**U.S.
      SECURITIES**


**AND
      EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**______________**




**FORM
      10-KSB**


**______________**


(Mark One)ý
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
  For
                  the fiscal year ended December 31, 2007**Commission
                  file number
                  000-51384**


**______________**




**InterMetro
      Communications, Inc.**


(Exact
      Name of Registrant as Specified in its Charter)





**Nevada**
            
            **88-0476779**(State
                of
              Incorporation)
            
            (IRS
                Employer
              Identification
                No.)




**2685
      Park Center Drive, Building A**


**Simi
      Valley, California 93065**


(Address
      of principal executive offices) (Zip
      Code)




**(805)
      433-8000**


(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, $0.001 par value**




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 ý




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 ý 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-KSB or any amendment
      to
      this Form 10-KSB. ý




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




State
      issuer’s revenues for its most recent fiscal year: $22,693,708




The
      aggregate market value of voting stock held by non-affiliates of the registrant,
      based upon the average of the bid and ask prices reported by the OTC Bulletin
      Board on March 31, 2008, was approximately $3,148,000.




There
      were 59,575,194 shares outstanding of the registrant’s Common Stock as of March
      31, 2008.




Transitional
      Small Business Disclosure Format (check one): Yes  ̈ No ý














**CAUTIONARY
      STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE
      PRIVATE**


**SECURITIES
      LITIGATION REFORM ACT OF 1995**




**THIS
      ANNUAL REPORT ON FORM 10-KSB AND THE INFORMATION INCORPORATED BY REFERENCE
      MAY
      INCLUDE “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF SECTION 27A OF THE
      SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. THE COMPANY INTENDS THE
      FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR
      FORWARD-LOOKING STATEMENTS. ALL STATEMENTS REGARDING THE COMPANY’S EXPECTED
      FINANCIAL POSITION AND OPERATING RESULTS, ITS BUSINESS STRATEGY, ITS FINANCING
      PLANS AND THE OUTCOME OF ANY CONTINGENCIES ARE FORWARD-LOOKING STATEMENTS.
      THE
      FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT ESTIMATES AND PROJECTIONS ABOUT
      OUR INDUSTRY AND OUR BUSINESS. WORDS SUCH AS “ANTICIPATES,” “EXPECTS,”
“INTENDS,” “PLANS,” “BELIEVES,” “SEEKS,” “ESTIMATES,” VARIATIONS OF SUCH WORDS
      AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
      STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
      UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
      SET FORTH OR IMPLIED BY ANY FORWARD LOOKING STATEMENTS. THE COMPANY ASSUMES
      NO
      OBLIGATION TO UPDATE PUBLICLY THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN,
      WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT
      AS
      MAY BE REQUIRED BY LAW.**







**TABLE
      OF CONTENTS**


****
              
              ******Page********PART
                  I**Item
                  1.
              Description
                  of Business
              1Item
                  1A.
              Risk
                  Factors
              8Item
                  2.
              Description
                  of Property
              20Item
                  3.
              Legal
                  Proceedings
              20Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              20**PART
                  II**Item
                  5.
              Market
                  for Common Equity and Related Shareholder Matters
              20Item
                  6.
              Management’s
                  Discussion and Analysis of Results of Operations and Financial
                  Condition
              22Item
                  7.
              Financial
                  Statements of InterMetro Communications, Inc.
              35Item
                  8.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              35Item
                  8a.
              Controls
                  and Procedures
              35Item
                  8b.
              Other
                  Information
              36**PART
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliance with
                  Section
                  16(a) of Exchange Act
              36Item
                  10.
              Executive
                  Compensation
              39Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              41Item
                  12.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              43Item
                  13.
              Exhibits
              44Item
                  14.
              Principal
                  Accountant Fees and Services
              45**SIGNATURES**
              
              47


i




**PART
      I**




**Item
      1. Description of Business**




**General**




We
      have
      built a national, private, proprietary voice-over Internet Protocol, or VoIP,
      network infrastructure offering an alternative to traditional long distance
      network providers. We use our network infrastructure to deliver voice calling
      services to traditional long distance carriers, broadband phone companies,
      VoIP
      service providers, wireless providers, other communications companies and end
      users. Our VoIP network utilizes proprietary software, configurations and
      processes, advanced Internet Protocol, or IP, switching equipment and
      fiber-optic lines to deliver carrier-quality VoIP services that can be
      substituted transparently for traditional long distance services. Based on
      the
      ability to compress data transported across VoIP infrastructures and lower
      capital cost per equivalent equipment capacity, we believe that VoIP technology
      is generally more cost efficient than the circuit-based technologies
      predominately used in existing long distance networks. In addition, traditional
      circuit based switches typically use proprietary embedded call control systems.
      In contrast, we believe VoIP technology, which uses software specifically
      developed to facilitate the sharing of data across different systems, makes
      it
      easier to integrate with enhanced IP communications services such as web-enabled
      phone call dialing, unified messaging and video conferencing
      services.




We
      focus
      on providing the national transport component of voice services over our private
      VoIP infrastructure. This entails connecting phone calls of carriers or end
      users, such as wireless subscribers, residential customers and broadband phone
      users, in one metropolitan market to carriers or end users in a second
      metropolitan market by carrying them over our VoIP infrastructure. We compress
      the phone calls on our network allowing us to carry up to approximately eight
      times the number of calls carried by a traditional long distance company over
      an
      equivalent amount of bandwidth. In addition, we believe our VoIP equipment
      costs
      significantly less than traditional long distance equipment based on the cost
      per equivalent voice port capacity and is less expensive to operate and maintain
      based on lower electricity needs, smaller space requirements and fewer engineers
      to operate. Our proprietary software and hardware configuration enables us
      to
      quickly, without modifying the existing network, add equipment that increases
      our geographic coverage and calling capacity.




During
      2006, we enhanced our network’s functionality by implementing Signaling System
      7, or SS-7, technology. SS-7 allows access to customers of the local telephone
      companies, as well as customers of wireless carriers. SS-7 is the established
      industry standard for reliable call completion, and it also provides
      interoperability between our VoIP infrastructure and traditional telephone
      company networks.




Historically,
      VoIP services have been hampered by poor sound quality and by lack of
      interoperability with traditional circuit-based phone devices. Our private,
      managed network design, as opposed to use of the unmanaged public Internet,
      gives us a high level of control of sound quality and we have designed internal
      software that provides access to our infrastructure from traditional phone
      devices. Our network services allow our customers to reduce costs while taking
      advantage of access to useful information about their voice traffic and can
      be
      easily accessed with both traditional phone devices and new IP-based devices,
      such as broadband IP phones, IP videophones and wireless IP phones.




Our
      VoIP
      infrastructure delivers significant benefits to our customers,
      including:




·
            increasing
                the margins earned from existing retail voice services or reducing
                the
                costs of using voice services;




·
            improving
                customer service through access to real-time information about network
                performance and billing;




·
            reducing
                the administrative burden of managing end users for our carrier
                customers;




·
            increasing
                the investment return on customer owned traditional circuit-based
                equipment; and




·
            enabling
                the creation of value-added enhanced voice
                services.




Our
      goal
      is to displace the incumbent long distance carriers as the presumed choice
      for
      voice transport services. We also intend to become a significant provider of
      VoIP infrastructure services for traditional phone companies and wireless
      carriers, as well as new high growth entrants in the consumer voice services
      market such as broadband phone companies and cable operators. We also package
      our VoIP services into calling cards and prepaid services. We have developed
      plug-and-play technology designed to enable IP devices, such as broadband phones
      and videophones, to be plugged directly into end users’ broadband internet
      routers, allowing for instant use of our services without having to configure
      the device or install any software to interoperate with our network. These
      technologies are expected to be sold under private label third-party
      arrangements. We sell our services through our direct sales force and
      independent sales agents. Our calling cards and prepaid services are primarily
      sold by our retail distribution partners. We believe that our proprietary
      technology and management experience in the communications industry, and in
      particular with VoIP, will enable us to benefit from the adoption of VoIP
      technologies by traditional phone companies. The wide-spread adoption of VoIP
      in
      the telecommunications industry may not materialize, however, and our business
      may not benefit from any adoption that does occur




**Company
      Background**




InterMetro
      Communications, Inc. (hereinafter, “we,” “us,”  “InterMetro” or the
“Company”) is a Nevada corporation which, through its wholly owned subsidiary,
      InterMetro Communications, Inc. (Delaware) (hereinafter, “InterMetro Delaware”),
      is engaged in the business of providing voice over Internet Protocol (“VoIP”)
      communications services. On December 29, 2006, InterMetro, a public “shell”
company, completed a Business Combination with InterMetro Delaware whereby
      InterMetro Delaware became our wholly-owned subsidiary. On the closing of the
      Business Combination, we authorized the issuance of 27,490,194 shares of common
      stock and 3,652,842 common stock purchase warrants to the InterMetro Delaware
      security holders. On May 31, 2007, the Company filed Amended and Restated
      Articles of Incorporation increasing the Company’s authorized shares of
      common stock to 150,000,000, par value $0.001 per share, at which time the
      second phase of 14,049,580 shares of common stock and 2,983,335 common stock
      purchase warrants were effectively issued in exchange for all of the remaining
      InterMetro Delaware common stock and warrants held by InterMetro Delaware
      security holders. All InterMetro Delaware securities were effectively cancelled
      except 100 shares of InterMetro Delaware common stock which represent 100%
      of
      the outstanding stock of the wholly-owned subsidiary.


1




Our
      company was originally incorporated as Lucy’s Cafe, Inc. in the State of Nevada
      on October 30, 2000 to acquire and a restaurant located in downtown Sacramento,
      California. We completed a sale of our restaurant assets and ceased operations
      in the fall of 2004 and were an inactive company from that time until December
      2006. InterMetro Delaware was originally incorporated in the State of California
      on July 22, 2003 to build a communications business based on VoIP
      technology and was reincorporated in Delaware on May 10, 2006.




**Material
      Acquisitions, Private Placements of Securities and
      Agreements**




*Private
      Placement of Securities – January/February 2006* .
      In
      January and February 2006, we raised capital through the issuances of $575,000
      of Series A convertible notes and $1.0 million of Series B preferred stock,
      respectively.




*Acquisition
      of Advanced Tel, Inc* . In
      March 2006, we acquired all of the outstanding stock of Advanced Tel, Inc.
      (“ATI”), a switchless reseller of wholesale long-distance services, for a
      combination of stock and cash. ATI was acquired to increase our customer base,
      to add minutes to our network and to access new sales channels. The initial
      purchase price included 308,079 shares of our common stock, as adjusted for
      the
      Business Combination, a promissory note payable of $250,000 to be paid over
      the
      six-month period following the closing and a two-year unsecured promissory
      note
      in an amount tied to ATI’s working capital of $150,000. The amount of common
      stock consideration paid to the selling shareholder of ATI is subject (or the
      payment of additional cash in lieu thereof at our option) to an adjustment
      if
      our common stock does not reach a minimum price of $4.87 per share during the
      two years following the closing date. The value of this guarantee has been
      included in our determination of the purchase price of the ATI acquisition.
      ATI’s selling shareholder may earn an additional 308,079 shares of our common
      stock, as adjusted for the Business Combination, and additional cash amounts
      during the two-year period following the closing upon meeting certain
      performance targets tied to revenue and profitability.




*Cantata
      Technology Agreement* . In May
      2006, we entered into a strategic agreement with Cantata Technology, Inc.,
      or
      Cantata, formerly known as Excel Switching Corporation, a leading provider
      of
      VoIP equipment and support services. We plan to significantly expand our VoIP
      network using Cantata’s latest, state of the art VoIP equipment, which we
      believe will increase the functionality and efficiency of our VoIP
      infrastructure. The terms of the strategic agreement allow us to apply more
      of
      our existing current financial resources to the expansion of our sales
      and operations. Furthermore, we expect Cantata’s equipment to enable us to better
      integrate, with cost advantages, industry standard SS-7 functionality and
      reliability with the unique enhanced services capabilities of our VoIP
      infrastructure. Among other benefits, the agreement provides us preferential
      pricing and rights to test and deploy newly developed
      technologies.




*Private
      Placement of Securities – December 2006* . In
      December 2006, InterMetro entered into a placement agent agreement with Hunter
      World Markets, Inc. as placement agent, pursuant to which Hunter World Markets,
      Inc. raised $10,235,000 of capital for us through the private placement (the
      “Private Placement”) of shares of our common stock for $1.00 per share.




*Private
      Placement of Securities – November 2007 to March 2008.*  In
      November and December 2007, the Company received $600,000 pursuant to the sale
      of secured notes with individual investors for general working capital. These
      funds were received prior to the closing of the sale of the secured notes,
      which
      occurred on January 16, 2008. The Company sold an additional amount of the
      same
      secured notes totaling $770,000 in the period between January and March 2008,
      and can continue to sell similar secured notes up to a maximum offering of
      $3
      million. The secured notes mature 18 months after issuance and bear interest
      at
      a rate of 10% per annum due at the maturity date.  The secured notes are
      secured by substantially all of the assets of the Company.  In connection
      with the notes, the Company issued two common stock purchase warrants for
      every dollar received or 2.74 million common stock purchase warrants with an
      exercise price of $1.00, 1.37 million of which expire on January 16, 2013 and
      1.37 million of which expire on February 1, 2014. With respect to 1.37 million
      of the total common stock purchase warrants issued in this financing, if such
      warrants are still held by the lenders at February 1, 2009, the lenders will
      be
      entitled to receive a payment (the “Reference Payment”) to the extent that the
      volume weighted average price per share for the 30 trading days ending January
      30, 2009 (the “Reference Price”) is less than $1.00.  The Reference Payment
      will be equal to the difference between $1.00 and the Reference Price.  The
      Company, in its sole discretion, will have the right, but not the obligation,
      to
      make this payment by issuing Common Stock, in lieu of cash, but in no event
      will
      the amount of stock issued be more than one share per dollar invested by the
      lenders.With
      respect to the remaining 1.37 million common stock purchase warrants issued
      in this financing, if such warrants are still held by the lenders at February
      1,
      2009, the lenders will be entitled to receive a payment (the “Second Reference
      Payment”) to the extent that the volume weighted average price per share for the
      30 trading days ending January 30, 2009 (the “Second Reference Price”) is less
      than $2.00.  The Second Reference Payment will be equal to the difference
      between $2.00 and the Second Reference Price up to a maximum value of
      $1.00.  The Company, in its sole discretion, will have the right, but not
      the obligation, to make this payment by issuing Common Stock, in lieu of cash,
      but in no event will the amount of stock issued be more than one share per
      dollar invested by the lenders.




**Our
      Service Offerings**




We
      use
      our network backbone to deliver voice calling services to traditional long
      distance carriers, broadband phone companies, VoIP service providers, wireless
      providers, other communications companies and end users.


2




*Carrier
      Services* .
      Carrier services consist of origination and termination services. Such services
      are provided over our VoIP network constructed as a nationwide system of
      regional IP nodes known as points-of-presence, or PoPs, connected by a
      fiber-optic backbone and other bandwidth segments utilizing a secure packet
      technology called asynchronous transfer mode, or ATM. Our PoPs are typically
      located in major metropolitan cities and allow us to connect to a majority
      of
      the personal and business telephones within a metropolitan geographic
      region.




Because
      the network is based on IP technology, the network enables a significant amount
      of information to be passed to our customers. This allows us to differentiate
      our service from traditional wholesale voice providers by providing unique
      real-time information along with enhanced voice services. Important uses for
      this functionality include the ability to quickly identify misuse or fraud
      that
      is occurring with a customer’s user base or to react more quickly to marketing
      opportunities based on identifiable trends in traffic patterns.




We
      believe our services offer our carrier customers a competitive advantage
      by:




·
            providing
                an alternative to the large traditional network service providers
                that
                have influenced price and service
                levels;




·
            increasing
                margins transparently by reducing direct network costs while maintaining
                or improving the quality of service received by their end
                users;




·
            providing
                access to our VoIP infrastructure without altering the physical connection
                process to a voice network and without any required investment in
                new
                equipment or software; and




·
            providing
                new functionality to reduce the cost of customer care and improve
                fraud
                detection.




*Retail
      Services* . Our
      retail VoIP services are sold to consumers and distributed in the form of
      calling cards or through the distribution of personal identification numbers,
      or
      PINs. Our retail services integrate the installation of voice services with
      billing and customer care functionality and voice and data applications such
      as
      on-demand conferencing and find-me/follow-me service. We primarily distribute
      our services through retail distribution partners who keep a portion of the
      retail revenue. We have created an automated system for activating and
      recharging our retail products. We believe our automation significantly lowers
      costs for retail distribution partners. For example, our automated PIN
      generating system replaces the need for point of sale terminals which charge
      per
      sale transaction fees and require initial integration and software
      setup.




Our
      VoIP
      network is highly flexible and allows our retail distribution partners to design
      voice products that fit the needs of their underlying end users. Our VoIP
      network allows our retail distribution partners to take advantage of their
      brand
      name recognition and customer loyalty.




We
      believe our services offer end users and retail distribution partners attractive
      solutions by:




·
            allowing
                for delivery of “ready-to-shelf” customized voice service products
                tailored specifically to our retail distribution partners’ end user
                demographics; and




·
            providing
                access to our VoIP network allowing retail customers to use their
                existing
                telephones with no requirement to purchase new equipment or software
                and
                without the need for broadband
                access.




*IP
      Devices* . We
      expect to enter into arrangements with one or more distribution partners under
      which they would sell plug-and-play product devices which do not require
      additional software. These devices would be purchased from manufacturers and
      would be configured to work exclusively with our network. We have developed
      three IP devices — the Broadband MetroFone, the VideoLine MetroFone, and the
      DialLine MetroFone. We do not currently generate any revenue from these
      products.




·
            *Broadband
                MetroFone*.
                The Broadband MetroFone looks and operates like a traditional phone
                but
                will use a customer’s broadband internet connection and our network to
                complete calls as compared to traditional phone calls which travel
                over
                low bandwidth copper line networks.




·
            *VideoLine
                MetroFone*.
                The VideoLine MetroFone operates in the same manner as the Broadband
                MetroFone but has the additional capability of sending and receiving
                real-time television quality video between any of our
                videophones.




·
            *DialLine
                MetroFone*.
                The DialLine MetroFone is an IP device, which connects between a
                retail
                customer’s phone and wall jack and automatically connects a retail
                customer with our network.




*Web-Services* . We are
      in the process of developing a web-service offering. Web-services allow voice
      to
      be embedded in applications so that end users can move seamlessly between voice
      and data communications streams.




**Technology
      and Network Infrastructure**




Our
      state-of-the-art proprietary VoIP network is comprised of three basic
      components: switching equipment, software and network facilities. Our VoIP
      switching equipment is manufactured by leading telecommunications industry
      equipment manufacturers, and enables us to manage voice and data traffic and
      the
      associated billing information. Our software applications, including both third
      party software and internally developed proprietary software, allow for
      web-based control of our VoIP switching platform and access to data gathered
      by
      our VoIP switches. We and our customers utilize this advanced functionality
      to
      monitor network performance, capacity utilization and traffic patterns, among
      other metrics, in real-time. Our IP-based core network facilities provide an
      efficient physical transport layer for voice and data traffic, and are
      supplemented by other carriers’ networks to provide extensive domestic and
      international coverage.


3




The
      geographic markets serviced by our VoIP infrastructure are connected by leased
      fiber lines and private IP circuits. In many geographic markets we have leased
      collocation facilities where we have installed our ATM/MPLS switching equipment
      which is used to interconnect these fiber lines and IP circuits. This equipment
      interconnects to the fiber lines running between markets in the network and
      our
      VoIP gateway equipment. The VoIP gateway equipment performs analog-to-digital
      conversion and compression of IP voice. The network is designed to be redundant
      and self-healing, so that isolated events do not disrupt overall service. Our
      proprietary software and hardware configuration enables us to quickly, without
      modifying the existing network, add equipment that increases our geographic
      coverage and calling capacity.




Our
      network switching system is configured to connect to carrier customers by
      connecting their switches with ours via traditional circuit-switched
      connections, or increasingly, through private and public IP connections. We
      also
      connect to local exchange carriers through traditional circuit-switched
      connections so that retail customers can gain access to our services through
      their existing telephones and telecommunications devices.




We
      believe that our competitive advantage includes the ability to incorporate
      software applications into our VoIP network. This allows us to provide enhanced
      functionality and customer service tools. Our VoIP switching system has an
      application programming interface to allow for the creation of software
      application tools to create the enhanced control and functionality features.
      Our
      engineering team has extensive experience in implementing value-added
      applications that allow for greater flexibility in creating services and greater
      control over network efficiencies and costs. We have developed technology to
      provide control of the network and access to network utilization data to us
      and
      to our customers. Customers can access their own customer service web interfaces
      that can be used for operations, such as rate modification, customer activation and deactivation,
      fraud/abuse detection and capacity utilization, among other services. Customers
      can also utilize the interfaces to control costs by managing traffic flow to
      their various network vendors, allowing them to least cost route in the same
      way
      as large telecommunications companies.




**Service
      Developments**




In
      the
      fall of 2005, we began to develop and implement technology to connect our
      network directly to local telephone companies and wireless networks in the
      major
      metropolitan markets that we serve through the addition of SS-7 capabilities
      to
      our VoIP infrastructure. SS-7 technology allows direct access to customers
      of
      local telephone companies. Prior to the SS-7 implementation, we primarily
      connected to competitive local exchange carriers, or CLECs, in each metropolitan
      market which in turn connected to the local telephone company in that
      market.




The
      combination of SS-7 technology and direct local telephone company
      interconnections allows us to offer additional services to our customers and
      we
      believe makes it easier for potential customers that use long distance companies
      to transition their voice traffic to our VoIP network. The SS-7 technology
      also
      allows us to offer an increased number of services and enhances our ability
      to
      develop new services. We began connecting to the local telephone company
      networks through the purchase of a significant amount of recurring fixed-cost
      network interconnection capacity in late 2005 in anticipation of future growth.
      In March 2006, we began utilizing the SS-7 connections to provide
      services




**Sales,
      Marketing and Distribution**




*Carrier
      Services Sales Strategy* . We
      employ a direct sales approach for carrier sales, which is led by experienced
      sales professionals with detailed knowledge of the carrier industry. We provide
      product knowledge, product application consulting, pricing, delivery, and
      performance information to potential customers so that they are able to help
      us
      design services that meet their needs. As we expect to expand the resources
      of
      our sales department, sales professionals will be increasingly focused on
      customer, channel, and geographic levels that are intended to allow us to manage
      the sales cycle more efficiently. We currently target traditional purchasers
      of
      wholesale voice transport services including: inter-exchange carriers,
      international-based carriers sending voice calls to the U.S., wireless carriers,
      prepaid service providers, internet-based voice service providers, such as
      broadband phone companies and cable companies.




We
      complement our direct sales force with an agent-based sales channel. Through
      the
      use of sales agents we reach a larger universe of potential customers. The
      agent
      community in the telecommunication industry is large and well-established.
      A
      typical agent promotes solutions from a variety of service providers into the
      carrier buying community. Agents act as telecommunications consultants to the
      customer, create long-term relationships and develop contacts within
      organizations. A key role of the agent is to advise the customer of various
      providers’ offerings.




*Retail
      Services Sales Strategy* . We
      package our VoIP services into calling card and other prepaid services and
      PIN
      products sold to retail customers of voice services. These VoIP services are
      sold through retail distribution partners, including general merchandise and
      discount retail chains, and do not require distributors to invest in any new
      technology or to understand the underlying technologies required to service
      and
      bill voice products. We enter into agreements with our retail distribution
      partners that define the terms under which they sell our services.




We
      design
      specific products for each retail distribution partner to improve adoption
      of
      our services and to improve their profitability. Retail distributors of our
      VoIP
      services collect the revenue from the sale of our products and pass on a
      majority of the cash collected, holding back a portion of the revenue as their
      compensation for providing distribution services. We seek innovative ways to
      expand the scope of our distribution channels and enhance our ability to
      identify and retain distribution partners. In addition, we also intend to
      cross-sell services through existing retail distribution partners.




*Marketing
      Overview* . We
      create brand awareness and lead generation through our presence at key trade
      shows, targeted mailings to specific industry carrier lists and buyers and
      trade
      magazine advertising. Additionally, we maintain a web site presence and make
      available collateral describing our services and business.


4




**Competition**




*Carrier
      Services* .
      When
      selling to carrier customers, we primarily compete with other carriers,
      including Verizon, Qwest and Global Crossing. We also compete with a number
      of
      smaller IP-based providers that focus either on a specific product or set of
      products or within a geographic region. We compete primarily on the basis of
      transmission quality, network reliability, price and customer service and
      support.




*Retail
      Services* .
      We
      compete for retail distribution partners against long distance providers
      including AT&T, MCI, Sprint and IDT who provide calling cards and prepaid
      services. Retail distributors purchase these products based on price and private
      label customization .




**Our
      Competitive Strengths**




We
      believe our highly flexible, scalable and secure VoIP infrastructure delivers
      the cost and functionality benefits of VoIP technology to our customers. Since
      inception, we have built our network on VoIP technology and do not have to
      make
      investments to upgrade from less efficient circuit-based technology used by
      many
      traditional carriers. We believe our VoIP network is robust and efficient,
      based
      on redundancies in equipment and network transmission paths, and utilizes some
      of the most advanced VoIP technology available.




We
      help
      our carrier customers increase their margins by lowering the cost of their
      wholesale voice transport usage, which enhances the economic value to them
      of
      their existing end users. We help our retail customers access lower cost
      VoIP-based solutions for their communications service needs by making our
      services accessible through their existing residential and wireless phones.
      We
      intend to continue investing in our VoIP infrastructure to improve and expand
      our existing service offerings and to address the constantly evolving needs
      of
      voice transport customers.




Our
      competitive strengths include:




·
            *State-of-the-art
                private VoIP infrastructure*.
                We built our VoIP infrastructure from advanced IP technology. We
                are not
                burdened by some of the constraints commonly faced by traditional
                telecommunications companies that use circuit-based equipment. Legacy
                equipment is more difficult to combine with the latest add-on voice
                services and network transport technology because it typically uses
                proprietary embedded call control systems. We operate and maintain
                our
                VoIP technology with significantly less personnel and lower operating
                costs than switch-based technology achieving comparable
                capacity.




·
            *Cost-efficient
                IP-based voice services*.
                We believe our VoIP technology provides significant cost savings
                due to
                compression and routing efficiencies. In addition, we save money
                by using
                equipment that requires little space and significantly reduced electricity
                costs versus older circuit-switched equipment. Our management team
                has
                extensive experience in negotiating pricing and contract terms for
                these
                types of products and services. We pass a significant portion of
                our cost
                savings on to our customers to help drive sales
                growth.




·
            *Experience
                marketing VoIP services*.
                Our seasoned management team has significant experience with wireline
                and
                wireless telecommunications and experience with IP-based communications.
                Our knowledge of the VoIP industry, including familiarity with the
                hardware, software and vendors, allows us to advise potential customers
                on
                how to incorporate the technology to increase profitability and increase
                customer reach. Members of our management team have marketed VoIP
                services
                to a wide range of customers and have been instrumental in developing
                new
                products to meet individual customer
                demands.




·
            *Product
                flexibility and speed of deployment*.
                We believe our private network equipment provides a high level of
                integration between the installation of voice services and billing
                and
                customer care functions. We believe our VoIP technology software,
                specifically developed to facilitate the sharing of data across different
                systems, allows us to create and deploy new products more quickly
                than
                traditional communications companies. We also utilize our VoIP
                infrastructure to tailor retail products to the individual needs
                of our
                retail distribution partners.




·
            *Strong
                engineering team with experience in both voice and data
                networking*.
                Our engineering team is comprised of individuals with backgrounds
                in
                networking, software development, database administration and
                telecommunications installations. We believe that our engineering
                team is
                among the most experienced in understanding VoIP services and the
                related
                software applications. Members of our engineering team have successfully
                deployed leading-edge technology in prior businesses, including the
                build-outs of both a national web hosting service and a large IP-based
                voice service network.




**Intellectual
      Property**




Our
      intellectual property is an important element of our business, but we believe
      that our competitive advantage depends primarily on the experience of our
      management team and the knowledge and skill of our engineering and technology
      staff. Our management team and technical staff periodically review our
      technological developments to identify core technology that provides us with
      a
      competitive advantage. We rely on a combination of patent, copyright, trademark
      and trade secret laws both domestically and internationally and confidentiality
      procedures to protect our intellectual property rights. Further, our employees
      and independent contractors are required to sign agreements acknowledging that
      all inventions, trade secrets, copyrights, works of authorship, developments
      and
      other processes generated by them on our behalf are our property, and assigning
      to us any ownership that they may claim in those matters. Our standard form
      agreements for carrier customers and retail distribution partners also contain
      provisions designed to protect our intellectual property rights.




We
      are
      the owners of one patent and two patent applications filed with the U.S. Patent
      and Trademark Office. Our patent relates to a system for routing toll free
      telephone calls. Both of our patent applications have been published. One patent
      application relates to the technology which combines instant messenger services
      with voice services. The other application relates to a method for transporting
      voice calls utilizing a combination of Internet Protocol and Asynchronous
      Transfer Mode. We are working with legal counsel to make all necessary filings
      to advance the examination of both patent applications.


