No other options
were granted during the twelve months ended December 31, 2008.





13





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
                                      
                                      
                                      638,250
                                      
                                      
                                      
                                      1.45
                                      
                                      
                                      
                                      1,361,7501997
      Recruitment Stock Option Plan
                                      
                                      
                                      237,361
                                      
                                      
                                      
                                      1.80
                                      
                                      
                                      
                                      132,6391995
      Directors Stock Option and Appreciation Rights Plan
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      12,5001995
      Employee Stock Option and Appreciation Rights Plan
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      20,000Equity compensation plans not approved by security
      holders:Issuance
      of non-qualified options to employees and outside
    consultants
                                      
                                      
                                      103,416
                                      
                                      
                                      
                                      60.10
                                      
                                      
                                      
                                      —Total
                                      
                                      
                                      979,027
                                      
                                      
                                      
                                      7.73
                                      
                                      
                                      
                                      1,526,889





(1) For a
description of the material terms of these plans, see Note 16 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 2008.





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 and our peer
group.  Our peer group consists of Acacia Technologies Group, Forgent
Networks Inc. (d/b/a Asure Software), UTEK Corporation, Patriot Scientific
Corporation and Network-1 Security Solutions Inc.  We selected these
companies for our peer group because they are in the business of licensing
intellectual property in a manner that is similar to our business
model.  The graph assumes an initial investment of $100.00 made on
December 31, 2003, and the reinvestment of dividends (where applicable). We have
never paid a dividend on our common stock.





14







Total
Return Analysis





12/31/03
                
                
                12/31/04
                
                
                12/31/05
                
                
                12/31/06
                
                
                12/31/07
                
                
                12/31/08C2
      Global Technologies Inc.
                
                $
                100.00
                
                
                $
                27.52
                
                
                $
                27.98
                
                
                $
                18.35
                
                
                $
                14.22
                
                
                $
                6.42Peer
      Group
                
                $
                100.00
                
                
                $
                105.38
                
                
                $
                120.33
                
                
                $
                192.02
                
                
                $
                152.57
                
                
                $
                53.88Russell
      2000 Index
                
                $
                100.00
                
                
                $
                118.33
                
                
                $
                123.72
                
                
                $
                146.44
                
                
                $
                144.15
                
                
                $
                95.44





Source:  Morningstar,
Inc.  (312) 384-4007





15





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.  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.








2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004Statement
      of Operations Data :Patent
      licensing and development revenues
                  
                  $
                  17,625
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  540Operating
      costs and expenses
                  
                  
                  12,022
                  
                  
                  
                  1,236
                  
                  
                  
                  1,301
                  
                  
                  
                  3,179
                  
                  
                  
                  4,541Operating
      income (loss)
                  
                  
                  5,603
                  
                  
                  
                  (1,236
                  )
                  
                  
                  (1,301
                  )
                  
                  
                  (3,179
                  )
                  
                  
                  (4,001
                  )Other
      income (expense):Interest
      expense – related party
                  
                  
                  (43
                  )
                  
                  
                  (184
                  )
                  
                  
                  (10,390
                  )
                  
                  
                  (12,154
                  )
                  
                  
                  (8,488
                  )Interest
      expense – third party
                  
                  
                  —
                  
                  
                  
                  (12
                  )
                  
                  
                  (510
                  )
                  
                  
                  (658
                  )
                  
                  
                  (65
                  )Other
      income (expense)
                  
                  
                  17
                  
                  
                  
                  (288
                  )
                  
                  
                  155
                  
                  
                  
                  1,084
                  
                  
                  
                  1,487Other
      income (expense), net
                  
                  
                  (26
                  )
                  
                  
                  (484
                  )
                  
                  
                  (10,745
                  )
                  
                  
                  (11,728
                  )
                  
                  
                  (7,066
                  )Income
      (loss) from continuing operations before income taxes and
      earnings from equity accounted investments
                  
                  
                  5,577
                  
                  
                  
                  (1,720
                  )
                  
                  
                  (12,046
                  )
                  
                  
                  (14,907
                  )
                  
                  
                  (11,067
                  )Income
      tax expense (recovery)
                  
                  
                  125
                  
                  
                  
                  (1,000
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Earnings
      from equity accounted investments
                  
                  
                  387
                  
                  
                  
                  81
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Income
      (loss) from continuing operations
                  
                  
                  5,839
                  
                  
                  
                  (639
                  )
                  
                  
                  (12,046
                  )
                  
                  
                  (14,907
                  )
                  
                  
                  (11,067
                  )Income
      (loss) from discontinued operations
                  
                  
                  (12
                  )
                  
                  
                  (6
                  )
                  
                  
                  4,370
                  
                  
                  
                  (3,582
                  )
                  
                  
                  (11,716
                  )Net
      income (loss)
                  
                  $
                  5,827
                  
                  
                  $
                  (645
                  )
                  
                  $
                  ( 7,676
                  )
                  
                  $
                  (18,489
                  )
                  
                  $
                  (22,783
                  )Net
      income (loss) per common share – basic and diluted:Income
      (loss) from continuing operations
                  
                  $
                  0.25
                  
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.63
                  )
                  
                  $
                  (0.77
                  )
                  
                  $
                  (0.57
                  )Income
      (loss) from discontinued operations
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  0.23
                  
                  
                  
                  (0.19
                  )
                  
                  
                  (0.61
                  )Net
      income (loss) per common share
                  
                  $
                  0.25
                  
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.40
                  )
                  
                  $
                  (0.96
                  )
                  
                  $
                  (1.18
                  )Balance
      Sheet Data:Total
      assets
                  
                  $
                  5,443
                  
                  
                  $
                  1,796
                  
                  
                  $
                  1,386
                  
                  
                  $
                  3,490
                  
                  
                  $
                  24,009Total
      current liabilities
                  
                  $
                  472
                  
                  
                  $
                  2,737
                  
                  
                  $
                  1,855
                  
                  
                  $
                  79,852
                  
                  
                  $
                  36,150Total
      long-term obligations:Related
      party
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  46,015Third
      party
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  1,580
                  
                  
                  $
                  3,164Discontinued
      liabilities
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  645Stockholders’
      equity (deficit)
                  
                  $
                  4,971
                  
                  
                  $
                  (941
                  )
                  
                  $
                  (469
                  )
                  
                  $
                  (77,942
                  )
                  
                  $
                  (61,965
                  )





16





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





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





The
following discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and Notes thereto, included in Item 15 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.





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





Liquidity





At
December 31, 2008 the Company’s working capital was $4,556, as compared to a
working capital deficit of $1,653 at December 31, 2007.  Cash
increased by $4,009, from $67 at December 31, 2007 to $4,076 at December 31,
2008.  The primary reason for the improvement in the Company’s
financial position is that during 2008 it recorded revenues and realized cash
from continuing operations for the first time since 2004.  All of the
revenue was derived from settlement and license agreements with
telecommunications carriers, which the Company entered into in February, May and
September 2008.  All amounts owing under these agreements were paid to
the Company in 2008.  During 2008 the Company also received net cash
of $664 from its portfolio investments.





The
Company’s liabilities at December 31, 2008 consisted solely of $472 in accounts
payable and accrued liabilities, as compared to $402 of the same at December 31,
2007, resulting in net free cash holdings of $3,604 at December 31,
2008.  The Company had no commitments or off balance sheet
arrangements at December 31, 2008.  The Company’s ongoing objective is
to continue to enter into licensing and royalty agreements with respect to its
patents.  Even if the Company does not enter into such agreements, it
has sufficient cash resources to cover its currently estimated annual cash
operating expenses of approximately $1,200.  At the current time, the
Company has no available credit facilities, nor does it have any guarantees from
related parties.  The Company’s other assets, consisting primarily of
a deferred tax asset, investments in private companies, and goodwill, are not
readily convertible to cash.





On an
ongoing basis, the Company considers opportunities to invest its available
cash.  At December 31, 2008 and the date of this Report, the Company
had no investment commitments.





At
December 31, 2008 the Company had no debt owing to its majority stockholder,
Counsel, as compared to $2,335 owing at December 31, 2007.





Ownership
Structure and Capital Resources





·
            At
      December 31, 2008 the Company had stockholders’ equity of $4,971, as
      compared to a stockholders’ deficit of $941 at December 31,
      2007.





·
            The
      Company is 90.8% owned by Counsel.  The remaining 9.2% is owned
      by public stockholders.





·
            Beginning
      in 2001, Counsel invested over $100,000 in C2 to fund the development of
      C2’s technology and its Telecommunications business, and at December 29,
      2006 C2 owed $83,582 to Counsel, including accrued and unpaid
      interest.  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 subsequently provided net advances of $2,151
      through December 31, 2007, all of which were repaid, together with accrued
      interest, in the first quarter of
2008.





17





Cash
Position and Cash Flows





Cash at
December 31, 2008 was $4,076 compared to $67 and $3 at the same date in
2007 and 2006, respectively.  As noted above, the significant increase
of $4,009 in 2008 is due to the collection of revenue from settlement and
licensing agreements, as well as positive cash flows from the Company’s
portfolio investments.





Cash provided by
or used in operating activities.Cash provided by operating
activities (excluding discontinued operations) during 2008 was $5,692, as
compared to cash used of $1,275 and $2,324 in 2007 and 2006,
respectively.  The improvement was primarily due to the Company
earning $5,839 from continuing operations in 2008, as compared to net losses of
$639 and $12,046 in 2007 and 2006, respectively. In 2008 the Company recorded a
net decrease of $125 in the $1,000 deferred income tax recovery that was
recorded in 2007; there were no deferred income tax asset transactions in
2006.  In 2008 the Company repaid the related party debt owing to
Counsel at December 31, 2007 and therefore capitalized no interest costs, as
compared to capitalizing $184 in 2007 and $7,542 in 2006.  In 2006,
the Company recorded $2,848 of amortization of discount and debt issuance costs
on a convertible note owing to Counsel; as this debt was eliminated by
conversion and forgiveness on December 30, 2006, there were no similar amounts
recorded in 2007 or 2008.  The Company’s gains on the sale of
portfolio investments, which were $425 in 2008 and $75 in 2007, reduced the net
cash provided by operating activities.





Cash provided by
investing activities.Net cash provided by investing
activities during 2008 was $664, as compared to $662 in 2007.  No cash
was provided or used in 2006.  In 2008, $781 was received as the net
proceeds on the sale of the Company’s investment in LIMOS.com, $8 was received
as a cash distribution from the Company’s investment in Knight’s Bridge GP, and
the Company increased its investments in Buddy Media by $124 and Knight’s Bridge
GP by $1.  In 2007, the Company’s $1,100 preferred share investment in
AccessLine Communications was redeemed in full.  The Company
subsequently invested $595 in portfolio investments, received $150 from the sale
of one of these investments, and received $7 as a cash distribution from
Knight’s Bridge GP.





Cash provided by
or used in financing activities.Net cash used by financing
activities in 2008 was $2,335, as compared to net cash provided of $683 in 2007
and $2,142 in 2006.  The single financing activity in 2008 was
repayment of the debt owing to Counsel at December 31, 2007.  Counsel
had provided net cash of $2,145 in 2007 and $2,401 in 2006.  In 2007
and 2006 the Company paid $1,462 and $1,765, respectively, to its third party
lender.  In 2006, $1,506 of the payments to the third party lender
were made from cash that had been segregated in 2005 for that purpose; no
segregated cash remained to be applied in 2007.





Contractual
Obligations





At
December 31, 2008 the Company had no outstanding debt other than the accounts
payable and accrued liabilities detailed in Note 7.  We have no
liabilities associated with income taxes that require disclosure under the terms
and provisions of FIN 48.





18





Consolidated
Results of Operations





Key
selected financial data for the three years ended December 31, 2008, 2007 and
2006 are as follows:





Percentage Change2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2008 vs. 2007
                  
                  
                  2007 vs. 2006Revenues:Patent
      licensing
                  
                  $
                  17,625
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  N/A
                  
                  
                  
                  N/AOperating
      costs and expenses:Patent
      licensing
                  
                  
                  10,729
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  N/A
                  
                  
                  
                  N/ASelling,
      general, administrative and other
                  
                  
                  1,273
                  
                  
                  
                  1,216
                  
                  
                  
                  1,281
                  
                  
                  
                  5
                  
                  
                  
                  (5
                  )Depreciation
      and amortization
                  
                  
                  20
                  
                  
                  
                  20
                  
                  
                  
                  20
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      operating costs and expenses
                  
                  
                  12,022
                  
                  
                  
                  1,236
                  
                  
                  
                  1,301
                  
                  
                  
                  873
                  
                  
                  
                  (5
                  )Operating
      income (loss)
                  
                  
                  5,603
                  
                  
                  
                  (1,236
                  )
                  
                  
                  (1,301
                  )
                  
                  
                  N/A
                  
                  
                  
                  (5
                  )Other
      income (expense):Other
      income (expense)
                  
                  
                  17
                  
                  
                  
                  (288
                  )
                  
                  
                  155
                  
                  
                  
                  N/A
                  
                  
                  
                  N/AInterest
      expense – third party
                  
                  
                  —
                  
                  
                  
                  (12
                  )
                  
                  
                  (510
                  )
                  
                  
                  N/A
                  
                  
                  
                  (98
                  )Interest
      expense – related party
                  
                  
                  (43
                  )
                  
                  
                  (184
                  )
                  
                  
                  (10,390
                  )
                  
                  
                  (77
                  )
                  
                  
                  (98
                  )Earnings
      from equity accounted investments
                  
                  
                  387
                  
                  
                  
                  81
                  
                  
                  
                  —
                  
                  
                  
                  378
                  
                  
                  
                  N/ATotal
      other income (expense)
                  
                  
                  361
                  
                  
                  
                  (403
                  )
                  
                  
                  (10,745
                  )
                  
                  
                  N/A
                  
                  
                  
                  (96
                  )Income
      (loss) from continuing operations before income taxes
                  
                  
                  5,964
                  
                  
                  
                  (1,639
                  )
                  
                  
                  (12,046
                  )
                  
                  
                  N/A
                  
                  
                  
                  (86
                  )Income
      tax expense (recovery)
                  
                  
                  125
                  
                  
                  
                  (1,000
                  )
                  
                  
                  —
                  
                  
                  
                  N/A
                  
                  
                  
                  N/AIncome
      (loss) from continuing operations
                  
                  
                  5,839
                  
                  
                  
                  (639
                  )
                  
                  
                  (12,046
                  )
                  
                  
                  N/A
                  
                  
                  
                  (95
                  )Income
      (loss) from discontinued operations
                  
                  
                  (12
                  )
                  
                  
                  (6
                  )
                  
                  
                  4,370
                  
                  
                  
                  100
                  
                  
                  
                  N/ANet
      income (loss)
                  
                  $
                  5,827
                  
                  
                  $
                  (645
                  )
                  
                  $
                  (7,676
                  )
                  
                  
                  N/A
                  
                  
                  
                  (92
                  )





Patent
licensing revenue is derived from licensing our intellectual
property.  Our VoIP Patent Portfolio is an international patent
portfolio covering the basic process and technology that enables VoIP
communications.  Our patented technology 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.  At present, no ongoing royalties are being paid to
the Company.  The Company’s objective is to obtain ongoing licensing
and royalty revenue from the target market for its patents, both domestically
and internationally.  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 seven telecommunications
companies.  During 2008 the Company effectively concluded the
litigation by entering into settlement and license agreements with the
defendants in such litigation.





We expect
to continue 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.  Net
proceeds are defined as amounts collected from third parties net of the direct
costs associated with the maintenance, licensing and enforcement of the VoIP
Patent Portfolio.





2008
Compared to 2007





Patent licensing revenues were
$17,625 in 2008 and $0 in 2007.  These revenues, as noted above, were
from settlement and license agreements entered into with the parties to the
Company’s patent litigation that commenced in June 2006.





Patent licensing expense was
$10,729 in 2008 and $0 in 2007. This expense includes four
components:  disbursements directly related to patent licensing,
contingency fees earned by our legal counsel, ongoing business expenses related
to patent licensing, and the participation fee of 35% payable to the vendor of
the VoIP Patent.





Selling, general, administrative and
other expense was $1,273 for the year ended December 31, 2008 as compared
to $1,216 for the year ended December 31, 2007.  The significant
changes included:





·
            Compensation
      expense in 2008 was $361 compared to $304 in 2007.  The salary
      earned by the CEO of C2 remained unchanged at $138.  In 2008 a
      bonus of $138 was paid; there was no bonus expense in
      2007.  Stock-based compensation expense decreased by $81, from
      $166 in 2007 to $85 in 2008.





19





·
            Legal
      expenses in 2008 were $88, a decrease of $69 compared to $157 in
      2007.





·
            Accounting
      and tax consulting expenses in 2008 were $122 compared to $146 in
      2007.





·
            Fees
      paid to the members of our Board of Directors were $126 in 2008 as
      compared to $104 in 2007.  The increase reflects the addition of
      a Class III director in January
2008.





·
            Management
      fee expense charged by our majority stockholder, Counsel, was $360 in 2008
      as compared to $225 in 2007.  The increase reflects the
      additional use of Counsel resources in connection with the patent
      licensing litigation and the Company’s investments in Internet-based
      e-commerce businesses.  See Item 13 of this Report for details
      regarding these management fees.





·
            Directors
      and officers insurance expense was $150 in both 2008 and
    2007.





·
            In
      2008, the Company incurred expenses of $21 with respect to maintenance
      fees for its patents.  In 2007 it incurred $60 with respect to
      filing fees for patents being issued in various European
      countries.





Depreciation and amortization
– This expense was $20 in both 2008 and 2007, and relates to the amortization of
the cost of the VoIP Patent.  As of December 31, 2008, the cost of the
patent has been fully amortized.





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





·
            In
      2008 the Company had other income of $17, as compared to other expense of
      $288 in 2007.  In 2008 this consists of $15 interest income and
      $2 received as a reduction of prior years’ insurance
      premiums.  The 2007 expense is primarily composed of the $293
      cost to prepay the Note owed to the third party lender, as detailed in
      Note 9 of the consolidated financial statements.  During 2007
      the Company earned $2 of bank interest and received $3 as a reduction of
      prior years’ insurance premiums.





·
            There
      was no third party interest expense in 2008, as compared to $12 in
      2007.  All of the interest expense in 2007 related to the debt
      held by the Company’s third party lender.  The loan was repaid
      in full effective January 10, 2007.





·
            Related
      party interest expense was $43 in 2008, as compared to $184 in
      2007.  The decrease of $141 is due to the repayment in full of
      the debt owing to Counsel.  As discussed in Note 13 of the
      consolidated financial statements, this was repaid in March 2008 and
      therefore the Company incurred no interest expense subsequent to that
      date.





Earnings from equity
investments – In 2008, the Company recorded earnings of $387 relating to
its equity accounted investments.  This primarily consists of the gain
of $425 from the sale of LIMOS.com, which is net of a loss of $43 that was
recorded by the Company as its share of the net loss of LIMOS.com prior to the
sale of the asset.  The remainder consists of $5 representing the
Company’s share of the earnings of Knight’s Bridge GP.  In 2007 the
Company had income of $81 from its equity accounted investments.  This
was composed of the gain of $75 on the sale of the Company’s interest in
MyTrade.com, $7 of income representing the Company’s share of the earnings of
Knight’s Bridge GP, and $1 representing the Company’s share of the loss recorded
by LIMOS.com.





2007
Compared to 2006





Patent licensing revenues were
$0 in both 2007 and 2006.





Patent licensing expense was
$0 in both 2007 and 2006.





Selling, general, administrative and
other expense was $1,216 for the year ended December 31, 2007 as compared
to $1,281 for the year ended December 31, 2006.  The significant
changes included:





·
            Compensation
      expense was $304 compared to $234 in 2006.  The salary earned by
      the CEO of C2 remained unchanged at $138; however, stock-based
      compensation expense increased by $27, from $139 in 2006 to $166 in
      2007.  In 2006 the Company incurred compensation expense of $27
      for an employee who provided technology-related services; his employment
      terminated in the second quarter of 2006 and consequently there was no
      corresponding expense in 2007.  Also, in the first quarter of
      2006 the Company recorded a credit of $69 relating to the reversal of
      bonus expense accrued in 2005 that was subsequently determined not to be
      warranted; there were no similar transactions in
  2007.





20





·
            Legal
      expenses in 2007 were $157, comparable to $171 in
  2006.





·
            Accounting
      and tax consulting expenses in 2007 were $146 compared to $295 in
      2006.  The decrease reflects the reduced complexity of the
      Company’s operations following the disposition of the Telecommunications
      business in the third quarter of
2005.





·
            Fees
      paid to the members of our Board of Directors were $104 in 2007 and
      2006.





·
            Management
      fee expense charged by our majority stockholder, Counsel, was $225 in both
      2007 and 2006.  See Item 13 of this Report for details regarding
      these management fees.





·
            Directors
      and officers insurance expense was $150 in both 2007 and
    2006.





·
            In
      the second quarter of 2007, the Company incurred expenses of $60 with
      respect to filing fees for patents being issued in various European
      countries.  There was no corresponding expense in
      2006.





Depreciation and amortization
– This expense was $20 in both 2007 and 2006, and relates to the amortization of
the cost of the VoIP Patent.





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





·
            In
      2007 the Company had other expense of $288, as compared to other income of
      $155 in 2006.  The 2007 expense is primarily composed of the
      $293 cost to prepay the Note owed to the third party lender, as detailed
      in Note 9.  During 2007 the Company earned $2 of bank interest
      and received $3 as a reduction of prior years’ insurance
      premiums.  The 2006 income primarily consists of the recovery of
      $110 of receivables that were fully reserved against when acquired in 2001
      as part of the acquisition of the assets of WorldxChange Communications
      Inc. from bankruptcy, as a result of the Company entering into settlement
      agreements with certain carriers.  The remaining income in 2006
      related to interest earned on cash
deposits.





·
            Third
      party interest expense was $12 in 2007, as compared to $510 in
      2006.  All of the interest expense related to the Note and the
      warrant to purchase common stock, both held by the Company’s third party
      lender.  As discussed in Note 9, the Note was prepaid in full
      effective January 10, 2007, and therefore the 2007 expense consists of
      interest and discount amortization for only ten days.  In 2006,
      the combined interest expense and discount amortization were $588, and the
      Company recorded a credit of $78 as a mark to market adjustment on the
      warrant to purchase common stock.  The 2006 mark to market
      adjustment on the warrant was based on the closing price of the Company’s
      common stock on the last day of each quarter.  As discussed in
      Note 9, in the fourth quarter of 2006 the warrant was transferred to
      stockholders’ equity and therefore no mark to market adjustments were
      required in 2007.





·
            Related
      party interest expense was $184 in 2007, as compared to $10,390 in
      2006.  The decrease of $10,206 is primarily due to the decrease
      in the debt owing to Counsel.  As discussed in Note 2 of the
      consolidated financial statements, on December 30, 2006, Counsel converted
      $3,386 of the $83,582 owed by C2 into 3,847,475 common shares and forgave
      the remaining balance of $80,196.  Subsequent net advances by
      Counsel of $2,151 through December 31, 2007 resulted in much lower
      interest expense during 2007.  It should also be noted that the
      related party interest expense in 2006 included $2,848 of amortization of
      the beneficial conversion feature (“BCF”) related to Counsel’s ability to
      convert a portion of its debt.  The BCF was fully amortized in
      2006, prior to the debt forgiveness by Counsel, and there was no
      corresponding expense in 2007.





Earnings from equity
investments – In 2007 the Company had income of $81 from its equity
accounted investments.  This was composed of the gain of $75 on the
sale of the Company’s interest in MyTrade.com, $7 of income representing the
Company’s share of the earnings of Knight’s Bridge GP, and $1 representing the
Company’s share of the loss recorded by LIMOS.com.  There were no
similar items in 2006.





21





Recent
Accounting Pronouncements





In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2,Effective Date of
FASB Statement No. 157(“FSP FAS 157-2”).  FSP FAS 157-2 delays the effective date of SFAS
No. 157,Fair Value
Measurements(“SFAS No.
157”) for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15,
2008.  FSP FAS 157-2 states that a measurement is recurring if it
happens at least annually and defines nonfinancial assets and nonfinancial
liabilities as all assets and liabilities other than those meeting the
definition of a financial asset or financial liability in SFAS No. 159,The
Fair Value Option for Financial Assets and Financial Liabilities, Including an
Amendment of FASB Statement No. 115(“SFAS No. 159”, discussed
below).  FSP FAS 157-2 was effective upon
issuance.  Entities that applied the measurement and disclosure
guidance in SFAS No. 157 in preparing either interim or annual financial
statements issued before the effective date of the FSP were not eligible for the
FSP’s deferral provisions. Entities were encouraged to adopt SFAS No. 157 in its
entirety, as long as they had not yet issued financial statements during that
year.  An entity that chose to adopt SFAS No. 157 in its entirety had
to do so forallnonfinancial assets and
nonfinancial liabilities within its scope.  As C2 had not employed
fair value accounting for any of its nonfinancial assets and nonfinancial
liabilities prior to its adoption of SFAS No. 157 at January 1, 2007, FSP FAS
157-2 had no effect on its financial position, operations or cash
flows.





In
February 2007, the FASB issued SFAS No. 159.  SFAS No. 159
provides the option to measure selected financial assets and liabilities at fair
value, and requires the fair values of those assets and liabilities to be shown
on the face of the balance sheet.  It also requires the provision of
additional information regarding the reasons for electing the fair value option
and the effect of the election on current period earnings.  SFAS No.
159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.  SFAS No. 159
was effective for fiscal years beginning after November 15, 2007, with
early adoption permitted if SFAS No. 157 was also adopted.  SFAS No.
159 is to be applied prospectively.  The Company adopted SFAS No. 159
at January 1, 2008.  The carrying values of the Company’s cash,
accounts payable and accrued liabilities approximate fair value, and therefore
the adoption of SFAS No. 159 had no effect on the reported amounts of these
assets and liabilities.  In addition, the Company has the option to
elect fair value accounting for its investments in internet-based E-commerce
businesses.  The Company has elected to continue to account for these
investments using the methods in place at December 31, 2007, as described below
under “Investments”.  Therefore, the adoption of SFAS No. 159 had no
impact on the Company’s financial position, results of operations or cash
flows.




On
October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP FAS
157-3”).  FSP FAS 157-3 amends SFAS No. 157 by incorporating an
example that illustrates key considerations in determining the fair value of a
financial asset in an inactive market.  It is intended to clarify
application issues, and emphasize the measurement principles of SFAS No. 157,
including the objective of fair value measurements, distressed transactions,
relevance of observable data and management’s assumptions.  FSP FAS
157-3 was effective as of October 10, 2008 and applicable to prior periods for
which financial statements have not been issued.  The adoption of FSP
FAS 157-3 had no effect on the Company’s financial position, results of
operations, or cash flows.




Future
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
No. 141(R)”) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS No. 160”).  SFAS No.
141(R) replaces SFAS No. 141 and SFAS No. 160 amends Accounting Research
Bulletin No. 51, Consolidated
Financial Statements.  Together, SFAS No. 141(R) and SFAS No.
160 substantially increase the use of fair value and make significant changes to
the way companies account for
business combinations and noncontrolling interests.  Specifically,
they will require more assets acquired and liabilities assumed to be measured at
fair value as of the acquisition date, liabilities related to contingent
consideration to be initially measured and remeasured at fair value in each
subsequent reporting period, acquisition-related costs to be expensed, and
noncontrolling interests in subsidiaries to be initially measured at fair value
and classified as a separate component of equity.  SFAS No.
141(R) and SFAS No. 160 are effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited.  They are to
be applied prospectively, with one exception relating to income
taxes.  The Company will adopt SFAS No. 141(R) and SFAS No. 160 on
January 1, 2009, and is currently evaluating the impact of these adoptions on
our consolidated financial statements.





In May
2008, the FASB issued FASB Staff Position No. FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP APB 14-1”).  FSP APB 14-1 addresses the
accounting for convertible debt securities that, upon conversion, may be settled
by the issuer fully or partially in cash.  It does not change the
accounting for traditional types of convertible debt securities that do not have
a cash settlement feature, and does not apply if, under existing GAAP for
derivatives, the embedded conversion feature must be accounted for separately
from the rest of the instrument.  FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008.  It
should be applied retrospectively to all past periods presented, even if the
convertible debt security has matured, been converted or otherwise extinguished
as of the FSP’s effective date.  The Company does not expect that the
adoption of FSP APB 14-1 on January 1, 2009 will have any effect on its
financial position, results of operations, or cash flows.




22




On June
25, 2008, the FASB ratified Emerging Issues Task Force Issue 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF
07-5”).  The Task Force reached a consensus on how an entity should
evaluate whether an instrument (or an embedded feature) is indexed to its own
stock, how the currency in which the instrument is denominated affects the
determination of whether the instrument is indexed to a company’s own stock, and
how an issuer should account for market-based employee stock option valuation
instruments.  EITF 07-5 is effective for fiscal years and interim
periods beginning after December 31, 2008, and must be applied to outstanding
instruments as of the beginning of the fiscal year of adoption, with a
cumulative-effect adjustment to the opening balance of retained
earnings.  Early adoption is not permitted.  The Company
does not expect that the adoption of EITF 07-5 on January 1, 2009 will have any
effect on its financial position, results of operations, or cash
flows.




Critical
Accounting Policies





Use
of estimates





Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States
(“GAAP”).  This 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 required for the preparation of the consolidated financial statements
included in Item 15 of this Report were those related to goodwill, investments,
deferred income tax assets, liabilities, contingencies surrounding litigation,
and stock-based compensation.  These estimates are considered
significant 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 that are
continuous in nature.  Management bases its estimates and judgments on
historical experience and various other factors that are believed to be
reasonable under the circumstances.





Revenue
recognition





The
Company’s revenue is comprised primarily of amounts received in connection with
the licensing of its patents.  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.





Goodwill





The
Company’s goodwill relates to an investment in a subsidiary company that holds
the rights to some of the Company’s patents.  The Company assesses the
fair value of its goodwill based upon the fair value of the Company as a
consolidated entity.  Beginning in 2005, the Company’s valuation was
based upon its market capitalization.  Management believed this to be
the most reasonable method at the time, given the absence of a predictable
revenue stream and the corresponding inability to use an alternative valuation
method for the Company’s patents, such as a discounted cash flow
analysis.  For the year ended December 31, 2008, given the success
that the Company has realized to date with respect to its patent litigation, the
Company was able to use a discounted cash flow analysis to value its
patents.  At December 31, 2008, the fair value of the Company’s net
assets significantly exceeded their book value, and therefore the Company’s
management determined that no impairment was present.





We cannot
predict the occurrence of future events that might adversely affect the reported
value of the 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





The
Company holds investments in two private companies:  a minority
preferred share investment in Buddy Media, Inc. and a one-third interest in
Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC.  The
Company sold its equity interest in LIMOS.com, LLC in the fourth quarter of
2008.





23





The Buddy
Media, Inc. preferred shares do not have a readily determinable fair value, and
are convertible into common stock that also does not have a readily determinable
fair value.  The investment is accounted for under the cost method,
which requires the fair value of the securities to be estimated quarterly using
the best available information as of the evaluation date in order to determine
whether there have been any other than temporary impairments in the investment’s
carrying value.  A determination that the investment was other than
temporarily impaired would require that it be written down to its fair value,
with the loss recorded in earnings in the period of the write
down.  The fair value is estimated according to the guidelines of SFAS
No. 157, Fair Value
Measurements.  Given the nature of the investments it is based
upon Level 3 inputs, such as recent financing rounds of the investee and other
investee-specific information.  Based on the Company’s analysis of
Buddy Media’s financial statements and projections as at December 31, 2008, the
Company concluded that there has been no impairment in the fair value of its
investment.





As
discussed in more detail in Note 5 of the consolidated financial statements, the
Company accounted for its investment in LIMOS.com LLC, and currently accounts
for its investment in Knight’s Bridge Capital Partners Internet Fund No. 1 GP
LLC (“Knight’s Bridge GP”), using the equity method.  Under this
method, the investments are carried at cost, plus or minus the Company’s share
of increases and decreases in the investee’s net assets and certain other
adjustments.  The Company’s share of the net income or loss of the
investee is reported separately in the Company’s income statement, and
any dividends received from the investee are credited to the investment
account.  The Company also recognizes any other-than-temporary
impairments of equity method investments.  Based on an analysis of
Knight’s Bridge GP at December 31, 2008, management concluded that its equity
investment was not impaired.





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.  At this time, the Company does not
believe that the outcome of the litigation in which it is currently involved
will have a material adverse impact on its business, results of operations,
financial position or liquidity.





Stock-Based
Compensation





At
December 31, 2008, the Company has several stock-based compensation plans, which
are described more fully in Note 16 to the consolidated financial
statements.  The Company calculates stock-based compensation in
accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, as revised December 2004 (“SFAS No. 123(R)”), which it was
required to adopt in the first quarter of 2006.  The provisions of the
Company’s stock-based compensation plans do not require the Company to settle
any options by transferring cash or other assets, and therefore the Company
classifies the awards as equity.





All
options are granted with an exercise price that is equal to, or greater than,
the market value of the Company’s common stock on the date of grant, and the
options vest in four equal installments beginning one year from the grant
date.  The Company estimates the fair value of each option grant on
the grant date using the Black-Scholes option pricing model with the following
assumptions:  an expected volatility determined as a weighted average
of the Company’s volatility and its peer group’s volatility, the discount window
primary credit rate for the appropriate term, as supplied by the Federal
Reserve, an expected term of 4.75 years as calculated according to the
provisions of SEC Staff Accounting Bulletin No. 110, and a dividend yield of
zero.





At
December 31, 2008, the Company had unrecognized stock-based compensation expense
of $126, which is expected to be recognized over a weighted-average period of
approximately 12 months.





Income
taxes





The
Company records deferred taxes in accordance with SFAS No. 109, Accounting for Income Taxes(“SFAS No. 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.





In July
2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 ("FIN
48").  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with SFAS No. 109,
and prescribes a recognition threshold and measurement attributes for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.  FIN 48 also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  The Company adopted the
provisions of FIN 48 effective January 1, 2007.  The adoption of FIN
48 had no material effect on the financial position, operations or cash flow of
the Company.  See Note 12 for further discussion of the Company’s
income taxes.





24





The
Company periodically assesses the value of its deferred tax asset, which has
been generated by a history of net operating and net capital losses, and which
has been recognized in accordance with FIN 48, and determines the necessity for
a valuation allowance.  The Company evaluates which portion of the
deferred tax asset, 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.





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 interest rates.  Due to
the fact that our cash and cash equivalents are deposited with major financial
institutions, 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, 2008 we had no variable or fixed rate debt instruments
outstanding.





We did
not have any foreign currency hedges or other derivative financial instruments
as of December 31, 2008.  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(T). Controls and
Procedures.