5


We
      are
      the owner of numerous trademarks and service marks for telecommunication
      services, phone cards, computer software, computer hardware, and telephone
      sets
      and have applied for registration of our trademarks and service marks to
      establish and protect our brand names as part of our intellectual property
      strategy.




In
      addition, we have non-exclusive license agreements with respect to technology
      and related databases from third parties related to the operations of our VoIP
      platform and the provision of certain service features. We believe our licenses
      will be renewable or replaceable on commercially reasonable terms.




**Governmental
      Regulation**




We
      are
      subject to federal, state, local and foreign laws, regulations, and orders
      affecting the rates, terms, and conditions of certain service and product
      offerings, costs, and other aspects of operations, including relations with
      other service providers. Regulation varies in each jurisdiction and may change
      in response to judicial proceedings, legislative and administrative proposals,
      government policies, competition, and technological developments.




The
      Federal Communications Commission, or FCC, has jurisdiction over our facilities
      and services to the extent they are used in the provision of interstate or
      international communications services. State regulatory commissions, commonly
      referred to as public service commissions or public utilities commissions,
      or
      PSCs or PUCs, generally have jurisdiction over facilities and services to the
      extent they are used in the provision of intrastate services. Local governments
      may assert authority to regulate aspects of our business through zoning
      requirements, permit or right-of-way procedures, taxation and franchise
      requirements. Foreign laws and regulations apply to communications that
      originate or terminate in a foreign country. Generally, the FCC and PSCs have
      not regulated Internet, video conferencing, or certain data services, although
      the underlying communications components of such offerings may be regulated.
      Our
      operations also are subject to various environmental, building, safety, health,
      and other governmental laws and regulations.




Federal
      law generally preempts any inconsistent state or local statutes and regulations
      that restrict the provision of competitive local, long distance and information
      services. Consequently, we are generally free to provide a broad range of
      communications services in every state. While this federal preemption greatly
      increases our potential for growth, it also increases the amount of competition
      to which we may be subject. It is also possible, despite the general federal
      preemption, that state or local regulatory agencies will assert jurisdiction
      over our services.




IP-based
      enhanced voice services are currently exempt from the reporting and pricing
      restrictions placed on common carriers by the FCC. However, there are several
      state and federal regulatory proceedings further defining what specific service
      offerings qualify for this exemption. Due to the growing acceptance and
      deployment of VoIP services, the FCC and a number of state PSCs are conducting
      regulatory proceedings that could affect the regulatory  duties
      and rights of entities that provide IP-based voice applications. There is
      regulatory uncertainty as to the imposition of access charges, which are used
      to
      compensate local exchange carriers to originate or terminate calls, and other
      taxes, fees and surcharges on VoIP services, including those that use the public
      switched telephone network. There is regulatory uncertainty as to the imposition
      of traditional retail, common carrier regulation on VoIP products and
      services.




The
      use
      of the public Internet and private Internet protocol networks to provide voice
      communications services, including VoIP, is a relatively recent market
      development. The provision of such services is largely unregulated within the
      U.S. There are, however, several pending FCC proceedings that will likely affect
      the regulatory status of Internet telephony and other IP-enabled services.
      Principal among them is an IP-Enabled Services rulemaking instituted on February
      12, 2004, which will examine numerous regulatory issues relating to VoIP. The
      FCC also has several pending declaratory rulings regarding the regulatory
      classification of certain IP-enabled services or arrangements. We cannot predict
      when the FCC may take action in these proceedings, or what action the FCC will
      take. Any of these proceedings could have an adverse impact on our
      business.




The
      concept of net neutrality asserts that network operators should not be allowed
      to charge content or application providers extra for faster delivery or other
      preferential treatment. On August 5, 2005, the FCC adopted a policy statement
      setting forth the following net neutrality guidelines: (1) consumers are
      entitled to access the lawful Internet content of their choice; (2) consumers
      are entitled to run applications and use services of their choice, subject
      to
      the needs of law enforcement; (3) consumers are entitled to connect their choice
      of legal devices that do not harm the network; and (4) consumers are entitled
      to
      competition among network providers, application and service providers, and
      content providers. Although the policy statement is not legally binding, it
      does
      set forth the FCC’s current view on net neutrality. On March 22, 2007, the FCC
      announced that it will issue a Notice of Inquiry to examine further the
      practices of broadband network providers and whether the policy statement should
      incorporate a new principle of nondiscrimination. Notwithstanding its earlier
      stated policy statement, the FCC could reverse its position or decide not to
      implement the policy in its on-going regulatory proceedings. Further, federal
      legislation may also address net neutrality in a manner that requires, permits
      or disallows the FCC to implement its stated net neutrality policy. Such
      legislation could also require the FCC to modify its policy in whole or in
      part.
      Because some of our VoIP products and services utilize the networks of third
      parties, regulation and potential legislation concerning net neutrality could
      impact our business. Further, some of our carrier customers rely, in part,
      on
      the enforcement of net neutrality principles in order to offer their VoIP
      services. If our carrier customers are adversely impacted by legislative or
      regulatory action concerning net neutrality, it could also adversely impact
      us.


6




On
      May
      19, 2005, the FCC issued an order requiring interconnected VoIP service
      providers to provide Enhanced 911 capabilities to their subscribers. The FCC
      issued another order on August 5, 2005 requiring interconnected IP-based voice
      service providers and network providers to comply with the Communications
      Assistance for Law Enforcement Act (“CALEA”), which establishes federal
      requirements for wiretapping and other electronic surveillance capabilities.
      This order was upheld by the U.S. Court of Appeals for the D.C. Circuit on
      June 9, 2006. The new requirements are scheduled to take effect on May 14,
      2007. Although we intend to comply with CALEA, we may be required to expend
      significant resources to do so. If we do not comply with CALEA, the FCC may
      subject us to fines and penalties. Additionally, we were required to submit
      a
      CALEA Monitoring Report on February 12, 2007 and a CALEA Systems Security Plan
      on March 12, 2007, however, the reports were not timely filed with the FCC.
      The
      FCC may subject us to fines and penalties if we fail to file the reports or
      because we were late in filing the reports with the FCC.




The
      FCC
      is also considering several petitions filed by individual companies concerning
      the rights and obligations of providers of IP-based voice services, and networks
      that handle IP-based voice traffic or that exchange that traffic with operators
      of Public Switched Telephone Network, or PSTN, facilities.




On
      October 18, 2002, AT&T Corporation filed a petition with the FCC requesting
      a declaratory ruling that calls that originate and terminate on the PSTN, but
      which may be converted into IP during some part of the transmission, are exempt
      from access charges under existing FCC rules. On April 21, 2004, the FCC
      rejected AT&T’s Petition, stating that the calls described by AT&T were
      telecommunications services subject to access charges under existing FCC rules.
      In addition, on June 30, 2006, the FCC released a declaratory ruling concluding
      that certain prepaid calling card service providers are telecommunications
      service providers and must pay access charges and contribute to the Universal
      Service Fund.




On
      September 22, 2003, Vonage Holdings Corporation, or Vonage, filed a petition
      with the FCC requesting a declaratory ruling that its voice communications
      offerings, which generally originate on a broadband network in IP format and
      terminate on the PSTN, or vice versa, are interstate information services not
      subject to state regulation under the federal Communications Act and existing
      FCC rules. On November 10, 2004, the FCC adopted an order ruling that Vonage’s
      service was an interstate service not subject to state regulation. The FCC
      did
      not rule whether the service was a telecommunications service or an information
      service under the Communications Act. Appeals were filed in a number of circuits
      and were consolidated in the U.S. Court of Appeals for the Eighth Circuit,
      which
      upheld the FCC’s presumption order on March 21, 2007.




State
      PSCs are also conducting regulatory proceedings that could impact our rights
      and
      obligations with respect to IP-based voice applications. Previously, the
      Minnesota Public Utilities Commission, or the MPUC, ruled that Vonage’s
      DigitalVoice service was a telephone service under state law, and ordered Vonage
      to obtain state certification, file tariffs, and comply with 911 requirements
      before continuing to offer the service in the state. Vonage filed a request
      in
      the U.S. District Court for the District of Minnesota to enjoin the MPUC’s
      decision. On October 16, 2003, a federal judge granted Vonage’s request for an
      injunction, concluding that Vonage provides an information service immune from
      state regulation and thereby barring the MPUC from enforcing its decision.
      On
      December 22, 2004, the U.S. Court of Appeals for the Eighth Circuit affirmed
      the
      District Court’s decision on the basis of the FCC’s determination that Vonage’s
      service was interstate and noted that the MPUC would be free to challenge the
      injunction if it or another party prevailed on an appeal of the FCC’s Vonage
      order.




The
      California Public Utilities Commission, or the CPUC, on February 11, 2004,
      initiated a rulemaking about the appropriate regulatory framework to govern
      VoIP. Among the issues the CPUC may consider is whether VoIP is subject to
      CPUC’s regulatory authority, including whether VoIP providers should be required
      to contribute to state universal service programs, whether VoIP providers should
      be required to pay intrastate access charges, whether VoIP should be subject
      to
      basic consumer protection rules, and whether exempting VoIP providers from
      requirements applicable to traditional voice providers would create unfair
      competitive advantages for VoIP providers.




Proceedings
      and petitions relating to IP-based voice applications are also under
      consideration in a number of other states, including but not limited to Alabama,
      Kansas, New York, North Dakota, Missouri, Ohio, Oregon, Pennsylvania, Virginia,
      Washington, and Wisconsin.




We
      cannot
      predict the outcome of any of these petitions and regulatory proceedings or
      any
      similar petitions and regulatory proceedings pending before the FCC or state
      public utility commissions. Moreover, we cannot predict how their outcomes
      may
      affect our operations or whether the FCC or state public utility commissions
      will impose additional requirements, regulations or charges upon our provision
      of IP communications services.




The
      Communications Act of 1934 requires that every telecommunications carrier
      contribute, on an equitable and non-discriminatory basis, to federal universal
      service mechanisms established by the FCC, and the FCC also requires providers
      of non-common carrier telecommunications to contribute to universal service,
      subject to some exclusions and limitations. At present, these contributions
      are
      calculated based on contributors’ interstate and international revenue derived
      from U.S. end users for telecommunications or telecommunications services,
      as
      those terms are defined under FCC regulations. The FCC invited public comment
      on
      how to further reform the manner in which the FCC assesses carrier contributions
      to the universal service fund including the standing of VoIP service providers
      in regards to the universal service fund mechanism. On June 27, 2006, the FCC
      released an order adopting interim modifications to its universal service rules
      to require providers of interconnected VoIP services to contribute to the
      Universal Service Fund. This order has been appealed to the U.S. Court of
      Appeals for the D.C. Circuit, which appeal remains pending. We are unable to
      predict whether the FCC’s interim rules will be upheld on appeal or made
      permanent, or if they will be subject to further reconsideration or review
      nor
      the cumulative effect of these rule changes on our business.


7




Changes
      or uncertainties in the regulations applicable to our business and the
      communications industry may negatively affect our business. If regulatory
      approvals become a requirement, delays in receiving required regulatory
      approvals may result in higher costs and lower revenues. Further, changes in
      communications, trade, monetary, fiscal and tax policies in the U.S. may
      negatively impact our results of operations.




**Employees**




As
      of
      December 31, 2007, we had 41 employees, all of whom were full time and located
      in the United States. We have never had a work stoppage and none of our
      employees is represented by a labor organization or under any collective
      bargaining arrangements. We consider our employee relations to be
      good.




**Item
      1A. Risk Factors**




Our
      business is subject to a variety of risks and uncertainties, which are described
      below. If any of these risks materialize, our business, financial condition
      or
      operating results could be adversely affected. The risks described below are
      not
      the only ones we face. Additional risks not currently known to us or that we
      currently do not deem material also may become important factors that may
      materially and adversely affect our business.




**Risks
      Related To Our Business**




***We
      have a limited operating history, which could make it difficult to accurately
      evaluate our business and prospects.***




We
      began
      offering VoIP services in March 2004. Accordingly, we have a limited operating
      history and, as a result, we have limited financial data that you can use to
      evaluate our business and prospects. In addition, we derive nearly all of our
      revenue from VoIP services, which utilize a relatively new technology that
      has
      undergone rapid changes in its short history. Our business model is also
      evolving and it may not be successful. As a result of these factors, the future
      revenue and income potential of our business is uncertain. Although we have
      experienced significant revenue growth in recent periods, we may not be able
      to
      sustain this growth. Any evaluation of our business and our prospects must
      be
      considered in light of these factors and the risks and uncertainties often
      encountered by companies in our stage of development. Some of these risks and
      uncertainties relate to our ability to do the following:




·
            maintain
                and expand our current relationships, and develop new relationships,
                with
                carrier customers, retail distribution partners, network vendors
                and
                equipment providers;




·
            continue
                to grow our revenue and meet anticipated growth
                targets;




·
            manage
                our expanding operations and implement and improve our operational,
                financial and management controls;




·
            adapt
                to industry consolidation;




·
            continue
                to grow our sales force and marketing
                efforts;




·
            successfully
                introduce new, and upgrade our existing, VoIP technologies and
                services;




·
            respond
                to government regulations and legislation relating to VoIP, traditional
                telecommunications services, the Internet, IP-based services and
                other
                aspects of our business;




·
            respond
                effectively to competition; and




·
            attract
                and retain qualified management and
                employees.




If
      we are
      unable to address these risks, our business, results of operations and prospects
      could suffer.




***We
      have a history of losses and we may not achieve profitability in the future,
      which raises substantial doubt about our ability to continue as a going
      concern.***




For
      the
      years ended December 31, 2007, 2006 and 2005, we incurred net losses of $16.9
      million, $13.9 million and $1.1 million, respectively, and negative cash
      flows from operations of $9.3 million and $3.4 million for the years ended
      December 31, 2007 and 2006, respectively. We expect to continue to incur losses,
      and we may not become profitable for the foreseeable future. In addition, as
      a
      public company, we incur increased legal and accounting costs and other expenses
      related to maintaining our trading status pursuant to SEC and NASD rules and
      regulations. We will have to generate and sustain significantly increased
      revenue to achieve profitability. Our revenue growth trends in prior periods
      may
      not be sustainable, and we may not achieve sufficient revenue to achieve or
      maintain profitability. We may incur significant losses in the future for a
      number of reasons, including those discussed in other risk factors and factors
      that we cannot foresee. We have past due balances with certain vendors that
      may
      result in collection actions unless we settle them. We may not obtain sufficient
      funds to bring these accounts current.


8




Our
      ability to continue as a going concern depends upon the success of our
      financings as well as our ability to increase our revenue base and generate
      cash
      from operations. We believe, based upon our projections for increasing revenues
      and upon prospects for additional financing currently being pursued, that we
      will have sufficient capital resources to operate our business for a least
      the
      next 12 months. In November and December 2007, the Company received $600,000
      and
      in the period from January to March 2008 the Company received an additional
      $770,000 pursuant to the sale of secured notes with individual investors for
      general working capital. The terms of the secured notes are 18 months maturity
      with an interest rate of 10% per annum due at the maturity date.  The
      secured notes are secured by substantially all of the assets of the
      Company.  The Company is also required to pay an origination fee of 3.00%
      and documentation fee of 2.50% of the principal amount of the secured notes
      at
      the maturity date.  Prepayment of the credit facilities requires payment of
      interest that would have accrued through maturity, discounted by 20%, in
      addition to principal, accrued interest and fees. The Company can continue
      to
      sell similar secured notes up to a maximum offering of $3 million. Such
      additional financings are necessary in order to fund ongoing operations until
      such time as the Company can achieve positive cash flow from operations. The
      Company is in the process of securing this required additional financing,
      however there can be no assurance that we will be successful in completing
      the
      required financing or that we will continue to expand our revenue base to the
      extent required for profitability.




***Our
      operating results may fluctuate in the future, which could make our results
      of
      operations difficult to predict or cause them to fall short of
      expectations.***




Our
      future operating results may vary significantly from quarter to quarter due
      to a
      variety of factors, many of which are beyond our control and could cause our
      results to be below investors’ expectations, causing the value of our securities
      to fall. Because our business is evolving, our historical operating results
      may
      not be useful in predicting our future operating results. Factors that may
      increase the volatility of our operating results include the
      following:




·
            the
                addition of new carrier customers and retail distribution partners
                or the
                loss of existing customers and retail distribution
                partners;




·
            changes
                in demand and pricing for our VoIP
                services;




·
            the
                timing of our introduction of new VoIP products and services and
                the costs
                we incur to develop these
                technologies;




·
            the
                timing and amount of sales and marketing expenses incurred to attract
                new
                carrier customers and retail distribution
                partners;




·
            changes
                in the economic prospects of carrier customers or the economy generally,
                which could alter current or prospective need for voice services,
                or could
                increase the time it takes us to close sales with
                customers;




·
            changes
                in our pricing policies, the pricing policies of our competitors
                or the
                pricing of VoIP services or traditional voice services
                generally;




·
            costs
                related to acquisitions of businesses or technologies;
                and




·
            the
                use of VoIP as a replacement for traditional voice services is a
                relatively new occurrence and carrier customers have not settled
                into
                consistent spending patterns.




***If
      we fail to manage our growth effectively, our business could be adversely
      affected.***




We
      have
      experienced rapid growth in our operations and to a lesser extent, our
      headcount, and we may experience continued growth in our business, both through
      acquisitions and internal growth. This growth will continue to place significant
      demands on our management and our operational and financial resources. In
      particular, continued growth will make it more difficult for us to accomplish
      the following:




·
            recruit,
                train and retain a sufficient number of highly skilled
                personnel;




·
            maintain
                our customer service standards;




·
            maintain
                the quality of our VoIP platform;




·
            develop
                and improve our operational, financial and management controls and
                maintain adequate reporting systems and
                procedures;




·
            successfully
                scale our VoIP platform, including network, software and other technology,
                to accommodate a larger business;
                and




·
            maintain
                carrier and end user satisfaction.




The
      improvements required to manage our growth will require us to make significant
      expenditures and allocate valuable management resources.


9




***Our
      industry is highly competitive and competitive pressures could prevent us from
      competing successfully in the voice transport services
      industry.***




The
      carrier and retail markets for voice transport services are intensely
      competitive. We expect this competition to continue to increase because there
      are currently no significant barriers to entry into our market. We compete
      both
      for wholesale carrier business and for retail consumption of voice transport
      services. We compete for wholesale carrier business on the basis of a number
      of
      factors, including price, quality, geographic reach and customer service. Our
      competitors often are large, well-established in the communications industry
      and
      enjoy several competitive advantages over us, including:




·
            greater
                financial and personnel resources;




·
            greater
                name recognition;




·
            established
                relationships with greater numbers of wholesale
                carriers;




·
            established
                distribution networks;




·
            greater
                experience in obtaining and maintaining FCC and other regulatory
                approvals
                for products and product enhancements and greater experience in developing
                compliance programs under U.S. federal, state and local laws and
                regulations;




·
            greater
                experience in lobbying the U.S. Congress and state legislatures for
                the
                enactment of legislation favorable to their
                interests;




·
            greater
                experience in product research and
                development;




·
            greater
                experience in launching, marketing, distributing and selling products;
                and




·
            broader-based
                and deeper product lines.




Our
      primary current and potential competitors consist of carriers including
      AT&T, Sprint, Verizon, Qwest, Level (3) and Global Crossing, other start-up
      VoIP providers that have been formed in the recent past and IP networking
      companies that are attempting to add voice as a supplement to their current
      data
      services offerings.




We
      also
      compete with companies focused on the distribution of retail voice services
      and
      expect to compete with companies providing VoIP services and broadband IP phones
      and videophones.




***If
      we lose any member of our senior management team and are unable to find a
      suitable replacement, we may not have the depth of senior management resources
      required to efficiently manage our business and execute our growth
      strategy.***




We
      depend
      on the continued contributions of our senior management and skilled employees.
      We do not maintain key person life insurance policies on any of our officers.
      There is a risk that the loss of a significant number of key personnel could
      have negative effects on our results of operations. We may not be able to
      attract and hire highly skilled personnel to replace lost employees necessary
      to
      carry out our business plan. There is also a risk that management may not be
      able to adopt an organizational structure that meets its objectives, including
      managing costs and attracting and retaining key employees.




We
      also
      need to hire additional members of senior management to adequately manage our
      growing business. We may not be able to identify and attract additional
      qualified senior management. Competition for senior management in our industry
      is intense. Qualified individuals are in high demand, and we may incur
      significant costs to attract them. If we are unable to attract and retain
      qualified senior management we may not be able to implement our business
      strategy effectively and our revenue may decline. Our success is substantially
      dependent on the performance of our executive officers and key employees. Given
      our early stage of development, we are dependent on our ability to retain and
      motivate high quality personnel. An inability to engage qualified personnel
      could materially adversely affect our ability to market our VoIP services.
      The
      loss of one or more of our key employees or our inability to hire and retain
      other qualified employees could have a material adverse effect on our business.
      See “Management”.




***A
      substantial portion of our revenue is generated from a limited number of carrier
      customers, and if we lose a major customer our revenue could
      decrease.***




A
      substantial portion of our revenue is generated from a limited number of our
      carrier customers. Our top 10 customers have accounted for approximately 54.6%
      and 60.1% of our revenues for the years ended December 31, 2007 and 2006,
      respectively. We expect that a limited number of carrier customers may continue
      to account for a significant percentage of our revenue and the loss of, or
      material reduction of their purchases could decrease our revenue and harm our
      business.




***We
      are dependent on a limited number of suppliers and on other capacity
      providers.***




We
      currently depend on critical services and equipment from a small number of
      suppliers. There is no guarantee that these suppliers will continue to offer
      us
      the services and equipment we require. If we cannot obtain adequate replacement
      equipment or services from our suppliers or acceptable alternate vendors, we
      could experience a material impact on our financial condition and operating
      results. In addition, we rely on other providers for network capacity beyond
      what we provide over our own network and there is a risk that current capacity
      providers may cease to provide capacity at economically justifiable
      rates.


10




***We
      are dependent on providers of local telecommunications services to reach the
      end
      users for our services.***




We
      currently depend on providers of local telecommunications services to provide
      end users with access to substantially all of our VoIP services. In the future,
      we may utilize other local telecommunications services suppliers to reach end
      users such as wireless carriers, cable companies, power companies and other
      providers of local broadband services. There is no guarantee that these
      suppliers will continue to offer the services we require, that these services
      will be available on economic terms sufficient to execute on our business model
      or that these suppliers will continue to do business with us. If we cannot
      obtain adequate replacement services from our suppliers or acceptable alternate
      vendors, we could experience a material impact on our financial condition and
      operating results. We have a settlement agreement with a significant provider
      of
      our local services related to payment for past amounts due of approximately
      $3.0
      million and past disputes in the amount of approximately $1.4 million. If we
      fail to keep our payment obligations under this agreement, the resulting
      potential termination of the related local services and collection proceedings
      would have a material adverse impact on our operating results, financial
      condition and business performance.




***We
      may from time to time be subject to disputes with customers, vendors and other
      third parties relating to amounts claimed due for services which we may not
      be
      able to resolve in our favor.***




It
      is not
      unusual in our industry to occasionally have disagreements with vendors and
      other third parties relating to amounts claimed due in connection with the
      services provided by us or companies like us. To the extent we are unable to
      favorably resolve these disputes, our revenues, profitability or cash may be
      adversely affected. We currently have a dispute reserve of approximately $1.0
      million, excluding the dispute identified under a separate risk factor for
      local
      telecommunications providers above, which is management’s estimate of disputes
      that will be resolved in our favor. The majority of this dispute reserve relates
      to the difference in pricing that we expect to pay when calls originate and
      terminate in different U.S. states or international jurisdictions versus the
      characterizations of these calls as being originated and terminated within
      the
      same U.S. state.




We
      are
      currently in an FCC mediation process with a third party organization that
      represents a significant number of the payphone operating companies in the
      U.S.
      They are attempting to collect an unspecified amount for payphone originated
      calls for which they claim that they have not already received compensation.
      If
      we are unable to resolve this dispute it c ould
      have
      a material adverse impact on our operating results, financial condition and
      business performance.




***We
      may pursue the acquisition of other businesses in order to grow our customer
      base and access technology and talent, and any such acquisition may not achieve
      the desired results or could result in operating difficulties, dilution and
      other harmful consequences.***




We
      completed the acquisition of ATI in March 2006. We expect to pursue additional
      acquisitions in the future as a key component of our business strategy. We
      do
      not know if we will be able to successfully complete any future acquisitions.
      Furthermore, we do not know that we will be able to successfully integrate
      any
      other acquired business, product or technology or retain any key employees
      of
      any acquired business. Integrating any business, product or technology we
      acquire could be expensive and time-consuming, disrupt our ongoing business
      and
      distract our management. If we are unable to integrate any acquired businesses,
      products or technologies effectively, our results of operations and financial
      condition will suffer. There may not be attractive acquisition opportunities
      available to us in the future. In addition, acquisitions involve numerous risks,
      any of which could harm our business, including:




·
            diversion
                of management’s attention and resources from other business
                concerns;




·
            difficulties
                and expenditures associated with integrating the operations and employees
                from the acquired company into our organization, and integrating
                each
                company’s accounting, management information, human resources and other
                administrative systems to permit effective
                management;




·
            inability
                to maintain the key business relationships and the reputations of
                the
                acquired businesses;




·
            ineffectiveness
                or incompatibility of acquired technologies or services with our
                existing
                technologies and systems;




·
            potential
                loss of key employees of acquired
                businesses;




·
            responsibility
                for liabilities of acquired
                businesses;




·
            unavailability
                of favorable financing for future
                acquisitions;




·
            inability
                to maintain our standards, controls, procedures and policies, which
                could
                affect our ability to receive an unqualified attestation from our
                independent accountants regarding management’s required assessment of the
                effectiveness of our internal control structure and procedures for
                financial reporting; and




·
            increased
                fixed costs.


11




The
      acquisition of another business, particularly in another country, can subject
      us
      to liabilities and claims arising out of such business, including tax
      liabilities and liabilities arising under foreign regulations. Future
      acquisitions would also likely require additional financing, resulting in an
      increase in our indebtedness or the issuance of additional capital stock which
      could be dilutive to holders of shares issued in this offering. Finally, any
      amortization or charges resulting from the costs of acquisitions could harm
      our
      operating results.




***Sales
      of our IP devices may be severely limited due to their failure to gain broad
      market acceptance.***




In
      the
      future, we intend to sell IP devices and related services. Market acceptance
      requires, among other things, that we




·
            educate
                consumers on the benefits of our
                products;




·
            commit
                a substantial amount of human and financial resources to secure strategic
                partnerships and otherwise support the retail and/or carrier distribution
                of our products;




·
            develop
                our own sales, marketing and support activities to consumers, broadband
                providers and retailers; and




·
            establish
                a sufficient number of retail locations carrying our
                products.




In
      the
      event we are unable to achieve any or all of these objectives, consumers may
      perceive little or no benefit from our products and may be unwilling to pay
      for
      them.




***Rapid
      technological changes in the industry in which we operate our business or the
      market in which we intend to sell our IP devices may render such devices
      obsolete or otherwise harm us competitively.***




We
      operate in a highly technological industry segment that is subject to rapid
      and
      frequent changes in technology and market demand. Frequently such changes can
      immediately and unexpectedly render existing technologies obsolete. Management
      expects that technology developed in the future will be superior to the
      technology that we (and others) now have. Our success depends on our ability
      to
      assimilate new technologies into our VoIP infrastructure and our IP devices
      and
      to properly train engineers, sales staff, distributors and resellers in the
      use
      of our technology. The success of our future service offerings or devices
      depends on several factors, including but not limited to proper new product
      definition, product cost, timely completion and market introduction of such
      services, differentiation of our future products from those of our competitors
      and market acceptance of these products. Competing technologies developed by
      others may render our current or future developed products or technologies
      obsolete or noncompetitive. The failure of our new product development efforts
      could have a detrimental effect on our business and results of
      operations.




***If
      we discover IP device defects, we may have product-related liabilities that
      may
      cause us to lose revenues or delay market acceptance of our IP
      devices.***




Devices
      as complex as those we intend to offer frequently contain errors, defects,
      and
      functional limitations when first introduced or as new versions are released.
      We
      have in the past experienced such errors, defects or functional
      limitations.




We
      intend
      to sell devices into markets that are demanding of robust, reliable and fully
      functional products. Therefore, delivery of devices with production defects
      or
      reliability, quality, or compatibility problems could significantly delay or
      hinder market acceptance, which could damage our credibility with our customers
      and adversely affect our ability to attract new customers. Moreover, such
      errors, defects, or functional limitations could cause problems, interruptions,
      delays, or a cessation of sales to our customers. Alleviating such problems
      may
      require significant expenditures of capital and resources by us. Despite our
      testing, our suppliers or our customers may find errors, defects or functional
      limitations in new products after commencement of commercial production, which
      could result in additional development costs, loss of, or delays in, market
      acceptance, diversion of technical and other resources from our other
      development efforts, product repair or replacement costs, claims by our
      customers or others against us, or the loss of credibility with prospective
      customers.




***Uncertainty
      or negative publicity may negatively affect the VoIP industry generally and
      our
      business.***




There
      is
      a possibility that uncertainty regarding broad market acceptance of VoIP
      technology or adverse publicity or negative perceptions about the VoIP industry
      as a whole could hinder our ability to obtain new customers or undermine our
      commercial relationship with existing customers. Further, the adoption of VoIP
      in the telecommunications industry may not materialize and, even if there is
      such adoption, our business may not benefit from it.




***Our
      ability to protect our intellectual property is
      uncertain.***




We
      rely
      on patent protection, trade secrets, know-how and contractual means to protect
      our proprietary technology. Patents may afford only limited protection and
      may
      not adequately protect our rights or permit us to gain or keep any competitive
      advantage. For example, our pending U.S. patent applications may not issue
      as
      patents in a form that will be advantageous to us, or may issue and be
      subsequently successfully challenged by others and invalidated. In addition,
      our
      pending patent applications include claims to material aspects of our products
      and methods that are not currently protected by issued patents. Furthermore,
      competitors may be able to design around the claims of our patents, or develop
      products or methods outside the scope of our issued claims which provide
      outcomes which are comparable to ours. We also rely on know-how and trade
      secrets to maintain our competitive position. Confidentiality agreements or
      other agreements with our employees, consultants and advisors may not be
      enforceable or may not provide meaningful protection for our proprietary
      technology, know-how, trade secrets, or other proprietary information in the
      event of misappropriation, unauthorized use or disclosure or other breaches
      of
      the agreements, or, even if such agreements are legally enforceable, we may
      not
      have adequate remedies for breaches of such agreements. The failure of our
      patents or agreements to protect our proprietary technology could result in
      significantly lower revenues, reduced profit margins or loss of market
      share.


12




The
      market for our products depends to a significant extent upon the goodwill
      associated with our trademarks and service marks. We own, or have licenses
      to
      use, the material trademarks, service marks and trade names used in connection
      with the packaging, marketing and distribution of our products in the markets
      where those products are sold. Therefore, trademark protection is important
      to
      our business. Although most of our trademarks and service marks are registered
      in the U.S., we may not be successful in asserting trademark protection. In
      addition, the laws of certain foreign countries may not protect our trademarks
      or service marks to the same extent as the laws of the U.S. The loss or
      infringement of our trademarks or service marks could impair the goodwill
      associated with our brands, harm our reputation and have a material adverse
      effect on our financial results.




***Network
      failures or delays may result in the loss of our customers or expose us to
      potential liability.***




Our
      VoIP
      network infrastructure uses a collection of communications equipment, software,
      operating protocols and applications for the transport of voice among multiple
      locations. Given the complexity of the network, it is possible that there could
      be severe disruptions in our ability to timely turn up service requests,
      minimize service interruptions and meet requirements of customer service level
      agreements. We have critical systems in our Los Angeles, California and New
      York, New York collocation facilities. Our California facilities are located
      in
      areas with a high risk of major earthquakes. Our facilities and network are
      also
      subject to break-ins, sabotage, intentional acts of vandalism and terrorism
      and
      to potential disruptions if the operators of these facilities encounter
      financial difficulties. Some of our systems may not be fully redundant, and
      our
      disaster recovery planning cannot account for all eventualities. The occurrence
      of a natural disaster, an operator’s decision to close a facility we are using
      without adequate notice for financial reasons or other unanticipated problems
      at
      our facilities could result in lengthy interruptions in our service. Network
      failures or delays in the turn up of services could cause business interruptions
      resulting in possible losses to our customers. Such failures or delays may
      expose us to claims by our customers and may result in the loss of
      customers.




***VoIP
      networks are vulnerable to unauthorized access or use by outside
      parties.***




While
      we
      built a private secure fiber optic infrastructure to minimize security risks
      from third party unauthorized sources, no network is invulnerable to hackers.
      A
      small percentage of voice traffic transported across our network may at times
      utilize the public internet. However, providing entry or exit points to our
      customers via the internet could enable computer hackers to access our network,
      and could lead to the impairment, failure or theft of our services. Further,
      it
      could also lead to the unauthorized interception and monitoring of end user
      voice calls. Unauthorized access or use may have an adverse impact on our
      services and reputation.




***Our
      products or activities may infringe, or may be alleged to infringe, upon
      intellectual property rights of others.***




We
      may
      encounter future litigation by third parties based on claims that our products
      or activities infringe the intellectual property rights of others, or that
      we
      have misappropriated the trade secrets of others. If any litigation or claims
      are resolved against us, we may be required to do one or more of the
      following:




·
            cease
                selling, incorporating or using any of our products that incorporates
                the
                infringed intellectual property, which would adversely affect our
                revenue
                or costs or both;




·
            obtain
                a license from the holder of the infringed intellectual property
                right,
                which might be costly or might not be available on reasonable terms,
                if at
                all; or




·
            redesign
                our products to make them non-infringing, which could be costly and
                time-consuming and may not be possible at
                all.




Because
      patent applications can take many months to be published, there may be pending
      applications, unknown to us, that may later result in issued patents that our
      products or product candidates or processes may infringe. These patent
      applications may have priority over patent applications filed by us. Disputes
      may arise regarding the ownership or inventorship of our intellectual property.
      There also could be existing patents of which we are unaware that our products
      may be infringing. As the number of participants in the market grows, the
      possibility of patent infringement claims against us increases. It is difficult,
      if not impossible, to determine how such disputes would be
      resolved.




Furthermore,
      because of the substantial amount of discovery required in connection with
      patent litigation, there is a risk that some of our confidential information
      could be required to be publicly disclosed. In addition, during the course
      of
      patent litigation, there could be public announcements of the results of
      hearings, motions or other interim proceedings or developments in the
      litigation. Any litigation claims against us may cause us to incur substantial
      costs and could place a significant strain on our financial resources, divert
      the attention of management or restrict our core business.


13




***We
      may be subject to damages resulting from claims that we, or our employees,
      have
      wrongfully used or disclosed alleged trade secrets of their former
      employers.***




Some
      of
      our employees were previously employed at other communications companies,
      including our competitors or potential competitors. Although no such claims
      against us are currently pending, we may be subject to claims that we or these
      employees have inadvertently or otherwise used or disclosed trade secrets or
      other proprietary information of their former employers. Litigation may be
      necessary to defend against these claims. Even if we are successful in defending
      against these claims, litigation could result in substantial costs and be a
      distraction to management. If we fail in defending such claims, in addition
      to
      paying monetary damages, we may lose valuable intellectual property rights
      or
      personnel. A loss of key research personnel or their work product could hamper
      or prevent our ability to commercialize product candidates, which could severely
      harm our business.




***We
      are exposed to various possible claims relating to our business and our
      insurance may not fully protect us.***




We
      may
      incur uninsured liabilities and losses as a result of the conduct of our
      business. For example, network failures or security breaches could subject
      us to
      claims by our customers, and physical damage to the leased facilities in which
      we maintain our equipment could result in damage or loss to our equipment.
      We
      plan to maintain comprehensive liability and property insurance which may not
      replace the full value of our potential liabilities or losses or cover such
      claims. We will also evaluate the availability and cost of business interruption
      insurance. However, should uninsured losses occur, shareholders could lose
      their
      invested capital.




***The
      costs incurred by us to develop, implement, and enhance our VoIP services may
      be
      higher than anticipated, which could hurt our ability to earn a
      profit.***




We
      may
      incur substantial cost overruns in the development and establishment of our
      VoIP
      services. For example, delays in the SS-7 enhancement to our VoIP infrastructure
      will cause us to incur monthly costs related to equipment and network components
      we are not able to fully utilize. Unanticipated costs may force us to obtain
      additional capital or financing from other sources, or may cause the loss of
      your entire investment in our common stock if we are unable to obtain the
      additional funds necessary to implement our business plan.




***We
      may need to raise additional funds in the future and such funds may not be
      available on acceptable terms or at all.***




We
      may
      need to raise additional funds in the future for any number of reasons,
      including:




·
            the
                loss of revenues generated by sales of our services and
                products;




·
            the
                upfront and ongoing costs associated with expanding and enhancing
                our VoIP
                infrastructure;




·
            the
                costs associated with expanding our sales and marketing
                efforts;




·
            the
                expenses we incur in manufacturing and selling our services and
                products;




·
            the
                costs of developing new products or
                technologies;




·
            the
                cost of obtaining and maintaining regulatory approval or clearance
                of our
                products and products in development;
                and




·
            the
                number and timing of acquisitions and other strategic
                transactions.




If
      we
      issue equity or debt securities to raise additional funds, our existing
      shareholders may experience dilution and the new equity or debt securities
      may
      have rights, preferences and privileges senior to those of our existing
      shareholders. In addition, if we raise additional funds through collaboration,
      licensing or other similar arrangements, it may be necessary to relinquish
      valuable rights to our potential products or proprietary technologies, or grant
      licenses on terms that are not favorable to us. If we cannot raise funds on
      acceptable terms or at all, we may not be able to develop or enhance our
      products, execute our business plan, take advantage of future opportunities
      or
      respond to competitive pressures or unanticipated customer requirements. In
      these events, our ability to achieve our development and commercialization
      goals
      would be adversely affected.




**Additional
      Risks Related to Regulation**




***Our
      industry is subject to regulation that could adversely impact our
      business.***




Traditional
      telephone service has been subject to significant federal and state regulation.
      Internet services generally have been subject to far less regulation. Because
      aspects of VoIP are similar to the traditional telephone services provided
      by
      incumbent local exchange carriers and other aspects are similar to the services
      provided by Internet service providers, the VoIP industry has not fit easily
      within the existing regulatory framework of communications law, and until
      recently has developed in an environment largely free from
      regulation.




The
      Federal Communications Commission, or FCC, the U.S. Congress and various
      regulatory bodies in the states and in foreign countries have begun to assert
      regulatory authority over VoIP providers, and are evaluating how VoIP may be
      regulated in the future. In addition, while some of the existing regulation
      concerning VoIP is applicable to the entire industry, many regulatory
      proceedings are focused on specific companies or categories of VoIP services.
      As
      a result, both the application of existing rules to us and our competitors
      and
      the effects of future regulatory developments are uncertain.




14




Communications
      services are generally subject to regulation at the federal, state, local and
      international levels. These regulations affect us, our customers, and our
      existing and potential competitors. Delays in receiving required regulatory
      approvals, completing interconnection agreements or other agreements with local
      exchange carriers or the adoption of new and adverse regulations may have a
      material adverse effect on us. In addition, future legislative and judicial
      actions could have a material adverse effect on us.




Federal
      legislation generally provides for significant deregulation of the U.S.
      communications industry, including the information service, local exchange,
      long
      distance and cable television industries. This legislation remains subject
      to
      judicial review and additional FCC rulemaking. As a result, we cannot predict
      the legislation’s effect on our future operations. Regulatory proceedings are
      under way or are being contemplated by federal and state authorities regarding
      items relevant to our business. These actions could have a material adverse
      effect on our business.




***Future
      legislation or regulation of the Internet and/or voice and video over IP
      services could restrict our business, prevent us from offering service or
      increase our cost of doing business.***




At
      present there are few laws, regulations or rulings that specifically address
      access to commerce and communications services that utilize internet protocol,
      including VoIP. We are unable to predict the impact, if any, that future
      legislation, judicial decisions or regulations concerning internet protocol
      products and services may have on our business, financial condition, and results
      of operations. Regulation may be targeted towards, among other things, fees,
      charges, surcharges, and taxation of VoIP services, liability for information
      retrieved from or transmitted over the Internet, online content regulation,
      user
      privacy, data protection, pricing, content, copyrights, distribution, electronic
      contracts and other communications, filing requirements, consumer protection,
      public safety issues like enhanced 911 emergency service, or E911, the
      Communications Assistance for Law Enforcement Act, or CALEA, the provision
      of
      online payment services, broadband residential Internet access, and the
      characteristics and quality of products and services, any of which could
      restrict our business or increase our cost of doing business. The increasing
      growth of the VoIP market and popularity of VoIP products and services heighten
      the risk that governmental agencies will seek to regulate VoIP and the
      Internet.




Many
      regulatory actions are underway or are being contemplated by governmental
      agencies. Several states of the U.S. and municipalities have recently shown
      an
      interest in regulating VoIP services, as they do for providers of traditional
      telephone service. If this trend continues, and if such regulation is not
      preempted by action of the U.S. federal government, we may become subject to
      a
      variety of inconsistent state and local regulations and taxes, which would
      increase our costs of doing business, and adversely affect our operating results
      and future prospects.




On
      February 12, 2004, the FCC initiated a notice of proposed rulemaking to update
      FCC policy and consider the appropriate regulatory classification for VoIP
      and
      other IP enabled services. On November 9, 2004, the FCC ruled that Vonage’s VoIP
      service and similar services are jurisdictionally interstate and not subject
      to
      state certification, tariffing and other common carrier regulations, including
      911. This ruling was subsequently appealed by several states, but was affirmed
      by the U.S. Court of Appeals for the Eighth Circuit on March 21, 2007. There
      is
      risk that a regulatory agency could require us to conform to rules that are
      unsuitable for IP communications technologies or rules that cannot be complied
      with due to the nature and efficiencies of IP routing, or are unnecessary or
      unreasonable in light of the manner in which we offer service to our customers.
      It is not possible to separate the Internet, or any service offered over it,
      into intrastate and interstate transmission components. While suitable
      alternatives may be developed in the future, the current IP network does not
      enable us to identify the geographic path of the traffic.




On
      June
      27, 2006, the FCC released an order adopting interim modifications to its
      universal service rules to require providers of interconnected VoIP services
      to
      contribute to the Universal Service Fund. This order was subsequently appealed
      to the U.S. Court of Appeals for the D.C. Circuit, which appeal remains pending.
      If the FCC’s interim rules are upheld on appeal or are made permanent, the
      cumulative effect of these rule changes could increase our cost of doing
      business.




***Our
      products must comply with industry standards, FCC regulations, state, local,
      country-specific and international regulations, and changes may require us
      to
      modify existing products and/or services.***




In
      addition to reliability and quality standards, the market acceptance of VoIP
      is
      dependent upon the adoption of industry standards so that products from multiple
      manufacturers are able to communicate with each other. Our VoIP products and
      services rely heavily on communication standards such as SIP, H.323 and SS-7
      and
      network standards such as TCP/IP to interoperate with other vendors’ equipment.
      There is currently a lack of agreement among industry leaders about which
      standard should be used for a particular application, and about the definition
      of the standards themselves. These standards, as well as audio and video
      compression standards, continue to evolve. We also must comply with certain
      rules and regulations of the FCC regarding electromagnetic radiation and safety
      standards established by Underwriters Laboratories, as well as similar
      regulations and standards applicable in other countries. Standards are
      continuously being modified and replaced. As standards evolve, we may be
      required to modify our existing products or develop and support new versions
      of
      our products. We must comply with certain federal, state and local requirements
      regarding how we interact with our customers, including consumer protection,
      privacy and billing issues, the provision of 911 emergency service and the
      quality of service we provide to our customers. The failure of our products
      and
      services to comply, or delays in compliance, with various existing and evolving
      standards could delay or interrupt volume production of our VoIP telephony
      products, subject us to fines or other
      imposed penalties, or harm the perception and adoption rates of our service,
      any
      of which would have a material adverse effect on our business, financial
      condition or operating results.




15




***There
      may be risks associated with the lack of 911 emergency dialing or the
      limitations associated with E911 emergency dialing with our VoIP
      services.***




In
      the
      future, we intend to sell and support IP devices. In May 2005, the FCC
      unanimously adopted an Order and Notice of Proposed Rulemaking, or NPRM, that
      requires some VoIP providers to provide emergency 911, or E911, service. On
      June
      3, 2005, the FCC released the text of the First Report and Order and Notice
      of
      Proposed Rulemaking in the VoIP E911 proceeding, or the VoIP E911 Order. As
      a
      result of the VoIP E911 Order, VoIP service providers that interconnect to
      the
      public switched telephone network, or PSTN, or interconnected VoIP providers,
      will be required to offer the same 911 emergency calling capabilities offered
      by
      traditional landline phone companies. All interconnected VoIP providers must
      deliver 911 calls to the appropriate local public safety answering point, or
      PSAP, along with call back number and location, where the PSAP is able to
      receive that information. E911 must be included in the basic service offering;
      it cannot be an optional or extra feature. The PSAP delivery obligation, along
      with call back number and location information must be provided regardless
      of
      whether the service is “fixed” or “nomadic.” User registration of location is
      permissible initially, although the FCC is committed to an advanced form of
      E911
      that will determine user location without user intervention, one of the topics
      of the further NPRM to be released eventually. The VoIP E911 Order mandates
      that
      existing and prospective customers must be notified of the capabilities and
      limitations of VoIP service with respect to emergency calling, and
      interconnected VoIP providers must obtain and maintain affirmative
      acknowledgement from each customer that the customer has read and understood
      the
      notice of limitations and distribute warning labels or stickers alerting
      consumers and other potential users of the limitations of VoIP 911 service
      to
      each new subscriber prior to the initiation of service. In addition, an
      interconnected VoIP provider must make it possible for customers to update
      their
      address (i.e., change their registered location) via at least one option that
      requires no equipment other than that needed to access the VoIP service. All
      interconnected VoIP providers were required to comply with the requirements
      of
      the VoIP E911 Order by November 28, 2005. On November 7, 2005, the FCC’s
      Enforcement Bureau issued a Public Notice with respect to that requirement.
      The
      notice stated that providers that had not fully complied with E911 requirements
      were not required to discontinue services to existing customers, but that the
      FCC expected such providers to discontinue marketing their services and
      accepting new customers in areas where the providers could not offer E911
      capabilities. However, in order to comply, interconnected VoIP providers must
      obtain access to incumbent local exchange carrier, or ILEC, facilities. In
      some
      cases, ILECs have denied VoIP providers access to these necessary facilities.
      Pending legislation may address whether ILECs have legal obligations to provide
      access to these necessary facilities.




The
      VoIP
      E911 Order will increase our cost of doing business and may adversely affect
      our
      ability to deliver service to new and existing end users in all geographic
      regions. We cannot guarantee that E911 service will be available to all of
      our
      subscribers. The VoIP E911 Order or follow-on orders or clarifications and
      potential legislation could have a material adverse effect on our business,
      financial condition and operating results.




***The
      IP devices we intend to offer could be adversely impacted if network operators
      are permitted to restrict or degrade access to their broadband
      networks.***




The
      concept of net neutrality asserts that network operators should not be allowed
      to charge content or application providers fees for faster delivery or other
      preferential treatment. On August 5, 2005, the FCC adopted a policy statement
      setting forth the following net neutrality guidelines: (1) consumers are
      entitled to access the lawful Internet content of their choice; (2) consumers
      are entitled to run applications and use services of their choice, subject
      to
      the needs of law enforcement; (3) consumers are entitled to connect their choice
      of legal devices that do not harm the network; and (4) consumers are entitled
      to
      competition among network providers, application and service providers, and
      content providers. The policy statement is not legally binding, though it does
      set forth the FCC’s current view on net neutrality. On March 22, 2007, the FCC
      announced that it will issue a Notice of Inquiry to examine further the
      practices of broadband network providers and whether the policy statement should
      incorporate a new principle of nondiscrimination. Notwithstanding its earlier
      policy statement, the FCC could reverse its position or decide not to implement
      the policy in its ongoing regulatory proceedings. Further, federal legislation
      may also address net neutrality in a manner that requires, permits or disallows
      the FCC to implement its stated net neutrality policy. Such legislation could
      also require the FCC to modify its policy in whole or in part. Because some
      of
      our IP devices and services may utilize the networks of third parties,
      regulation and potential legislation
      concerning net neutrality could impact our business. Further, some of our
      carrier customers rely, in part, on the implementation of net neutrality
      principles in order to offer their VoIP services. If our carrier customers
      are
      adversely impacted by legislative or regulatory action concerning net
      neutrality, it could also adversely impact us.




16




***Uncertainty
      regarding whether certain of our services are classified as*** **“telecommunications”
      or “information” services makes it difficult to predict whether we will need to
      pay additional charges, surcharges, fees and/or taxes to provide our services
      and whether we are subject to state and local regulation.**




There
      are
      many unresolved proceedings at the FCC intended to address whether various
      types
      of VoIP services are properly classified as telecommunications services and/or
      information services. Federal legislation may also impact this determination.
      If
      our services are determined to be telecommunications services, we may be subject
      to additional regulation, including but not limited to the application of
      additional charges, surcharges, taxes and fees that would adversely impact
      our
      business. If it is determined that we provide telecommunications services,
      we
      could also be required to comply with state regulation and the related filing
      requirements that could adversely impact our business.




***We
      may from time to time be subject to disputes with customers and vendors relating
      to amounts invoiced for services provided which we may not be able to resolve
      in
      our favor.***




It
      is not
      unusual in our industry to occasionally have disagreements with vendors relating
      to amounts billed for services provided between the recipient of the services
      and the vendor. To the extent we are unable to favorably resolve these disputes,
      our revenues, profitability or cash may be adversely affected.




**Risks
      Related to our Common Stock**




***Until
      December 2006, we were a public shell company. There are certain risks
      associated with transactions with public shell companies generally, including
      increased Securities and Exchange Commission scrutiny and regulation and lack
      of
      analyst coverage.***




Prior
      to
      December 2006, we were effectively a public shell company with no material
      assets or operations and our only value was that we maintained current filings
      with the Securities and Exchange Commission and a class of securities that
      was
      offered for sale pursuant to the OTC Bulletin Board. On December 29, 2006,
      we
      entered into exchange agreements with all of InterMetro Delaware’s shareholders,
      note holders and warrant holders to effect a share exchange between the Company
      and InterMetro Delaware which resulted in InterMetro Delaware becoming our
      wholly owned subsidiary and the InterMetro Delaware security holders becoming
      our controlling shareholders. The Business Combination provided an immediate
      benefit for the then existing shareholders of the Company that might not have
      been readily available, or available at all, to other shareholders who either
      acquired their shares of common stock in connection with this offering or
      otherwise.




Substantial
      additional risks are associated with a public shell merger transaction such
      as
      the absence of accurate or adequate public information concerning the public
      shell; undisclosed liabilities; improper accounting; claims or litigation from
      former officers, directors, employees or stockholders; contractual obligations;
      regulatory requirements and others. Although management performed due diligence
      on the public shell company, there can be no assurance that such risks do not
      occur. The occurrence of any such risk could materially adversely affect our
      results of operations, financial condition and stock price.




Security
      analysts of major brokerage firms may not provide coverage of us since there
      is
      no incentive for brokerage firms to recommend the purchase of our common stock.
      No assurance can be given that brokerage firms will want to conduct any
      secondary public offerings on our behalf in the future.




***Our
      common stock may be considered a*** **“penny
      stock” and may be difficult to sell.**




The
      Securities and Exchange Commission has adopted regulations which generally
      define “penny stock” to be an equity security that has a market price of less
      than $5.00 per share or an exercise price of less than $5.00 per share, subject
      to specific exemptions. The market price of our common stock is less than $5.00
      per share and therefore may be designated as a “penny stock” according to
      Securities and Exchange Commission rules. This designation requires any broker
      or dealer selling these securities to disclose certain information concerning
      the transaction, obtain a written agreement from the purchaser and determine
      that the purchaser is reasonably suitable to purchase
      the securities. These rules may restrict the ability of brokers or dealers
      to
      sell our common stock and may affect the ability of investors to sell their
      shares. In addition, since our common stock is currently traded on the NASD’s
      OTC Bulletin Board, investors may find it difficult to obtain accurate
      quotations of our common stock and may experience a lack of buyers to purchase
      such stock or a lack of market makers to support the stock price.




***Our
      principal shareholders have significant voting power and may take actions that
      may not be in the best interest of other
      shareholders.***




As
      of
      December 31, 2007, our executive officers, directors, and principal shareholders
      who hold 5% or more of our outstanding common stock beneficially owned, in
      the
      aggregate, approximately 71% of our outstanding common stock. These shareholders
      are able to exercise significant control over all matters requiring shareholder
      approval, including the election of directors and approval of significant
      corporate transactions. This concentration of ownership may have the effect
      of
      delaying or preventing a change in control and might adversely affect the market
      price of our common stock. This concentration of ownership may not be in the
      best interests of all our shareholders.




17




***We*** **incur
      increased costs and risks as a result of being a public company, particularly
      in
      the context of Section 404 of the Sarbanes-Oxley Act of
      2002.**




We
      incur
      increased costs as a result of becoming a public company and from compliance
      activities related to the Sarbanes-Oxley Act of 2002, or SOX, as well as new
      rules subsequently implemented by the Securities and Exchange Commission and
      the
      NASD, and these costs may continue to increase. These new rules and regulations
      have increased our legal and financial compliance costs and made some activities
      more time-consuming and costly. In addition, we incur costs associated with
      our
      public company reporting requirements. These rules and regulations to make
      it
      more expensive for us to obtain certain types of insurance, including directors’
and officers’ liability insurance and we may be forced to accept reduced policy
      limits and coverage in the future or incur substantially higher costs to obtain
      the same or similar coverage. The impact of these events also could make it
      more
      difficult for us to attract and retain qualified persons to serve on our board
      of directors, our board committees or as executive officers. We are presently
      evaluating and monitoring developments with respect to new rules and regulations
      and cannot predict the amount of the additional costs we may incur or the timing
      of such costs.




Section
      404 of SOX requires us to include an internal controls report from management
      in
      our Annual Reports on Form 10-KSB, and we are required to expend significant
      resources in developing the necessary documentation and testing procedures.
      Given the risks inherent in the design and operation of internal controls over
      financial reporting, the effectiveness of our internal controls over financial
      reporting is uncertain. If our internal controls are not designed or operating
      effectively, we would be required to disclose that our internal control over
      financial reporting was not effective. In addition, our registered public
      accounting firm may either disclaim an opinion as it relates to management’s
      assessment of the effectiveness of our internal controls or may issue an adverse
      opinion on the effectiveness of our internal controls over financial reporting.
      Investors may lose confidence in the reliability of our financial statements,
      which could cause the market price of our common stock to decline and which
      could affect our ability to run our business as we otherwise would like
      to.




***Our
        management has identified a number of material weaknesses in our internal
        control over financial reporting as of December 31, 2007, which, if not
        sufficiently remediated, could result in material misstatements in our annual
        or
        interim financial statements in future periods.***
  In
        connection with our management’s assessment of our internal control over
        financial reporting as required under Section 404 of the Sarbanes-Oxley Act
        of
        2002, our management identified a number of material weaknesses in our internal
        control over financial reporting as of December 31, 2007. A material
        weakness is a deficiency, or a combination of deficiencies, in internal control
        over financial reporting, such that there is a reasonable possibility that
        a
        material misstatement of our annual or interim financial statements will
        not be
        prevented or detected on a timely basis. As a result, our management has
        concluded that we did not maintain effective internal control over financial
        reporting as of December 31, 2007.
  We
        are in
        the process of implementing remediation efforts with respect to these material
        weaknesses. However, if these remediation efforts are insufficient to address
        these material weaknesses, or if additional material weaknesses in our internal
        control over financial reporting are discovered in the future, we may fail
        to
        meet our future reporting obligations, our financial statements may contain
        material misstatements and our financial conditions and results of operations
        may be adversely impacted. Any such failure could also adversely affect our
        results of periodic management assessment regarding the effectiveness of
        our
        internal control over financial reporting, as required by the SEC's rules
        under
        Section 404 of the Sarbanes-Oxley Act of 2002. The existence of a material
        weakness could result in errors in our financial statements that could result
        in
        a restatement of financial statements or failure to meet reporting obligations,
        which in turn could cause investors to lose confidence in reported financial
        information leading to a decline in our stock price.
  Although
        we believe that these remediation efforts will enable us to improve our internal
        control over financial reporting, we cannot assure you that these remediation
        efforts will remediate the material weaknesses identified or that any additional
        material weaknesses will not arise in the future due to a failure to implement
        and maintain adequate internal control over financial reporting. Furthermore,
        there are inherent limitations to the effectiveness of controls and procedures,
        including the possibility of human error and circumvention or overriding
        of
        controls and procedures.




***The
      market price of our common stock may be volatile.***




The
      market price of our common stock has been and will likely continue to be highly
      volatile, as is the stock market in general. Some of the factors that may
      materially affect the market price of our common stock are beyond our control,
      such as changes in financial estimates by industry and securities analysts,
      conditions or trends in the communications industry, announcements made by
      our
      competitors or sales of our common stock. These factors may materially adversely
      affect the market price of our common stock, regardless of our
      performance.




In
      addition, the public stock markets have experienced extreme price and trading
      volume volatility. This volatility has significantly affected the market prices
      of securities of many companies for reasons frequently unrelated to the
      operating performance of the specific companies. These broad market fluctuations
      may adversely affect the market price of our common stock.




***Factors
      which may adversely affect market prices of our common
      stock.***




Market
      prices for our common stock will be influenced by a number of factors,
      including:




·
            the
                issuance of new equity securities pursuant to a future offering or
                acquisition;




·
            changes
                in interest rates;




·
            competitive
                developments, including announcements by competitors of new products
                or
                services or significant contracts, acquisitions, strategic partnerships,
                joint ventures or capital
                commitments;




·
            variations
                in quarterly operating results;




18




·
            changes
                in financial estimates by securities
                analysts;




·
            the
                depth and liquidity of the market for our common
                stock;




·
            investor
                perceptions of us and the communications industry generally;
                and




·
            general
                economic and other national
                conditions.