Evaluation
of Disclosure Controls and Procedures




C2’s
management carried out an evaluation, as required by Rule 13a-15(b) of the
Exchange Act, with the participation of our principal executive officer and our
principal financial officer (the “Certifying Officers”), of the effectiveness of
our disclosure controls and procedures, as of the end of our last fiscal
quarter. Based upon this evaluation, the Certifying Officers concluded that our
disclosure controls and procedures were effective, as of the end of the period
covered by this Report, such that the information relating to C2 and its
consolidated subsidiaries required to be disclosed in our Exchange Act reports
filed with the SEC (i) is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms, and (ii) is accumulated and
communicated to C2’s management, including our Certifying Officers, as
appropriate to allow timely decisions regarding required
disclosure.


Management’s
Annual Report on Internal Control Over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, in accordance with Rules 13a-15(f)
and 15d-15(f) of the Exchange Act.  Under the supervision and with the
participation of the Company’s management, including the Certifying Officers, we
conducted an evaluation of the effectiveness of the Company’s internal control
over financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.





The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles in the United States of America.
The Company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the Company’s assets that could have a
material effect on the financial statements.





25





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Based on
its assessment using these criteria, the Company’s management concluded that the
Company maintained effective internal control over financial reporting as of
December 31, 2008.





This
Report does not include an attestation report of the Company’s independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s report in
this Report.  The Company will require an auditor's attestation
regarding the effectiveness of internal controls to be included as a report
submitted with the Company's Annual Report on Form 10-K for its fiscal year
ending December 31, 2009.





Changes
in Internal Controls over Financial Reporting





There
were no changes in our internal control over financial reporting during the
fourth fiscal quarter of 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





Item 9B. Other
Information.


None.





26





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 five members:  one
Class I director (Mr. Shimer), three Class II directors (Messrs. Toh, Heaton,
and Silber) and one Class III director (Mr. Turock).  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)
              
              TitleAllan
      C. Silber
              
              60
              
              Chairman
      of the Board and Chief Executive OfficerHal
      B. Heaton
              
              58
              
              Director
      (2), (3), (4)Henry
      Y.L. Toh
              
              51
              
              Director
      (2), (3), (4)Samuel
      L. Shimer
              
              45
              
              Director
      (2)David
      L. Turock
              
              51
              
              Director
      (2), (5)Stephen
      A. Weintraub
              
              61
              
              Executive
      Vice President, Corporate Secretary and Chief Financial
      Officer





(1)
            As
      of December 31, 2008.


(2)
            Independent
      Director


(3)
            Member
      of the Audit Committee


(4)
            Member
      of the Compensation Committee


(5)
            Appointed
      to the Board of Directors January 16,
2008





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, the Chairman of Knight’s Bridge Capital Partners Inc.,
a wholly-owned subsidiary of Counsel that is a financial services provider, and
the Chairman and CEO of Terra Firma Capital Corporation, a TSX Venture Exchange
listed company of which Counsel owns approximately 23%.  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 1983 to the 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 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 been
President and CEO, and a director, of Amerique Investments since
1992.  Additionally, he has been Executive Vice President and a
director of InovaChem, Inc., a development stage research and development
company in specialized chemistry, since February 2008.  Mr. Toh has
served as a director of iDNA, Inc., a specialized finance and entertainment
company, since 1998; a director of Teletouch Communications, Inc., a retail
provider of internet, cellular and paging services, since 2001; a director of
Isolagen, Inc., a biotechnology company, since 2004; and a director of American
Surgical Holdings, Inc. since 2006.  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 J. H. Whitney & Co., a private equity
fund management company, where he remains as a Partner.  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.





27





David L. Turock,
Director.  Mr. Turock was appointed by the Board of Directors as a
Class III director on January 16, 2008 to fill a Board vacancy.  Mr.
Turock began his career working with AT&T Bell Laboratories in 1982 and Bell
Communications Research in 1988, and subsequently founded enhanced telephone
service provider, Call Sciences.  He later formed Interexchange, which
designed and operated one of the world’s largest debit card
systems.  Most recently, from 2001 to 2007, Mr. Turock was Chief
Technology Officer of Therap Services, a provider of informatics services to
disabled patients.  Mr. Turock is also the inventor of the Company’s
VoIP Patent.  Mr. Turock received his B.S. in Experimental Psychology
from Syracuse University, his M.S. and Ph.D. degrees in Cognitive Psychology
from Rutgers University, and his M.S.E. in Computer Science from the Moore
School of the University of Pennsylvania.





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 Counsel and
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.  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.





Each
officer of C2 has been appointed by the Board of Directors and holds his office
at the discretion of the Board of Directors.





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, 2008, with two
exceptions.  David Turock, a Director, failed to file a timely Form
3.  As well, Counsel Communications LLC, a wholly-owned subsidiary of
Counsel, failed to file a timely Form 4.  As of the date of filing
this Report, both Mr. Turock and Counsel Communications LLC are 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





Board
Meetings and Committees


The Board
held four meetings during the fiscal year ended December 31,
2008.  The Board has designated two standing
committees:  the Audit Committee and the Compensation
Committee.  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 since such procedures were adopted and implemented.





28





Audit
Committee


The Audit
Committee is responsible for making recommendations to the Board of Directors
concerning the selection and engagement of independent accountants and for
reviewing the scope of the annual audit, audit fees, results of the audit and
independent registered public accounting firm’s independence.  The
Audit Committee is also responsible for corporate governance, and reviews and
discusses with management and the Board of Directors such matters as accounting
policies, internal accounting controls and procedures for preparation of
financial statements.  Its membership is currently comprised of Mr.
Toh (Chairman) and Mr. Heaton, both independent directors.  The Audit
Committee held four meetings during the fiscal year ended December 31,
2008.  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.c-2technologies.com.





Audit
Committee Financial Expert


The Board
has determined that Mr. Henry Y.L. Toh is an Audit Committee financial expert as
defined by Item 407(d) of Regulation S-K and is “independent” as such term is
defined under Nasdaq Marketplace Rules and applicable federal securities laws
and regulations.





29





Item
11. Executive Compensation.





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;


•       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 of specified 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 focus management 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 executives with that of our
      shareholders. The equity-based component promotes a continuing focus on
      building profitability and shareowner
value.





•
            Total
      compensation should enhance our ability to attract, retain, motivate and
      develop knowledgeable and experienced executives 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.





30





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.





Our
Named Executive Officers for 2008





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, 2007
and 2008, 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 2007 and
2008.





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.





Except
for the CEO, the Company had no paid employees during 2007 and
2008.  As noted above, the Company’s CEO, Mr. Allan Silber, is also
the CEO of Counsel.  Mr. Silber’s annual salary of $137.5, and a
discretionary bonus of up to 100% of his base salary, have been fixed at these
amounts since 2005.





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.





31





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.





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.  The most recent option grants occurred in
2006, when Mr. Silber, as well as other employees of Counsel who receive no
direct compensation from the Company, were awarded a total of 455,000 options to
purchase common stock.





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.





Executive
and Director Compensation – Tabular Disclosure





Please
note that all amounts reported in the tables below, and the accompanying notes,
are in dollars, rounded to the nearest dollar.





Summary
Compensation Table





The
following table sets forth the aggregate compensation for services rendered
during the fiscal years ended December 31, 2008, 2007 and 2006 by our Named
Executive Officers. We have no other officers or employees whose compensation is
$100,000 or more.  As discussed below and 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 a Management Services
Agreement (the “Agreement”) entered into between Counsel and C2.





Name and Principal Position
                                
                                Year
                                
                                Salary
                                
                                
                                Bonus
                                
                                
                                Option
                                  Awards1
                                
                                
                                TotalAllan
      Silber
                                
                                2008
                                
                                $
                                137,500
                                
                                
                                $
                                137,500
                                
                                
                                $
                                33,563
                                
                                
                                $
                                308,563Chairman
      of the Board and Chief
                                
                                2007
                                
                                
                                137,500
                                
                                
                                
                                —
                                
                                
                                
                                33,563
                                
                                
                                
                                171,063Executive
      Officer
                                
                                2006
                                
                                
                                137,500
                                
                                
                                
                                —
                                
                                
                                
                                13,982
                                
                                
                                
                                151,482Stephen
      Weintraub
                                
                                2008
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                12,375
                                
                                
                                
                                12,375Executive
      Vice President, Chief
                                
                                2007
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                12,375
                                
                                
                                
                                12,375Financial
      Officer and Corporate Secretary
                                
                                2006
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                5,155
                                
                                
                                
                                5,155





1 The
amounts reported in this column relate 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, as included in our Annual Report on
Form 10-K for the year ended December 31, 2006, for details of these
options.





32





Grants
of Plan-Based Awards





There
were no grants of plan-based awards to the Chief Executive Officer and Chief
Financial Officer during the years ended December 31, 2007 and
2008.  During 2006, the Chief Executive Officer was granted 300,000
options to purchase common stock, and the Chief Financial Officer was granted
75,000 options to purchase common stock.  Please see the “Grants of Plan-Based Awards for the
Year Ended December 31, 2006” table, as included in our Annual Report on
Form 10-K for the year ended December 31, 2006, for details of these
options.





Allan
Silber, the CEO of C2, is an employee of Counsel.  As CEO of C2, he is
entitled to an annual salary of $137,500, plus a discretionary bonus of up to
100% of the base salary.  Mr. Silber was awarded his full bonus
entitlement in 2008 in recognition of his involvement in the successful
prosecution and settlement of the Company’s patent infringement
litigation.  There were no bonus awards in 2007 or 2006.





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 and
successive Agreements have been entered into in each subsequent
year.  Under the terms of the Agreement, C2 agrees to make payment to
Counsel for ongoing services provided to C2 by certain Counsel
personnel.  The basis for such services charged is an allocation,
based on time incurred, of the cost of the base compensation paid by Counsel to
those employees providing services to C2.  For the year ended December
31, 2008, the cost was $360,000.  For the years ended December 31,
2007 and 2006, the cost was $225,000.  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 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 2009 on the same cost
basis.





Outstanding
Equity Awards at Fiscal Year-End





The
following table sets forth the detail of outstanding equity awards, as regards
exercisable and unexercisable options, at December 31, 2008.





Name
                      
                      Number of
                        Securities
                        Underlying
                        Unexercised
                        Options:
                        Exercisable
                      
                      
                      Number of
                        Securities
                        Underlying
                        Unexercised
                        Options:
                        Unexercisable1
                      
                      
                      Option
                        Exercise
                        Price($/Sh)
                      
                      Option
                        Expiration
                        DateAllan
      Silber
                      
                      
                      112,500
                      
                      
                      
                      112,500
                      
                      
                      
                      $ 
      0.66
                      
                      August
      1, 2013Allan
      Silber
                      
                      
                      37,500
                      
                      
                      
                      37,500
                      
                      
                      
                      1.11
                      
                      August
      1, 2013Stephen
      Weintraub
                      
                      
                      37,500
                      
                      
                      
                      37,500
                      
                      
                      
                      1.01
                      
                      August
      1,
2013





1 The
options vest 25% annually beginning on the first anniversary of the grant date, which was
August 1, 2006 for all options reported in this table.





33





Compensation
of Directors





The
following table sets forth the aggregate compensation for services rendered
during the fiscal year ended December 31, 2008 by each person serving as a
director.




Name
                                    
                                    Fees Earned or Paid in Cash
                                    
                                    
                                    Option Awards1
                                    
                                    
                                    TotalHenry
      Y.L. Toh
                                    
                                    
                                    $43,000
                                    
                                    
                                    
                                    $5,334
                                    
                                    
                                    
                                    $48,334Hal
      B. Heaton
                                    
                                    
                                    35,000
                                    
                                    
                                    
                                    5,334
                                    
                                    
                                    
                                    40,334Samuel
      L. Shimer
                                    
                                    
                                    24,000
                                    
                                    
                                    
                                    5,334
                                    
                                    
                                    
                                    29,334David
      L. Turock
                                    
                                    
                                    24,000
                                    
                                    
                                    
                                    1,670
                                    
                                    
                                    
                                    25,670





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 each year from 2004 to
2008.  The table below provides information regarding the current year
compensation expense and grant date fair value of each option award underlying
the reported 2008 compensation expense.




DETAIL OF DIRECTOR OPTION AWARDS EXPENSEName
            
            Grant Date
            
            Number of
              Options
              Awarded
            
            
            Grant Date Fair
              Value of Option
              Award
            
            
            2008 ExpenseHenry
      Y.L. Toh
            
            August
      10, 2004
            
            
            10,000
            
            
            
            $ 
      5,400
            
            
            
            $     
      788April
      1, 2005
            
            
            10,000
            
            
            
            3,600
            
            
            
            900April
      3, 2006
            
            
            10,000
            
            
            
            3,300
            
            
            
            825April
      2, 2007
            
            
            10,000
            
            
            
            4,600
            
            
            
            1,150March
      31, 2008
            
            
            10,000
            
            
            
            8,700
            
            
            
            1,671$  
      5,334Hal
      B. Heaton
            
            August
      10, 2004
            
            
            10,000
            
            
            
            $ 
      5,400
            
            
            
            $   
        788April
      1, 2005
            
            
            10,000
            
            
            
            3,600
            
            
            
            900April
      3, 2006
            
            
            10,000
            
            
            
            3,300
            
            
            
            825April
      2, 2007
            
            
            10,000
            
            
            
            4,600
            
            
            
            1,150March
      31, 2008
            
            
            10,000
            
            
            
            8,700
            
            
            
            1,671$ 
       5,334Samuel
      L. Shimer
            
            August
      10, 2004
            
            
            10,000
            
            
            
            $ 
      5,400
            
            
            
            $     
      788April
      1, 2005
            
            
            10,000
            
            
            
            3,600
            
            
            
            900April
      3, 2006
            
            
            10,000
            
            
            
            3,300
            
            
            
            825April
      2, 2007
            
            
            10,000
            
            
            
            4,600
            
            
            
            1,150March
      31, 2008
            
            
            10,000
            
            
            
            8,700
            
            
            
            1,671$  
      5,334David
      L. Turock
            
            March
      31, 2008
            
            
            10,000
            
            
            
            8,700
            
            
            
            $ 
       1,671


Each
director who is not employed by C2 or by Counsel receives a $20,000 per year
cash retainer, $1,000 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 $10,000 per year,
Audit Committee members who are not the chair receive a cash retainer of $5,000
per year, and other committee chairpersons receive an annual cash retainer of
$2,000 per 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 2008, 2007 or 2006.  300,000 stock
options were awarded to Allan Silber during 2006.





34





Compensation
Committee Interlocks and Insider Participation





The
Compensation Committee reviews and approves the compensation for executive
employees.  The Compensation Committee Charter was first approved by
C2’s Board of Directors on February 12, 2003 and was subsequently revised on
December 9, 2005.  The Compensation Committee Charter is available on
the Company’s website www.c-2technologies.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 no meetings during the fiscal year ended December
31, 2008.





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.




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. 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, 2008, 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





Stock
Option Plans





At
December 31, 2008, the Company had five 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 2008 and 2007.  As of
December 31, 2008 and 2007, no options to purchase shares were outstanding, and
no options expired in 2008 and 2007.





35





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, 2008 and
2007, there were no options outstanding under the 1995 Employee
Plan.  No options were granted or exercised in 2008 or 2007 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, 2008, there were options to purchase 237,361 shares (2007 – 238,611
shares) of the Company’s common stock outstanding under the 1997
Plan.  112,500 of these options, with an exercise price of $0.66 per
share, were unvested at December 31, 2008 (2007 – 168,750).  They will
vest in 2009 and 2010.  112,500 options with an exercise price of
$0.66 per share were vested at December 31, 2008 (2007 –
56,250).  12,361 options with exercise prices of $1.40 to $111.26 per
share were vested at December 31, 2008 (2007 – 13,611 options with exercise
prices of $1.40 to $111.26 per share).  The options with an exercise
price of $0.66 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 remaining 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 2008, no options to purchase shares of common stock were
issued, and 1,250 options expired.  During 2007, no options to
purchase shares of common stock were issued, and 1,000 options
expired.  There were no exercises during 2008 or 2007.





2000 Employee Stock Purchase
Plan





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





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





36





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, 2008, there
were options to purchase 638,250 shares (2007 - 598,250 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 2008, 40,000 options (2007 – 30,000 options) were
granted.  During 2008 and 2007 no options to purchase shares of common
stock were forfeited or expired.  There were no options exercised
during 2008 and 2007, and no SARs have been issued under the 2003
Plan.





37





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





Please
see Item 5 for detail of the Company’s securities authorized for issuance under
equity compensation plans.





The
following table sets forth information regarding the ownership of our common
stock as of February 26, 2009 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 February 26, 2009, there are 22,745,530 shares of
common stock and 594 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 OwnedAllan
      C. Silber
                                    
                                    150,000(3)
                                    
                                    
                                    
                                    1%Hal
      B. Heaton
                                    
                                    42,948(4)
                                    
                                    
                                    
                                    *%Henry
      Y.L. Toh
                                    
                                    41,413(4)
                                    
                                    
                                    
                                    *%Samuel
      L. Shimer
                                    
                                    35,000(5)
                                    
                                    
                                    
                                    *%David
      L. Turock
                                    
                                    2,500(4)
                                    
                                    
                                    
                                    *%Stephen
      A. Weintraub
                                    
                                    37,500(6)
                                    
                                    
                                    
                                    *%Counsel
      Corporation and subsidiaries
                                      40
      King Street West  Suite 3200
                                      Toronto,
      Ontario M5H 3Y2
                                    
                                    20,644,481
                                    
                                    
                                    
                                    90%All
      Executive Officers and Directors as a Group (6 people)
                                    
                                    309,361
                                    
                                    
                                    
                                    1%





*
            Indicates
      less than one percent





(1)
            Unless
      otherwise noted, all listed shares of common stock are owned of record by
      each person or entity named as beneficial owner and that person or entity
      has sole voting and dispositive power with respect to the shares of common
      stock owned by each of them.  All addresses are c/o C2 Global
      Technologies Inc. unless otherwise
indicated.