***There
      is no assurance of an established public trading market, and the failure to
      establish one would adversely affect the ability of our investors to sell their
      securities in the public market.***




At
      present, there is minimal trading of our securities, and there can be no
      assurance that an active trading market will develop. Our common stock, however,
      is traded on the OTC Bulletin Board. The OTC Bulletin Board is an inter-dealer,
      over-the-counter market that provides significantly less liquidity than the
      NASD’s automated quotation system, or NASDAQ Stock Market. Quotes for stocks
      included on the OTC Bulletin Board are not listed in the financial sections
      of
      newspapers as are those for the NASDAQ Stock Market. Therefore, prices for
      securities traded solely on the OTC Bulletin Board may be difficult to obtain
      and holders of common stock may be unable to resell their securities at or
      near
      their original price or at any price.




***A
      significant number of our shares will be eligible for sale, and their sale
      could
      depress the market price of our common stock.***




Sales
      of
      a significant number of shares of our common stock in the public market could
      harm the market price of our common stock. In May 2007 and January 2008 we
      registered an aggregate of 21,429,000 shares and shares underlying warrants,
      or
      36% of our common stock currently outstanding, for resale in the public market
      pursuant a Form SB-2 registration statements. As such shares of our common
      stock
      are resold in the public market, the supply of our common stock will increase,
      which could decrease its price. Some or all of our shares of common stock as
      well as shares of common stock underlying warrants and options may also be
      offered from time to time in the open market pursuant to an effective
      registration statement or Rule 144, and these sales may have a depressive effect
      on the market for our shares of common stock. In general, a person who has
      held
      restricted shares for a period of six months may, upon filing with the
      Securities and Exchange Commission a notification on Form 144, sell into the
      market shares of our common stock.




***Shares
      eligible for future sale may adversely affect the market price of our common
      stock.***




The
      former non-affiliated securities holders of InterMetro Delaware who received
      shares of our common stock in the Business Combination will be eligible to
      sell
      all of their shares of common stock by means of ordinary brokerage transactions
      in the open market pursuant to Rule 144 promulgated under the Securities Act
      of
      1933, as amended (the “Securities Act”), Rule 144, commencing on May 10, 2008
      which is the expiration date of the lock-up agreement entered into by all
      InterMetro Delaware securities holders at the time of the Business Combination.
      Rule 144 permits, under certain circumstances, the sale of securities, without
      any limitations, by a non-affiliate that has satisfied a one-year holding
      period. Any substantial resale, and the possibility of substantial resales,
      of
      the common stock under Rule 144 may have an adverse effect on the market price
      of our common stock by creating an excessive supply.




***If
      we fail to maintain effective internal controls over financial reporting, the
      price of our common stock may be adversely affected.***




We
      are
      required to establish and maintain appropriate internal controls over financial
      reporting. Failure to establish those controls, or any failure of those controls
      once established, could adversely impact our public disclosures regarding our
      business, financial condition or results of operations. In addition,
      management’s assessment of internal controls over financial reporting may
      identify weaknesses and conditions that need to be addressed in our internal
      controls over financial reporting or other matters that may raise concerns
      for
      investors. Any actual or perceived weaknesses and conditions that need to be
      addressed in our internal control over financial reporting, disclosure of
      management’s assessment of our internal controls over financial reporting or
      disclosure of our public accounting firm’s attestation to or report on
      management’s assessment of our internal controls over financial reporting may
      have an adverse impact on the price of our common stock.




***P*** **rovisions
      in our articles of incorporation and bylaws and under Nevada law may discourage,
      delay or prevent a change of control of our company or changes in our management
      and, therefore, depress the trading price of our common
      stock.**




Our
      articles of incorporation and bylaws contain provisions that could depress
      the
      trading price of our common stock by acting to discourage, delay or prevent
      a
      change of control of our company or changes in our management that the
      shareholders of our company may deem advantageous. These
      provisions:




·
            authorize
                the issuance of “blank check” preferred stock that our board of directors
                could issue to increase the number of outstanding shares to discourage
                a
                takeover attempt;




·
            allow
                shareholders to request that we call a special meeting of our shareholders
                only if the requesting shareholders hold of record at least a majority
                of
                the outstanding shares of common
                stock;




·
            provide
                that the board of directors is expressly authorized to make, alter,
                amend
                or repeal our bylaws; and




19




·
            provide
                that business to be conducted at any special meeting of shareholders
                be
                limited to matters relating to the purposes stated in the applicable
                notice of meeting.




***We
      do not foresee paying cash dividends in the foreseeable
      future.***




We
      have
      not paid cash dividends on our stock and do not plan to pay cash dividends
      on
      our common stock in the foreseeable future.




**Item
      2. Description of Property**




Our
      principal executive office is located in Simi Valley, California, where we
      lease
      a facility with 18,674 square feet of space for approximately $21,863 per month
      under a lease that expires in March 2009. We believe that our space will be
      adequate for our needs and that suitable additional or substitute space in
      the
      future will be available to accommodate the foreseeable expansion of our
      operations. We also lease collocation space for our VoIP equipment in carrier
      class telecommunications facilities in major metropolitan markets throughout
      the
      U.S. and expect to add additional collocation facilities as we expand our VoIP
      network.




**Item
      3. Legal Proceedings**




From
      time
      to time we may be involved in litigation of claims relating to disputes of
      the
      cost and quality of services provided by our network component vendors,
      providers of general and administrative services and employees. We may also
      be
      involved with litigation of claims of alleged infringement, misuse or
      misappropriation of intellectual property rights of third parties. In the normal
      course of business, we may also be subject to claims arising out of our
      operations, and may file collection claims against delinquent customers. As
      of
      the date of this Annual Report, there are no claims or actions pending or
      threatened against us that, if adversely determined, would have a material
      adverse effect on us.




On
      April
      30, 2007, we filed a complaint against KMC Data, LLC (“KMC”) in Federal District
      Court in the State of California asserting that KMC’s tariffed charges are
      unlawful and are not applicable to us. On May 23, 2007 KMC filed counter claims
      attempting to collect on these tariffed charges. There are approximately
      $684,000 of charges that we dispute. We cannot predict the outcome of these
      proceedings at this time. A ruling against us could have a material adverse
      impact on our operating results, financial condition and business performance.




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




No
      matters were submitted during the fourth quarter of the fiscal year covered
      by
      this report to a vote of security holders.




**PART
      II**




**Item
      5. Market for Common Equity and Related Stockholder
      Matters**




**Common
      Stock**




Our
      common stock is listed on the OTC Bulletin Board and trades under the symbol
      “IMTO.” At the close of business on March 31, 2008, there were 59,575,194 issued
      and outstanding common shares which were held by approximately 84 shareholders
      of record, of which 11,535,000 shares
      were free trading. The balance is restricted stock as that term is used in
      Rule
      144 of the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”).




There
      is
      currently minimal trading volume for our securities. During the period from
      October 1 through December 30, 2005, the only period in fiscal year 2005 and
      2006 for which common stock quotations are available due to lack of trading
      volume, our common stock traded at a high of $0.06 and a low of $0.05 per share. The
      following table sets forth certain information with respect to the high and
      low
      market prices of our common stock for the periods indicated in the year ending
      December 31, 2007. These
      quotations, as provided by the OTC Bulletin Board, reflect inter-dealer prices,
      without retail mark-up, mark-down or commission and may not represent actual
      transaction prices between dealers.




Year
            
            Quarter
            
            High
            
            Low2007
            
            
            Fourth
            
            $
            1.55
            
            $
            0.24Third
            
            
            2.10
            
            
            1.50Second
            
            
            2.00
            
            
            1.45First
            
            
            2.60
            
            
            1.37




20




**Dividends**




We
      have
      not declared or paid any cash dividends on our common stock and we do not expect
      to pay any cash dividends in the foreseeable future. The decision whether to
      pay
      cash dividends on our common stock will be made by our Board of Directors,
      in
      their discretion, and will depend on our financial condition, operating results,
      capital requirements and other factors that our Board of Directors considers
      significant. We currently intend to retain our earnings for funding growth
      and,
      therefore, do not expect to pay any dividends in the foreseeable
      future.




**Equity
      Compensation Plan Information**





**Plan
                Category**
            
            **Number of**
              **Securities to be Issued**
              **Upon Exercise of**
              **Outstanding Stock**
              **Options**
            
            **Weighted-Average**
              **Exercise Price of**
              **Outstanding Stock**
              **Options**
            
            **Number of**
              **Securities**
              **Remaining**
              **Available for**
              **Future Issuance**
              **Under Equity**
              **Compensation**
              **Plans**Equity
                Compensation plans not approved by security holders2004
                Stock Option Plan
            
            
            5,406,743
            
            $
            0.14
            
            
            -
                0-2007
                Omnibus Stock and Incentive Plan
            
            
            2,350,000
            
            $
            0.25
            
            
            6,553,410




***2004
      Stock Option Plan***




Our
      Board
      of Directors voted unanimously to cause the Company to assume all stock options
      under the 2004 Stock Plan of InterMetro Delaware (the “2004 Plan”), which were
      issued and outstanding immediately prior to the closing of the Business
      Combination, which closed on or about December 29, 2006. All InterMetro Delaware
      stock options were converted into options to purchase shares of our common
      stock
      as of December 29, 2006. Upon the shareholders ratification of the 2004 Plan
      pursuant to the Schedule 14C Information Statement filed with the Securities
      and
      Exchange Commission declared effective May 10, 2007, we froze any further grants
      of stock options under the 2004 Plan. Any shares reserved for issuance under
      the
      2004 Plan that are not needed for outstanding options granted under that plan
      will be cancelled and returned to treasury shares. The number of outstanding
      stock options and the exercise prices
      were adjusted in the same proportion as the exchange ratio for the outstanding
      common stock in the Business Combination. The exercise periods and other terms
      and conditions remained the same. Accordingly, as of December 31, 2007, we
      had stock options to purchase approximately 5,406,742 shares of our common
      stock
      outstanding under the 2004 plan of which approximately 4,528,724 vest as
      follows: 20% on the date of grant and 1/16 of the balance each quarter
      thereafter until the remaining stock options have vested and approximately
      878,018 of which as follows: 50% on the date of grant and 50% at one year after
      the date of grant. The exchanged stock options are exercisable for a period
      of
      ten years from the date of initial grant by InterMetro at exercise prices
      ranging from $0.0406 to $0.9738.




For
      the
      fiscal year ended December 31, 2006, InterMetro Delaware issued stock options
      to
      purchase 86,765 shares of common stock under the 2004 Plan at an average
      exercise price of $5.37 per share (exchangeable for stock options to purchase
      908,826 shares of our common stock at an average exercise price of $0.513)
      to
      employees and directors. For the fiscal year ended December 31, 2007, InterMetro
      issued no stock options under the 2004 plan and 308,077 options that had
      previously been issued were forfeited as a consequence of an employee departure.
      As of December 31, 2007 none of the Company’s outstanding stock options have
      been exercised.




***Omnibus
      Stock and Incentive Plan***




Effective
      January 19, 2007, our Board of Directors approved the 2007 Omnibus Stock and
      Incentive Plan (the “2007 Plan”) for directors, officers, employees, and
      consultants. Our shareholders ratified the 2007 Plan pursuant to the Schedule
      14C Information Statement filed with the Securities and Exchange Commission
      which was declared effective on May 10, 2007. The 2007 Plan allows any of the
      following types of awards, to be granted alone or in tandem with other awards:
      (1) Stock options which may be either incentive stock options (“ISOs”), which
      are intended to satisfy the requirements of Section 422 of the Internal Revenue
      Code of 1986, as amended, or nonstatutory stock options (“NSOs”), which are not
      intended to meet those requirements; (2) restricted stock which is common stock
      that is subject to restrictions, including a prohibition against transfer and
      a
      substantial risk of forfeiture, until the end of a “restricted period” during
      which the grantee must satisfy certain vesting conditions; (3) restricted stock
      units which entitle the grantee to receive common stock, or cash (or other
      property) based on the value of common stock, after a “restricted period” during
      which the grantee must satisfy certain vesting conditions or the restricted
      stock unit is forfeited; (4) stock appreciation rights which entitle the grantee
      to receive, with respect to a specified number of shares of common stock, any
      increase in the value of the shares from the date the award is granted to the
      date the right is exercised; and (5) other types of equity-based compensation
      which may include shares of common stock granted upon the achievement of
      performance objectives.




21




The
      2007
      Plan will be administered by the Compensation Committee once this committee
      is
      formed, which will at all times be composed of two or more members of the Board
      of Directors who are not our employees or consultants. Any employee or director
      of, or consultant for, us or any of our subsidiaries or other affiliates will
      be
      eligible to receive awards under the 2007 Plan. We have reserved 8,903,410
      shares of common stock for awards under the 2007 Plan. In addition, on each
      anniversary of the 2007 Plan’s effective date on or before the fifth anniversary
      of the effective date, the aggregate number of shares of our common stock
      available for issuance under the 2007 Plan will be increased by the lesser
      of
      (a) 5% of the total number of shares of our common stock outstanding as of
      the
      December 31 immediately preceding the anniversary, (b) 4,713,570 shares, or
      (c)
      a lesser number of shares of our common stock that our board, in its sole
      discretion, determines. In general, shares reserved for awards that lapse or
      are
      canceled will be added back to the pool of shares available for awards under
      the
      2007 Plan.




Awards
      under the 2007 Plan are forfeitable until they become vested. An award will
      become vested only if the vesting conditions set forth in the award agreement
      (as determined by the Compensation Committee) are satisfied. The vesting
      conditions may include performance of services for a specified period,
      achievement of performance objectives, or a combination of both. The
      Compensation Committee also will have authority to provide for accelerated
      vesting upon occurrence of an event such as a change in control. The 2007 Plan
      specifically prohibits the Compensation Committee from repricing any stock
      options or stock appreciation rights. In general, awards under the 2007 Plan
      may
      not be assigned or transferred except by will or the laws of descent and
      distribution. However, the Compensation Committee may allow the transfer of
      NSOs
      to members of a 2007 Plan participant’s immediate family or to a trust,
      partnership, or corporation in which the parties in interest are limited to
      the
      participant and members of the participant’s immediate family.




The
      Board
      of Directors or the Compensation Committee may amend, alter, suspend, or
      terminate the 2007 Plan at any time. If necessary to comply with any applicable
      law (including stock exchange rules), we will first obtain stockholder approval.
      Amendments, alterations, suspensions, and termination of the 2007 Plan generally
      may not impair a participant’s (or a beneficiary’s) rights under an outstanding
      award. However, rights may be impaired if necessary to comply with an applicable
      law or accounting principles (including a change in the law or accounting
      principles) pursuant to a written agreement with the participant. Unless it
      is
      terminated sooner, the 2007 Plan will terminate upon the earlier of June 23,
      2016 or the date all shares available for issuance under the 2007 Plan have
      been
      issued and vested.




For
      the
      fiscal year ended December 31, 2007, InterMetro issued 2,350,000 shares of
      common stock under the 2007 Plan at an average exercise price of $0.25 per
      share
      to employees. As of December 31, 2007, none of the Company’s outstanding stock
      options issued pursuant to the 2007 Plan have been exercised .




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




**Cautionary
      Statements**




This
      Annual Report contains financial projections and other “forward-looking
      statements,” as that term is used in federal securities laws, about our
      financial condition, results of operations and business. These statements
      include, among others: statements concerning the potential for revenues and
      expenses and other matters that are not historical facts. These statements
      may
      be made expressly in this Annual Report. You can find many of these statements
      by looking for words such as “believes,” “expects,” “anticipates,” “estimates,”
or similar expressions used in this Annual Report. These forward-looking
      statements are subject to numerous assumptions, risks and uncertainties that
      may
      cause our actual results to be materially different from any future results
      expressed or implied by us in those statements. The most important facts that
      could prevent us from achieving our stated goals include, but are not limited
      to, the following:




(a)
            volatility
                or decline of our stock price;




(b)
            potential
                fluctuation in quarterly results;




(c)
            our
                failure to earn revenues or
                profits;




(d)
            inadequate
                capital and barriers to raising capital or to obtaining the financing
                needed to implement its business
                plans;




(e)
            changes
                in demand for our products and
                services;




(f)
            rapid
                and significant changes in markets;




(g)
            litigation
                with or legal claims and allegations by outside
                parties;




(h)
            insufficient
                revenues to cover operating costs;




(i)
            the
                possibility we may be unable to manage our
                growth;




(j)
            extensive
                competition;




(k)
            loss
                of members of our senior
                management;




(l)
            our
                dependence on local exchange
                carriers;


22




(m)
            our
                need to effectively integrate businesses we
                acquire;




(n)
            risks
                related to acceptance, changes in, and failure and security of,
                technology; and




(o)
            regulatory
                interpretations and changes.




We
      caution you not to place undue reliance on the statements, which speak only
      as
      of the date of this Annual Report. The cautionary statements contained or
      referred to in this section should be considered in connection with any
      subsequent written or oral forward-looking statements that we or persons acting
      on behalf of us may issue. We do not undertake any obligation to review or
      confirm analysts’ expectations or estimates or to release publicly any revisions
      to any forward-looking statements to reflect events or circumstances after
      the
      date of this Annual Report or to reflect the occurrence of unanticipated
      events.




The
      following discussion should be read in conjunction with our condensed
      consolidated financial statements and notes to those statements.




**Background**




InterMetro
      Communications, Inc. (hereinafter, “we,” “us,”  “InterMetro” or the
“Company”) is a Nevada corporation which through its wholly owned subsidiary,
      InterMetro Communications, Inc. (Delaware) (hereinafter, “InterMetro Delaware”),
      is engaged in the business of providing voice over Internet Protocol (“VoIP”)
      communications services. On December 29, 2006, InterMetro, a public “shell”
company, completed a business combination with InterMetro Delaware whereby
      InterMetro Delaware became our wholly-owned subsidiary. For financial reporting
      purposes, InterMetro Delaware was considered the accounting acquirer in the
      business combination. Accordingly, the historical financial statements presented
      and the discussion of financial condition and results of operations prior to
      December 29, 2006 below are those of InterMetro Delaware and do not include
      the Company’s historical financial results. All costs associated with the
      business combination were expensed as incurred.




**General**





We
      have
      built a national, private, proprietary voice-over Internet Protocol, or VoIP,
      network infrastructure offering an alternative to traditional long distance
      network providers. We use our network infrastructure to deliver voice calling
      services to traditional long distance carriers, broadband phone companies,
      VoIP
      service providers, wireless providers, other communications companies and end
      users. Our VoIP network utilizes proprietary software, configurations and
      processes, advanced Internet Protocol, or IP, switching equipment and
      fiber-optic lines to deliver carrier-quality VoIP services that can be
      substituted transparently for traditional long distance services. We believe
      VoIP technology is generally more cost efficient than the circuit-based
      technologies predominantly used in existing long distance networks and is easier
      to integrate with enhanced IP communications services such as web-enabled phone
      call dialing, unified messaging and video conferencing services.




We
      focus
      on providing the national transport component of voice services over our private
      VoIP infrastructure. This entails connecting phone calls of carriers or end
      users, such as wireless subscribers, residential customers and broadband phone
      users, in one metropolitan market to carriers or end users in a second
      metropolitan market by carrying them over our VoIP infrastructure. We compress
      and dynamically route the phone calls on our network allowing us to carry up
      to
      approximately eight times the number of calls carried by a traditional long
      distance company over an equivalent amount of bandwidth. In addition, we believe
      our VoIP equipment costs significantly less than traditional long distance
      equipment and is less expensive to operate and maintain. Our proprietary network
      configuration enables us to quickly, without modifying the existing network,
      add
      equipment that increases our geographic coverage and calling
      capacity.




During
      2006, we enhanced our network’s functionality by implementing Signaling System
      7, or SS-7, technology. SS-7 allows access to customers of the local telephone
      companies, as well as customers of wireless carriers. SS-7 is the established
      industry standard for reliable call completion, and it also provides
      interoperability between our VoIP infrastructure and traditional telephone
      company networks.




For
      the
      quarter ended September 30, 2005, which was the last quarter prior to the
      initiation of our SS-7 network expansion, we had gross margin of approximately
      30.0%. As part of the network expansion which began in December 2005, we
      began purchasing additional network capacity on a fixed-cost and monthly
      recurring basis. These costs, along with other expenses related to the
      expansion, such as certain nonrecurring costs for installing these services,
      are
      included in our total network expenses for the year ended December 31,
      2006. However, we did not begin selling services utilizing the network expansion
      until the quarter ended June 30, 2006. The increase in network costs
      without a corresponding increase in revenues was a significant factor in
      reducing our gross margin to (8.9)% for the year ended December 31, 2006.
      Correspondingly, an increase in the average utilization of our expanded network
      during the year ended December 31, 2007 contributed to an improvement of gross
      margin to (3.4)% for the year ended December 31, 2007 and positive gross margin
      of 7.4% for the quarter ended December 31, 2007. While we expect to continue to
      add to capacity, as of December 31, 2007, the SS-7 network expansion was a
      fully
      operating and revenue generating component of our VoIP infrastructure. We
      believe that increasing voice minutes utilizing our network expansion will
      ultimately generate gross margins approximating those generated prior to the
      network expansion. A key aspect of our current business strategy is to focus
      on
      sales to increase these voice minutes.




23




We
      currently estimate that this expansion will allow us to provide approximately
      10.2 billion minutes of additional voice services per year on our VoIP
      infrastructure, based on 60% utilization of the equipment we have connected
      via
      dedicated circuits to switches operated by local exchange carriers.




**Overview**




*History* .
      InterMetro Delaware was founded as a California corporation in July 2003
      and began generating revenue in March 2004. Since that time, we have
      increased our revenue to approximately $22.7 million for the year ended
      December 31, 2007 which includes approximately $7.8 million of revenue
      from our March 2006 acquisition.





We
      increased our employee base from 14 employees at December 31, 2003 to 41
      employees as of December 31, 2007. We expect our headcount to continue to
      grow as our business expands. Our corporate headquarters is located in Simi
      Valley, California. We lease collocation space for our VoIP equipment in
      carrier-class telecommunications facilities in metropolitan markets throughout
      the U.S. and expect to add additional collocation facilities as we expand our
      VoIP network.





**Trends
      in Our Industry and Business**





A
      number
      of trends in our industry and business could have a significant effect on our
      operations and our financial results. These trends include:




*Increased
      competition for end users of voice services* . We
      believe there are an increasing number of companies competing for the end users
      of voice services that have traditionally been serviced by the large incumbent
      carriers. The competition has come from wireless carriers, competitive local
      exchange carriers, or CLECs, and interexchange carriers, or IXCs, and more
      recently from broadband VoIP providers, including cable companies and DSL
      companies offering broadband VoIP services over their own IP networks. All
      of
      these companies provide national calling capabilities as part of their service
      offerings, however, most of them do not operate complete national network
      infrastructures. These companies previously purchased national transport
      services exclusively from traditional carriers, but are increasingly purchasing
      transport services from us.




*Merger
      and acquisition activities of traditional long distance
      carriers* .
      Recently, the three largest operators of traditional long distance service
      networks were acquired by or have merged with several of the largest local
      wireline and wireless telecommunications companies. AT&T Corp. was acquired
      by SBC Communications Inc., MCI, Inc. was acquired by Verizon Communications,
      Inc. and Sprint Corporation and Nextel Communications, Inc. engaged in a merger
      transaction. While we believe it is too early to tell what effects these
      transactions will have on the market for national voice transport services,
      we
      may be negatively affected by these events if these companies increase their
      end
      user bases, which could potentially decrease the amount of services purchased
      by
      our carrier customers. In addition, these companies have greater financial
      and
      personnel resources and greater name recognition. However, we could potentially
      benefit from the continued consolidation in the industry, which has resulted
      in
      fewer competitors.




*Regulation* . Our
      business has developed in an environment largely free from regulation. However,
      the Federal Communications Commission (“FCC”) and many state regulatory agencies
      have begun to examine how VoIP services could be regulated, and a number of
      initiatives could have an impact on our business. These regulatory initiatives
      include, but are not limited to, proposed reforms for universal service, the
      intercarrier compensation system, FCC rulemaking regarding emergency calling
      services related to broadband IP devices, and the assertion of state regulatory
      authority over us. Complying with regulatory developments may impact our
      business by increasing our operating expenses, including legal fees, requiring
      us to make significant capital expenditures or increasing the taxes and
      regulatory fees applicable to our services. One of the benefits of our
      implementation of SS-7 technology is to enable us to purchase facilities from
      incumbent local exchange carriers under switched access tariffs. By purchasing
      these traditional access services, we help mitigate the risk of potential new
      regulation related to VoIP.




**Our
      Business Model**




Historically,
      we have been successful in implementing our business plan through the expansion
      of our VoIP infrastructure. Since our inception, we have grown our customer
      base, including the customers from our recent acquisition, to include over
      200
      customers, including several large publicly-traded telecommunications companies
      and retail distribution partners. In connection with the addition of customers
      and the provision of related voice services, we have expanded our national
      VoIP
      infrastructure.




In
      2006,
      we also began to dedicate significant resources to acquisition growth,
      completing our first acquisition in March 2006. We acquired ATI to add
      minutes to our network and to access new sales channels and customers. We plan
      to grow our business through direct sales activities and potentially through
      acquisitions.




24




*Revenue* . We
      generate revenue primarily from the sale of voice minutes that are transported
      across our VoIP infrastructure. In addition, ATI, as a reseller, generates
      revenues from the sale of voice minutes that are currently transported across
      other telecom service providers’ networks. However, we have migrated some of
      these revenues on to our VoIP infrastructure, and intend to migrate a
      significant portion of ATI’s revenues in the future. We negotiate rates per
      minute with our carrier customers on a case-by-case basis. The voice minutes
      that we sell through our retail distribution partners are typically priced
      at
      per minute rates, are packaged as calling cards and are competitive with
      traditional calling cards and prepaid services. Our carrier customer services
      agreements and our retail distribution partner agreements are typically one
      year
      in length with automatic renewals. We generally bill our customers on a weekly
      or monthly basis with either a prepaid balance required at the beginning of
      the
      week or month of service delivery or with net terms determined by the customers’
creditworthiness. Factors that affect our ability to increase revenue
      include:


·
                Changes
                    in the average rate per minute that we charge our
                    customers.


Our
      voice
      services are sold on a price per minute basis. The rate per minute for each
      customer varies based on several factors, including volume of voice services
      purchased, a customer’s creditworthiness, and, increasingly, use of our SS-7
      based services, which are priced higher than our other voice transport
      services.


·
                  Increasing
                        the net number of customers utilizing our VoIP
                        services.


Our
      ability to increase revenue is primarily based on the number of carrier
      customers and retail distribution partners that we are able to attract and
      retain, as revenue is generated on a recurring basis from our customer base.
      We
      expect increases in our customer base primarily through the expansion of our
      direct sales force and our marketing programs. Our customer retention efforts
      are primarily based on providing high quality voice services and superior
      customer service. We expect that the addition of SS-7 based services to our
      network will significantly increase the universe of potential customers for
      our
      services because many customers will only connect to a voice service provider
      through SS-7 based interconnections.


·
                  Increasing
                          the average revenue we generate per
                          customer.


We
      increase the revenue generated from existing customers by expanding the number
      of geographic markets connected to our VoIP infrastructure. Also, we are
      typically one of several providers of voice transport services for our larger
      customers, and can gain a greater share of a customer’s revenue by consistently
      providing high quality voice service.


·
                    Acquisitions.


We
      expect
      to expand our revenue base through the acquisition of other voice service
      providers. We plan to continue to acquire businesses whose primary cost
      component is voice services or whose technologies expand or enhance our VoIP
      service offerings.




We
      expect
      that our revenue will increase in the future primarily through the addition
      of
      new customers gained from our direct sales and marketing activities and from
      acquisitions.




*Network
      Costs* . Our
      network, or operating, costs are primarily comprised of fixed cost and usage
      based network components. In addition, ATI incurs usage based costs from its
      underlying telecom service providers. We generally pay our fixed network
      component providers at the beginning or end of the month in which the service
      is
      provided and we pay for usage based components on a weekly or monthly basis
      after the delivery of services. Some of our vendors require a prepayment or
      a
      deposit based on recurring monthly expenditures or anticipated usage volumes.
      Our fixed network costs include:


·
                    SS-7
                            based interconnection
                            costs.


During
      the first nine months of 2006, we added a significant amount of capacity,
      measured by the number of simultaneous phone calls our VoIP infrastructure
      can
      connect in a geographic market, by connecting directly to local phone companies
      through SS-7 based interconnections purchased on a monthly recurring fixed
      cost
      basis. As we expand our network capacity and expand our network to new
      geographic markets, SS-7 based interconnection capacity will be the primary
      component of our fixed network costs. Until we are able to increase revenues
      based on our SS-7 services, these fixed costs significantly reduce the gross
      profit earned on our revenue.


·
                    Competitive
                            local exchange carrier
                            costs.


The
      interconnections between our VoIP infrastructure and our customers’ end users,
      as well as our retail customers, have historically been purchased on a monthly
      recurring fixed cost basis from competitive local exchange carriers, or CLECs.
      Historically, CLEC interconnections had been our largest component of fixed
      network costs. During 2006, we transitioned our business by replacing most
      of
      our CLEC interconnections with SS-7 based interconnections. However, until
      the
      quarter ended September 30, 2006, we maintained a portion of these services
      to provide a transition for existing customers who purchase our SS-7 services.
      Having both the CLEC and SS-7 services running simultaneously significantly
      increased our network costs as a percentage of revenue and correspondingly
      decreased our gross margin during the year ended December 31,
      2006.


25
  ·
                    Other
                            fixed costs.