(2)
            As
      to each person or entity named as beneficial owners, that person’s or
      entity’s percentage of ownership is determined based on the assumption
      that any options or convertible securities held by such person or entity
      which are exercisable or convertible within 60 days have been exercised or
      converted, as the case may be.





(3)
            Represents
      shares of common stock issuable pursuant to options.  Mr. Silber
      is Chairman, Chief Executive Officer and President of Counsel, and a
      beneficial owner of approximately 6,628,776 shares or 14.1% of the
      outstanding common stock (11.2% 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.  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.





(6)
            Represents
      shares of common stock issuable pursuant to options.  Mr.
      Weintraub is Executive Vice President, Secretary and Chief Financial
      Officer of Counsel and a beneficial owner of 401,901 shares in Counsel,
      which represents less than 1% beneficial ownership of
      Counsel.  Mr. Weintraub disclaims beneficial ownership of the
      shares of C2’s common stock beneficially owned by
  Counsel.





There are
no arrangements, known to the Company, including any pledge by any person of
securities of the registrant or any of its parents, the operation of which may
at a subsequent date result in a change of control of the
registrant.





38





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 31, 2008, C2 had no indebtedness to Counsel.   The
details of the individual notes payable to Counsel at December 31, 2007, which
were repaid during 2008, are presented below.





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
additional periodic loans were made from time to time (collectively and as
amended, the “Promissory Note”).  The Promissory Note accrued interest
at 10% per annum compounded quarterly from the date funds were
advanced.  The loan was amended several times and the maturity date of
the loan plus accrued interest was extended to December 31, 2008.  The
Promissory Note was secured by the assets of the Company and was subject to
certain events of default.  There were no conversion features
associated with the Promissory Note.  The outstanding balance at
December 29, 2006 (including principal and accrued interest), prior to the
December 30, 2006 debt forgiveness by Counsel, was $41,897.At December 31, 2006 and
2007, C2 was indebted to Counsel in the amount of $6 and $2,288,
respectively.





Secured
Loan to C2





To fund
the acquisition of the WorldxChange Communications, Inc. assets and operations
on June 4, 2001, Counsel provided a loan (the “Initial Loan”) to C2 in the
aggregate amount of $15,000.  On October 1, 2003 Counsel assigned the
balance owed in connection with the Initial Loan of $9,743, including accrued
interest, 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”).  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.  The New Loan was subject to certain
events of default.  It was amended several times and the maturity date
of the loan plus accrued interest was extended to December 31,
2008.  There were no conversion features associated with the New
Loan.  As of December 29, 2006, the total outstanding debt under the
New Loan (including principal and accrued interest), prior to the December 30,
2006 debt forgiveness by Counsel, was $13,428.  At December 31, 2006
and 2007 total outstanding debt under the New Loan was $0 and $47,
respectively.





Counsel
Management Services





Since
December 2004, C2 and Counsel have entered into successive annual management
services agreements (the “Agreement”).  Under the terms of the
Agreement, C2 agrees to make payment to Counsel for ongoing services provided to
C2 by certain Counsel personnel.  The basis for such services charged
is an allocation, based on time incurred, of the cost of the base compensation
paid by Counsel to those employees providing services to C2.  For the
year ended December 31, 2008, the cost was $360.  For the years ended
December 31, 2007 and 2006, the cost was $225.  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
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 2009 on the same cost basis.





Director
Independence





Our Board
is subject to the independence requirements under the applicable SEC rules and
regulations and Nasdaq Marketplace Rules.  Pursuant to the
requirements, the Board undertook its annual review of director
independence.  During this review, the Board considered transactions
and relationships between each director or any member of his or her immediate
family and C2 and its subsidiaries and affiliates.  The purpose of
this review was to determine whether any such relationships or transactions
existed that were inconsistent with a determination that the director is
independent.   As a result of this review, the Board
affirmatively determined that during 2008 that Mr. Toh, Mr. Heaton, Mr. Shimer
and Mr. Turock are independent for purposes of the independence
requirements.  The Board further determined that each of the foregoing
directors met the independence requirements needed to serve on the Board
committees for which they serve.





39





Item
14. Principal Accountant Fees and Services.





In
November 2006 the Company’s Audit Committee engaged Mintz & Partners LLP
(“Mintz”) 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.





On
December 12, 2007, the Company was informed by Mintz that it had reached an
agreement with Deloitte & Touche LLP, whereby Deloitte & Touche LLP
acquired Mintz’s public accounting practice.  The transaction was
completed on January 29, 2008.  Effective that date, both firms were
operating under the name Deloitte & Touche LLP (“Deloitte & Touche”) and
Mintz ceased providing services as a separate entity.





Fees paid
or expected to be paid to Deloitte & Touche, our independent registered
public accounting firm for the fiscal periods ended December 31, 2008 and 2007,
are set forth below.





Year Ended December 31,2008
                  
                  
                  2007Audit
      fees
                  
                  $
                  88
                  
                  
                  $
                  94Audit-related
      fees
                  
                  
                  —
                  
                  
                  
                  11Tax
      fees
                  
                  
                  —
                  
                  
                  
                  17All
      other fees
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  88
                  
                  
                  $
                  122





Fees paid
to BDO Seidman, LLP, our independent registered public accounting firm for the
period May 17, 2004 to November 16, 2006, for the fiscal period ended December
31, 2007 are set forth below.





Year Ended
                      December 31,2007Audit
      fees
                    
                    $
                    20Audit-related
      fees
                    
                    
                    —Tax
      fees
                    
                    
                    —All
      other fees
                    
                    
                    —Total
                    
                    $
                    20





Audit
Fees





Audit
fees are for professional services for the audit of our annual financial
statements for the years ended December 31, 2007 and 2008, the reviews of the
financial statements included in our quarterly reports on Form 10-Q for the
years ended December 31, 2007 and 2008, and services in connection with our
statutory and regulatory filings for the years ended December 31, 2007 and
2008.  They amounted to $114 and $88, respectively.





Audit-Related
Fees





Audit
related fees are for assurance and related services that are reasonably related
to the audit and reviews of our financial statements for the years ended
December 31, 2007 and 2008, exclusive of the fees disclosed as Audit Fees
above.  These fees include benefit plan audits and accounting
consultations, which amounted to $11 and $0 for the respective
years.





Tax
Fees





Tax fees
are for services related to tax compliance, consulting and planning services for
the years ended December 31, 2007 and 2008 and included preparation of tax
returns, review of restrictions on net operating loss carryforwards and other
general tax services.  Tax fees amounted to $17 and $0 for the
respective years.





40





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, 2007 and 2008.





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 to pre-approve services performed by the independent
registered public accounting firm.  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 Chairman or any of its other members pursuant to
delegated authority) for approval.


`


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.





41





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, 2008 and 2007





Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006





Consolidated
Statement of Changes in Stockholders’ Equity for the years ended December 31,
2008, 2007 and 2006





Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006





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 Exhibit3.1(i)
                  
                  Amended
      and Restated Articles of Incorporation. (1)3.2(ii)
                  
                  Bylaws
      as amended (2)10.1*
                  
                  1997
      Recruitment Stock Option Plan. (3)10.2*
                  
                  2001
      Stock Option and Appreciation Rights Plan. (4)10.2.1*
                  
                  2003
      Stock Option and Appreciation Rights Plan. (5)10.3
                  
                  Securities
      Purchase Agreement dated as of October 14,
      2004.  (7)10.4
                  
                  Registration
      Rights Agreement dated as of October 14, 2004. (7)10.5
                  
                  Common
      Stock Purchase Warrant issued October 14, 2004. (7)10.6*
                  
                  Counsel
      Management Agreement. (8)10.7
                  
                  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 (9)10.8
                  
                  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
    (9)10.9
                  
                  Promissory
      Note for $6,315.53 dated December 31, 2006 between C2 Global Technologies
      Inc. and Counsel Corporation.
(10)





42





Exhibit Number
                  
                  Title of Exhibit10.10
                  
                  Promissory
      Note for $1,613,000.00 dated March 31, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (11)10.11
                  
                  Promissory
      Note for $56,250.00 dated March 31, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (11)10.12
                  
                  Promissory
      Note for $142,050.31 dated March 31, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (11)10.13
                  
                  Promissory
      Note for $147,000.00 dated June 30, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (12)10.14
                  
                  Promissory
      Note for $56,250.00 dated June 30, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (12)10.15
                  
                  Promissory
      Note for $44,826.30 dated June 30, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (12)10.16
                  
                  Promissory
      Note for $672,961.16 dated September 30, 2007 between C2 Global
      Technologies Inc. and Counsel Corporation. (13)10.17
                  
                  Promissory
      Note for $56,250.00 dated September 30, 2007 between C2 Global
      Technologies Inc. and Counsel Corporation. (13)10.18
                  
                  Promissory
      Note for $73,295.21 dated September 30, 2007 between C2 Global
      Technologies Inc. and Counsel Corporation. (13)10.19
                  
                  The
      Pledge Agreement dated as of September 21, 2007. (14)10.20
                  
                  The
      Priorities Agreement dated as of September 21, 2007.
  (14)10.21
                  
                  Fifth
      Amendment to Loan Agreement between C2 Global Technologies Inc. and
      Counsel Corporation (US) dated June 4, 2001, dated as of December 31, 2007
      (15)10.22
                  
                  Sixth
      Amendment to Loan Agreement between C2 Global Technologies Inc. and
      Counsel Corporation (US) dated June 4, 2001, dated as of December 31, 2007
      (15)10.23
                  
                  Fifth
      Amendment to Loan Agreement between C2 Global Technologies Inc. and
      Counsel Corporation dated January 26, 2004, dated as of December 31, 2007
      (15)10.24
                  
                  Promissory
      note for $145,000.00 dated November 14, 2007 between C2 Global
      Technologies Inc. and Counsel Corporation (US) (15)10.25
                  
                  Promissory
      Note for $120,000.00 dated December 31, 2007 between C2 Global
      Technologies Inc. and Counsel Corporation. (15)10.26
                  
                  Promissory
      Note for $56,250.00 dated December 31, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (15)10.27
                  
                  Promissory
      Note for $61,351.77 dated December 31, 2007 between C2 Global Technologies
      Inc. and Counsel Corporation. (15)10.28
                  
                  Settlement
      and License Agreement dated as of February 18, 2008
(16)10.29
                  
                  Settlement
      and License Agreement dated as of February 27, 2008
(16)10.30
                  
                  Settlement
      and License Agreement dated as of May 30, 2008
  (17)





43





Exhibit Number
                    
                    Title of Exhibit10.31
                    
                    Settlement
      and License Agreement dated as of September 25, 2008
  (18)10.32
                    
                    Stipulation
      of Dismissal with Prejudice dated as of March 12, 2009 (filed
      herewith)14
                    
                    C2
      Global Technologies Inc. Code of Conduct. (6)21
                    
                    List
      of subsidiaries. (filed herewith)23.1
                    
                    Consent
      of Deloitte & Touche LLP (filed herewith)23.2
                    
                    Consent
      of Mintz & Partners LLP (filed 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
      (filed 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
      (filed herewith)32.1
                    
                    Certification
      pursuant to 18 U.S.C 1350 as adopted pursuant to Section 906 of the
      Sarbanes Oxley Act of 2002 (filed herewith)32.2
                    
                    Certification
      pursuant to 18 U.S. C. 1350 as adopted pursuant to Section 906 of the
      Sarbanes Oxley Act of 2002 (filed
herewith)





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





(1)
              Incorporated
      by reference to our Quarterly Report on Form 10-QSB for the quarter ended
      June 30, 1996, 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 Definitive Proxy Statement for the October
      7, 1997 annual stockholder
meeting.





(4)
              Incorporated
      by reference to our Definitive Proxy Statement for the September 7, 2001
      annual stockholder meeting.





(5)
              Incorporated
      by reference to our Definitive Proxy Statement for the November 26, 2003
      annual stockholder meeting.





(6)
              Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2003.





(7)
              Incorporated
      by reference to our Current Report on Form 8-K filed on October 20,
      2004.





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





(9)
              Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      June 30, 2005.





(10)
              Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2006.





(11)
              Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      March 31, 2007.





(12)
              Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      June 30, 2007.





(13)
              Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      September 30, 2007.





(14)
              Incorporated
      by reference to our Current Report on Form 8-K filed on September 26,
      2007, file number 0-17973.





(15)
              Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2007.





44





(16)
              Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      March 31, 2008.





(17)
              Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      June 30, 2008.





(18)
              Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      September 30, 2008.





45







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 18, 2009
                  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
                            
                            March
      18, 2009Allan
      C. Silber
                            
                            Executive
      Officer/s/Stephen A. Weintraub
                            
                            Executive Vice President, Chief Financial Officer and
                            
                            March
      18, 2009Stephen
      A. Weintraub
                            
                            Corporate
      Secretary/s/ Catherine A. Moran
                            
                            Vice
      President of Accounting and Controller
                            
                            March
      18, 2009Catherine
      A. Moran/s/ Hal B. Heaton
                            
                            Director
                            
                            March
      18, 2009Hal
      B. Heaton/s/ Samuel L. Shimer
                            
                            Director
                            
                            March
      18, 2009Samuel
      L. Shimer/s/ Henry Y. L. Toh
                            
                            Director
                            
                            March
      18, 2009Henry
      Y.L. Toh/s/ David L. Turock
                            
                            Director
                            
                            March
      18, 2009David
      L. Turock




46


(c)
Financial Statement Schedules





The
following Schedules are included in our Financial Statements:





Schedule
of Valuation and Qualifying Accounts


47





INDEX
OF FINANCIAL STATEMENTS & SUPPLEMENTAL SCHEDULE





Title
of Document





PageReports
      of Independent Registered Public Accounting Firms
                                
                                F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                                
                                F-4Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
                                
                                F-5Consolidated
      Statement of Changes in Stockholders’ Equity (Deficit) for the years ended
      December 31, 2008, 2007 and 2006
                                
                                F-6Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                                
                                F-7Notes
      to Consolidated Financial Statements
                                
                                F-9Schedule
      of Valuation and Qualifying Accounts
                                
                                S-1




F-1


Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders of


C2 Global
Technologies Inc.


Toronto,
Ontario, Canada





We have
audited the accompanying consolidated balance sheets of C2 Global Technologies
Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity (deficit), and cash flows for the years then
ended.  We also audited the financial statement schedule listed in the
index at item S-1.  These financial statements are the responsibility
of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.





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 audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
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 present fairly, in all material
respects, the financial position of C2 Global Technologies Inc. and subsidiaries
as ofDecember
31, 2008 and 2007, and the results of their operations and their cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.  Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.





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 Company’s internal control over
financial reporting.  Accordingly, we express no such
opinion.





/s/
      Deloitte & Touche LLPDeloitte
      & Touche LLPLicensed
      Public AccountantsToronto,
      CanadaMarch
      12, 2009




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, 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
  LLPMintz
      & Partners LLPToronto,
      OntarioMarch
      1, 2007




F-3


C2
GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


as
of December 31, 2008 and 2007


(In
thousands of $US, except share and per share amounts)





2008
                
                
                2007ASSETSCurrent
      assets:Cash
                
                $
                4,076
                
                
                $
                67Deferred
      income tax assets (Note 12)
                
                
                875
                
                
                
                1,000Other
      current assets
                
                
                77
                
                
                
                17Total
      current assets
                
                
                5,028
                
                
                
                1,084Other
      assets:Intangible
      assets, net (Note 8)
                
                
                —
                
                
                
                20Goodwill
      (Note 8)
                
                
                173
                
                
                
                173Investments
      (Note 5)
                
                
                242
                
                
                
                519Total
      assets
                
                $
                5,443
                
                
                $
                1,796LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable and accrued liabilities (Note 7)
                
                $
                472
                
                
                $
                402Notes
      payable to a related party (Note 9)
                
                
                —
                
                
                
                2,335Total
      liabilities
                
                
                472
                
                
                
                2,737Commitments
      and contingencies (Notes 2, 10 and 11)Stockholders’
      equity (deficit):Preferred
      stock, $10.00 par value, authorized 10,000,000 shares; issued and
      outstanding 594 Class N shares at December 31, 2008 and 607 Class N shares
      at December 31, 2007, liquidation preference of $594 at December 31, 2008
      and $607 at December 31, 2007
                
                
                6
                
                
                
                6Common
      stock, $0.01 par value, authorized 300,000,000 shares; issued and
      outstanding 22,745,530 shares at December 31, 2008 and 23,095,010 shares
      at December 31, 2007
                
                
                227
                
                
                
                231Additional
      paid-in capital
                
                
                274,761
                
                
                
                274,672Accumulated
      deficit
                
                
                (270,023
                )
                
                
                (275,850
                )Total
      stockholders’ equity (deficit)
                
                
                4,971
                
                
                
                (941
                )Total
      liabilities and stockholders’ equity (deficit)
                
                $
                5,443
                
                
                $
                1,796





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, 2008, 2007 and 2006


(In
thousands of $US, except per share amounts)





2008
                  
                  
                  2007
                  
                  
                  2006RevenuePatent
      licensing
                  
                  $
                  17,625
                  
                  
                  $
                  —
                  
                  
                  $
                  —Operating
      costs and expenses:Patent
      licensing
                  
                  
                  10,729
                  
                  
                  
                  —
                  
                  
                  
                  —Selling,
      general and administrative
                  
                  
                  1,273
                  
                  
                  
                  1,216
                  
                  
                  
                  1,281Depreciation
      and amortization
                  
                  
                  20
                  
                  
                  
                  20
                  
                  
                  
                  20Total
      operating costs and expenses
                  
                  
                  12,022
                  
                  
                  
                  1,236
                  
                  
                  
                  1,301Operating
      income (loss)
                  
                  
                  5,603
                  
                  
                  
                  (1,236
                  )
                  
                  
                  (1,301
                  )Other
      income (expense):Other
      income (expense)
                  
                  
                  17
                  
                  
                  
                  (288
                  )
                  
                  
                  155Interest
      expense – third party
                  
                  
                  —
                  
                  
                  
                  (12
                  )
                  
                  
                  (510
                  )Interest
      expense – related party (Note 9)
                  
                  
                  (43
                  )
                  
                  
                  (184
                  )
                  
                  
                  (10,390
                  )Total
      other income (expense)
                  
                  
                  (26
                  )
                  
                  
                  (484
                  )
                  
                  
                  (10,745
                  )Income
      (loss) from continuing operations before the undernoted
                  
                  
                  5,577
                  
                  
                  
                  (1,720
                  )
                  
                  
                  (12,046
                  )Income
      tax expense (recovery) (Note 12)
                  
                  
                  125
                  
                  
                  
                  (1,000
                  )
                  
                  
                  —Earnings
      (loss) of equity accounted investments (net of $0 tax) (Note
      5)
                  
                  
                  (38
                  )
                  
                  
                  6
                  
                  
                  
                  —Gains
      on sale of equity accounted investments (Note 5)
                  
                  
                  425
                  
                  
                  
                  75
                  
                  
                  
                  —Income
      (loss) from continuing operations
                  
                  
                  5,839
                  
                  
                  
                  (639
                  )
                  
                  
                  (12,046
                  )Income
      (loss) from discontinued operations (Note 6)
                  
                  
                  (12
                  )
                  
                  
                  (6
                  )
                  
                  
                  4,370Net
      income (loss) and comprehensive income (loss)
                  
                  $
                  5,827
                  
                  
                  $
                  (645
                  )
                  
                  $
                  (7,676
                  )Weighted
      average common shares outstanding
                  
                  
                  22,907
                  
                  
                  
                  23,095
                  
                  
                  
                  19,258Weighted
      average preferred shares outstanding
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  1Net
      income (loss) per share – basic and diluted: (Note 4)Income
      (loss) from continuing operationsCommon
      shares
                  
                  $
                  0.25
                  
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.63
                  )Preferred
      shares
                  
                  $
                  10.19
                  
                  
                  
                  N/A
                  
                  
                  
                  N/AIncome
      (loss) from discontinued operationsCommon
      shares
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  0.23Preferred
      shares
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  N/A





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’ EQUITY


for
the years ended December 31, 2008, 2007 and 2006


(In
thousands of $US, except share amounts)





AdditionalPreferred
      stock
                            
                            
                            Common
      stock
                            
                            
                            paid-
                            
                            
                            AccumulatedShares
                            
                            
                            Amount
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            in
      capital
                            
                            
                            Deficit
                            
                            
                            TotalBalance
      at December 31, 2005
                            
                            
                            617
                            
                            
                            $
                            6
                            
                            
                            
                            19,237,135
                            
                            
                            $
                            192
                            
                            
                            $
                            189,162
                            
                            
                            $
                            (267,302
                            )
                            
                            $
                            (77,942
                            )Conversion
      of Class N preferred stock to common stock
                            
                            
                            (6
                            )
                            
                            
                            —
                            
                            
                            
                            240
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Conversion
      of related party debt to common stock (1)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3,847,475
                            
                            
                            
                            39
                            
                            
                            
                            3,347
                            
                            
                            
                            —
                            
                            
                            
                            3,386Forgiveness
      of related party debt (2)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            80,196
                            
                            
                            
                            —
                            
                            
                            
                            80,196Transfer
      of warrant to equity (3)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            430
                            
                            
                            
                            (227
                            )
                            
                            
                            203Beneficial
      conversion feature on certain convertible notes payable to related
      party
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,225
                            
                            
                            
                            —
                            
                            
                            
                            1,225Compensation
      cost related to stock options
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            139
                            
                            
                            
                            —
                            
                            
                            
                            139Net
      loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (7,676
                            )
                            
                            
                            (7,676
                            )Balance
      at December 31, 2006
                            
                            
                            611
                            
                            
                            
                            6
                            
                            
                            
                            23,084,850
                            
                            
                            
                            231
                            
                            
                            
                            274,499
                            
                            
                            
                            (275,205
                            )
                            
                            
                            (469
                            )Conversion
      of Class N preferred stock to common stock
                            
                            
                            (4
                            )
                            
                            
                            —
                            
                            
                            
                            160
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Conversion
      of third party debt to common stock (4)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            10,000
                            
                            
                            
                            —
                            
                            
                            
                            7
                            
                            
                            
                            —
                            
                            
                            
                            7Compensation
      cost related to stock options
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            166
                            
                            
                            
                            —
                            
                            
                            
                            166Net
      loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (645
                            )
                            
                            
                            (645
                            )Balance
      at December 31, 2007
                            
                            
                            607
                            
                            
                            
                            6
                            
                            
                            
                            23,095,010
                            
                            
                            
                            231
                            
                            
                            
                            274,672
                            
                            
                            
                            (275,850
                            )
                            
                            
                            (941
                            )Conversion
      of Class N preferred stock to common stock
                            
                            
                            (13
                            )
                            
                            
                            —
                            
                            
                            
                            520
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Cancellation
      of common stock (5)
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (350,000
                            )
                            
                            
                            (4
                            )
                            
                            
                            4
                            
                            
                            
                            —
                            
                            
                            
                            —Compensation
      cost related to stock options
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            85
                            
                            
                            
                            —
                            
                            
                            
                            85Net
      income
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            5,827
                            
                            
                            
                            5,827Balance
      at December 31, 2008
                            
                            
                            594
                            
                            
                            $
                            6
                            
                            
                            
                            22,745,530
                            
                            
                            $
                            227
                            
                            
                            $
                            274,761
                            
                            
                            $
                            (270,023
                            )
                            
                            $
                            4,971




(1)
            The
      Company issued 3,847,475 common shares of the Company in exchange for
      $3,386 of related party debt, as discussed in Note
  2.





(2)
            Contemporaneous
      with the issuance of common shares described in (1) above, the remaining
      $80,196 of related party debt outstanding at December 30, 2006 was
      forgiven, as discussed in Note 2.





(3)
            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.




(4)
            In
      connection with the payment of a note payable to a third party, the
      Company converted a portion of the note into 10,000 common shares, as
      discussed in Note 9.





(5)
            In
      connection with the June 2008 settlement of a derivative lawsuit, the
      Company agreed to cancel 350,000 common shares, as discussed in Note
      14.




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, 2008, 2007 and 2006


(In
thousands of $US)


2008
                
                
                2007
                
                
                2006Cash
      flows from operating activities:Net
      income (loss) from continuing operations
                
                $
                5,839
                
                
                $
                (639
                )
                
                $
                (12,046
                )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                20
                
                
                
                20
                
                
                
                20Equity
      interests in significantly influenced companies
                
                
                38
                
                
                
                (6
                )
                
                
                —Gain
      on sale of portfolio investments
                
                
                (425
                )
                
                
                (75
                )
                
                
                —Stock
      compensation expense
                
                
                85
                
                
                
                166
                
                
                
                139Amortization
      of discount and debt issuance costs on convertible note
      payable
                
                
                —
                
                
                
                8
                
                
                
                298Accrued
      interest added to notes payable to a related party
                
                
                —
                
                
                
                184
                
                
                
                7,542Amortization
      of discount and debt issuance costs on notes payable to a related
      party
                
                
                —
                
                
                
                —
                
                
                
                2,848Non-cash
      cost of prepayment of third party debt
                
                
                —
                
                
                
                224
                
                
                
                —Mark
      to market adjustment of warrant to purchase common stock
                
                
                —
                
                
                
                —
                
                
                
                (78
                )Changes
      in operating assets and liabilities:Decrease
      (increase) in other assets
                
                
                (60
                )
                
                
                (9
                )
                
                
                177Decrease
      (increase) in deferred income tax asset
                
                
                125
                
                
                
                (1,000
                )
                
                
                —Increase
      (decrease) in accounts payable and accrued liabilities
                
                
                70
                
                
                
                (148
                )
                
                
                (1,224
                )Net
      cash provided by (used in) operating activities by continuing
      operations
                
                
                5,692
                
                
                
                (1,275
                )
                
                
                (2,324
                )Net
      cash used in operating activities by discontinued
    operations
                
                
                (12
                )
                
                
                (6
                )
                
                
                (142
                )Net
      cash provided by (used in) operating activities
                
                
                5,680
                
                
                
                (1,281
                )
                
                
                (2,466
                )Cash
      flows from investing activities:Purchase
      of portfolio investments
                
                
                (125
                )
                
                
                (595
                )
                
                
                —Redemption
      of portfolio investments
                
                
                —
                
                
                
                1,100
                
                
                
                —Sale
      of portfolio investments
                
                
                781
                
                
                
                150
                
                
                
                —Cash
      distributions from portfolio investments
                
                
                8
                
                
                
                7
                
                
                
                —Net
      cash provided by (used in) investing activities of
      continuingand
      discontinued operations
                
                
                664
                
                
                
                662
                
                
                
                —Cash
      flows from financing activities:Increase
      in notes payable to a related party
                
                
                —
                
                
                
                3,245
                
                
                
                2,401Repayment
      of notes payable to a related party
                
                
                (2,335
                )
                
                
                (1,100
                )
                
                
                —Release
      of restricted cash to pay convertible note payable
                
                
                —
                
                
                
                —
                
                
                
                1,506Repayment
      of convertible note payable
                
                
                —
                
                
                
                (1,462
                )
                
                
                (1,765
                )Net
      cash provided by (used in) financing activities of continuing
                  and
      discontinued operations
                
                
                (2,335
                )
                
                
                683
                
                
                
                2,142Increase
      (decrease) in cash
                
                
                4,009
                
                
                
                64
                
                
                
                (324
                )Cash
      at beginning of year
                
                
                67
                
                
                
                3
                
                
                
                327Cash
      at end of year
                
                $
                4,076
                
                
                $
                67
                
                
                $
                3





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, 2008, 2007 and 2006


(In
thousands of $US)





2008
                    
                    
                    2007
                    
                    
                    2006Supplemental
      schedule of non-cash investing and financing activities:Disposition
      of telecommunications business in exchange for assumption of
      liabilities
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    4,324Discount
      in connection with convertible notes payable to related
      parties
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,225Conversion
      of notes payable to a third party to common stock
                    
                    
                    —
                    
                    
                    
                    7
                    
                    
                    
                    —Conversion
      of notes payable to a related party to common stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,386Forgiveness
      of related party debt
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    80,196Supplemental
      cash flow information:Taxes
      paid
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    4Interest
      paid
                    
                    
                    43
                    
                    
                    
                    21
                    
                    
                    
                    304





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 $US, 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. and its wholly-owned subsidiaries, including C2 Communications Technologies
Inc. and C2 Investments 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.  All
significant intercompany accounts and transactions have been eliminated upon
consolidation.





C2 owns
certain patents, including two foundational patents in voice over internet
protocol (“VoIP”) technology – U.S. Patent Nos. 6,243,373 (the “VoIP Patent”)
and 6,438,124 (the “C2 Patent”) (together the “VoIP Patent Portfolio”), which it
licenses.  The VoIP Patent, including a corresponding foreign patent
and related international patent applications, was acquired from a third party
in 2003.  At the time of acquisition, the vendor of the VoIP Patent
was granted a first priority security interest in the patent in order to secure
C2’s obligations under the associated purchase agreement, as discussed in Note
11.  The C2 Patent was developed by the Company.





Subsequent
to the disposition of its Telecommunications business in September 2005, as
discussed in Note 6 to these consolidated financial statements, licensing of
intellectual property constitutes the primary business of the
Company.  C2’s target market consists of carriers, equipment
manufacturers, service providers and end users in the internet protocol (“IP”)
telephone market who are using C2’s patented VoIP technologies by deploying VoIP
networks for phone-to-phone communications.  The Company has engaged,
and intends to continue to engage, in licensing agreements with third parties
domestically and internationally.  At present, no ongoing royalties
are being paid to the Company.  The Company plans to obtain ongoing
licensing and royalty revenue from the target market for its patents, with the
assistance of outside counsel, in order to realize value from its intellectual
property.  In 2008, the Company entered into settlement and license
agreements with six telecommunications companies and one associated
supplier.





In the
third quarter of 2007, the Company began investing in Internet-based e-commerce
businesses through its acquisitions of minority positions in MyTrade.com, Inc.
(sold in the fourth quarter of 2007), Buddy Media, Inc. (“Buddy Media”) and
LIMOS.com LLC (“LIMOS.com”).  It continued its investment activities
in the fourth quarter of 2007 with the acquisition of a one-third interest in
Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge
GP”).  In the second quarter of 2008, the Company increased its
investments in Buddy Media and Knight’s Bridge GP.  In October 2008,
the Company sold its investment in LIMOS.com, realizing a gain of
$425.  These investments are discussed in more detail in Note
5.





Note 2 – Liquidity and Capital
Resources





At
December 31, 2008 the Company’s working capital was $4,556, as compared to a
working capital deficit of $1,653 at December 31, 2007.  Cash
increased by $4,009, from $67 at December 31, 2007 to $4,076 at December 31,
2008.  The primary reason for the improvement in the Company’s
financial position is that during 2008 it recorded revenues and realized cash
from continuing operations for the first time since 2004.  All of the
revenue was derived from settlement and license agreements with
telecommunications carriers, which the Company entered into in February, May and
September 2008.  All amounts owing under these agreements were paid to
the Company in 2008.  During 2008 the Company also received net cash
of $664 from its portfolio investments.  This was composed of $781 net
proceeds on the sale of LIMOS.com and $8 of cash distributions from Knight’s
Bridge GP, less an investment of $124 in Buddy Media and $1 in Knight’s Bridge
GP,





The
Company’s liabilities at December 31, 2008 consisted solely of $472 in accounts
payable and accrued liabilities, as compared to $402 of the same at December 31,
2007, resulting in net free cash holdings of $3,604 at December 31,
2008.  The Company had no commitments or off balance sheet
arrangements at December 31, 2008.  The Company’s ongoing objective is
to continue to enter into licensing and royalty agreements with respect to its
patents.  Even if the Company does not enter into such agreements, it
has sufficient cash resources to cover its currently estimated annual cash
operating expenses of approximately $1,200.  At the current time, the
Company has no available credit facilities, nor does it have any guarantees from
related parties.  The Company’s other assets, consisting primarily of
a deferred tax asset, investments in private companies, and goodwill, are not
readily convertible to cash.





On an
ongoing basis, the Company considers opportunities to invest its available
cash.  At December 31, 2008 and the date of this Report, the Company
had no investment commitments.


F-9





At
December 31, 2008 the Company had no debt owing to its majority stockholder,
Counsel Corporation (together with its subsidiaries, "Counsel") as compared
to $2,335 owing at December 31, 2007.





Ownership
Structure and Capital Resources





·
            At
      December 31, 2008 the Company had stockholders’ equity of $4,971, as
      compared to a stockholders’ deficit of $941 at December 31,
      2007.





·
            The
      Company is 90.8% owned by Counsel.  The remaining 9.2% is owned
      by public stockholders.





·
            Beginning
      in 2001, Counsel invested over $100,000 in C2 to fund the development of
      C2’s technology and its Telecommunications business, and at December 29,
      2006 C2 owed $83,582 to Counsel, including accrued and unpaid
      interest.  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 subsequently provided net advances of $2,151
      through December 31, 2007, all of which were repaid, together with accrued
      interest, in the first quarter of
2008.




Note
3 – Summary of Significant Accounting Policies





Use
of estimates





The
preparation of our 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 goodwill and intangibles, valuation of deferred income tax assets,
liabilities, contingencies surrounding litigation, and stock-based
compensation.  These estimates 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 that are continuous in nature.  Management bases its
estimates and judgments on historical experience and various other factors that
are believed to be reasonable under the circumstances.





Revenue
recognition





The
Company’s revenue is comprised primarily of amounts received in connection with
the licensing of its patents.  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.





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.





Intangible
assets and goodwill





The
Company accounts for intangible assets in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 141, Business Combinations (to be
replaced by SFAS No. 141(R) effective January 1, 2009) and SFAS No. 142, Goodwill and Other Intangible
Assets.  Effective January 1, 2009, the Company will also adopt
FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”).  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.


F-10





The
Company assesses the fair value of its intangible assets and its goodwill based
upon the fair value of the Company as a consolidated entity. Beginning in 2005,
the Company’s valuation was based upon its market capitalization. Management
believed this to be the most reasonable method at the time, given the absence of
a predictable revenue stream and the corresponding inability to use an
alternative valuation method for the Company’s patents, such as a discounted
cash flow analysis. For the year ended December 31, 2008, given the success that
the Company has realized to date with respect to its patent litigation, the
Company was able to use a discounted cash flow analysis to value its patents. If
the carrying amount of the Company’s net assets exceeds the Company’s estimated
fair value, intangible asset and/or 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 its
implied fair value.