Other
      significant fixed costs components of our VoIP infrastructure include private
      fiber-optic circuits and private managed IP bandwidth that interconnect our
      geographic markets, monthly leasing costs for the collocation space used to
      house our networking equipment in various geographic markets, local loop
      circuits that are purchased to connect our VoIP infrastructure to our customers
      and usage based vendors within each geographic market. Other fixed network
      costs
      include depreciation expense on our network equipment and monthly subscription
      fees paid to various network administrative services.




The
      usage-based cost components of our network include:


·
                    Off-net
                            costs.


In
      order
      to provide services to our customers in geographic areas where we do not have
      existing or sufficient VoIP infrastructure capacity, we purchase transport
      services from traditional long distance providers and resellers, as well as
      from
      other VoIP infrastructure companies. We refer to these costs as “off-net” costs.
      Off-net costs are billed on a per minute basis with rates that vary
      significantly based on the particular geographic area to which a call is being
      connected.


·
                    SS-7
                            based interconnections with local
                            carriers.


The
      SS-7
      based interconnection services we began purchasing during the first quarter
      of
      2006, and those we intend to purchase for the provision of a majority of our
      future services, include a usage based, per minute cost component. The rates
      per
      minute for this usage based component are significantly lower than the per
      minute rates for off-net services. The usage based costs for SS-7 services
      are
      expected to be the largest cost component of our network as we grow revenue
      utilizing SS-7 technology.




Our
      fixed-cost network components generally do not experience significant price
      fluctuations. Factors that affect these network components include:


·
                    Efficient
                            utilization of fixed-cost network
                            components.


Our
      customers utilize our services in identifiable fixed daily and weekly patterns.
      Customer usage patterns are characterized by relatively short periods of high
      volume usage, leaving a significant amount of time during each day where the
      network components remain idle.




Our
      ability to attract customers with different traffic patterns, such as customers
      who cater to residential calling services, which typically spike during evening
      hours, with customers who sell enterprise services primarily for use during
      business hours, increases the overall utilization of our fixed-cost network
      components. This decreases our overall cost of operations as a percentage of
      revenues.


·
                    Strategic
                            purchase of fixed-cost network
                            components.


Our
      ability to purchase the appropriate amount of fixed-cost network capacity to
      (1)
      adequately accommodate periods of higher call volume from existing customers,
      (2) anticipate future revenue growth attributed to new customers, and (3) expand
      services for new and existing customers in new geographic markets is a key
      factor in managing the percentage of fixed costs we incur as a percentage of
      revenue.




From
      time
      to time, we also make strategic decisions to add capacity with newly deployed
      technologies, such as the SS-7 based services, which require purchasing a large
      amount of network capacity in many geographic markets prior to the initiation
      of
      customer revenue.




We
      expect
      that both our fixed-cost and usage-based network costs will increase in the
      future primarily due to the expansion of our VoIP infrastructure and use of
      off-net providers related to the expected growth in our revenues.




Our
      usage-based network components costs are affected by:


26
  ·
                    Fluctuations
                            in per minute rates of off-net service
                            providers.


Increasing
      the volume of services we purchase from our vendors typically lowers our average
      off-net rate per minute, based on volume discounts. Another factor in the
      determination of our average rate per minute is the mix of voice services we
      use
      by carrier type, with large fluctuations based on the carrier type of the end
      user which can be local exchange carriers, wireless providers or other voice
      service providers.


·
                    Sales
                            mix of our VoIP infrastructure capacity versus off-net
                            services.


Our
      ability to sell services connecting our on-net geographic markets, rather than
      off-net areas, affects the volume of usage based off-net services we purchase
      as
      a percentage of revenue.


·
                    Acquisitions
                            of telecommunications
                            businesses.


We
      expect
      to continue to make acquisitions of telecommunications companies. As we complete
      these acquisitions and add an acquired company’s traffic and revenue to our
      operations, we may incur increased usage-based network costs. These increased
      costs will come from traffic that remains with the acquired company’s
      pre-existing carrier and from any of the acquired company’s traffic that we
      migrate to our SS-7 services or our off-net carriers. We may also experience
      decreases in usage based charges for traffic of the acquired company that we
      migrate to our network. The migration of traffic onto our network requires
      network construction to the acquired company’s customer base, which may take
      several months or longer to complete.




*Sales
      and Marketing Expense* .
      Sales
      and marketing expenses include salaries, sales commissions, benefits, travel
      and
      related expenses for our direct sales force, marketing and sales support
      functions. Our sales and marketing expenses also include payments to our agents
      that source carrier customers and retail distribution partners. Agents are
      primarily paid commissions based on a percentage of the revenues that their
      customer relationships generate. In addition, from time to time we may cover
      a
      portion or all of the expenses related to printing physical cards and related
      posters and other marketing collateral. All marketing costs associated with
      increasing our retail consumer user base are expensed in the period in which
      they are incurred. We expect that our sales and marketing expenses will increase
      in the future primarily due to increases in our direct sales force.




*General
      and Administrative Expense* .
      General
      and administrative expenses include salaries, benefits and expenses for our
      executive, finance, legal and human resources personnel. In addition, general
      and administrative expenses include fees for professional services, occupancy
      costs and our insurance costs, and depreciation expense on our non-network
      depreciable assets. Our general and administrative expenses also include
      stock-based compensation on option grants to our employees and options and
      warrant grants to non-employees for goods and services received.




**Results
      of Operations**




The
      following table sets forth, for the periods indicated, the results of our
      operations expressed as a percentage of revenue:





**Year Ended December 31,****2007**
            
            **2006**
            
            **2005**Net
                revenues
            
            
            100
            %
            
            100
            %
            
            100
            %Network
                costs
            
            
            103
            
            
            109
            
            
            70Gross
                profit
            
            
            (3
            )
            
            (9
            )
            
            30Operating
                expenses:Sales
                and marketing
            
            
            9
            
            
            10
            
            
            6General
                and administrative
            
            
            35
            
            
            41
            
            
            28Total
                operating
                expenses
            
            
            44
            
            
            51
            
            
            34Operating
                loss
            
            
            (47
            )
            
            (60
            )
            
            (4
            )Interest
                expense
            
            
            2
            
            
            9
            
            
            7Loss
                on liability of options and warrants
            
            
            25
            
            
            —
            
            
            —Loss
                before provision for income tax
            
            
            (74
            )
            
            (69
            )
            
            (11
            )Provision
                for income taxes
            
            
            (-
            )
            
            (-
            )
            
            (-
            )Net
                loss
            
            
            (74
            )%
            
            (69
            )%
            
            (11
            )%




27




***Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006***




*Net
      Revenues* .
      Net
      revenues increased
      $2.6 million, or 12.9%, to $22.7 million for the year ended December 31, 2007
      from $20.1 million for the year ended December 31, 2006. One component of the
      increase in net revenues was the addition of customers acquired through the
      ATI
      acquisition. The acquisition occurred in March 2006 (see Note 2 to the
      Consolidated Financial Statements) and, consequently, the addition of the ATI
      customers was a factor in the increase in net revenues for the first three
      months of the year ended December 31, 2007. On this basis, the addition of
      the
      ATI customers represented approximately a $2.1 million increase in net revenues.
      Without the increase attributable to the ATI acquisition, revenues would have
      increased by approximately $500,000, or 2.5%, from $20.1 million for the year
      ended December 31, 2006 to $20.6 million for the year ended December 31, 2007.
      We have been acquiring new customers and increasing revenues to existing
      customers which contributed approximately $1.2 million and $3.2 million,
      respectively, to our revenue increase in the year ended December 31, 2007.
      These
      increases were offset, however, by a $1.4 million reduction in revenues
      attributable to the loss of two customers, one due to an acquisition and a
      $2.6
      million reduction in revenues from two existing customers.




*Network
      Costs* .
      Network
      costs increased $1.6 million, or 7.1%, to $23.5 million for the year ended
      December 31, 2007 from $21.9 million for the year ended December 31, 2006.
      The
      increase in cost is primarily related to both increased usage based cost and
      a
      full year of fixed costs in our SS-7 technology based network. These costs
      were
      offset by an approximate $1.9 million reduction in the use of competitive local
      exchange companies replaced by SS-7 technology and an approximate $1.2 million
      reduction in costs for from off-net vendors, primarily related to improved
      per
      minute pricing.




Gross
      margin increased to (3.4)% for the year ended December 31, 2007 from (8.9)% for
      the year ended December 31, 2006. We expect gross margin to continue to improve
      as we more fully utilize capacity in our SS-7 technology based network.
 The SS-7 based interconnection services we began purchasing during the
      first quarter of 2006, and those we intend to purchase for the provision of
      a
      majority of our future services, include a usage based, per minute cost
      component. The rates per minute for this usage based component are significantly
      lower than the per minute rates for off-net services. The usage based costs
      for
      SS-7 services are expected to be the largest cost component of our network
      as we
      grow revenue utilizing SS-7 technology. In addition, the costs related to
      building out and maintaining a robust telecommunications infrastructure have
      contributed to negative gross margins and we are also beginning to see the
      positive results of increasing voice minutes on our gross margin.





Depreciation
      expense included within network costs was $975,000 (4.3% of net revenues) for
      the year ended December 31, 2007 as compared to $734,000 (3.7% of net revenues)
      for the year ended December 31,2006.




*Sales
      and Marketing* .
      Sales
      and marketing expenses decreased $20,000, or 1.0%, and was approximately $2.1
      million for the years ended December 31, 2007 and 2006. Sales and marketing
      expenses as a percentage of net revenues were 9.1% and 10.4% for the years
      ended
      December 31, 2007 and 2006, respectively. The decrease in sales and marketing
      expenses for the year ended December 31, 2007 includes decreases in expenditures
      for advertising, consulting and outsourced customer services, promotions and
      trade shows partially offset by increased salaries and wages for additional
      sales staff and by approximately $211,000 of sales and marketing expenses added
      through the acquisition of ATI, primarily for commissions paid to outside sales
      agents, which is ATI’s primary selling cost.




*General
      and Administrative* .
      General
      and administrative expenses decreased $262,000, or 3.2%, to $8.0 million for
      the
      year ended December 31, 2007 from $8.3 million for the year ended December
      31,
      2006. General and administrative expenses as a percentage of net revenues were
      35.2% and 41.0% for the years ended December 31, 2007 and 2006, respectively.
      General and administrative expenses included stock-based charges related to
      warrants and stock options of $1.5 million and $1.7 million for the years ended
      December 31, 2007 and 2006, respectively. In addition, the prior fiscal year
      ended December 31, 2006 included non-recurring costs related to the Company’s
      withdrawn IPO of $2.2 million. Without this decrease in stock based charges
      in
      the current fiscal year and adjusting for the non-recurring IPO cost, general
      and administrative expenses would have increased approximately $2.2 million
      in
      the current year ended December 31, 2007.The increase in general and
      administrative expenses on this basis for year ended December 31, 2007 is
      primarily attributable to the costs related to operating as a publicly traded
      company which include increased professional services expenses, increased
      insurance costs and increased payroll from higher headcount. Professional
      services expenses, insurance costs and payroll related expenses increased by
      approximately $1.4 million, $286,000 and $443,000, respectively, in the year
      ended December 31, 2007 as compared to the year ended December 31, 2006. In
      addition, there was an increase in general and administrative expense relate
      to
      the acquisition of ATI of approximately $176,000.





*Option
      and Warrant Liability.* In the
      year ended December 31, 2007, we incurred a loss on option and warrant liability
      of $5.6 million. This loss represents the change in estimated value of our
      liability for options granted under our 2004 Plan that are exercisable but
      for
      which we did not have adequate unissued authorized common stock. The value
      of
      this estimated liability was $5.4 million and $11.0 million at December 31,
      2006 and March 31, 2007, respectively. This liability was created on December
      29, 2006 as a result of the business combination between InterMetro and Lucy’s
      Cafe and therefore had no effect on the year ended December 31, 2006. Pursuant
      to the Company’s May 2007 filing and subsequent effectiveness of the definitive
      Schedule 14C Information Statement and the increase in authorized shares of
      common stock to 150,000,000 as described in Note 8 to the Consolidated
      Financial Statements, there is no remaining liability for these options at
      December 31, 2007.




28




*Interest
      Expense, net* .
      Interest expense, net decreased $1.3 million, or 74.3%, to $459,000 for the
      year
      ended December 31, 2007 from $1.8 million for the year ended December 31, 2006.
      The decrease in interest expense is primarily attributable to the retirement
      of
      most of the Company’s long-term liabilities and to a one-time reversal of
      estimated interest expense from prior periods in the amount of
      $90,000.




***Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005***




*Net
      Revenues* .
      Net
      revenues increased $9.5 million, or 90.1%, to $20.1 million for the year ended
      December 31, 2006 from $10.6 million for the year ended December 31, 2005.
      The increase in net revenues was primarily attributable to growth in net
      revenues from carrier customers. Approximately $10.3 million, or 51.3%, of
      our
      2006 revenues came from new customers including new customers added through
      our
      direct sales force, customers acquired through the ATI acquisition and the
      ramp
      up of revenues generated through retail calling card sales, which represented
      $1.3 million, $7.0 million and $2.0 million of the increase, respectively.
      New
      customer revenue growth was offset by a decrease in customer revenues from
      customers acquired prior to January 1, 2006 of $(787,000), which included a
      decrease of $(1.8) million from the loss of three customers that encountered
      financial difficulties while all other existing customer revenues increased
      by
      $1.0 million, primarily from increased usage of SS-7 network technology.
      Revenues for the year ended December 31, 2006 were negatively impacted by one
      time credits and marketing discounts given in the quarter ended December 31,
      2006 of $(239,000) related to the ramp up of revenue on SS-7 technology. The
      SS-7 technology was deployed in 2006, so there was no impact from these items
      for the year ended December 31, 2005.




*Network
      Costs* .
      Network
      costs increased $14.5 million, or 197.8%, to $21.9 million for the year ended
      December 31, 2006 from $7.4 million for the year ended December 31, 2005,
      primarily due to network expansion related to the addition of SS-7 technology,
      off-net costs incurred for the customers acquired through the ATI acquisition,
      increased network traffic sent to international destinations and increased
      use
      of third party networks to terminate calls, which increased network costs by
      $4.5 million, $6.0 million, $1.2 million and $1.2 million, respectively. The
      increase in network costs from SS-7 technology included approximately $1.9
      million for monthly fixed cost network components and $2.6 million for per
      minute and per call variable costs paid to local exchange carriers. The increase
      in international and third party domestic network costs was due in part to
      increased revenue from retail calling card services.




Network
      costs in 2006 included $1.0 million for usage based charges from competitive
      local exchange carriers who applied these charges primarily to offset access
      fees charged to them by the incumbent local exchange carriers. During 2006,
      incumbent carriers began to aggressively pursue collection of per minute access
      fees from competitive local exchange carriers for calls that left the local
      market through competitive local exchange carrier facilities. The ability for
      incumbent local exchange carriers to apply access fees to these types of calls
      has historically been debated in front of the FCC. Approximately $889,000 of
      these usage based charges were incurred in the six months ended June 30, 2006,
      as we significantly reduced our purchase of competitive local exchange carrier
      services in the second-half of 2006 due to increased usage of SS-7 based network components.
      The
      usage based charges related to this issue were $30,000 for the year ended
      December 31, 2005.




Gross
      margin decreased to (8.9)% for the year ended December 31, 2006 from 30.5%
      for
      the year ended December 31, 2005. This decrease in gross margin was attributable
      to the deployment of SS-7 based technology in the network which was
      significantly underutilized during 2006, payments during 2006 for unutilized
      competitive local carrier network facilities that were purchased under committed
      term agreements, substantially all of which have been eliminated by year end,
      and increased off-net based revenue primarily from the acquisition of ATI which
      had a 14.7% gross margin for the year ended December 31, 2006.




Depreciation
      expense included within network costs for year ended December 31, 2006 was
      $734,000 (3.7% of net revenues) as compared to $558,000 (5.3% of net revenues)
      for the year ended December 31, 2005.




*Sales
      and Marketing* .
      Sales
      and marketing expenses increased $1.4 million, or 213.4%, to $2.1 million for
      the year ended December 31, 2006 from $668,000 for the year ended December
      31,
      2005. Sales and marketing expenses as a percentage of net revenues were 10.4%
      and 6.3% for the years ended December 31, 2006 and 2005, respectively. The
      increase in sales and marketing expenses for the year ended December 31, 2006
      principally related to $726,000 of sales and marketing expenses added through
      the acquisition of ATI, primarily for commissions paid to outside sales agents,
      which is ATI’s primary selling cost. Additionally, sales and marketing expenses
      increased due to increased retail calling card revenue, increased usage of
      print
      advertising and increased presence at industry trade shows, which increased
      sales and marketing expenses by $283,000, $97,000 and $77,000, respectively.
      Sales and marketing expenses included stock-based charges related to warrants
      and stock options of $97,000 for the year ended December 31, 2006.




*General
      and Administrative* .
      General
      and administrative expenses increased $5.3 million, or 175.0% to $8.3 million
      for the year ended December 31, 2006 from $3.0 million for the year ended
      December 31, 2005. General and administrative expenses as a percentage of net
      revenues were 41.0% and 28.4% for the years ended December 31, 2006 and
      2005, respectively. General and administrative expenses included stock-based
      charges related to warrants and stock options of $1.7 million and $443,000
      for
      the years ended December 31, 2006 and 2005, respectively, and included $2.2
      million for the one-time write off of expenses related to InterMetro’s initial
      public offering, which was withdrawn prior to the Business Combination with
      Lucy’s Cafe, for the year ended December 31, 2006. General and administrative
      expenses before stock-based charges and initial public offering expenses
      increased $1.8 million, or 69.0%, to $4.3 million for the year ended December
      31, 2006 from $2.6 million for the year ended December 31, 2005. General and
      administrative expenses before stock-based charges and initial public offering
      expenses as a percent of net revenues were 21.5% and 24.2% for the years ended
      December 31, 2006 and 2007, respectively. The increase in general and
      administrative expenses before stock-based charges and initial public offering
      expenses for the year ended December 31, 2006 principally related to increased
      legal expenses, increased payroll from higher headcount, increased general
      and
      administrative expenses from the acquisition of ATI, primarily payroll, and
      a
      one-time bad debt charge in the second quarter for a former ATI customer, which
      accounted for $159,000, $556,000, $572,000 and $125,000 of the increase,
      respectively.




29




*Interest
      Expense, net* .
      Interest expense, net increased $1.1 million, or 168.5%, to $1.8 million for
      the
      year ended December 31, 2006 from $665,000 for the year ended December 31,
      2005.
      Approximately $906,000 of the increase in interest expense was attributable
      to
      stock-based charges for the amortization of debt discount and the issuance
      of
      warrants in connection with our January 2006 Series A Notes financing and the
      issuance of warrants in connection with our December 2006 credit facility
      financing. Interest expense for the year ended December 31, 2006 also
      included interest related to equipment financing agreements and leases, interest
      and fees for bridge notes, and interest related to our Series A Notes of
      $195,000, $221,000 and $317,000, respectively. The Series A Notes were exchanged
      for shares of common stock in December 2006 and all outstanding principal,
      interest on fees payable on the December 2006 credit facility were repaid in
      January 2007.




**Liquidity
      and Capital Resources**




At
      December 31, 2007 we had $277,000 in cash as compared to $151,000 in cash at
      December 31, 2006.





The
      Company’s working capital position, defined as current assets less current
      liabilities, has historically been negative and was negative $12.0 million
      at
      December 31, 2007 as compared to negative $8.6 million at December 31, 2006.
      Included in current liabilities at December 31, 2007 was $1.1 million due under
      strategic equipment agreements used to finance equipment purchases. The Company
      has agreements with vendors that allow for significantly longer terms than
      the
      terms for payment offered to the majority of its customers. This difference
      in
      payment terms has been a significant factor in the Company reporting negative
      working capital as part of its ongoing operations, and the Company expects
      this
      difference to continue.





*Significant
      changes in cash flows for December 31, 2007 as compared to December 31,
      2006:*




Net
        cash
        used in operating activities was $9.3 million for the year ended December
        31,
        2007 as compared to net cash used in operating activities of $3.4 million
        for
        the year ended December 31, 2006. The more significant changes that increased
        the use of cash from operating activities were our net loss for the year
        ended
        December 31, 2007 of approximately $16.9 million and a $2.3 million reduction
        in
        accrued expenses principally related to payments made to our professional
        service providers for costs primarily attributable to our initial public
        offering which was subsequently withdrawn in December 2006. Partially offsetting
        these uses of funds was the add-back of a $5.6 million non-cash loss on options
        and warrants as well as non-cash expense for stock based compensation of
        $1.6
        million and depreciation of $1.0 million.




Net
      cash
      used in investing activities for the year ended December 31, 2007 was $77,000
      attributable to the purchase of network-related equipment as compared to $21,000
      for the year ended December 31, 2006 which included $51,000 of fixed asset
      purchases partially offset by a decrease in restricted cash of
      $30,000.




Net
        cash
        provided by financing activities for the year ended December 31, 2007 was
        $9.5
        million as compared to cash provided by financing activities of $3.0 million
        for
        the year ended December 31, 2006. Net cash provided for the year ended December
        31, 2007 included the receipt of approximately $10.2 million in gross proceeds
        from our sale of common stock in December 2006 (proceeds were held in escrow
        at
        December  31, 2006) and $600,000 in proceeds from bridge financing during
        the fourth quarter of fiscal 2007. These inflows were partially offset by
        the
        repayment of our related party credit facilities of $1.1 million, repayment
        of
        amount due to a related party of $195,000 and principal payments of capital
        lease obligations of $205,000. The most significant components of net cash
        provided by financing activities for the year ended December 31, 2006 were
        $1.1
        million proceeds from related party credit facility, approximately $1.5 million
        from the issuance of Series A convertible notes and Series B preferred stock
        and
        $459,000 of cash acquired in the ATI acquisition.




*Significant
      changes in cash flows for December 31, 2006 as compared to December 31, 2005
      are
      as follows:*




Net
      cash
      used in operating activities was $3.4 million for the year ended December 31,
      2006 as compared to net cash provided by operating activities of $1.3 million
      for the year ended December 31, 2005. The more significant changes related
      to
      our net loss for the year ended December 31, 2006 of approximately $13.9
      million, depreciation and other non-cash charges of approximately $3.7 million,
      increases in our deferred revenues of $876,000, accounts payable of $5.0 million
      and accrued expenses of $975,000. The increase in our accounts payable and
      accrued expenses principally related to increases in amounts due to our
      professional services of approximately $1.8 million (principally, costs incurred in connection with our initial public offering
      which was subsequently withdrawn in December 2006) and amounts due under our
      strategic agreements of $586,000 and $1.8 million relating to our acquisition
      of
      ATI.




Net
      cash
      used in investing activities for the year ended December 31, 2006 was $21,000
      as
      compared to $821,000 for the year ended December 31, 2005 and was attributable
      to purchases of property and equipment offset by the return of the restricted
      cash securing our line of credit facility which was repaid in September
      2006.




30




Net
      cash
      provided by financing activities for the year ended December 31, 2006 was $3.0
      million as compared to cash used in financing activities of $211,000 for the
      year ended December 31, 2005. Net cash for the year ended December 31, 2006
      included the net proceeds from the sale of our Series A convertible promissory
      notes of $565,000, the net proceeds from the sale of our preferred stock of
      $1.0
      million and cash of $459,000 held by ATI when we acquired it offset by the
      repayment of principal of our capital lease obligations of $223,000 during
      such
      period. In addition, we received proceeds of $1.1 million from borrowings under
      credit facilities with related parties.




The
      Company has incurred net losses of $16.9 million and $13.9 million and negative
      cash flow from operations of $9.3 million and $3.4 million for the years ended
      December 31, 2007 and 2006, respectively. As of December 31, 2007, the Company
      has a working capital deficit of $12.0 million. The Company plans to use its
      current cash balance and capital raised from outside sources to fund future
      operating losses until the Company has grown revenues so that cash flows from
      operating activities are sufficient to sustain operations without the need
      for
      outside capital. Also, the Company will need additional cash from outside
      financing sources to continue operations and achieve its growth strategies,
      including cash for use in the completion of potential acquisitions.




In
      November and December 2007, the Company received $600,000 and in January through
      March 2008, the Company received an additional $770,000 pursuant to the sale
      of
      secured notes with individual investors for general working capital. The terms
      of the secured notes are 18 months maturity with an interest rate of 10% per
      annum due at the maturity date.  The secured notes are secured by
      substantially all of the assets of the Company.  The Company is also
      required to pay an origination fee of 3.00% and documentation fee of 2.50%
      of
      the principal amount of the secured notes at the maturity date.  Prepayment
      of the credit facilities requires payment of interest that would have accrued
      through maturity, discounted by 20%, in addition to principal, accrued interest
      and fees. The Company can continue to sell similar secured notes up to a maximum
      offering of $3 million. Such additional financing is necessary in order to
      fund
      ongoing operations until such time as the Company can achieve positive cash
      flow
      from operations. The Company is in the process of securing this required
      additional financing, h owever,
      there can be no assurance that we will be successful in completing the financing
      required to fund our ongoing operations or that we will continue to expand
      our
      revenue base to the extent required to achieve positive cash-flows from
      operations in the future, which raises substantial doubt about our ability
      to
      continue as a going concern.





Our
      long-term operating cash requirements include the capital necessary to fund
      the
      expansion of capacity and continuing implementation of SS-7 technology in our
      existing metropolitan markets as well as expansion of our network infrastructure
      to additional metropolitan markets. We expect cash flow from operating
      activities of our existing network to offset the negative cash flow from
      operating activities and cash spent on financing of our capacity and
      metropolitan market expansions. We intend to adhere to a go-forward policy
      of
      fully funding all network infrastructure expansions in advance and intend to
      expand while maintaining sufficient cash to cover our projected needs. To the
      extent our plans change, we may need to seek additional funding by accessing
      the
      equity or debt capital markets. There is uncertainty regarding whether some
      of
      our VoIP services should be classified as telecommunications services. Any
      VoIP
      services so classified may be subject to third-party access charges, taxes
      and
      fees. If access charges, taxes and fees are imposed on services we have provided
      or continue to provide, it could have a material adverse effect on our results
      of operations and financial condition. We do not believe, however, that there
      would be substantial impairment of our liquidity.




In
      addition, we may pursue acquisitions that require a portion or all of our cash
      on hand to complete and may also require us to seek additional funding. Our
      net
      losses to date may prevent us from obtaining additional funds on favorable
      terms
      or at all. Because of our history of net losses and our limited tangible assets,
      we do not fit traditional credit lending criteria, which could make it difficult
      for us to obtain loans or to access the debt capital markets. If additional
      funds were raised through the issuance of convertible debt or equity securities,
      the percentage of stock owned by our then-current stockholders would be reduced.
      Furthermore, such convertible debt and equity securities may have rights,
      preferences or privileges senior to those of our then-current equity securities.
      The sale of convertible debt securities or additional equity securities could
      result in additional dilution to our stockholders. The incurrence of
      indebtedness would result in incurring debt service obligations and could result
      in operating and financial covenants that would restrict our operations. In
      addition, there can be no assurance that any additional financing will be
      available on acceptable terms, if at all.




***Credit
      Facilities***




In
      February 2005, we executed an agreement with a commercial bank for a $30,000
      revolving credit facility to be used for general working capital. Interest
      on
      the outstanding balance accrued at an annual rate of 2.5% above the bank’s prime
      rate. We were required to maintain a $30,000 balance in an account with the
      bank
      (in which the bank has a security interest) as collateral for this loan. We
      were
      also required to pay the bank on a monthly basis an unused line fee on the
      unused portion of this line at an annual rate of 0.625%. This credit facility
      was repaid in full in September 2006.




In
      August
      2006, we entered into unsecured credit facilities of an aggregate of $525,000,
      with certain of our directors and officers, for general working capital. The
      facilities had one-year maturities and accrued interest on outstanding principal
      at 10% per annum compounded monthly. Principal and accrued interest were payable
      on August 31, 2007. We were also required to pay an origination fee of
      7.25% of the maximum principal amount outstanding (during the term) on August
      31, 2007 (or at the time of prepayment) and lender legal fees and other expenses
      of $9,500, or less, for each credit facility. Prepayment of the credit
      facilities required payment of interest that would have accrued through
      maturity, discounted by 15%, in addition to principal and accrued interest.
      In
      August and October 2006, we took advances of $450,000 and $75,000 under these
      facilities, respectively, and in January 2007 we repaid all of these facilities
      and all accrued fees and interest.




31




On
      or
      about December 14, 2006, we entered into a Term Credit Agreement pursuant to
      which we borrowed $600,000 from The Hunter Fund Limited bearing no interest
      as
      long as there is no default, and all principal and accrued interest was to
      be
      payable on the earlier of (i) the closing of the Private Placement, or (ii)
      six
      months from the date of funding, or (iii) the effective date of the termination
      of the placement agent. We paid a bridge loan origination fee of $42,000 on
      the
      closing and were obligated to pay an additional fee of $75,000 on the maturity
      date of the loan. The financing was secured by certain of our assets. We were
      also obligated to pay $10,000 for the lender’s legal fees. Under the Term Credit
      Agreement, we were also obligated to issue the lender warrants to purchase
      600,000 shares of our common stock with an exercise price of $0.60 per share,
      an
      exercise period of three years from the date of issuance and a cashless exercise
      feature. The bridge loan principal and all related fees and expenses were repaid
      in January 2007.