Goodwill,
in addition to being tested for impairment annually, is 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 at December 31, 2008 and 2007.  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, or other factors not
known to management at this time.  See Note 8 for more detail
regarding the Company’s goodwill and intangible assets.





Investments





Investments
are accounted for under the methods appropriate to each type of
investment.





Equity
securities that do not have a readily determinable fair value, and equity
securities having underlying common stock that also does not have a readily
determinable fair value, are accounted for under the cost method when the
Company’s ownership interests do not allow it to exercise significant influence
over the entities in which it has invested.  When the Company’s
ownership interests do allow it to exercise significant influence over the
entities in which it has invested, the investments are accounted for under the
equity method.





The
Company monitors all of its investments for impairment by considering factors
such as the economic environment and market conditions, as well as the
operational performance of, and other specific factors relating to, the
businesses underlying the investments.  The fair values of the
securities are estimated quarterly using the best available information as of
the evaluation date, including data such as 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.  The Company will record an other than
temporary impairment in the carrying value of the investments should the Company
conclude that such a decline has occurred.





Impairments,
equity pick-ups, dividends and realized gains and losses on equity securities
are reported separately in the consolidated statements of
operations.  See Note 5 for further discussion of the Company’s
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.





Stock-based
compensation





At
December 31, 2008, the Company has several stock-based compensation plans, which
are discussed in Note 16.  The Company calculates stock-based
compensation in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, as revised December 2004 (“SFAS No. 123(R)”), which it was
required to adopt in the first quarter of 2006.  The provisions of the
Company’s stock-based compensation plans do not require the Company to settle
any options by transferring cash or other assets, and therefore the Company
classifies the awards as equity.





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.


F-11


Income
taxes





The
Company records deferred taxes in accordance with SFAS No. 109, Accounting for Income Taxes(“SFAS No. 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 periodically assesses the value of its deferred tax asset, which has
been generated by a history of net operating and net capital losses, 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.





In July
2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 ("FIN
48").  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a company's financial statements in accordance with SFAS No. 109,
and prescribes a recognition threshold and measurement attributes for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return.  FIN 48 also provides guidance
on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  The Company adopted the
provisions of FIN 48 effective January 1, 2007.  The adoption of FIN
48 had no material effect on the financial position, operations or cash flow of
the Company.  See Note 12 for further discussion of the Company’s
income taxes.





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, 2008
and 2007 for the Company’s financial instruments, which include cash, accounts
payable and accrued liabilities, and related party debt, approximates fair
value.





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 elected to adopt SFAS No. 157 at
January 1, 2007, in order to conform to the adoption of a similar Canadian
accounting pronouncement by its parent, Counsel.  The Company’s
adoption of SFAS No. 157 had no effect on the Company’s financial position,
operations or cash flows.





In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2,Effective Date of
FASB Statement No. 157(“FSP FAS 157-2”).  FSP FAS 157-2 delays the effective date of SFAS
No. 157 for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15,
2008.  FSP FAS 157-2 states that a measurement is recurring if it
happens at least annually and defines nonfinancial assets and nonfinancial
liabilities as all assets and liabilities other than those meeting the
definition of a financial asset or financial liability in SFAS No. 159,The
Fair Value Option for Financial Assets and Financial Liabilities, Including an
Amendment of FASB Statement No. 115(“SFAS No. 159”, discussed
below).  FSP FAS 157-2 was effective upon
issuance.  Entities that applied the measurement and disclosure
guidance in SFAS No. 157 in preparing either interim or annual financial
statements issued before the effective date of the FSP were not eligible for the
FSP’s deferral provisions. Entities were encouraged to adopt SFAS No. 157 in its
entirety, as long as they had not yet issued financial statements during that
year. An entity that chose to adopt SFAS No. 157 in its entirety had to do so
for all nonfinancial assets and nonfinancial liabilities within its
scope.  As C2 had not employed fair value accounting for any of its
nonfinancial assets and nonfinancial liabilities prior to its adoption of SFAS
No. 157 at January 1, 2007, FSP FAS 157-2 had no effect on its financial
position, operations or cash flows.





Segment
reporting





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





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.


F-12





Recent
accounting pronouncements





In
February 2007, the FASB issued SFAS No. 159.  SFAS No. 159 provides
the option to measure selected financial assets and liabilities at fair value,
and requires the fair values of those assets and liabilities to be shown on the
face of the balance sheet.  It also requires the provision of
additional information regarding the reasons for electing the fair value option
and the effect of the election on current period earnings.  SFAS No.
159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.  SFAS No. 159
is effective for fiscal years beginning after November 15, 2007, with early
adoption permitted if SFAS No. 157 is also adopted.  SFAS No. 159 is
to be applied prospectively.  The Company adopted SFAS No. 159 at
January 1, 2008.  As noted above, the carrying values of the Company’s
cash, accounts payable and accrued liabilities approximate fair value, and
therefore the adoption of SFAS No. 159 had no effect on the reported amounts of
these assets and liabilities.  In addition, upon adoption, the Company
had the option to elect fair value accounting for its investments in
internet-based E-commerce businesses.  The Company elected to continue
to account for these investments using the methods in place at December 31,
2007, which are described above under “Investments”.  Therefore, the
adoption of SFAS No. 159 had no impact on the Company’s financial position,
results of operations or cash flows.




On
October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (“FSP FAS
157-3”).  FSP FAS 157-3 amends SFAS No. 157 by incorporating an
example that illustrates key considerations in determining the fair value of a
financial asset in an inactive market.  It is intended to clarify
application issues, and emphasize the measurement principles of SFAS No. 157,
including the objective of fair value measurements, distressed transactions,
relevance of observable data and management’s assumptions.  FSP FAS
157-3 is effective as of October 10, 2008 and applicable to prior periods for
which financial statements have not been issued.  The adoption of FSP
FAS 157-3 had no effect on the Company’s financial position, results of
operations, or cash flows.


Future
accounting pronouncements





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
No. 141(R)”) and SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS No. 160”).  SFAS No.
141(R) replaces SFAS No. 141 and SFAS No. 160 amends Accounting Research
Bulletin No. 51, Consolidated
Financial Statements.  Together, SFAS No. 141(R) and SFAS No.
160 substantially increase the use of fair value and make significant changes to
the way companies account for business combinations and noncontrolling
interests.  Some of the more significant requirements are that they
will require more assets acquired and liabilities assumed to be measured at fair
value as of the acquisition date, liabilities related to contingent
consideration to be initially measured and remeasured at fair value in each
subsequent reporting period, acquisition-related costs to be expensed, and
noncontrolling interests in subsidiaries to be initially measured at fair value
and classified as a separate component of equity.  SFAS No. 141(R) and
SFAS No. 160 are effective for fiscal years beginning after December 15,
2008, with early adoption prohibited.  They are to be applied
prospectively, with one exception relating to income taxes.  The
Company will adopt SFAS No. 141(R) and SFAS No. 160 on January 1, 2009, and is
currently evaluating the impact of these adoptions on our consolidated financial
statements.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS No. 161”).  SFAS No. 161 does not change FASB Statement No.
133’s scope or accounting, but does require expanded disclosures about an
entity’s derivative instruments and hedging activities.  The required
disclosures include:  how and why an entity is using a derivative
instrument or hedging activity, how the entity accounts for derivative
instruments and hedged items under FASB Statement No. 133, and how the entity’s
financial position, financial performance and cash flows are affected by
derivative instruments.  SFAS No. 161 also amends SFAS No. 107, Disclosures about Fair Value of
Financial Instruments (“SFAS No. 107”) to clarify that derivative
instruments are subject to SFAS No. 107’s concentration-of-credit-risk
disclosures.  SFAS No. 161 is effective for fiscal years and interim
periods beginning after November 15, 2008, with early adoption
permitted.  The Company did not early adopt of SFAS No. 161 and
expects that its adoption on January 1, 2009 will not have a significant impact
on its financial statements.





In April
2008, the FASB issued FASB Staff Position No. FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”).  FSP FAS 142-3 amends the
list of factors that an entity should consider in developing renewal or
extension assumptions used in determining the useful life of recognized
intangible assets under SFAS No. 142, both those acquired individually or as
part of a group of other assets, and those acquired in business combinations or
asset acquisitions.  The FSP also expands the disclosure requirements
of SFAS No. 142.  The FSP is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years.  Although the guidance regarding an intangible
asset’s useful life is to be applied prospectively only to intangible assets
acquired after FSP FAS 142-3’s effective date, the disclosure requirements must
be applied prospectively to all intangible assets recognized as of the effective
date.  At December 31, 2008, the Company’s intangible assets were
fully amortized, and the Company is currently evaluating the impact that FSP FAS
142-3 will have on its financial statement disclosures when it is adopted on
January 1, 2009.




F-13


In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS No. 162”).  SFAS No. 162 is
intended to improve financial reporting by providing a consistent framework for
determining the accounting principles to be used in the preparation of financial
statements in conformity with GAAP.  Currently, GAAP hierarchy is
outlined in the American Institute of Certified Public Accountants Statement on
Auditing Standards No. 69, “The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles”, which is directed
to auditors rather than to the entities responsible for the preparation of
financial statements.  SFAS No. 162 will be effective 60 days
following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly
in Conformity With Generally Accepted Accounting Principles”.  The
FASB does not believe that SFAS No. 162 will result in a change to current
practice, but has provided transition provisions.  The Company does
not expect that the adoption of SFAS No. 162 will have any effect on its
financial statements.




In May
2008, the FASB issued FASB Staff Position No. FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP APB 14-1”).  FSP APB 14-1 addresses the
accounting for convertible debt securities that, upon conversion, may be settled
by the issuer fully or partially in cash.  It does not change the
accounting for traditional types of convertible debt securities that do not have
a cash settlement feature, and does not apply if, under existing GAAP for
derivatives, the embedded conversion feature must be accounted for separately
from the rest of the instrument.  FSP APB 14-1 is effective for fiscal
years and interim periods beginning after December 15, 2008.  It
should be applied retrospectively to all past periods presented, even if the
convertible debt security has matured, been converted or otherwise extinguished
as of the FSP’s effective date.  The Company does not expect that the
adoption of FSP APB 14-1 on January 1, 2009 will have any effect on its
financial position, results of operations, or cash flows.





On June
25, 2008, the FASB ratified Emerging Issues Task Force Issue 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity’s Own Stock (“EITF
07-5”).  The Task Force reached a consensus on how an entity should
evaluate whether an instrument (or an embedded feature) is indexed to its own
stock, how the currency in which the instrument is denominated affects the
determination of whether the instrument is indexed to a company’s own stock, and
how an issuer should account for market-based employee stock option valuation
instruments.  EITF 07-5 is effective for fiscal years and interim
periods beginning after December 31, 2008, and must be applied to outstanding
instruments as of the beginning of the fiscal year of adoption, with a
cumulative-effect adjustment to the opening balance of retained
earnings.  Early adoption is not permitted.  The Company
does not expect that the adoption of EITF 07-5 on January 1, 2009 will have any
effect on its financial position, results of operations, or cash
flows.




On
November 13, 2008, the Emerging Issues Task Force (“EITF”) reached a consensus
on EITF 08-6, Equity Method
Investment Accounting Considerations (“EITF 08-6”).  The
consensus is effective for transactions occurring in interim periods and fiscal
years beginning on or after December 15, 2008, coincident with the effective
dates of SFAS No. 141(R) and SFAS No. 160.  The major points of the
consensus are that an entity should determine the initial carrying value of an
equity method investment by applying the cost accumulation model described in
SFAS No. 141(R), an entity should use the other-than-temporary impairment model
of Accounting Principles Board Opinion No. 18 when testing equity method
investments for impairment, share issuances by the investee should be accounted
for as if the equity method investor had sold a proportionate share of its
investment, and when an investment is no longer within the scope of equity
method accounting and instead is within the scope of cost method accounting, the
investor should prospectively use the current carrying amount of the investment
as its initial cost.  The Company will adopt EITF 08-6 on January 1,
2009.





The FASB,
the EITF and the SEC have issued other accounting pronouncements and regulations
during 2008 that will become effective in subsequent periods.  The
Company’s management does not believe that these pronouncements will have a
significant impact on the Company’s financial statements at the time they become
effective.





Note
4 –Earnings (Loss) per Share





The
Company is required, in periods in which it has net income, to calculate basic
earnings per share (“basic EPS”) using the two-class method described in EITF
Issue No. 03-6, Participating
Securities and the Two-Class Method under SFAS Statement No. 128 (“EITF
03-6”).  The two-class method is required because the Company’s Class
N preferred shares, each of which is convertible to 40 common shares, have the
right to receive dividends or dividend equivalents should the Company declare
dividends on its common stock.  Under the two-class method, earnings
for the period, net of any deductions for contractual preferred stock dividends
and any earnings actually distributed during the period, are allocated on a
pro-rata basis to the common and preferred stockholders.  The
weighted-average number of common and preferred shares outstanding during the
period is then used to calculate basic EPS for each class of
shares.


F-14





In
periods in which the Company has a net loss, basic loss per share is calculated
by dividing the loss attributable to common stockholders by the weighted-average
number of common shares outstanding during the period.  The two-class
method is not used, because the preferred stock does not participate in
losses.





Options,
warrants 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.  Their effect has
been determined to be anti-dilutive for 2008.  As the Company had a
net loss from continuing operations for 2007 and 2006, diluted loss per share is
not presented.





In
January 2008, four shares of the Company’s Class N preferred stock were
converted into 160 shares of common stock.  There was a similar
conversion of six preferred shares into 240 common shares in June 2008, and
another of three preferred shares into 120 common shares in November
2008.  In October 2007, four shares of preferred stock were converted
into 160 shares of common stock.  All of the converted stock was held
by unrelated third parties.





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





2008
                
                
                2007
                
                
                2006Assumed
      conversion of Class N preferred stock
                
                
                23,760
                
                
                
                24,280
                
                
                
                24,440Assumed
      conversion of third party convertible debt
                
                
                —
                
                
                
                —
                
                
                
                1,671,123Assumed
      exercise of options and warrant to purchase shares of common
      stock
                
                
                1,979,027
                
                
                
                1,975,749
                
                
                
                2,096,3292,002,787
                
                
                
                2,000,029
                
                
                
                3,791,892





Note 5 –
Investments




The
Company’s investments as of December 31 consisted of the following:




2008
                            
                            2007Buddy
      Media, Inc.
                            
                            $
                            224
                            
                            
                            $
                            100LIMOS.com
      LLC
                            
                            
                            —
                            
                            
                            
                            399Knight’s
      Bridge Capital Partners Internet Fund No. 1 GP LLC
                            
                            
                            18
                            
                            
                            
                            20Total
      investments
                            
                            $
                            242
                            
                            
                            $
                            519




Buddy
Media, Inc.





On
September 12, 2007, the Company acquired 303,030 shares of convertible Series A
Preferred Stock of Buddy Media, Inc. (“Buddy Media”), a private company, for a
total purchase price of $100.  Buddy Media is a leading developer of
applications for emerging new media platforms, including Facebook, MySpace and
other social media sites.  The Company’s investment was less than 5%
of Buddy Media on an as-converted basis.  The Series A preferred
shares vote on an as-converted basis with the common stock.





On April
15, 2008, the Company acquired 140,636 shares of convertible Series B Preferred
Stock of Buddy Media for a total purchase price of $124.  The Series B
preferred shares are senior to the Series A preferred shares described above,
but otherwise have substantially equivalent terms and
conditions.  Following the purchase, the Company’s investment remains
less than 5% of Buddy Media on an as-converted basis.





The
Company accounts for its investment under the cost method.  At each
balance sheet date, the Company estimates the fair value of the securities using
the best available information.  Because Buddy Media’s shares are not
traded on an open market, their valuation must be based primarily on
investee-specific information, which is a Level 3 input as defined by SFAS No.
157.  The Company will record an other than temporary impairment of
the investment in the event the Company concludes that such impairment has
occurred.


F-15





Based on
the Company’s analysis of Buddy Media’s financial statements and projections as
at December 31, 2008, the Company concluded that there has been no impairment in
the fair value of its investment.





Knight’s
Bridge Capital Partners Internet Fund No. 1 GP LLC





The
Company acquired a one-third interest in Knight’s Bridge Capital Partners
Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”), a private company, effective
December 7, 2007, for a total purchase price of $20.  The additional
two-thirds interest in Knight’s Bridge GP was acquired by parties affiliated
with Counsel.  Knight’s Bridge GP is the general partner of Knight’s
Bridge Capital Partners Internet Fund No. 1 LP (the “Fund”).  The Fund
holds investments in several Internet-based e-commerce businesses.  As
the general partner of the Fund, Knight’s Bridge GP manages the Fund, in return
for which it earns a 2% per annum management fee with respect to the Fund’s
invested capital.  Knight’s Bridge GP also has a 20% carried interest
on any incremental realized gains from the Fund’s investments.





The
Company accounts for its investment under the equity method.  During
2008, the Company invested an additional $1 in Knight’s Bridge GP, recorded $5
as its share of Knight’s Bridge GP’s earnings, and received cash distributions
of $8.  At December 31, 2008, the Company’s investment in Knight’s
Bridge GP, net of recorded earnings and cash distributions, was
$18.





At each
balance sheet date, the Company estimates the fair value of its investment using
the best available information as of the evaluation date.  Because
Knight’s Bridge GP is a closely-held, non-public entity, this valuation must be
based primarily on investee-specific information, which is a Level 3 input as
defined by SFAS No. 157.  Knight’s Bridge GP’s value is directly
linked to the value of the Fund, which is also a non-public
entity.  The Company will record an other than temporary impairment of
its equity investment in Knight’s Bridge GP in the event the Company concludes
that such impairment has occurred.





Based on
the Company’s analysis of Knight’s Bridge GP’s and the Fund’s financial
statements and projections as at December 31, 2008, the Company concluded that
there has been no impairment in the fair value of its investment.





LIMOS.com
LLC





On
September 21, 2007, the Company acquired 400,000 units of LIMOS.com, LLC
(“LIMOS.com”), an established provider of Internet-initiated leads for licensed
limousine operators, for a total purchase price of $400.  This
represented a 16% ownership interest in LIMOS.com, which was subsequently
reduced to 15.69%.





The
Company accounted for its investment in LIMOS.com under the equity
method.  The Company recorded a loss of $1 from its investment for the
period September 21, 2007 to December 31, 2007, and a loss of $43 for the period
January 2008 to October 2008.





In
October 2008, the Company sold its interest in LIMOS.com for net proceeds of
$781 and realized a gain of $425, which has been reported in Earnings of Equity
Investments in these consolidated financial statements.  The gain was
calculated as the difference between the Company’s proceeds of $781 and the $356
net book value of LIMOS.com at the date of the sale.





Note
6 – Discontinued Operations





Disposition
of the Telecommunications Business





Commencing
in 2001, the Company entered the telecommunications business, and by 2003 had
combined several asset and share purchases to set up the Telecommunications
segment of the Company’s business.  This segment 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 WXCC
to an unrelated third party.  The transaction was completed on
September 30, 2005, and resulted in a gain on disposition of $6,387, net of
disposition and business exit costs.  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.


F-16





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 certain 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 was included in income from
discontinued operations.





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 was included in income
from discontinued operations.





Note
7 – Composition of Certain Financial Statement Captions





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





2008
                  
                  
                  2007Regulatory
      and legal fees
                  
                  $
                  51
                  
                  
                  $
                  69Accounting,
      auditing and tax consulting
                  
                  
                  95
                  
                  
                  
                  107Patent
      licensing
                  
                  
                  135
                  
                  
                  
                  —Sales
      and other taxes
                  
                  
                  62
                  
                  
                  
                  62Remuneration
      and benefits
                  
                  
                  87
                  
                  
                  
                  114Other
                  
                  
                  42
                  
                  
                  
                  50$
                  472
                  
                  
                  $
                  402





Note
8 – Intangible Assets and Goodwill





Details
of intangible assets and goodwill were as follows at December 31:





2008Amortization
                      period
                    
                    Cost
                    
                    
                    Accumulated
                      amortization
                    
                    
                    NetIntangible
      assets subject to amortization:Patent
      rights
                    60
      months
                    
                    $
                    100
                    
                    
                    $
                    (100
                    )
                    
                    $
                    —Goodwill
                    
                    
                    
                    173
                    
                    
                    
                    —
                    
                    
                    
                    173$
                    273
                    
                    
                    $
                    (100
                    )
                    
                    $
                    173





2007Amortization
                    period
                  
                  Cost
                  
                  
                  Accumulated
                    amortization
                  
                  
                  NetIntangible
      assets subject to amortization:Patent
      rights
                  60
      months
                  
                  $
                  100
                  
                  
                  $
                  (80
                  )
                  
                  $
                  20Goodwill
                  
                  
                  
                  173
                  
                  
                  
                  —
                  
                  
                  
                  173$
                  273
                  
                  
                  $
                  (80
                  )
                  
                  $
                  193





The
Company’s patent rights were acquired in December 2003 and are associated with
the VoIP Patent.  Aggregate amortization expense of intangibles was
$20 for each of the years ended December 31, 2008, 2007 and 2006, with the
rights being fully amortized in the fourth quarter of 2008.





The
Company’s goodwill relates to an investment in a subsidiary company that holds
certain of the Company’s patent rights.


F-17





Note
9 – Debt





At
December 31, 2008, the Company’s debt consisted solely of its accounts payable
and accrued liabilities.





Notes payable to a related
party





At
December 31, 2007 C2 was indebted to Counsel in the amount of $2,335,
representing $2,151 of net advances made since the December 30, 2006 debt
forgiveness, and $184 of accrued interest on those advances.  The debt
was repaid to Counsel in the first quarter of 2008.  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 provided that the principal amount outstanding bore
interest at the prime rate as published in the Wall Street Journal plus 3% (but
not less than 7% per annum) decreasing by 2% (but not 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.  Principal was
payable at the rate of approximately $147 per month, in cash or, in certain
circumstances, in registered common stock.  In the event the monthly
payment was paid in cash, the Company paid 102% of the amount
due.  The Company had 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.





The
Company’s net loss on the prepayment of the Note was $293, calculated as
follows:





Amount
      paid to third party lender
                      
                      $
                      1,388Balance
      of Note owing at January 10, 2007, net of $8.8
                        converted
      to common shares
                      
                      
                      (1,315
                      )Accrued
      interest owing for period January 1 – 10, 2007
                      
                      
                      (4
                      )Net
      premium paid
                      
                      
                      69Premium
      related to excess of $0.88 conversion price over $0.70
                        market
      price:  10,000 shares x $0.18
                      
                      
                      (2
                      )Write-off
      unamortized discount and financing costs
                      
                      
                      226Net
      loss on prepayment of Note
                      
                      $
                      293





The net
loss of $293 was approximately equal to the total of the interest expense and
discount amortization that the Company would have incurred by holding the debt
to its contractual maturity of October 14, 2007.





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.





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 holder to purchase the stock through the earlier of
(i) October 13, 2009 or (ii) the date on which the average
closing price for any consecutive ten trading dates shall equal or exceed 15
times the Exercise Price.  The Exercise Price shall equal $1.00 per
share as to the first 250,000 shares, $1.08 per share for the next 250,000
shares and $1.20 per share for the remaining 500,000 shares.  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.


F-18





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 was 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 chose 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, 2008, 2007 and 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.





Note
10 – Commitments





At
December 31, 2008, C2 has no commitments other than its accounts payable and
accrued liabilities.




Note
11 – Patent Residual




In the
fourth quarter of 2003, C2 acquired the VoIP Patent 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.  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.  In 2008, as a result of entering into four
settlement and license agreements, the Company incurred $2,630 of patent
residual expense.





Note
12 – Income Taxes





In 2008
the Company recognized a net future income tax expense of $125.  This
was the result of the reversal of a future income tax recovery of $1,000 that
was recorded in 2007 with respect to estimated income for tax purposes that was
realized in 2008, and a net future income tax recovery of $875 that was recorded
with respect to the tax effect of available tax loss carry forwards expected to
be utilized in 2009.  No income tax benefit was recognized with
respect to the Company’s net losses recorded in 2006.  The reported
tax benefit varies from the amount that would be provided by applying the
statutory U.S. Federal income tax rate to the income (loss) from continuing
operations before taxes for the following reasons:




2008
                      
                      
                      2007
                      
                      
                      2006Expected
      federal statutory tax benefit
                      
                      $
                      2,028
                      
                      
                      $
                      (554
                      )
                      
                      $
                      (4,096
                      )Increase
      (reduction) in taxes resulting from:State
      income taxes
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (121
                      )Non-deductible
      interest on certain notes
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,841Non-deductible
      insurance premium
                      
                      
                      51
                      
                      
                      
                      51
                      
                      
                      
                      —Change
      in valuation allowance attributable to continuing
    operations
                      
                      
                      (1,966
                      )
                      
                      
                      (508
                      )
                      
                      
                      1,371Other
                      
                      
                      12
                      
                      
                      
                      11
                      
                      
                      
                      5Future
      income tax expense (recovery)
                      
                      $
                      125
                      
                      
                      $
                      (1,000
                      )
                      
                      $
                      —





The
change in the valuation allowance, including discontinued operations, was a
decrease of $1,961 (applying FIN48), a decrease of $668 (applying FIN 48), and a
decrease of $21,186 for the years ended 2008, 2007 and 2006,
respectively.





At
December 31, 2008, after the application of FIN 48 described further below, the
Company had total net operating loss and net capital loss carryforwards for
federal income tax purposes of approximately $83,500 and $34,300
respectively.  The Company believes that it is more likely than not
that it will utilize at least approximately $2,600 of these tax losses against
estimated future  income for tax purposes arising in
2009.  The net operating loss carryforwards expire between 2024 and
2027. The net capital loss carryforwards expire in 2010 and
2011.


F-19





The
Company’s utilization of approximately $30,400 of its available net operating
loss carryforwards against future income for tax purposes is restricted pursuant
to the “change in ownership” rules in Section 382 of the Internal Revenue Code
and after the application of FIN 48 described further below.  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 was
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.





The
Company is subject to state income tax in multiple jurisdictions. While the
Company had net operating loss carryforwards for state income tax purposes in
certain states where it previously conducted business, its available state tax
loss carryforwards may differ substantially by jurisdiction and, in general, are
subject to the same or similar restrictions as to expiry and usage described
above. In addition, in certain states the Company’s state tax loss carryforwards
which were attributable to the business of WXC Corp. ceased to be available to
the Company following the sale of the shares of this company in 2006. It is
entirely possible that in the future, the Company may not have tax loss
carryforwards available to shield income generated for state tax purposes and
which is attributable to a particular state from being subject to tax in that
particular state.





The
components of the deferred tax asset and liability as of December 31 (after the
application of FIN 48) are as follows:





2008
                  
                  
                  2007
                  
                  
                  2006Post-FIN48Net
      operating loss carry forwards
                  
                  $
                  28,420
                  
                  
                  $
                  29,968
                  
                  
                  $
                  29,393Net
      capital loss carry forwards
                  
                  
                  11,691
                  
                  
                  
                  11,835
                  
                  
                  
                  11,862Acquired
      in-process research and development and intangible assets
                  
                  
                  972
                  
                  
                  
                  1,343
                  
                  
                  
                  1,715Stock-based
      compensation
                  
                  
                  105
                  
                  
                  
                  88
                  
                  
                  
                  42Accrued
      liabilities
                  
                  
                  7
                  
                  
                  
                  7
                  
                  
                  
                  7Reserve
      for accounts receivable
                  
                  
                  2
                  
                  
                  
                  2
                  
                  
                  
                  2Other
                  
                  
                  17
                  
                  
                  
                  57
                  
                  
                  
                  (35
                  )Valuation
      allowance
                  
                  
                  (40,339
                  )
                  
                  
                  (42,300
                  )
                  
                  
                  (42,986
                  )Total
      deferred tax assets
                  
                  
                  875
                  
                  
                  
                  1,000
                  
                  
                  
                  —Deferred
      tax liabilities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      deferred tax assets
                  
                  $
                  875
                  
                  
                  $
                  1,000
                  
                  
                  $
                  —





The
Company has claimed a valuation allowance at the end of the year sufficient to
reduce its net deferred tax asset to $875, the amount considered more likely
than not to be utilized in 2009.  The Company had a net deferred tax
asset of $1,000 as of December 31, 2007, all of which was reversed in 2008 on
the recognition of the realization of income for tax purposes in
2008.  As the Company had no expectation of generating income for tax
purposes in 2007, a full valuation allowance was provided for at December 31,
2006 to reduce the total deferred tax asset to nil.





In the
first quarter of 2006, the Company adopted SFAS No. 123(R). Effective December
31, 2006, as provided in FASB Staff Position (FSP) No. FAS 123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards (“FSP
123(R)-3”), the Company elected to apply “the short cut method”, as outlined in
FSP 123(R)-3, as the methodology for recognizing any related windfall tax
benefits as a credit to additional paid-in capital. The adoption of SFAS No.
123(R) and “the short cut method” had no immediate impact from an income tax
perspective, since SFAS No. 123(R) specifically prohibits the
recognition  of any windfall tax benefits that have not been realized
in cash or in the form of a reduction of income taxes payable. The Company, to
date, has not realized such benefits either in cash or in the form of a
reduction in income taxes payable due to the continued availability of net
operating tax loss carryforwards. The adoption of the “short cut method” will
therefore only have application in the event of the Company incurring an income
tax liability at a future date.


F-20





Uncertain
Tax Positions





The
Company adopted the provisions of FIN 48 effective January 1, 2007. As a result
of the implementation of FIN 48, the Company recorded a reduction in its
deferred tax asset of approximately $13,100, attributable to unrecognized tax
benefits of $24,000 associated with prior years’ tax losses, which are not
expected to be available primarily due to change of control usage restrictions,
and a reduction in the rate of the tax benefit associated with all of its tax
attributes.  Due to the Company’s historic policy of applying a
valuation allowance against its deferred tax assets, the effect of the above was
an offsetting reduction in the Company’s valuation
allowance.  Accordingly, the above reduction had no net impact on the
Company’s financial position, operations or cash flow.  As of December
31, 2008, the unrecognized tax benefit determined pursuant to FIN 48 is
$13,138.  The following table summarizes the activity related to gross
unrecognized tax benefits of the Company from January 1, 2008 to December 31,
2008:





Beginning
      unrecognized tax benefit per FIN 48
                  
                  $
                  13,167Increase
      (decrease) related to prior year positions
                  
                  
                  (29
                  )Increase
      (decrease) related to current year positions
                  
                  
                  —Ending
      unrecognized tax benefit per FIN 48
                  
                  $
                  13,138





In the
unlikely event that these tax benefits are recognized in the future, there
should be no impact on the Company’s effective tax rate, unless recognition
occurs at a time when all of the Company’s historic tax loss carryforwards have
been utilized and the associated valuation allowance against the Company’s
deferred tax assets has been reversed. In such circumstances, the amount
recognized at that time should result in a reduction in the Company’s effective
tax rate.





The
Company’s policy is to recognize accrued interest and penalties related to
unrecognized tax benefits in income tax expense. Because the Company has tax
loss carryforwards in excess of the unrecognized tax benefits, the Company did
not accrue for interest and penalties related to unrecognized tax benefits
either upon the adoption of FIN 48 or in the current period.





It is
reasonably possible that the total amount of the Company’s unrecognized tax
benefits will significantly increase or decrease within the next 12
months.  These changes may be the result of future audits, the
application of “change in ownership” rules leading to further restrictions in
tax losses arising from changes in the capital structure of the Company and/or
that of its parent company Counsel, reductions in available tax loss
carryforwards through future merger, acquisition and/or disposition
transactions, failure to continue a significant level of business activities, or
other circumstances not known to management at this time.  At this
time, an estimate of the range of reasonably possible outcomes cannot be
made.





The
Company has a history of generating annual tax losses since 1991.  All
loss taxation years remain open for audit pending the application of the
respective tax losses against income in a subsequent taxation
year.  In general, the statute of limitations expires three years from
the date that a company files a tax return applying prior year tax loss
carryforwards against income for tax purposes in the later year.  The
Company applied historic tax loss carryforwards to offset debt forgiveness in
2006 and income for tax purposes in 2008, respectively.  The 2005
through 2008 taxation years remain open for audit.





Note
13 – Transactions with Controlling Stockholder





Transactions
with Counsel





At
December 31, 2008, C2 had no indebtedness to Counsel.   The
details of the individual notes payable to Counsel at December 31, 2007, which
were repaid during 2008, are presented below.





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
additional periodic loans were made from time to time (collectively and as
amended, the “Promissory Note”).  The Promissory Note accrued interest
at 10% per annum compounded quarterly from the date funds were
advanced.  The loan was amended several times and the maturity date of
the loan plus accrued interest was extended to December 31, 2008.  The
Promissory Note was secured by the assets of the Company and was subject to
certain events of default.  There were no conversion features
associated with the Promissory Note.  The outstanding balance at
December 29, 2006 (including principal and accrued interest), prior to the
December 30, 2006 debt forgiveness  by Counsel, was $41,897.At December 31, 2006 and
2007, C2 was indebted to Counsel in the amount of $6 and $2,288,
respectively.


F-21





Secured Loan to
C2





To fund
the acquisition of the WorldxChange Communications, Inc. assets and operations
on June 4, 2001, Counsel provided a loan (the “Initial Loan”) to C2 in the
aggregate amount of $15,000.  On October 1, 2003 Counsel assigned the
balance owed in connection with the Initial Loan of $9,743, including accrued
interest, 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”).  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.  The New Loan was subject to certain
events of default.  It was amended several times and the maturity date
of the loan plus accrued interest was extended to December 31,
2008.  There were no conversion features associated with the New
Loan.  As of December 29, 2006, the total outstanding debt under the
New Loan (including principal and accrued interest), prior to the December 30,
2006 debt forgiveness by Counsel, was $13,428.  At December 31, 2006
and 2007 total outstanding debt under the New Loan was $0 and $47,
respectively.





Counsel Management
Services





Since
December 2004, C2 and Counsel have entered into successive annual management
services agreements (the “Agreement”).  Under the terms of the
Agreement, C2 agrees to make payment to Counsel for ongoing services provided to
C2 by certain Counsel personnel.  The basis for such services charged
is an allocation, based on time incurred, of the cost of the base compensation
paid by Counsel to those employees providing services to C2.  For the
year ended December 31, 2008, the cost was $360.  For the years ended
December 31, 2007 and 2006, the cost was $225.  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
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 2009 on the same cost basis.





Note
14 – Legal Proceedings





In April
2004, certain shareholders of C2 filed derivative and securities lawsuits in the
Superior Court of the State of California against Counsel, C2 and several
affiliated companies, as well as four present and former officers and directors
of C2.  Counsel and C2 believe that the claims are and were without
merit, and have defended the actions accordingly.