***Leases***




In
      February 2004, we entered into a non-cancelable lease agreement to purchase
      network equipment, software and other equipment up to $465,000. In connection
      with entering into this lease facility, we issued to the lessor a warrant to
      purchase 143,261 shares of our common stock at an exercise price of $0.162
      per
      share, as adjusted for the Business Combination. In August 2005 and April 2006,
      we entered into similar non-cancelable lease agreements to purchase network
      equipment, software and other equipment up to an additional $300,000 in each
      lease. In connection with the August 2005 lease facility, we issued a warrant
      to
      purchase 56,018 shares of our common stock at an exercise price of $0.268 per
      share, as adjusted for the Business Combination. In May 2006, in conjunction
      with entering into a lease, we issued a warrant to purchase 21,567 shares of
      our
      common stock at an exercise price of $0.974 per share, as adjusted for the
      Business Combination. The future minimum lease payments are discounted using
      interest rates of 18% to 28% over 18 to 30 months.




***Critical
      Accounting Policies and the Use of Estimates***




Our
      financial statements are prepared in accordance with accounting principles
      generally accepted in the U.S. The preparation of these financial statements
      requires us to make estimates and assumptions that affect the reported amounts
      of assets, liabilities, revenue, costs and expenses and related disclosures.
      We
      base our estimates on historical experience and on various other assumptions
      that we believe to be reasonable under the circumstances, the results of which
      form the basis for making judgments about the carrying value of assets and
      liabilities that are not readily apparent from other sources. We evaluate our
      estimates and assumptions on an ongoing basis. Actual results may differ from
      these estimates under different assumptions or conditions.




We
      believe that the following accounting policies involve the greatest degree
      of
      judgment and complexity. Accordingly, these are the policies we believe are
      the
      most critical to aid in fully understanding and evaluating our financial
      condition and results of operations.




*Revenue
      Recognition* .
      We
      recognize our VoIP services revenues when services are provided, primarily
      on
      usage. Revenues derived from sales of calling cards through related distribution
      partners are deferred upon the sale of the cards. These deferred revenues are
      recognized as revenues generally when all usage of the cards occurs. We
      recognize revenue in the period that services are delivered and when the
      following criteria have been met: persuasive evidence of an arrangement exists,
      the fees are fixed and determinable, no significant performance obligations
      remain for us and collection of the related receivable is reasonably assured.
      Our deferred revenues consist of fees received or billed in advance of the
      delivery of the services or services performed in which cash receipt is not
      reasonably assured. This revenue is recognized when the services are provided
      and no significant performance obligations remain or when cash is received
      for
      previously performed services. We assess the likelihood of collection based
      on a
      number of factors, including past transaction history with the customer and
      the
      credit worthiness of the customer. Generally, we do not request collateral
      from
      our customers. If we determine that collection of revenues are not reasonably
      assured, we defer the recognition of revenue until the time collection becomes
      reasonably assured, which is generally upon receipt of cash.




***Stock-Based
      Compensation***




Effective
      January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payments,” which
      revises SFAS 123, “Accounting for Stock-Based Compensation,” issued in 1995.
      Prior to the adoption of SFAS 123(R), we accounted for stock-based employee
      compensation arrangements using the intrinsic value method in accordance with
      the provisions and related interpretations of Accounting Principles Board
      Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).
      We adopted SFAS 123(R) applying the “modified prospective transition method”
under which we continue to account for nonvested equity awards outstanding
      at
      the date of adoption of SFAS 123(R) in the same manner as they had been
      accounted for prior to adoption, that is, we would continue to apply APB 25
      in
      future periods to equity awards outstanding at the date we adopted SFAS
      123(R).




Under
      the
      provisions of SFAS 123(R), we elected to continue to recognize compensation
      cost
      for our employees under the minimum value method of APB 25 and to comply with
      the pro forma disclosure requirements under SFAS 123(R) for all options granted
      prior to January 1, 2006. Stock-based employee compensation cost is reflected
      in
      net loss related to common stock options if options granted under the 2004
      Plan
      have an exercise price below the deemed fair market value of the underlying
      common stock on the date of grant.




Effective
      January 1, 2006, we estimated the fair value of each option award on the date
      of
      grant using the Black-Scholes option-pricing model using various assumptions.
      Expected volatility is based on the historical volatility of a peer group of
      publicly traded entities. The expected term of options granted is derived from
      the average midpoint between vesting and the contractual term, as described
      in
      the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107,
“Share-Based Payment.” The risk-free rate for the expected term of the option is
      based on the U.S. Treasury yield curve in effect at the time of
      grant.




32




Since
      January 1, 2006, our stock-based compensation has been based on the balance
      of
      deferred stock-based compensation for unvested awards at January 1, 2006, using
      the intrinsic value as previously recorded under APB 25, and the fair value
      of the awards on the date of grant for awards after January 1, 2006. The
      adoption of SFAS No. 123(R) has resulted and will continue to result in
      higher amounts of stock-based compensation for awards granted after January
      1,
      2006 than would have been recorded if we had continued to apply the provisions
      of APB 25. For the options granted prior to January 1, 2006, the intrinsic
      value
      per share is being recognized as compensation expense over the applicable
      vesting period (which equals the service period). For those options granted
      January 1, 2006 and thereafter, compensation expense was determined based on
      the
      fair value of the options and is being recognized in our Consolidated Statement
      of Operations over the applicable vesting period (which equals the service
      period).




We
      account for equity instruments issued to non-employees in accordance with the
      provisions of SFAS 123(R), “Accounting for Stock-Based Compensation,” and
      Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity
      Instruments That are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling Goods or Services.” All transactions involving goods or
      services as the consideration received for the issuance of equity instruments
      are accounted for based on the fair value of the consideration received or
      the
      fair value of the equity instrument issued, whichever is more readily measured.
      The measurement date of the fair value of the equity instrument issued is the
      earlier of the date on which the counterparty’s performance is complete or the
      date on which it is probable that performance will occur.




***Accounts
      Receivable and the Allowance for Doubtful Accounts***




Accounts
      receivable consist of trade receivables arising in the normal course of
      business. We do not charge interest on our trade receivables. The allowance
      for
      doubtful accounts is our best estimate of the amount of probable credit losses
      in our existing accounts receivable. We review our allowance for doubtful
      accounts monthly. We determine the allowance based upon historical write-off
      experience, payment history and by reviewing significant past due balances
      for
      individual collectibility. If estimated allowances for uncollectible accounts
      subsequently prove insufficient, additional allowance may be
      required.




***Impairment
      of Long-Lived Assets***




We
      assess
      impairment of our other long-lived assets in accordance with the provisions
      of
      SFAS 144, *Accounting
      for the Impairment or Disposal of Long-lived Assets* .
      An
      impairment review is performed whenever events or changes in circumstances
      indicate that the carrying value may not be recoverable. Factors considered
      by
      us include:




·
            Significant
                underperformance relative to expected historical or projected future
                operating results;




·
            Significant
                changes in the manner of use of the acquired assets or the strategy
                for
                our overall business; and




·
            Significant
                negative industry or economic
                trends.




When
      we
      determine that the carrying value of a long-lived asset may not be recoverable
      based upon the existence of one or more of the above indicators of impairment,
      an estimate is made of the future undiscounted cash flows expected to result
      from the use of the asset and its eventual disposition. If the sum of the
      expected future undiscounted cash flows and eventual disposition is less than
      the carrying amount of the asset, an impairment loss is recognized in the amount
      by which the carrying amount of the asset exceeds the fair value of the asset,
      based on the fair market value if available, or discounted cash flows if not.
      To
      date, we have not had an impairment of long-lived assets and are not aware
      of
      the existence of any indicators of impairment.




***Accounting
      for Income Taxes***




We
      account for income taxes using the asset and liability method in accordance
      with
      SFAS 109, *Accounting
      for Income Taxes* ,
      which
      requires the recognition of deferred tax assets and liabilities for the expected
      future tax consequences of temporary differences between the carrying amounts
      and tax bases of the assets and liabilities. We periodically review the
      likelihood that we will realize the value of our deferred tax assets and
      liabilities to determine if a valuation allowance is necessary. We have
      concluded that it is more likely than not that we will not have sufficient
      taxable income of an appropriate character within the carryforward period
      permitted by current law to allow for the utilization of certain of the
      deductible amounts generating deferred tax assets; therefore, a full valuation
      allowance has been established to reduce the deferred tax assets to zero at
      December 31, 2007 and 2006. In addition, we operate within multiple domestic
      taxing jurisdictions and are subject to audit in those jurisdictions. These
      audits can involve complex issues, which may require an extended period of
      time
      for resolution. Although we believe that our financial statements reflect a
      reasonable assessment of our income tax liability, it is possible that the
      ultimate resolution of these issues could significantly differ from our original
      estimates.




***Net
      Operating Loss Carryforwards***




As
      of
      December 31, 2007 and 2006, our net operating loss carryforwards for federal
      tax
      purposes were approximately $14.0 and $7.2 million, respectively. Under Section
      382 of the Internal Revenue Code, if a corporation undergoes an “ownership
      change” (generally defined as a greater than 50% change (by value) in its equity
      ownership over a three-year period), the corporation’s ability to use its
      pre-change of control net operating loss carryforwards and other pre-change
      tax
      attributes against its post-change income may be limited. This Section 382
      limitation is applied annually so as to limit the use of our pre-change net
      operating loss carryforwards to an amount that generally equals the value of
      our
      stock immediately before the ownership change multiplied by a designated federal
      long-term tax-exempt rate. Subject to applicable limitations, net operating
      losses subject to a Section 382 limitation are not lost if they are not utilized
      in a particular year. Section 382 provides that all unused net operating losses
      can be carried forward and aggregated with the following year’s available net
      operating loss.




33




***Contingencies
      and Litigation***




We
      evaluate contingent liabilities including threatened or pending litigation
      in
      accordance with SFAS 5, “Accounting for Contingencies” and record accruals when
      the outcome of these matters is deemed probable and the liability is reasonably
      estimable. We make these assessments based on the facts and circumstances and
      in
      some instances based in part on the advice of outside legal
      counsel.




It
      is not
      unusual in our industry to occasionally have disagreements with vendors relating
      to the amounts billed for services provided. We currently have disputes with
      vendors that we believe did not bill certain charges correctly. While we have
      paid the undisputed amounts billed for these non-recurring charges based on
      rate
      information provided by these vendors, as of December 31, 2007, there is
      approximately $2.5 million of unresolved charges in dispute. We are in
      discussion with these vendors regarding these charges and may take additional
      action as deemed necessary against these vendors in the future as part of the
      dispute resolution process. Management does not believe that any settlement
      would have a material adverse effect on our financial position or results of
      operations.




**Contractual
      Obligations**




Our
      major
      outstanding contractual obligations relate to our capital lease obligations
      related to purchases of fixed assets, amounts due under our strategic equipment
      agreement, operating lease obligations, and other contractual obligations,
      primarily consisting of the underlying elements of our network. There are no
      significant provisions in our agreements with our network partners that are
      likely to create, increase, or accelerate obligations due thereunder other
      than
      changes in usage fees that are directly proportional to the volume of activity
      in the normal course of our business operations. We have no long-term
      obligations of more than three years.




The
      following table reflects a summary of our contractual obligations at December
      31, 2007:


**Payments Due by Period**
                **(In Thousands)****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than**
                **1
                  year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **more
                  than**
                **5
                  years**Capital
                  lease obligations
              
              $
              276
              
              $
              170
              
              $
              106
              
              
              —
              
              
              —Operating
                  lease obligations
              
              
              326
              
              
              260
              
              
              66
              
              
              —
              
              
              —Total
              
              $
              602
              
              $
              430
              
              $
              172
              
              
              —
              
              
              —




**Off-Balance
      Sheet Arrangements**




We
      currently do not have any outstanding derivative financial instruments,
      off-balance sheet guarantees, interest rate swap transactions, foreign currency
      forward contracts or any other off-balance sheet arrangements.




**Quantitative
      and Qualitative Disclosures Regarding Market Risk**




*Foreign
      Currency Market Risks* . We
      currently do not have significant exposure to foreign currency exchange rates
      as
      all of our sales are denominated in U.S. dollars.




*Interest
      Rate Market Risk* . Our
      cash is invested in bank deposits and money market funds denominated in U.S.
      dollars. The carrying value of our cash, restricted cash, accounts receivable,
      deposits, other current assets, trade accounts payable, accrued expenses,
      deferred revenue and customer deposits, and current portion of long-term capital
      lease obligations approximate fair value because of the short period of time
      to
      maturity. At December 31, 2007, the carrying value of the capital lease
      obligations approximate fair value as their contractual interest rates
      approximate market yields for similar debt instruments.




**Recent
      Accounting Pronouncements**





For
      a
      discussion of the impact of recently issued accounting pronouncements, see
      the
      subsection entitled "Recent Accounting Pronouncements" contained in Note 1
      of the Notes to Consolidated Financial Statements under "Item 8. Financial
      Statements and Supplementary Data."




34




**Item
      7. Financial Statements of InterMetro Communications, Inc.**




See
      the
      Index to Consolidated Financial Statements on Page F-1 attached hereto.




**Item
      8. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**




Effective
      as of January 31, 2007, we replaced Hansen, Barnett & Maxwell, P.C. (“HBM”)
      as our independent registered public accounting firm. HBM had been previously
      engaged as the principal accountant to audit our financial statements. The
      reason for the replacement of HBM was that, following the Business Combination,
      the shareholders of InterMetro owned a majority of the outstanding shares of
      our
      common stock. InterMetro is our primary business unit, and the current
      independent registered public accountants of InterMetro is the firm of Mayer
      Hoffman McCann P.C (“MHM”). We believed that it was in our best interest to have
      MHM continue to work with our business, and we therefore retained MHM as our
      independent registered public accounting firm effective as January 31, 2007.
      We
      reported the above change in accountants on Form 8-K filed with the Securities
      and Exchange Commission on January 31, 2007.




**Item
      8A(T). Controls and Procedures**




***Evaluation
      of Disclosure Controls and Procedures***




As
      required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, we carried
      out
      an evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures as of the end of the period covered by this Annual
      Report. This evaluation was carried out under the supervision and with the
      participation of our Chief Executive Officer and our Chief Financial
      Officer.




The
      Company maintains a set of disclosure controls and procedures designed to ensure
      that information required to be disclosed by the Company in the reports filed
      under the Exchange Act is recorded, processed, summarized and reported within
      the time periods specified by the Securities and Exchange Commission’s rules and
      forms. Disclosure controls are also designed with the objective of ensuring
      that
      this information is accumulated and communicated to the Company’s management,
      including the Company’s Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required
      disclosure.




Based
      upon their evaluation as of the end of the period covered by this report, the
      Company’s Chief Executive Officer and Chief Financial Officer concluded that,
      the Company’s disclosure controls and procedures are effective to ensure that
      information required to be included in the Company’s periodic Securities and
      Exchange Commission filings is recorded, processed, summarized, and reported
      within the time periods specified in the Securities and Exchange Commission
      rules and forms.




The
      Company’s board of directors was advised by MHM, the Company’s independent
      registered public accounting firm, that during their performance of audit
      procedures for 2006, MHM identified material weaknesses as defined in Public
      Company Accounting Oversight Board Standard No. 2 in the Company’s internal
      control over financial reporting and in the segregation of duties within the
      accounting department. The Company is not an accelerated filer and MHM did
      not
      perform an audit of the Company’s internal controls. These weaknesses were
      identified in connection with the audit of the financial statements and reported
      pursuant to the requirements under Statement on Auditing Standards No. 61,
      Communications with Audit Committees.




The
      Company’s control over financial reporting has been identified based on the
      number of error corrections and adjustments to Company prepared audit schedules
      made by the Company as part of completing a timely audit process, none of which
      were individually material weaknesses. Additionally, the Company identified
      significant deficiencies surrounding the financial reporting process.
      Collectively, these represent a material weakness in the financial reporting
      process.




It
      was
      also identified that the size of the Company’s accounting staff prohibited its
      ability to properly segregate duties, a material weakness that could lead to
      the
      inability of the Company’s internal control system to timely identify and
      resolve accounting and disclosure matters.




***Management’s
      Annual Report on Internal Control Over Financial
      Reporting***




Management
        is responsible for establishing and maintaining adequate internal control
        over
        financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
        Act. 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 in accordance with GAAP. Because of its
        inherent limitations, internal control over financial reporting may not prevent
        or detect misstatements. Also, projection of any evaluation of effectiveness
        to
        future periods is 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.
  Management
        has conducted, with the participation of our Chief Executive Officer and
        our
        Chief Financial Officer, an assessment, including testing of the effectiveness,
        of our internal control over financial reporting as of December 31, 2007.
        Management’s assessment of internal control over financial reporting was
        conducted using the criteria in *Internal
        Control over Financial Reporting - Guidance for Smaller Public
        Companies* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission
        (“COSO”).
  A
        material weakness is a deficiency, or a combination of deficiencies, in internal
        control over financial reporting, such that there is a reasonable possibility
        that a material misstatement of our annual or interim financial statements
        will
        not be prevented or detected on a timely basis. In connection with our
        management’s assessment of our internal control over financial reporting as
        required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified
        the
        following material weaknesses in our internal control over financial reporting
        as of December 31, 2007:
 ·
              While
                  we have implemented control procedures for reviewing all material
                  financial reporting items and test these control processes, certain
                  of our
                  control procedures are not sufficient to prevent the risk that
                  a potential
                  material misstatement of the financial statements would occur without
                  being prevented or detected, specifically with regards to dispute
                  reserves
                  for accounts payable, accruals for third party charges and certain
                  equity
                  accounts. In
                  each case, the Company does not have adequate staffing to ensure
                  that the
                  monitoring processes mitigate risks that external information used
                  is
                  correct and, in the case of equity accounts, that the Company has
                  personnel with adequate understanding of the applicability of accounting
                  principles. 
 ·
              We
                  have not maintained sufficient evidence to support that certain
                  of our
                  internal controls over financial reporting activities were performed
                  on a
                  timely basis, specifically related to confirmation testing of disputes
                  of
                  information received from our vendors, variance analysis, accounts
                  receivable analyses and equity accounts. 
 ·
              Due
                  to the small size of our Company, we have not adequately divided,
                  or
                  compensated for, functions among personnel to reduce the risk that
                  a
                  potential material misstatement of the financial statements would
                  occur
                  without being prevented or detected with regards to certain of
                  our equity
                  accounts. Specifically,
                  with regards to equity awards, at times information used in our
                  financial
                  reporting is not able to be given to additional competent staff
                  to
                  mitigate the risk of erroneous or inappropriate
                  actions.
 Because
        of the material weaknesses noted above, management has concluded that we
        did not
        maintain effective internal control over financial reporting as of December
        31,
        2007, based on*Internal
        Control over Financial Reporting - Guidance for Smaller Public
        Companies*issued
        by (“COSO”).
  **Remediation
        of Material Weaknesses in Internal Control Over Financial
        Reporting**
  We
        are in
        the process of implementing remediation efforts with respect to the material
        weaknesses noted above as follows:
 ·
              We
                  plan to improve our monitoring processes and add additional staff
                  resources to monitor our dispute reserves, accruals for third party
                  charges and equity reporting
                  activities.
 ·
              We
                  intend on developing specific policies and procedures around the
                  nature
                  and retention of evidence of the operation of controls. For example,
                  where
                  other forms of sign-off and evidence of timeliness do not exist,
                  reviews
                  will be evidenced via sign-off (including signature and
                  date). 
 ·
              We
                  are considering re-assigning roles and responsibilities in order
                  to
                  improve segregations of duties with regards to control activities
                  for our
                  equity accounts.
  We
        believe the foregoing efforts will enable us to improve our internal control
        over financial reporting. Management is committed to continuing efforts aimed
        at
        improving the design adequacy and operational effectiveness of its system
        of
        internal controls. The remediation efforts noted above will be subject to
        our
        internal control assessment, testing and evaluation process.
  **Changes
        in Internal Control Over Financial Reporting**
  There
        were no changes in our internal control over financial reporting during the
        fourth quarter ended December 31, 2007 that materially affected, or are
        reasonably likely to materially affect, our internal control over financial
        reporting.




This
      annual report does not include an attestation
      report of the Company’ registered public accounting firm regarding internal
      control over financial reporting. Management’s report was not subject to
      attestation by the Company’s registered public accounting firm pursuant to
      temporary rules of the Securities and Exchange Commission that permits us to
      provide only management’s report in this annual report.




35




**Item
      8B. Other Information**




None.




**PART
      III**




**Item
      9. Directors, Executive Officers, Promoters and Control Persons; Compliance
      with
      Section 16(a) of Exchange Act**




The
      following table lists our executive officers and directors as of December 31,
      2007:




**Name**
            
            **Age**
            
            **Position**Charles
                Rice
            
            44
            
            President,
                Chief Executive Officer and Chairman of the BoardJon
                deOng
            
            34
            
            Chief
                Technology Officer, DirectorVincent
                Arena
            
            38
            
            Chief
                Financial Officer, DirectorJoshua
                Touber(1)
            
            45
            
            DirectorRobert
                Grden(1)
            
            44
            
            DirectorDouglas
                Benson(1)
            
            75
            
            Director





(1)
      Member of the Audit Committee




***Charles
      Rice*** has
      served as a Director and as our Chief Executive Officer and President since
      December 29, 2006. Mr. Rice is the founder of InterMetro Delaware and has
      served as the Chairman, Chief Executive Officer and President since its
      inception in July 2003. Under Mr. Rice’s leadership, InterMetro Delaware
      was ranked 46th in Entrepreneur magazine’s June 2006 Hot 100 Fastest Growing
      Businesses in America. From 1999 to 2003, Mr. Rice was Chairman, Chief
      Executive Officer, and President of CNM Network, Inc., or CNM, a national VoIP
      carrier. Mr. Rice joined CNM in 1997 and became a member of its board of
      directors in 1998. From 1998 to 1999, Mr. Rice served as CNM’s Vice
      President and Chief Operating Officer. Prior to CNM, Mr. Rice spent over 15
      years in executive positions. Mr. Rice attended California State University
      of Northridge.




***Jon
      deOng*** has
      served as our Chief Technology Officer since December 29, 2006 and as a Director
      since January 19, 2007. Mr. deOng has served as InterMetro Delaware’s Chief
      Technology Officer and a director since its inception in July 2003. Prior to
      joining InterMetro Delaware, Mr. deOng served as the Chief Technology
      Officer for CNM from 1999 to 2003 and served as a member of CNM’s board of
      directors from 1999 to 2003. From 1998 to 1999, Mr. deOng served as Vice
      President of Technology at CNM. Prior to CNM, Mr. deOng was responsible for
      managing the development and deployment of Netcom On-line Communication
      Services, Inc.’s Business Center, the core infrastructure systems of Netcom’s
      web hosting service, later acquired by ICG Communications, Inc. Mr. deOng
      attended the University of Texas.




***Vincent
      Arena*** has
      served as our Chief Financial Officer since December 29, 2006 and as a Director
      since January 19, 2007. Mr. Arena has served as InterMetro Delaware’s Chief
      Financial Officer since its inception in July 2003 and as a member of InterMetro
      Delaware’s board of directors since December 2003. Prior to joining InterMetro
      Delaware, Mr. Arena was the Chief Financial Officer for CNM from February
      2001 to June 2003. From 1997 to 2001, Mr. Arena held various investment
      banking positions at Jefferies & Company, Inc., most recently serving as a
      Vice President in the Telecommunications Group. Mr. Arena holds a Bachelor
      of Arts degree and a Bachelor of Science degree from Boston University and
      a
      Masters degree in Business Administration from the Wharton School at the
      University of Pennsylvania.




***Joshua
      Touber*** has
      served as a director since January 19, 2007. Mr. Touber has served as a
      director of InterMetro Delaware since March 2004. Mr. Touber is currently
      President of Touber Media, LLC, a media consulting firm. From 1998 to 2003,
      Mr. Touber was the Chief Operating Officer of Ascent Media Creative
      Services Group, a subsidiary of Liberty Media Group. In 1995, Mr. Touber
      founded Virtuosity, a telecommunication services provider that developed the
      “virtual assistant” product category under the “Wildfire” brand name and has
      served as its President since its inception.




36




***Robert
      Grden*** has
      served as a director since January 19, 2007. Mr. Grden has served as a
      director of InterMetro Delaware since August 2004. Mr. Grden is currently
      the Deputy County Treasurer for the Wayne County Michigan Treasurer’s office, a
      position he has held since 1991. Prior to that, he was a management consultant
      with Ernst & Young LLP serving clients in a variety of industries.
      Mr. Grden is also the current Chairman of, and has served the last seven
      years on, the Board of Trustees of the Wayne County Retirement Commission where
      he oversees certain employee compensation and benefit plans.




***Douglas
      Benson*** has
      served as a director since January 19, 2007. Dr. Benson has served as a
      director of InterMetro Delaware since May 2006. Dr. Benson is currently the
      Chief Executive Officer of the Edwin S. Johnston Company, a real estate
      investment and development company, a position he has held for the past 20
      years. Dr. Benson was a founder and majority shareholder of Heritage Bank,
      a commercial bank in Michigan. Dr. Benson served on the board of directors
      of Andrews University for over 10 years. Dr. Benson holds a Bachelor of
      Arts degree from Andrews University and a Doctor of Medicine from Loma Linda
      University.




**Former
      Management Relationships**




Messrs.
      Rice, deOng and Arena held positions for several years as executive officers
      of
      CNM Network, Inc. until their departure in June 2003. After their departure,
      CNM
      relocated its headquarters and in December 2003, changed its company name.
      In
      September 2004, 15 months after management’s departure, the entity formerly
      known as CNM filed a voluntary bankruptcy proceeding in the U.S. Bankruptcy
      Court - Central District of California.




**Limitation
      of Liability and Indemnification of Officers and Directors;
      Insurance**




Our
      Articles of Incorporation limits the liability of directors to the maximum
      extent permitted by Nevada law. Nevada law provides that directors of a
      corporation will not be personally liable for monetary damages for breach of
      their fiduciary duties as directors, except liability for:




·
            any
                breach of their duty of loyalty to the corporation or its
                shareholders;




·
            acts
                or omissions not in good faith or which involve intentional misconduct
                or
                a knowing violation of law;




·
            unlawful
                payments of dividends or unlawful stock repurchases or redemptions;
                or




·
            any
                transaction from which the director derived an improper personal
                benefit.




Our
      Bylaws provide that we will indemnify our directors, officers, employees and
      other agents to the fullest extent permitted by law.




We
      have
      separate indemnification agreements with our directors and officers, in addition
      to the indemnification provided for in our Bylaws. These agreements, among
      other
      things, provide that we will indemnify our directors and officers for certain
      expenses (including attorneys’ fees), judgments, fines and settlement amounts
      incurred by a director or executive officer in any action or proceeding arising
      out of such person’s services as one of our directors or officers, or rendering
      services at our request, to any of our subsidiaries or any other company or
      enterprise. We believe that these provisions and agreements are necessary to
      attract and retain qualified persons as directors and officers.




Insofar
      as an indemnification for liabilities arising under the Securities Act may
      be
      permitted for directors, officers or persons controlling us pursuant to the
      foregoing provisions, we have been informed that in the opinion of the
      Securities and Exchange Commission each indemnification is against public policy
      as expressed in the Securities Act and is therefore unenforceable.




**Legal
      Proceedings**




There
      is
      no pending litigation or proceeding involving any of our directors or officers
      as to which indemnification is required or permitted, and we are not aware
      of
      any threatened litigation or proceeding that may result in a claim for
      indemnification.




**Executive
      Officers, Directors and Committees**




***Executive
      Officers***




Our
      executive officers are appointed by and serve at the discretion of our Board
      of
      Directors. We have employment agreements with our executive officers, which are
      discussed below under the heading “Executive Compensation - Employment
      Agreements.”




***Board
      of Directors***




Our
      Board
      of Directors currently consists of six directors. Messrs. Benson, Grden and
      Touber are “independent” as defined in NASD Marketplace Rule 4200(a)(15). Mr.
      Rice, who is our President and Chief Executive Officer, Mr. Arena, who is our
      Chief Financial Officer, and Mr. deOng, who is our Chief Technology Officer,
      are
      not independent. We plan to appoint additional independent directors so that
      a
      majority of our directors are independent.




The
      Board
      of Directors is divided into three classes, Class I, Class II and Class III,
      with each class serving staggered three-year terms. The members of the classes
      are divided as follows:




·
            Class
                I, whose term expires at the annual meeting of the shareholders to
                be held
                in 2008, is comprised of Messrs. Joshua Touber and Douglas
                Benson;




37




·
            Class
                II, whose term expires at the annual meeting of the shareholders
                to be
                held in 2009, is comprised of Messrs. Robert Grden and Vincent Arena;
                and




·
            Class
                III, whose term expires at the annual meeting of shareholders to
                be held
                in 2010, is comprised of Messrs. Charles Rice and Jon
                deOng.




Our
      Amended and Restated Bylaws provide that the number of persons constituting
      our
      Board of Directors may be fixed from time to time, but only by a resolution
      adopted by a majority of our Board of Directors and provided that such number
      cannot be less than three nor more than eleven. Vacancies on the Board of
      Directors and newly created directorships resulting from any increase in the
      authorized number of directors will be filled by a majority vote of the
      directors then in office, even if less than a quorum, or by the sole remaining
      director. Any additional directorships resulting from an increase in the number
      of directors will be distributed among the three classes so that, as nearly
      as
      possible, each class will consist of one-third (1/3) of the total number of
      directors. This classification of the Board of Directors may have the effect
      of
      delaying or preventing changes in the control of or management of the Company.
      Our directors may be removed only for cause by the affirmative vote of holders
      of at least 66 2/3% of our then outstanding capital stock voting together as
      a
      single class .