Effective
June 18, 2008, in order to settle the litigation, and without any admission of
liability by either C2 or the other defendants, the parties agreed to the
following terms: (i) Counsel and/or certain of its affiliates, other than C2,
would pay a total of $520 to the named plaintiffs; (ii) Counsel and/or a
subsidiary other than C2 would give the plaintiffs approximately 370,000 common
shares of C2, being five common shares of C2 for every share of C2 owned by the
plaintiffs when the litigation commenced; (iii) plaintiffs who were also
dissenting shareholders in an appraisal action filed by C2 in Florida in June
2004 would withdraw their dissent and C2 would return the shares that they
tendered; (iv) Counsel and/or an affiliate would transfer 350,000 common shares
to C2 for cancellation to settle the derivative claims of the
litigation.  As a result of the transfer of common shares to the
plaintiffs and the cancellation of the shares transferred to C2, Counsel’s
percentage ownership in C2 decreased from approximately 92.5% to approximately
90.8%.  The settlement did not have a material adverse impact on the
Company’s business, results of operations, financial position or
liquidity.


F-22





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, in the event that C2 does not have sufficient resources to fund the
payments.  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 17th
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.  As a result of the June 2008
settlement of the derivative and securities lawsuits in California, described
above, the stay of the Florida declaratory judgment action is expected to be
lifted shortly. Subsequent to December 31, 2008, the Company completed
an agreement with the holders of 27,221 of the 27,536 shares held by the
remaining dissenting stockholders, whereby the stockholders agreed to accept
$4.60 per share in full payment for their respective shares, which will be
cancelled by the Company, and a release of any other claims that they may
have against the Company and Counsel. When the declaratory
judgment action resumes with respect to the remaining dissenting stockholders,
who exercised their appraisal rights with respect to the remaining 315 shares,
the Company provides no assurance that this matter will be resolved in our
favor; however, the Company's management does not believe that an unfavorable
outcome of this matter would 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 alleged that these companies’ VoIP services
and systems infringe upon the Company’s U.S. Patent No. 6,243,373, entitled
“Method and Apparatus for
Implementing a Computer Network/Internet Telephone
System”.  The complaint sought an injunction, monetary damages
and costs.





In June
2007, the complaint against Bellsouth Corporation was dismissed without
prejudice.  In February 2008, the Company settled the complaints
against AT&T, Inc. and Verizon Communications, Inc. by entering into
settlement and license agreements.  In May 2008 the Company settled
the complaint against Sprint Nextel Corporation by entering into a similar
agreement.  In September 2008, C2 effectively concluded the litigation
by entering into a similar agreement with Qwest Communications International,
Inc., Global Crossing Limited, and Level 3 Communications, Inc., which agreement
also includes Sonus Networks, Inc.





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.





In
January 2008, four shares of the Company’s Class N preferred stock were
converted into 160 shares of common stock.  There was a similar
conversion of six preferred shares into 240 common shares in June 2008, and
another of three preferred shares into 120 common shares in November
2008.  In October 2007, four shares of preferred stock were converted
into 160 shares of common stock.  All of the converted stock was held
by unrelated third parties.





At
December 31, 2008 and 2007, of the 10,000,000 shares of preferred stock
authorized, 9,486,500 remain undesignated and unissued.


F-23





Note
16 – Stock-Based Compensation





Stock-
Based Compensation Plans





At
December 31, 2008, the Company had five stock-based compensation plans, which
are described below.





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 2008 and 2007.  As of
December 31, 2008 and 2007, no options to purchase shares were outstanding, and
no options expired in 2008 and 2007.





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, 2008 and
2007, there were no options outstanding under the 1995 Employee
Plan.  No options were granted or exercised in 2008 or 2007 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, 2008, there were options to purchase 237,361 shares (2007 – 238,611
shares) of the Company’s common stock outstanding under the 1997
Plan.  112,500 of these options, with an exercise price of $0.66 per
share, were unvested at December 31, 2008 (2007 – 168,750).  They will
vest in 2009 and 2010.  112,500 options with an exercise price of
$0.66 per share were vested at December 31, 2008 (2007 –
56,250).  12,361 options with exercise prices of $1.40 to $111.26 per
share were vested at December 31, 2008 (2007 – 13,611 options with exercise
prices of $1.40 to $111.26 per share).  The options with an exercise
price of $0.66 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 remaining 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 2008, no options to purchase shares of common stock were
issued, and 1,250 options expired.  During 2007, no options to
purchase shares of common stock were issued, and 1,000 options
expired.  There were no exercises during 2008 or
2007.


F-24





2000 Employee Stock Purchase
Plan





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





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





2003 Stock Option and
Appreciation Rights Plan





In
November 2003, the stockholders of the Company approved the 2003 Stock Option
and Appreciation Rights Plan (the “2003 Plan”) which provides for the issuance
of incentive stock options, non-qualified stock options and 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, 2008, there
were options to purchase 638,250 shares (2007 - 598,250 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 2008, 40,000 options (2007 – 30,000 options) were
granted.  During 2008 and 2007 no options to purchase shares of common
stock were forfeited or expired.  There were no options exercised
during 2008 and 2007, and no SARs have been issued under the 2003
Plan.





Other
options





During
1997 and 2001, 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.  During 2008, there were no exercises, expiries or
forfeitures.  During 2007, 43,667 options expired, and none were
exercised or forfeited.  The remaining options must be exercised
within ten years of the grant date.  As of December 31, 2008 and 2007
there remained 833 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.  During 2007, the remaining 105,915 options expired and there
were therefore no options outstanding at December 31, 2008 or
2007.  There were no options exercised or forfeited in
2007.





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.  During 2008, 35,472 options expired, and none were
exercised or forfeited.  No options expired, were exercised or
forfeited during 2007.  As of December 31, 2008 5,000 options remained
outstanding (2007 – 40,472).





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 expired, were exercised or forfeited during 2008 or
2007.  As of December 31, 2008 and 2007, 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 expired,
were exercised or forfeited during 2008 or 2007.  The fair value of
the options issued was recorded as deferred compensation of $300, 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, 2008
and 2007 there remained 10,000 options outstanding.





F-25




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 expired, were exercised or forfeited during
2008 or 2007.  As of December 31, 2008 and 2007, there remained 68,833
options outstanding.





Stock-Based
Compensation Expense


The
Company accounts for the stock-based compensation plans described above in
accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, as revised December 2004 (“SFAS No. 123(R)”), which the
Company was required to adopt 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 fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:




2008
                  
                  
                  2007
                  
                  
                  2006Risk-free
      interest rate
                  
                  
                  1.80%
                  
                  
                  
                  4.51%
                  
                  
                  
                  5.06%Expected
      life (years)
                  
                  
                  4.75
                  
                  
                  
                  4.75
                  
                  
                  
                  4.75Expected
      volatility
                  
                  
                  198.4%
                  
                  
                  
                  79.1%
                  
                  
                  
                  79.1%Expected
      dividend yield
                  
                  
                  Zero
                  
                  
                  
                  Zero
                  
                  
                  
                  Zero





Options
were granted on a single date in both 2008 and 2007.  In 2006, options
were granted in both April and August:  The risk-free interest rates
are those for U.S. Treasury constant maturities, for terms matching the expected
term of the option.  The weighted average rate for 2006 corresponds to
interest rates of 4.90% and 5.07%.  The expected life of the options
is calculated according to Staff Accounting Bulletin No. 110’s simplified method
for estimating the expected term of the options, based on the vesting period and
contractual term of each option grant, which are the same for all
grants.  For 2007 and 2006, expected volatility was based on the
Company’s historical volatility in conjunction with peer group volatility and
relevant stock-price indices.  For 2008, expected volatility was based
on the Company’s historical volatility and peer group volatility.  As
the Company’s stock is closely held and thinly traded, the Company believes that
incorporating peer group information provides a better measure of expected
volatility than the Company’s stock price alone.  The Company has
never paid a dividend on its common stock and therefore the expected dividend
yield is zero.





Total
compensation cost related to stock options in 2008, 2007 and 2006 was $85, $166
and $139, respectively.  No tax benefit from stock-based compensation
was recognized in these years, as no options were exercised.  The
Company’s stock-based compensation had no effect on its cash flows during the
same periods.  Option holders are not entitled to receive dividends or
dividend equivalents.





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





2008
                  
                  
                  2007
                  
                  
                  2006Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  975,749
                  
                  
                  $
                  9.88
                  
                  
                  
                  1,096,326
                  
                  
                  $
                  19.51
                  
                  
                  
                  727,026
                  
                  
                  $
                  37.50Granted
                  
                  
                  40,000
                  
                  
                  $
                  0.90
                  
                  
                  
                  30,000
                  
                  
                  $
                  0.70
                  
                  
                  
                  455,000
                  
                  
                  $
                  0.82Exercised
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —Expired
                  
                  
                  (36,722
                  )
                  
                  $
                  57.53
                  
                  
                  
                  (150,577
                  )
                  
                  $
                  78.00
                  
                  
                  
                  (85,700
                  )
                  
                  $
                  73.14Forfeited
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  —Outstanding
      at end of year
                  
                  
                  979,027
                  
                  
                  $
                  7.73
                  
                  
                  
                  975,749
                  
                  
                  $
                  9.88
                  
                  
                  
                  1,096,326
                  
                  
                  $
                  19.51Options
      exercisable at year end
                  
                  
                  681,527
                  
                  
                  $
                  10.75
                  
                  
                  
                  549,936
                  
                  
                  $
                  16.89
                  
                  
                  
                  499,701
                  
                  
                  $
                  41.24Weighted-average
      fair value of options granted during the year
                  
                  
                  
                  
                  
                  $
                  0.87
                  
                  
                  
                  
                  
                  
                  $
                  0.46
                  
                  
                  
                  
                  
                  
                  $
                  0.50




As of
December 31, 2008, the total unrecognized stock-based compensation expense
related to unvested stock options was $126, which is expected to be recognized
over a weighted-average period of 12 months.


F-26





In March
2008, 40,000 options were granted to the Company’s non-employee directors under
the terms of the 2003 Stock Option and Appreciation Rights
Plan.  There were no other option grants during 2008, and no options
were exercised during the year ending December 31, 2008.





As of
December 31, 2008, the aggregate intrinsic value of options outstanding was $0,
based on the Company’s closing stock price of $0.14 on December 31,
2008.  Intrinsic value is the amount by which the fair value of the
underlying stock exceeds the exercise price of the options.  At
December 31, 2008, all of the outstanding options had exercise prices greater
than $0.14.





The
following table presents information regarding unvested stock options
outstanding at December 31, 2008, 2007 and 2006:





Options
                  
                  
                  Weighted
                    Average
                    GrantDate
                    FairValueUnvested
      at December 31, 2007
                  
                  
                  425,813
                  
                  
                  $
                  0.51Granted
                  
                  
                  40,000
                  
                  
                  $
                  0.87Vested
                  
                  
                  (168,313
                  )
                  
                  $
                  0.54Expired
                  
                  
                  —
                  
                  
                  $
                  —Unvested
      at December 31, 2008
                  
                  
                  297,500
                  
                  
                  $
                  0.54





Options
                  
                  
                  Weighted
                    Average
                    Grant
      Date
                    Fair ValueUnvested
      at December 31, 2006
                  
                  
                  596,625
                  
                  
                  $
                  0.63Granted
                  
                  
                  30,000
                  
                  
                  $
                  0.46Vested
                  
                  
                  (198,312
                  )
                  
                  $
                  1.28Expired
                  
                  
                  (2,500
                  )
                  
                  $
                  —Unvested
      at December 31, 2007
                  
                  
                  425,813
                  
                  
                  $
                  0.51





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




The total
fair value of options vesting during the years ending December 31, 2008, 2007
and 2006 was $91, $171 and $114, respectively.  The unvested options
have no associated performance conditions.  Therefore, the Company
expects that, barring the departure of individual directors or employees, all of
the unvested options will vest according to the standard four-year
timetable.





The
following table summarizes information about all stock options outstanding at
December 31, 2008:





Exercise
      price
                                
                                
                                Options
                                  Outstanding
                                
                                
                                Weighted
                                  Average
                                  Remaining
                                  Life (years)
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price
                                
                                
                                Number
                                  Exercisable
                                
                                
                                Weighted
                                  Average
                                  Remaining
                                  Life (years)
                                
                                
                                Weighted
                                  Average
                                  Exercise
                                  Price$ 0.51 to $ 1.39
                                
                                
                                
                                710,000
                                
                                
                                
                                4.11
                                
                                
                                $
                                0.87
                                
                                
                                
                                412,500
                                
                                
                                
                                3.60
                                
                                
                                $
                                0.90$ 1.40 to $ 3.00
                                
                                
                                
                                159,448
                                
                                
                                
                                1.67
                                
                                
                                $
                                2.94
                                
                                
                                
                                159,448
                                
                                
                                
                                1.67
                                
                                
                                $
                                2.94$ 6.88 to $ 15.62
                                
                                
                                
                                2,965
                                
                                
                                
                                2.02
                                
                                
                                $
                                14.99
                                
                                
                                
                                2,965
                                
                                
                                
                                2.02
                                
                                
                                $
                                14.99$ 48.76 to $ 71.26
                                
                                
                                
                                103,083
                                
                                
                                
                                0.87
                                
                                
                                $
                                58.63
                                
                                
                                
                                103,083
                                
                                
                                
                                0.87
                                
                                
                                $
                                58.63$ 78.00 to $127.50
                                
                                
                                
                                3,531
                                
                                
                                
                                1.56
                                
                                
                                $
                                111.46
                                
                                
                                
                                3,531
                                
                                
                                
                                1.56
                                
                                
                                $
                                111.46979,027
                                
                                
                                
                                3.35
                                
                                
                                $
                                7.73
                                
                                
                                
                                681,527
                                
                                
                                
                                2.72
                                
                                
                                $
                                10.75




F-27





Note
17 – Summarized Quarterly Data (unaudited)





Following
is a summary of the quarterly results of operations for the years ended December
31, 2008 and 2007.





March 31
                                  
                                  
                                  June 30
                                  
                                  
                                  September 30
                                  
                                  
                                  December 31Net
      sales
                                  2008
                                  
                                  $
                                  6,225
                                  
                                  
                                  $
                                  1,900
                                  
                                  
                                  $
                                  9,500
                                  
                                  
                                  $
                                  —2007
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —Gross
      profit
                                  2008
                                  
                                  $
                                  3,041
                                  
                                  
                                  $
                                  592
                                  
                                  
                                  $
                                  3,403
                                  
                                  
                                  $
                                  (140
                                  )2007
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —Operating
      income (loss)
                                  2008
                                  
                                  $
                                  2,760
                                  
                                  
                                  $
                                  307
                                  
                                  
                                  $
                                  3,086
                                  
                                  
                                  $
                                  (550
                                  )2007
                                  
                                  $
                                  (284
                                  )
                                  
                                  $
                                  (319
                                  )
                                  
                                  $
                                  (323
                                  )
                                  
                                  $
                                  (310
                                  )Net
      income (loss) from continuing operations
                                  2008
                                  
                                  $
                                  1,795
                                  
                                  
                                  $
                                  311
                                  
                                  
                                  $
                                  4,015
                                  
                                  
                                  $
                                  (282
                                  )2007
                                  
                                  $
                                  (625
                                  )
                                  
                                  $
                                  (365
                                  )
                                  
                                  $
                                  (372
                                  )
                                  
                                  $
                                  723Net
      income (loss)
                                  2008
                                  
                                  $
                                  1,795
                                  
                                  
                                  $
                                  305
                                  
                                  
                                  $
                                  4,012
                                  
                                  
                                  $
                                  (285
                                  )2007
                                  
                                  $
                                  (627
                                  )
                                  
                                  $
                                  (383
                                  )
                                  
                                  $
                                  (375
                                  )
                                  
                                  $
                                  740Basic
      and diluted income (loss) from continuing operations per common
      share
                                  2008
                                  
                                  $
                                  0.08
                                  
                                  
                                  $
                                  0.01
                                  
                                  
                                  $
                                  0.18
                                  
                                  
                                  $
                                  (0.01
                                  )2007
                                  
                                  $
                                  (0.03
                                  )
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  0.03Basic
      and diluted income from continuing operations per preferred
      share
                                  2008
                                  
                                  $
                                  3.11
                                  
                                  
                                  $
                                  0.54
                                  
                                  
                                  $
                                  7.05
                                  
                                  
                                  $
                                  N/A2007
                                  
                                  $
                                  N/A
                                  
                                  
                                  $
                                  N/A
                                  
                                  
                                  $
                                  N/A
                                  
                                  
                                  $
                                  N/ABasic
      and diluted income (loss) per common share
                                  2008
                                  
                                  $
                                  0.08
                                  
                                  
                                  $
                                  0.01
                                  
                                  
                                  $
                                  0.18
                                  
                                  
                                  $
                                  (0.01
                                  )2007
                                  
                                  $
                                  (0.03
                                  )
                                  
                                  $
                                  (0.01
                                  )
                                  
                                  $
                                  (0.02
                                  )
                                  
                                  $
                                  0.03Basic
      and diluted income per preferred share
                                  2008
                                  
                                  $
                                  3.11
                                  
                                  
                                  $
                                  0.54
                                  
                                  
                                  $
                                  7.05
                                  
                                  
                                  $
                                  N/A2007
                                  
                                  $
                                  N/A
                                  
                                  
                                  $
                                  N/A
                                  
                                  
                                  $
                                  N/A
                                  
                                  
                                  $
                                  N/A




F-28





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
                  PeriodAllowance
      for doubtful accounts:December
      31, 2006
                
                $
                6
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                6December
      31, 2007
                
                $
                6
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                6December
      31, 2008
                
                $
                6
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                6


____________


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


S-1