***Committees
      of the Board of Directors***




Our
      Board
      of Directors currently has a standing Audit Committee. We plan to establish
      a
      Compensation Committee and a Nominating and Governance Committee. Until such
      committees are established, matters otherwise addressed by such committees
      will
      be acted upon by the majority of independent directors. The following is a
      brief
      description of our committees and contemplated committees.




***Audit
      Committee***




Messrs.
      Benson, Grden and Touber are the current members of our Audit Committee. Mr.
      Grden has been appointed to serve as chairman of the Audit Committee. Mr. Grden
      meets the applicable NASD listing standards for designation as an “Audit
      Committee Financial Expert.”




Pursuant
      to the Audit Committee charter, the functions of our Audit Committee
      includes:




·
            meeting
                with our management periodically to consider the adequacy of our
                internal
                controls and the objectivity of our financial
                reporting;




·
            engaging
                and pre-approving audit and non-audit services to be rendered by
                our
                independent auditors;




·
            recommending
                to our Board of Directors the engagement of our independent auditors
                and
                oversight of the work of our independent
                auditors;




·
            reviewing
                our financial statements and periodic reports and discussing the
                statements and reports with our management, including any significant
                adjustments, management judgments and estimates, new accounting policies
                and disagreements with management;




·
            establishing
                procedures for the receipt, retention and treatment of complaints
                received
                by us regarding accounting, internal accounting controls and auditing
                matters;




·
            administering
                and discussing with management and our independent auditors our code
                of
                ethics; and reviewing and approving all related-party transactions
                in
                accordance with applicable listing exchange rules.




***Report
      of the Audit Committee***




Our
      Audit
      Committee has reviewed and discussed our audited financial statements for the
      fiscal year ended December 31, 2007 with senior management. The Audit Committee
      has also discussed with MHM, our independent auditors, the matters required
      to
      be discussed by the Statement on Auditing Standards No. 61 (Communication with
      Audit Committees) and received the written disclosures and the letter from
      MHM
      required by Independence Standards Board Standard No. 1 (Independence Discussion
      with Audit Committees). The Audit Committee has discussed with MHM the
      independence of MHM as our auditors. Finally, in considering whether the
      independent auditors provision of non-audit services to the Company is
      compatible with the auditors’ independence for both MHM and HBM, the Company’s
      Audit Committee has recommended to the Board of Directors that our audited
      financial statements be included in our Annual Report on Form 10-KSB for the
      fiscal year ended December 31, 2007 for filing with the United States Securities
      and Exchange Commission. Our Audit Committee did not submit a formal report
      regarding its findings.




**AUDIT
      COMMITTEE**




Robert
      Grden


Joshua
      Touber


Douglas
      Benson




Notwithstanding
      anything to the contrary set forth in any of our previous or future filings
      under the Securities Act or the Exchange Act that might incorporate this report
      in future filings with the Securities and Exchange Commission, in whole or
      in
      part, the foregoing report shall not be deemed to be incorporated by reference
      into any such filing.





38




**Code
      of Conduct**




We
      have
      adopted a Code of Conduct that applies to all of our directors, officers and
      employees. The text of the Code of Conduct has been posted on InterMetro’s
      Internet website and can be viewed at *http://www.intermetro.net/conduct.htm* . Any
      waiver of the provisions of the Code of Conduct for executive officers and
      directors may be made only by the Audit Committee and, in the case of a waiver
      for members of the Audit Committee, by the Board of Directors. Any such waivers
      will be promptly disclosed to our shareholders.




**Compliance
      with Section 16(A) of Exchange Act**




Section
      16(a) of the Exchange Act requires our officers and directors, and certain
      persons who own more than 10% of a registered class of our equity securities
      (collectively, “Reporting Persons”), to file reports of ownership and changes in
      ownership (“Section 16 Reports”) with the Securities and Exchange Commission.
      Reporting Persons are required by the Securities and Exchange Commission to
      furnish us with copies of all Section 16 Reports they file.




Based
      solely on its review of the copies of such Section 16 Reports received by it,
      or
      written representations received from certain Reporting Persons, all Section
      16(a) filing requirements applicable to our Reporting Persons during and with
      respect to the fiscal year ended December 31, 2007 have been complied with
      on a
      timely basis.




**Item
      10. Executive Compensation**




**Executive
      Officer Compensation**




The
      following table summarizes compensation paid or accrued by the Company for
      the
      years ended December 31, 2006 and 2007 for services rendered in all capacities,
      by our chief executive officer and the other most highly compensated executive
      officers during the fiscal years ended December 31, 2006 and 2007.




**Summary
      Compensation Table**




**Name and  Principal  Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Option**
              **Awards**
            
            **Non-Equity**
              **Incentive Plan**
              **Compensation**
            
            **Non-Qualified**
              **Deferred**
              **Compensation**
              **Earnings**
            
            **All Other**
              **Compensation(1)**
            
            **Total**Charles
                Rice
            
            
            2007
            
            $
            268,295
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            21,727
            
            $
            290,022Chief
                    Executive Officer and President
            
            
            2006
            
            
            269,943
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            20,316
            
            
            290,259Jon
                deOng
            
            
            2007
            
            $
            225,612
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            17,775
            
            $
            243,387Chief
                Technology Officer
            
            
            2006
            
            
            226,997
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            17,316
            
            
            244,313Vincent
                Arena
            
            
            2007
            
            $
            222,581
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            13,515
            
            $
            236,096Chief
                Financial Officer
            
            
            2006
            
            
            205,350
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            13,290
            
            
            218,640





(1)
              Amounts
                  primarily represent medical insurance premiums and reimbursements
                  for
                  automobile and electronic communication device
                  expenses.




**Emp** **loyment
      Agreements**




Effective
      on or about January 1, 2007, we assumed from InterMetro Delaware certain
      employment agreements with our Chief Executive Officer, Charles Rice, Chief
      Technical Officer, Jon deOng, and Chief Financial Officer, Vincent Arena. Each
      of the agreements was originally entered into as of January 1, 2004 and has
      a
      term ending on December 31, 2009, with automatic one-year extensions unless
      either we or the executive provides notice of intention not to renew the
      agreement at least 60 days prior to the end of its term.




The
      agreement with Mr. Rice provides for an initial base annual salary of
      $220,000 and a discretionary annual bonus target of up to 100% of his base
      annual salary. The agreement with Mr. deOng provides for an initial base
      annual salary of $185,000 and a discretionary annual bonus target of up to
      75%
      of his base annual salary. The agreement with Mr. Arena provides for an
      initial base annual salary of $185,000 and a discretionary annual bonus target
      of up to 75% of his base annual salary. We anticipate senior executive bonuses
      under each of these agreements will be determined based on various factors,
      including revenue achievement and operating income (loss) before depreciation
      and amortization targets, as well as personal contributions. These performance
      factors may change from year to year. Each of these agreements calls for an
      11%
      yearly increase in annual base salary.




39




Pursuant
      to the employment agreements, Mr. Rice, Mr. deOng, and Mr. Arena
      were each granted, on January 2, 2004, options to purchase 308,080 shares of
      our
      common stock, as adjusted for the Business Combination. The options for
      Mr. Rice have an exercise price of $0.0446 per share and the options for
      Messrs. deOng and Arena have an exercise price of $0.0406. Mr. deOng and
      Mr. Arena’s options have an exercise period of ten years from the date of grant
      and Mr. Rice’s options have an exercise period of five years from the date
      of grant. The options were 20% vested upon grant, and 1/16 of the unvested
      options vest each calendar year quarter from the grant date.




These
      employment agreements may be terminated by us if the executive acts with gross
      negligence in the performance of his duties resulting in a breach of his
      fiduciary duties to us, our board, or our shareholders (provided that we give
      the executive notice of the basis for the termination and an opportunity for
      30
      days to cease committing the alleged conduct).




Severance
      benefits are payable under the agreements if the executive’s employment is
      terminated (i) if we materially breach the employment agreement or terminates
      the agreement other than for gross negligence (as described above), (ii) upon
      the death or disability of the executive, or (iii) on account of non-renewal
      of
      the employment agreement after a change in control of our ownership. These
      severance benefits include (i) a lump sum payment equal to the greater of the
      sum of the executive’s annual compensation and accrued but unpaid bonus payable
      through the end of the term of the employment agreement or one year of the
      executive’s annual base compensation, (ii) continuation medical insurance
      coverage and other benefits through the end of the term, and (iii) full
      vesting of all unvested stock options, with the ability to exercise all options
      granted under the agreement for the remainder of their term.




If
      the
      executive terminates his employment for reasons other than our breach of the
      agreement, he will not be entitled to severance benefits and will have a period
      of 90 days after notification of termination to exercise his vested options.
      If
      the executive’s employment is terminated for gross negligence (as described
      above), the executive will not be entitled to severance benefits, but he will
      be
      entitled to exercise his vested stock options for the remainder of their
      term.




**Outstanding
      Equity Awards**




The
      following table sets forth information for each of our executive officers
      regarding the number of shares subject to exercisable and unexercisable stock
      options to purchase shares of our common stock at the fiscal year ended December
      31, 2007.




**Outstanding
      Equity Awards at Fiscal Year-End**


**Name**
              
              **Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **Exercisable(1)**
              
              **Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **Unexercisable(1)**
              
              **Option**
                **Exercise**
                **Price**
              
              **Option**
                **Expiration**
                **Date**Charles
                  Rice
              
              
              308,080
              
              
              -
                  0
                  -
              
              $
              0.0446
              
              
              1/2/09Chairman,
                  Chief Executive Officer, and PresidentJon
                  deOng
              
              
              308,080
              
              
              -
                  0
                  -
              
              $
              0.0406
              
              
              1/2/14Chief
                  Technology OfficerVincent
                  Arena
              
              
              308,080
              
              
              -
                  0
                  -
              
              $
              0.0406
              
              
              1/2/14Chief
                  Financial Officer


(1)
            Stock
                options were granted under our 2004 Stock Plan and vested 20% on
                the date
                of grant and 1/16 of the balance each quarter thereafter until the
                remaining stock options were
                vested.




**Director
      Compensation**




As
      of
      January 19, 2007, we approved the following non-employee director compensation
      program. We will pay our non-employee directors $1,000 per board meeting
      attended in person and $500 for each telephonic meeting. In addition, we will
      compensate members of our board committees as follows: (i) each member of our
      Audit Committee will receive $500 per meeting and (ii) each member of our
      Compensation Committee and Nominating and Governance Committee will receive
      $350
      per meeting. The Chairman of our Audit Committee will also receive an annual
      retainer of $5,000 per year. We intend to grant our directors options under
      our
      2007 Plan in an amount to be determined prior to grant.




The
      following table summarizes the compensation paid or accrued by InterMetro for
      the year ended December 31, 2007 to InterMetro’s directors.




40




**Director
      Compensation**





**Name**
            
            **Fees**
              **Earned or**
              **Paid in**
              **Cash**
            
            **Stock**
              **Awards**
            
            **Option**
              **Awards**
            
            **Non-Equity**
              **Incentive Plan**
              **Compensation**
            
            **Change in**
              **Pension Value**
              **and Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings**
            
            **All Other**
              **Compensation(1)**
            
            **Total**Joshua
                Touber,
              Director
            
            $
            6,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            5,085
            
            $
            11,085Robert
                Grden,
              Director
            
            $
            10,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            10,000Douglas
                Benson,
              Director
            
            $
            4,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            $
            4,000







(1)
      Amount included in this Form 10-KSB primarily represents medical insurance
      premiums.




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




The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock as of December 31, 2007, by (i) each director,
      (ii) each executive officer, (iii) all directors and executive officers as
      a
      group, and (iv) each person who beneficially owns more than five percent of
      our
      common stock. Beneficial ownership is determined in accordance with the rules
      of
      the Securities and Exchange Commission. In computing the number of shares
      beneficially owned by a person and the percentage of ownership of that person,
      shares of common stock subject to options held by that person that are currently
      exercisable or become exercisable within 60 days of December 31, 2007 are deemed
      outstanding even if they have not actually been exercised. Those shares,
      however, are not deemed outstanding for the purpose of computing the percentage
      ownership of any other person. The percentage ownership of each beneficial
      owner
      is based on 59,575,194 outstanding shares of common stock. Except as otherwise
      listed below, the address of each person is c/o InterMetro Communications,
      Inc.,
      2685 Park Center Drive, Building A, Simi Valley, California 93065. Except as
      indicated, each person listed below has sole voting and investment power with
      respect to the shares set forth opposite such person’s name.




**Name
                and Title of Beneficial Owner**
            
            
            **Number of**
              **Shares Beneficially**
              **Owned(1)**
            
            
            **Percentage**
              **Ownership**Charles
                Rice
            
            
            37,315,132
            (2)
            
            56.1
            %Chairman,
                President,Chief
                Executive Officer and
                SecretaryVincent
                Arena
            
            
            2,507,111
            (3)
            
            4.2
            %Chief
                Financial OfficerJon
                deOng
            
            
            2,714,915
            (4)
            
            4.5
            %Chief
                Technology OfficerJoshua
                Touber
            
            
            1,105,411
            (5)
            
            1.8
            %DirectorRobert
                Grden
            
            
            184,848
            (6)
            
            *DirectorDouglas
                Benson
            
            
            4,013,091
            (7)
            
            6.7
            %DirectorDirectors
                and executive officers as
                a group (6 persons)
            
            
            42,618,482
            
            
            63.1
            %David
                Marshall
            
            
            6,317,767
            (8)
            
            10.4
            %9229
                Sunset
                BoulevardSuite
                505Los
                Angeles, CA
                90069Mitchell
                Pindus
            
            
            3,034,607
            (9)
            
            5.1
            %228
                S. Medio DriveLos
                Angeles, CA 90049Hunter
                World Markets, Inc.
            
            
            8,579,000
            (10)
            
            13.3
            %9300
                Wilshire BoulevardPenthouse
                SuiteBeverly
                Hills, CA 92012




41





* Indicates
        beneficial ownership of less than one percent.





(1)
            Unless
                otherwise indicated and subject to applicable community property
                laws, to
                our knowledge each stockholder named in the table possesses sole
                voting
                and investment power with respect to all shares of common stock,
                except
                for those owned jointly with that person’s
                spouse.





(2)
            Includes
                357,123 shares which may be purchased pursuant to warrants and stock
                options that are exercisable within 60 days of December 31, 2007.
                Also
                includes 5,108,141 shares over which Mr. Rice would have voting power
                pursuant to voting agreements upon the exercise of stock options
                under the
                2004 Plan and 2007 Plan and an additional 9,288,595 shares owned
                by
                certain of our employees over which Mr. Rice maintains voting
                control. Mr. Rice has granted options to certain individuals to
                purchase a total of 1,016,686 shares of his common stock. These options
                expire on May 15, 2009. Includes 5,306,893 shares and warrants to
                purchase
                1,010,874 shares owned by David Marshall, the manager of an advisor
                to us,
                and his affiliates over which Mr. Rice has voting power for a period
                of two years from December 29, 2006 with respect to all matters (4,000,000
                shares) and with respect to the selection of directors (the balance
                of the
                shares). Mr. Marshall purchased 2,500,000 of these shares from
                Mr. Rice for $150,000 prior to the closing of the Business
                Combination. Also includes 2,554,587 shares and warrants to purchase
                480,020 shares owned by Mitchell Pindus and his affiliates over which
                Mr. Rice has voting power for a period of two years from December 29,
                2006 with respect to the selection of
                directors.





(3)
            Includes
                308,080 shares which may be purchased pursuant to stock options that
                are
                exercisable within 60 days of December 31,
                2007.





(4)
            Includes
                308,080 shares which may be purchased pursuant to stock options that
                are
                exercisable within 60 days of December 31,
                2007.





(5)
            Includes
                342,459 shares which may be purchased pursuant to warrants and stock
                options that are exercisable within 60 days of December 31, 2007.
                Also
                includes 61,623 shares and warrants to purchase 61,623 shares which
                are
                owned by Laurel Research, Inc., of which Mr. Touber is President,
                pursuant to warrants that are exercisable within 60 days of December
                31,
                2007.





(6)
            Includes
                184,848 shares which may be purchased pursuant to stock options that
                are
                exercisable within 60 days of December 31,
                2007.





(7)
            Includes
                369,694 shares which may be purchased pursuant to warrants and stock
                options that are exercisable within 60 days of December 31,
                2007.





(8)
            Includes
                680,065 shares owned by David Marshall Inc., of which David Marshall
                is
                the chief executive officer; 478,240 shares owned by the David Marshall
                Pension Trust, of which Mr. Marshall is the trustee; 373,441 shares
                which may be purchased by David Marshall Inc. pursuant to warrants
                that
                are exercisable within 60 days of December 31, 2007; 637,443 shares
                which
                may be purchased by the David Marshall Pension Trust pursuant to
                warrants
                that are exercisable within 60 days of December 31, 2007; 648,588
                shares
                owned by Glenhaven Corporation, of which Mr. Marshall is the chief
                executive officer, and 3,500,000 shares owned by Santa Monica Capital,
                LLC, of which Mr. Marshall is the manager. These shares are subject
                to a voting agreement pursuant to which Charles Rice has voting power
                for
                a period of two years from December 29, 2006 with respect to all
                matters
                (4,000,000 shares) and with respect to the selection of directors
                (the
                balance of the shares).





(9)
            Includes
                1,846,664 shares owned by the Pindus Living Trust, of which
                Mr. Pindus is the co-trustee; 561,184 shares owned by the Mitchell R.
                Pindus Individual Retirement Account; 48,913 shares owned by the
                Myles
                Pindus Trust, of which Mr. Pindus is the trustee; 48,913 shares owned
                by the Tobias Pindus Trust, of which Mr. Pindus is the trustee;
                48,913 shares owned by the Erin Pindus Trust, of which Mr. Pindus is
                the trustee; 248,961 shares which may be purchased by the Pindus
                Living
                Trust pursuant to warrants that are exercisable within 60 days of
                December
                31, 2007; 231,059 shares which may be purchased by the Mitchell R.
                Pindus
                Individual Retirement Account pursuant to warrants that are exercisable
                within 60 days of December 31, 2007. These shares are subject to
                a voting
                agreement pursuant to which Charles Rice has voting power for a period
                of
                two years from December 29, 2006 with respect to the selection of
                directors.




42




(10)
            Includes
                3,885,000 shares of common stock owned by Hunter World Markets, Inc.
                (“Hunter”) and its affiliates and 4,694,000 shares which may be purchased
                by Hunter and its affiliates pursuant to warrants that are exercisable
                within 60 days of December 31, 2007. Todd M. Ficeto is President,
                Chief
                Executive Officer, and control person of Hunter and may be deemed
                to have
                voting and investment power over the shares held by Hunter.
                Mr. Ficeto disclaims beneficial ownership of the shares held by
                Hunter except to the extent of his pecuniary interest therein. Includes
                250,000 shares held by Mr. Ficeto. Includes 25,000 shares held by
                Hunter Ficeto and 25,000 shares held by Natalia Ficeto. Mr. Ficeto is
                the father of Hunter Ficeto and Natalia Ficeto and may be considered
                the
                control person of shares held by
                them.




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




**Certain
      Relationships and Related Transactions**




***Hunter
      World Markets, Inc. and our Company***




In
      December 2006, Hunter World Markets, Inc., or Hunter, and its affiliates
      acquired 3,650,000 shares of our common stock from our then controlling
      stockholder for $11,231, said shares representing approximately 46.8% of our
      outstanding common stock prior to the Business Combination.




On
      December 14, 2006, InterMetro executed a Term Credit Agreement with the Hunter
      Fund Limited, an affiliated entity of Hunter, for a $600,000 term loan bridge
      financing. In connection with the bridge financing, InterMetro paid the Hunter
      Fund Limited a bridge loan origination fee of $42,000 and an additional loan
      fee
      to Hunter of $75,000. In addition, InterMetro issued the Hunter Fund Limited
      five-year warrants to purchase 600,000 shares of our common stock at an exercise
      price of $0.60 per share, exercisable for a period of three years from the
      date
      of issuance. The bridge loan principal and all related fees and expenses were
      repaid in January 2007.




For
      its
      services as the placement agent, Hunter was paid a selling commission equal
      to
      10% of the gross proceeds of the Private Placement, or $1,023,500. In addition,
      we also paid Hunter $435,000 for consulting services rendered. Hunter also
      earned five-year warrants to purchase 4,094,000 shares of common stock,
      exercisable year from the date of issuance with an exercise price of $1.50
      per
      share. Upon the closing of the Business Combination and the Private Placement,
      Hunter and its affiliates beneficially owned 4,485,000 shares of our common
      stock or approximately 7.5% of the common stock outstanding, which excludes
      shares underlying the placement agent warrants. For more information about
      Hunter, see “Item 11. Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters.”




***Consulting
      Services***




David
      Marshall, a beneficial owner of 10.4% of our common stock, the Chief Executive
      Officer of Glenhaven Corporation, an advisor to InterMetro until December 2006,
      and the agent for InterMetro’s Series A lenders prior to the repayment of the
      Series A Notes, entered into a three-year consulting agreement with us under
      which Santa Monica Capital LLC (an affiliate of Mr. Marshall) will receive
      $13,000 per month (subject to a minimum increase of 5% per year) and 5% of
      all
      gross proceeds derived from new business referrals and introductions made by
      Santa Monica Capital LLC.




***Securities
      Issuances***




In
      December 2006, Santa Monica Capital, LLC, an affiliate of David Marshall,
      purchased 1,000,000 shares and Mitchell Pindus purchased 500,000 shares of
      the
      6,500,000 shares of our common stock purchased from our then controlling
      stockholder prior to the Business Combination. Further, also in December 2006,
      David Marshall acquired 2,500,000 shares of our common stock, as adjusted for
      the Business Combination, from Charles Rice, our Chairman, Chief Executive
      Officer and President, on the closing of the Business Combination in
      consideration for $150,000 payable to Mr. Rice within a twelve month period.
      Upon the closing of the Business Combination and the Private Placement, David
      Marshall and Mitchell Pindus beneficially owned 6,317,777 and 3,034,607 shares,
      respectively, of our common stock, or approximately 10.4% and 5.1% of the common
      stock outstanding. For more information on the ownership of David Marshall
      or
      Mitchell Pindus. See “Item 11. Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters.”




***Voting
      Agreements***




Upon
      the
      closing of the Business Combination, David Marshall, Mitchell Pindus and their
      affiliates agreed to enter into voting agreements with Charles Rice pursuant
      to
      which Mr. Rice will vote all shares of our common stock owned by David Marshall,
      Mitchell Pindus and their affiliates with respect to certain matters for a
      period of two years from the date of the closing of the Business Combination.
      These shares are subject to a voting agreement pursuant to which Charles Rice
      has voting power for a period of ninety days from December 29, 2006 for all
      shares for all matters, and for a period of two years from December 29, 2006
      with respect to all matters (limited to 4,000,000 shares owned by Marshall
      and
      his affiliates) and with respect to the selection of directors (the balance
      of
      shares owned by Marshall and his affiliates and all shares owned by Pindus
      and
      his affiliates).




Holders
      of options under our 2004 Plan are required to enter into an agreement granting
      Mr. Rice voting rights with respect to the common stock issued upon exercise
      of
      their options, which agreements expire ten years after execution
      thereof.




43




Holders
      of common stock purchased from Mr. Rice pursuant to options have entered into
      a
      shareholders’ agreement granting Mr. Rice voting rights with respect to the
      common stock issued upon exercise of their options, which agreements expire
      ten
      years after execution thereof.




***Indemnification
      Agreements***




We
      have
      indemnification agreements with each of our directors, officers and certain
      employees. The indemnification agreements provide that the director or officer
      will be indemnified to the fullest extent not prohibited by law for claims
      arising in such person’s capacity as a director or officer no later than 30 days
      after written demand to us. The agreements further provide that in the event
      of
      a change of control, we would seek legal advice from a special independent
      counsel selected by us and approved by the officer or director, who has not
      performed services for either party for five years, to determine the extent
      to
      which the officer or director would be entitled to an indemnity under applicable
      law. We believe that these agreements are necessary to attract and retain
      skilled management with experience relevant to our industry.




***Registration
      Rights***




In
      connection with our Business Combination and Private Placement on December
      29,
      2006, we agreed to file two registration statements on Form SB-2 pursuant to
      Rule 415 of the Securities Act. The first of which we agreed to file within
      thirty 30 days after the date of the closing of the Private Placement to cover
      the resale of the 10,235,000 shares of our common stock issued in the Private
      Placement and the second of which we agreed to file within 10 business days
      of
      the date six months after the effective date of the first registration statement
      to register certain shares of our common stock that were outstanding prior
      to
      the Business Combination, or the Existing Shares, and the shares underlying
      warrants issued to the placement agent and its affiliates.




The
      first
      registration statement on Form SB-2 was declared effective by the SEC on May
      10,
      2007. The second registration statement on Form SB-2 was declared effective
      by
      the SEC on January 31, 2008.




***Employment
      Agreements***




We
      have
      employment agreements with our executive officers described under “Item 10.
      Executive Compensation — Employment Agreements.”




**Director
      Independence**




See
“Item
      9. Directors, Executive Officers, Promoters and Control Persons; Compliance
      with
      Section 16(A) of Exchange Act — Executive Officers, Directors and Committees —
Board of Directors.”




**Item
      13. Exhibits**




(a)
            Exhibits




3.1*
            
            Articles
                of Incorporation3.2**
            
            Amended
                and Restated Articles of Incorporation3.3**+
            
            Amended
                and Restated Bylaws4.1*
            
            Specimen
                Certificate for Common Stock4.2**
            
            2004
                Stock Option Plan4.3**
            
            2007
                Omnibus Stock and Incentive Plan4.4**
            
            Form
                of Stock Option Agreement4.5****
            
            Form
                of Placement Agent Warrant4.6****
            
            Form
                of Bridge Financing Warrant4.7***
            
            Form
                of Exchange Agreement, dated as of December 29, 20064.8***
            
            Credit
                Term Agreement for the Bridge Financing, dated December 14,
                20064.9***
            
            Initial
                Registration Rights Agreement, dated as of December 29,
                20064.10***
            
            Additional
                Registration Rights Agreement, dated as of December 29,
                20064.11****
            
            Stock
                Purchase Agreement dated as of March 30, 2006 between InterMetro
                and David
                Singer4.12.1
            
            Form
                of Secured Note Financing Warrant4.12.2
            
            Form
                of Secured Note Financing Warrant9.1***
            
            Voting
                Trust Agreement, dated as of December 29, 20069.2***
            
            Voting
                Trust Agreement, dated as of December 29,
                2006




44




10.1****
            
            Employment
                Agreement dated as of January 1, 2004 between InterMetro and Charles
                Rice,
                as amended10.2****
            
            Employment
                Agreement dated as of January 1, 2004 between InterMetro and Jon
                deOng, as
                amended10.3****
            
            Employment
                Agreement dated as of January 1, 2004 between InterMetro and Vincent
                Arena, as amended10.4****
            
            Employment
                Agreement dated as of March 31, 2006 between Advanced Tel, Inc. and
                David
                Singer10.5****†
            
            Strategic
                Agreement dated as of May 2, 2004 between InterMetro and Qualitek
                Services, Inc.10.6****†
            
            Strategic
                Agreement dated as of May 2, 2006 between InterMetro and Cantata
                Technology, Inc.10.7****
            
            Office
                Lease between InterMetro and Pacific Simi Associates, LLC dated as
                of
                April 6, 200610.8****†
            
            Services
                Agreement between InterMetro and 99¢ Only Stores10.9****
            
            Form
                of Indemnification Agreement10.10***
            
            Placement
                Agent Agreement for the Private Placement, dated December 14,
                200610.11***
            
            Consulting
                Agreement with Advisor, dated as of December 29, 200610.12
            
            Loan
                and Security Agreement, dated January 16, 200810.13
            
            Form
                of Promissory Note21.1****
            
            Subsidiaries
                of InterMetro Communications, Inc.31.1
            
            Section
                302 Certification31.2
            
            Section
                302 Certification32.1
            
            Section
                906 Certification32.2
            
            Section
                906 Certification







*
            Incorporated
                by reference to the SB-2 filed with the Securities and Exchange Commission
                dated May 15, 2002.**
            Incorporated
                by reference to the Schedule 14C Information Statement filed with
                the
                Securities and Exchange Commission on March 6, 2007.**+
            Incorporated
                by reference to the Form 8K filed with the Securities and Exchange
                Commission dated June 28, 2007.***
            Incorporated
                by reference to the Form 8K filed with the Securities and Exchange
                Commission dated January 8, 2007.****
            Incorporated
                by reference to the SB-2 filed with the Securities and Exchange Commission
                dated February 9, 2007.†
            Confidential
                treatment has been requested for portions of this Exhibit which have
                been
                filed separately with the Securities and Exchange Commission pursuant
                to
                Rule 406 promulgated under the Securities
                Act.




(b)
            There
                were no Current Reports on Form 8-K filed by the Company during and
                subsequent to the last quarter of the fiscal year ended December
                31,
                2007.




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




HBM
      served as our auditors for the years ended December 31, 2006 and 2005. MHM
      is
      our principal accountant firm, replacing HBM on January 31, 2007. HBM provided
      other non-audit services to us during the year ended December 31, 2006. MHM
      has
      not provided any non-audit services to us during the year ended December 31,
      2007. The Audit Committee of our Board of Directors has considered whether
      the
      provision of non-audit services are compatible with maintaining HBM
      independence.




Each
      year
      the independent auditor’s retention to audit our financial statements, including
      the associated fee, is approved by the Board before the filing of the previous
      year’s Annual Report on Form 10-KSB.




**Audit
      Fees (in thousands):**





**2007**
            
            
            **2006**Audit
                Fees (1)
            
            $
            199
            
            $
            11Audit
                related fees (2)
            
            
            131
            
            
            -Tax
                related fees (2)
            
            
            -
            
            
            1All
                other fees
            
            
            -
            
            
            -$
            330
            
            $
            12







45




(1)
            Audit
                Fees paid to MHM in 2007 and HBM in 2006 consist of fees for the
                audit of
                our financial statements and review of the interim financial statements
                included in our quarterly reports.




(2)
            Audit
                related fees paid to MHM in 2007 consist primarily of fees for review
                of
                various S.E.C. filings. Non-Audit fees paid to HBM in 2006 consist
                of fees
                for the preparation of original federal and state income tax returns
                and
                fees for miscellaneous tax consulting
                services.




**Pre-Approval
      Policies and Procedures of Audit and Non-Audit Services of Independent
      Registered Public Accounting Firm**




The
      Audit
      Committee’s policy is to pre-approve, typically at the beginning of our fiscal
      year, all audit and non-audit services, other than de minimis non-audit
      services, to be provided by an independent registered public accounting firm.
      These services may include, among others, audit services, audit-related
      services, tax services and other services and such services are generally
      subject to a specific budget. The independent registered public accounting
      firm
      and management are required to periodically report to the full Board regarding
      the extent of services provided by the independent registered public accounting
      firm in accordance with this pre-approval, and the fees for the services
      performed to date. As part of the Board’s review, the Board will evaluate other
      known potential engagements of the independent auditor, including the scope
      of
      work proposed to be performed and the proposed fees, and approve or reject
      each
      service, taking into account whether the services are permissible under
      applicable law and the possible impact of each non-audit service on the
      independent auditor’s independence from management. At Audit Committee meetings
      throughout the year, the auditor and management may present subsequent services
      for approval. Typically, these would be services such as due diligence for
      an
      acquisition, that would not have been known at the beginning of the
      year.




The
      Audit
      Committee has considered the provision of non-audit services, if any, provided
      by our independent registered public accounting firm to be compatible with
      maintaining their independence. The Audit Committee will continue to approve
      all
      audit and permissible non-audit services provided by our independent registered
      public accounting firm.




46




**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, as amended, the Registrant has duly caused this report to be signed on
      its
      behalf by the undersigned, thereunto duly authorized.





INTERMETRO
                COMUUNICATIONS, INC.Dated:
                April 15,
                2008
            By:
            /s/
                Charles RiceCharles
                Rice, Chairman of the Board,Chief
                Executive Officer, and President




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, this
      report has been signed below by the following persons on behalf of the
      registrant and in the capacities and on the dates indicated.




By:
              /s/
                  Charles Rice
              
              Dated:
                  April 15, 2008Charles
                  Rice, Chairman of the Board,Chief
                  Executive Officer, and PresidentBy:
              /s/
                  Vincent Arena
              
              Dated:
                  April 15, 2008Vincent
                  ArenaChief
                  Financial Officer and DirectorBy:
              /s/
                  Jon deOng
              
              Dated:
                  April 15, 2008Jon
                  deOngChief
                  Technology Officer and DirectorBy:
              /s/
                  Joshua Touber
              
              Dated:
                  April 15, 2008Joshua
                  TouberDirectorBy:
              /s/
                  Robert Grden
              
              Dated:
                  April 15, 2008Robert
                  GrdenDirectorBy:
              /s/
                  Douglas Benson
              
              Dated:
                  April 15, 2008Douglas
                  BensonDirector




47




**INTERMETRO
      COMMUNICATIONS, INC.**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**CONTENTS**




**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005
            F-4Consolidated
                Statements of Stockholders’ Deficit for the years ended December 31, 2007,2006
                and 2005
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            F-6Notes
                to Consolidated Financial Statements
            F-7







**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of Directors and Stockholders




**InterMetro
      Communications, Inc.**




We
      have
      audited the accompanying consolidated balance sheets of InterMetro
      Communications, Inc. (the “Company”) as of December 31, 2007 and 2006 and the
      related consolidated statements of operations, stockholders’ deficit and cash
      flows for each of the three years in the period ended December 31, 2007.
      These consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements 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. 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 referred to above present fairly,
      in all material respects, the financial position of the Company as of December
      31, 2007 and 2006, and the results of their operations and their cash flows
      for
      each of the three years in the period ended December 31, 2007 in conformity
      with U.S. generally accepted accounting principles.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern.  As discussed in Note 1, the
      Company incurred net losses of $16,915,000, $13,930,000 and $1,112,000 for
      the
      years ended December 31, 2007, 2006 and 2005, respectively, and as of December
      31, 2007, the Company’s current liabilities exceeded its current assets by
      $12,003,000 and the Company had a deficit in stockholders’ equity of $9,217,000.
      Negative cash flows from operations were $9,283,000 and $3,393,000 for the
      years
      ended December 31, 2007 and 2006, respectively   The Company also
      anticipates that it will not have sufficient cash flow to fund its operations
      through the end of fiscal 2008.  These factors, among others, as discussed
      in Note 1 to the consolidated financial statements, raise substantial doubt
      about the Company’s ability to continue as a going concern.  Management’s
      plans in regard to these matters are also described in Note 1.  The
      consolidated financial statements do not include any adjustments relating to
      the
      recoverability and classification of asset carrying amounts or the amount and
      classification of liabilities that might result should the Company be unable
      to
      continue as a going concern.




/s/
      MAYER
      HOFFMAN MCCANN P.C.


MAYER
      HOFFMAN MCCANN P.C.


Los
      Angeles, California


April
        15,
        2008


F-2


**INTERMETRO
      COMMUNICATIONS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(Dollars
      in Thousands, except par value)**


**December
                31,****2007**
            
            **2006****ASSETS**Cash
            
            $
            277
            
            $
            151Cash
                held in escrow
            
            
            —
            
            
            10,235Accounts
                receivable, net of allowance for doubtful accounts of $125 at
              December
                31, 2007 and 2006
            
            
            1,875
            
            
            1,149Deposits
            
            
            180
            
            
            220Other
                current assets
            
            
            333
            
            
            215Total
                current assets
            
            
            2,665
            
            
            11,970Property
                and equipment, net
            
            
            937
            
            
            1,637Goodwill
            
            
            1,800
            
            
            1,800Other
                intangible assets
            
            
            119
            
            
            155Other
                long-term assets
            
            
            36
            
            
            5**Total
                Assets**
            
            $
            5,557
            
            $
            15,567**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT**Accounts
                payable, trade
            
            $
            8,924
            
            $
            6,350Accrued
                expenses
            
            
            3,519
            
            
            5,828Bank
                Overdraft
            
            
            464
            
            
            —Deferred
                revenues and customer deposits
            
            
            586
            
            
            1,102Borrowings
                under line of credit facilities
            
            
            190
            
            
            190Current
                portion of amounts and notes due to related parties
            
            
            215
            
            
            410Current
                portion of long-term capital lease obligations
            
            
            170
            
            
            153Promissory
                notes, including $250,000 from related parties
            
            
            600
            
            
            —Liability
                for options and warrants
            
            
            —
            
            
            5,384Borrowings
                under related party credit facilities
            
            
            —
            
            
            1,125Total
                current liabilities
            
            
            14,668
            
            
            20,542Capital
                lease obligations, net of current portion
            
            
            106
            
            
            95Total
                liabilities
            
            
            14,774
            
            
            20,637**Commitments
                and contingencies (Note 12)****Stockholders’
                Deficit**Preferred
                stock — $0.001 par value; 10,000,000 shares authorized; 0 shares issued
                and outstanding at December 31, 2007 and 2006
            
            
            —
            
            
            —Common
                stock — $0.001 par value;150,000,000 and 50,000,000 shares authorized at
                December 31, 2007 and December 31, 2006; 59,575,194 shares issued
                and
                outstanding at December 31, 2007 and 2006
            
            
            60
            
            
            60Additional
                paid-in capital
            
            
            25,807
            
            
            13,245Deferred
                stock based compensation
            
            
            (167
            )
            
            (373
            )Accumulated
                deficit
            
            
            (34,917
            )
            
            (18,002
            )Total
                stockholders’ deficit
            
            
            (9,217
            )
            
            (5,070
            )**Total
                Liabilities and Stockholders’ Deficit**
            
            $
            5,557
            
            $
            15,567





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


F-3


**INTERMETRO
        COMMUNICATIONS, INC.**
  **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(In
        thousands, except per share amounts)**


**Year
                    Ended December 31,****2007**
                
                **2006**
                
                **2005******************
                
                ************
                
                ************Net
                    revenues
                
                $
                22,694
                
                $
                20,109
                
                $
                10,580Network
                    costs
                
                
                23,467
                
                
                21,908
                
                
                7,357Gross
                    profit
                
                
                (773
                )
                
                (1,799
                )
                
                3,223Operating
                    expensesSales
                    and marketing (includes stock based compensation of $106, $97
                    and $0 for
                    the years ended December 31, 2007, 2006 and 2005,
                    respectively)
                
                
                2,072
                
                
                2,092
                
                
                668General
                    and administrative (includes stock based compensation of $1,487,
                    $1,721
                    and $443 for the years ended December 31, 2007, 2006 and 2005,
                    respectively)
                
                
                7,990
                
                
                8,252
                
                
                3,001Total
                    operating expenses
                
                
                10,062
                
                
                10,344
                
                
                3,669Operating
                    loss
                
                
                (10,835
                )
                
                (12,143
                )
                
                (446
                )Interest
                    expense, net (includes stock based charges of $0 , $970 and $59
                    for the
                    years ended December 31, 2007, 2006 and 2005,
                    respectively)
                
                
                460
                
                
                1,786
                
                
                665Loss
                    on liability for options and warrants
                
                
                5,615
                
                
                -
                
                
                -Loss
                    before provision for income taxes
                
                
                (16,910
                )
                
                (13,929
                )
                
                (1,111
                )Provision
                    for income taxes
                
                
                (5
                )
                
                (1
                )
                
                (1
                )Net
                    loss
                
                $
                (16,915
                )
                $
                (13,930
                )
                $
                (1,112
                )Basic
                    and diluted net loss per common share
                
                $
                (0.28
                )
                $
                (0.53
                )
                $
                (0.05
                )Shares
                    used to calculate basic and diluted net loss per common
                    share
                
                
                59,575
                
                
                26,071
                
                
                24,646




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


F-4


**INTERMETRO
      COMMUNICATIONS, INC.**




**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ DEFICIT**


**(Dollars
      in Thousands)**





**Preferred
                Stock**
            
            **Common
                Stock**
            
            **Additional**
              **Paid-In**
            
            **Deferred**
              **Stock
                Based**
            
            **Accumulated**
            
            **Total**
              **Stockholders’****Shares******
            
            **Amount**
            
            **Shares******
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **Deficit**
            
            **Deficit**Balance
                at December 31, 2004
            
            
            —
            
            $
            —
            
            
            24,645,816
            
            $
            25
            
            $
            682
            
            $
            (86
            )
            $
            (2,960
            )
            $
            (2,339
            )Issuance
                of common stock warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            171
            
            
            
            
            
            —
            
            
            171Issuance
                of common stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            794
            
            
            (794
            )
            
            —
            
            
            —Issuance
                of common stock warrants for equipment
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            269
            
            
            —
            
            
            —
            
            
            269Amortization
                of stock-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            306
            
            
            —
            
            
            306Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,112
            )
            
            (1,112
            )Balance
                at December 31, 2005
            
            
            —
            
            
            —
            
            
            24,645,816
            
            
            25
            
            $
            1,916
            
            
            (574
            )
            
            (4,072
            )
            
            (2,705
            )Beneficial
                conversion feature of Series A convertible promissory
                notes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            200
            
            
            —
            
            
            —
            
            
            200Issuance
                of Series B preferred stock, net
            
            
            117,660
            
            
            —
            
            
            —
            
            
            —
            
            
            545
            
            
            —
            
            
            —
            
            
            545Issuance
                of common stock warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,134
            
            
            —
            
            
            —
            
            
            2,134Issuance
                of common stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            639
            
            
            (191
            )
            
            —
            
            
            448Issuance
                of Founder’s common stock
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            29
            
            
            —
            
            
            —
            
            
            29Issuance
                of common stock for acquisition
            
            
            —
            
            
            —
            
            
            308,079
            
            
            —
            
            
            1,500
            
            
            —
            
            
            —
            
            
            1,500Amortization
                of stock-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            392
            
            
            —
            
            
            392Exercise
                of warrants
            
            
            —
            
            
            —
            
            
            1,621,479
            
            
            2
            
            
            11
            
            
            —
            
            
            —
            
            
            13Issuance
                of common stock warrants for private placement
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,775
            
            
            —
            
            
            —
            
            
            2,775Issuance
                of common stock in private placement
            
            
            —
            
            
            —
            
            
            10,235,000
            
            
            10
            
            
            10,225
            
            
            —
            
            
            —
            
            
            10,235Cost
                of capital capitalized in private placement
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (6,646
            )
            
            —
            
            
            —
            
            
            (6,646
            )Capital
                contribution from majority shareholder
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,350
            
            
            —
            
            
            —
            
            
            2,350Lucy’s
                Cafe reverse merger conversion:Exchange
                of Series A Notes
            
            
            —
            
            
            —
            
            
            13,732,379
            
            
            14
            
            
            3,098
            
            
            —
            
            
            —
            
            
            3,112Exchange
                of Series B Preferred Stock
            
            
            (117,660
            )
            
            —
            
            
            1,232,441
            
            
            1
            
            
            (1
            )
            
            —
            
            
            —
            
            
            —Merger
                of Lucy’s Cafe
            
            
            —
            
            
            —
            
            
            7,800,000
            
            
            8
            
            
            (146
            )
            
            —
            
            
            —
            
            
            (138
            )Liability
                for options and warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,384
            )
            
            —
            
            
            —
            
            
            (5,384
            )Net
                loss for the year ended December 31, 2006
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (13,930
            )
            
            (13,930
            )Balance
                at December 31, 2006
            
            
            
            
            
            
            
            
            59,575,194
            
            
            60
            
            
            13,245
            
            
            (373
            )
            
            (18,002
            )
            
            (5,070
            )Amortization
                of stock-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,387
            
            
            206
            
            
            —
            
            
            1,593Cash
                refunded from reduction of private placement fees
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            176
            
            
            —
            
            
            —
            
            
            176Reclassification
                of Options and Warrants Liability to Equity
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            10,999
            
            
            —
            
            
            —
            
            
            10,999Net
                loss for the year ended December 31, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (16,915
            )
            
            (16,915
            )Balance
                at December 31, 2007
            
            
            —
            
            $
            —
            
            
            59,575,194
            
            $
            60
            
            $
            25,807
            
            $
            (167
            )
            $
            (34,917
            )
            $
            (9,217
            )





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


F-5


**INTERMETRO
        COMMUNICATIONS, INC.**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(Dollars
        in Thousands)**





**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005******Cash
                flows from operating activities:Net
                loss
            
            $
            (16,915
            )
            $
            (13,930
            )
            $
            (1,112
            )Adjustments
                to reconcile net loss to net cash (used in) provided by operating
                activities:Depreciation
                and amortization
            
            
            1,046
            
            
            810
            
            
            579Stock
                based compensation
            
            
            1,593
            
            
            2,197
            
            
            477Amortization
                of debt discount
            
            
            —
            
            
            392
            
            
            59Charge
                for beneficial conversion feature of Series A convertible promissory
                notes
            
            
            —
            
            
            200
            
            
            —Loss
                on options and warrants
            
            
            5,615
            
            
            —
            
            
            —Provision
                for bad debts
            
            
            —
            
            
            125
            
            
            (17
            )(Increase)
                decrease in operating assets:Accounts
                receivable
            
            
            (726
            )
            
            28
            
            
            (322
            )Deposits
            
            
            40
            
            
            34
            
            
            (166
            )Other
                current assets
            
            
            (118
            )
            
            (125
            )
            
            10Other
                long-term assets
            
            
            (31
            )
            
            (3
            )
            
            27Increase
                (decrease) in operating liabilities:Accounts
                payable, trade
            
            
            2,574
            
            
            5,028
            
            
            582Accrued
                expenses
            
            
            (2,309
            )
            
            975
            
            
            1,089Bank
                overdraft
            
            
            464Deferred
                revenues and customer deposits
            
            
            (516
            )
            
            876
            
            
            137Net
                cash (used in) provided by operating activities
            
            
            (9,283
            )
            
            (3,393
            )
            
            1,343Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (77
            )
            
            (51
            )
            
            (791
            )(Increase)
                decrease in restricted cash
            
            
            —
            
            
            30
            
            
            (30
            )Net
                cash used in investing activities
            
            
            (77
            )
            
            (21
            )
            
            (821
            )Cash
                flows from financing activities:Cash
                acquired in acquisition of Advanced Tel, Inc.
            
            
            —
            
            
            459
            
            
            —Proceeds
                from secured notes
            
            
            600
            
            
            —
            
            
            —Net
                proceeds from escrow for private placement
            
            
            10,235
            
            
            —
            
            
            —Cash
                refunded from reduction of private placement fees
            
            
            176
            
            
            —
            
            
            —Proceeds
                from related party loan
            
            
            160Payment
                of amounts due to related party
            
            
            (355
            )
            
            (84
            )
            
            —Net
                proceeds from issuance of Series A convertible promissory
                notes
            
            
            —
            
            
            565
            
            
            —Net
                proceeds from issuance of Series B preferred stock
            
            
            —
            
            
            985
            
            
            —Proceeds
                from related party credit facility
            
            
            —
            
            
            1,125
            
            
            —Net
                proceeds from related party line of credit facility
            
            
            —
            
            
            190
            
            
            30Repayment
                of related party line of credit facility
            
            
            (1,125
            )
            
            (30
            )
            
            —Proceeds
                from exercise of warrants
            
            
            —
            
            
            13
            
            
            —Principal
                payments on capital lease obligations
            
            
            (205
            )
            
            (223
            )
            
            (241
            )Net
                cash (used in) provided by financing activities
            
            
            9,486
            
            
            3,000
            
            
            (211
            )Net
                increase (decrease) in cash
            
            
            126
            
            
            (414
            )
            
            311Cash
                at beginning of year
            
            
            151
            
            
            565
            
            
            254Cash
                at end of year
            
            $
            277
            
            $
            151
            
            $
            565





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


F-6


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1
      — Nature of Operations and Summary of Significant Accounting
      Policies**





*Company
      Background* -
      InterMetro Communications, Inc., formerly Lucy’s Cafe, Inc., (hereinafter,
“InterMetro” or the “Company”) is a Nevada corporation which, through its wholly
      owned subsidiary, InterMetro Communications, Inc. (Delaware) (hereinafter,
      “InterMetro Delaware”), is engaged in the business of providing voice over
      Internet Protocol (“VoIP”) communications services. The Company owns and
      operates state-of-the-art VoIP switching equipment and network facilities that
      are utilized to provide traditional phone companies, wireless phone companies,
      calling card companies and marketers of calling cards with wholesale voice
      and
      data services, and voice-enabled application services. The Company’s customers
      pay the Company for minutes of utilization or bandwidth utilization on its
      national voice and data network and the Company’s calling card marketing
      customers pay per calling card sold. The Company’s business is located in Simi
      Valley, California.




On
      December 29, 2006, the Company consummated the acquisition of InterMetro
      Delaware, a privately-held company, through a merger transaction (the “Business
      Combination”) which resulted in a share exchange such that the InterMetro
      Delaware Investors became the controlling shareholders of InterMetro, and such
      that InterMetro Delaware became a wholly owned subsidiary of InterMetro. All
      costs associated with the Business Combination were expensed as
      incurred.




Pursuant
      to the Business Combination, the Company issued directly to the InterMetro
      Delaware Investors, in two phases, a total of 41,540,194 shares of common stock
      in exchange for all of their issued and outstanding shares of common stock
      (the
“Private Company Common Stock”) and preferred stock, and outstanding convertible
      promissory notes on an as converted basis. The first phase issuance occurred
      effectively on December 29, 2006 and included the issuance of 27,490,194
      shares of common stock in exchange for the entire principal amount of the
      convertible promissory notes and accrued interest due, all outstanding shares
      of
      preferred stock and Private Company Common Stock held by non-employees, and
      a
      portion of the Private Company Common Stock held by employees. On May 31, 2007,
      the Company filed Amended and Restated Articles of Incorporation increasing
      the
      Company’s authorized shares of common stock to 150,000,000, par value
      $0.001 per share, at which time the second phase of 14,049,580 shares of common
      stock were effectively issued in exchange for all of the remaining Private
      Company Common Stock held by the employees of InterMetro Delaware. All
      InterMetro Delaware securities were effectively cancelled except 100 shares
      of
      Private Company Common Stock which represent 100% of the outstanding stock
      of
      the wholly-owned subsidiary.




*Basis
      of Presentation* - For
      accounting purposes, the Business Combination was accounted for as a
      recapitalization of InterMetro Delaware. Accordingly, the historical financial
      statements of the Company reflect the historical operations and financial
      statements of InterMetro Delaware before the Business Combination. See Notes
      6,
      7, 8, 9 and 10 for more detailed discussions of the Business
      Combination.




All
      share
      and per share data provided in these Notes to Consolidated Financial Statements
      have been retroactively restated to reflect the conversion ratio related to
      the
      exchange of shares in the Business Combination, unless otherwise stated herein.
      All preferred share data is provided on a pre-exchange basis as all of the
      preferred shares were exchanged as part of the Business Combination. See Note
      7
      for detailed discussions of the exchange of preferred stock in the Business
      Combination.





*Going
      Concern* - The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern, which contemplates the realization
      of
      assets and settlement of obligations in the normal course of business. The
      Company incurred net losses of $16,915,000, $13,930,000 and $1,112,000 for
      the
      years ended December 31, 2007, 2006 and 2005, respectively. In addition, the
      Company had total shareholders’ deficit of $9,217,000 and a working capital
      deficit of $12,003,000 as of December 31, 2007. The consolidated financial
      statements do not include any adjustments relating to the recoverability and
      classification of asset carrying amounts or the amount and classification of
      liabilities that might result should the Company be unable to continue as a
      going concern.


F-7


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Management
      believes that the recent losses are primarily attributable to costs related
      to
      building out and supporting a robust telecommunications infrastructure and
      the
      requirement for continued expansion of the customer base and the resultant
      increase in revenues in order for the Company to become profitable. The Company
      continues to require outside financing until such time as we can achieve
      positive cash flow from operations. In November and December 2007, the Company
      received $600,000 and in January 2008, the Company received $620,000 pursuant
      to
      the sale of secured notes with individual investors and can continue to sell
      similar secured notes up to a maximum offering of $3 million. We anticipate
      completing the additional financing required but there can be no assurance
      that
      we will be successful in completing this required financing or that we will
      continue to expand our revenue base to the extent required to achieve positive
      cash-flows from operations in the future.





The
      Company will be required to obtain other financing during the next twelve months
      or thereafter as a result of future business developments, including any
      acquisitions of business assets or any shortfall of cash flows generated by
      future operations in meeting the Company’s ongoing cash requirements. Such
      financing alternatives could include selling additional equity or debt
      securities, obtaining long or short-term credit facilities, or selling operating
      assets. No assurance can be given, however, that the Company could obtain such
      financing on terms favorable to the Company or at all. Any sale of additional
      common stock or convertible equity or debt securities would result in additional
      dilution to the Company’s stockholders.





*Principles
      of Consolidation* - The
      consolidated financial statements include the accounts of InterMetro, InterMetro
      Delaware, and InterMetro Delaware’s wholly owned subsidiary, Advanced
      Tel, Inc. (“ATI”). All intercompany balances and transactions have been
      eliminated in consolidation.




*Use
      of Estimates* - In the
      normal course of preparing financial statements in conformity with U.S.
      generally accepted accounting principles, management is required to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      Beginning in the quarter ended December 2005, the Company began to significantly
      increase the sale of minutes through retail calling cards. During 2006, these
      increased sales provided additional data that allowed the Company to modify
      the
      process for estimating revenues for retail calling cards. The improved process
      resulted in a decrease in revenues of $330,000 for the year ended
      December 31, 2006 compared to the results for this period if the Company
      had not modified the process.





*Revenue
      Recognition* - VoIP
      services are recognized as revenue when services are provided primarily based
      on
      usage. Revenues derived from sales of calling cards through retail distribution
      partners are deferred upon sale of the cards. These deferred revenues are
      recognized as revenue generally at the time card minutes are expended. The
      Company recognizes revenue in the period that services are delivered and when
      the following criteria have been met: persuasive evidence of an arrangement
      exists, the fees are fixed and determinable, no significant Company obligations
      remain and collection is reasonably assured. Deferred revenue consists of fees
      received or billed in advance of the delivery of the services or services
      performed in which collection is not reasonably assured. This revenue is
      recognized when the services are provided and no significant Company obligations
      remain. Management of the Company assesses the likelihood of collection based
      on
      a number of factors, including past transaction history with the customer and
      the credit worthiness of the customer. Generally, management of the Company
      does
      not request collateral from customers. If management of the Company determines
      that collection of revenues are not reasonably assured, amounts are deferred
      and
      recognized as revenue at the time collection becomes reasonably assured, which
      is generally upon receipt of cash.




*Accounts
      Receivable* -
      Accounts receivable consist of trade receivables arising in the normal course
      of
      business. The Company does not charge interest on its trade receivables. The
      allowance for doubtful accounts is the Company’s best estimate of the amount of
      probable credit losses in the Company’s existing accounts receivable. The
      Company reviews its allowance for doubtful accounts monthly. The Company
      determines the allowance based upon historical write-off experience, payment
      history and by reviewing significant past due balances for individual
      collectibility. If estimated allowances for uncollectible accounts subsequently
      prove insufficient, additional allowance may be required.




*Network
      Costs* - The
      Company’s network costs consist of telecommunication costs, leasing collocation
      facilities and certain build-outs, and depreciation of equipment related to
      the
      Company’s network infrastructure. It is not unusual in the Company’s industry to
      occasionally have disagreements with vendors relating to the amounts billed
      for
      services provided between the recipient of those services and the vendor. As
      a
      result, the Company currently has disputes with vendors that it believes did
      not
      bill certain network charges correctly.  The Company’s policy is to include
      amounts that it intends to dispute or that it has disputed in a reserve account
      as an offset to accounts payable if management believes that the facts and
      circumstances related to the dispute provide probable support that the dispute
      will be resolved in the Company’s favor.




F-8


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





*Advertising
      Costs* - The
      Company expenses advertising costs as incurred. Advertising costs included
      in
      sales and marketing expenses were $99,950, $157,200 and $59,975 for the years
      ended December 31, 2007, 2006 and 2005, respectively.




*Depreciation
      and Amortization* -
      Depreciation and amortization of property and equipment is computed using the
      straight-line method based on the following estimated useful lives:





Telecommunications
                equipment
            
            2-3
                yearsTelecommunications
                software
            
            18
                months to 2 yearsComputer
                equipment
            
            2
                yearsOffice
                equipment and furniture
            
            3
                yearsLeasehold
                improvements
            
            Useful
                life or remaining lease term, which ever is
                shorter





Maintenance
      and repairs are charged to expense as incurred; significant betterments are
      capitalized.




*Impairment
      of Long-Lived Assets* - The
      Company assesses impairment of its other long-lived assets in accordance with
      the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-lived Assets.” An impairment
      review is performed whenever events or changes in circumstances indicate that
      the carrying value may not be recoverable. Factors considered by the Company
      include:




·
            significant
                underperformance relative to expected historical or projected future
                operating results;




·
            significant
                changes in the manner of use of the acquired assets or the strategy
                for
                our overall business; and




·
            significant
                negative industry or economic
                trends.





When
      management of the Company determines that the carrying value of a long-lived
      asset may not be recoverable based upon the existence of one or more of the
      above indicators of impairment, an estimate is made of the future undiscounted
      cash flows expected to result from the use of the asset and its eventual
      disposition. If the sum of the expected future undiscounted cash flows and
      eventual disposition is less than the carrying amount of the asset, an
      impairment loss is recognized in the amount by which the carrying amount of
      the
      asset exceeds the fair value of the asset, based on the fair market value if
      available, or discounted cash flows if not. To date, the Company has not had
      an
      impairment of long-lived assets and is not aware of the existence of any
      indicators of impairment.




*Goodwill
      and Intangible Assets* - The
      Company records goodwill when consideration paid in a business acquisition
      exceeds the fair value of the net tangible assets and the identified intangible
      assets acquired. The Company accounts for goodwill and intangible assets in
      accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS 142
      requires that goodwill and intangible assets with indefinite useful lives not
      be
      amortized, but instead be tested for impairment at least annually or whenever
      changes in circumstances indicate that the carrying value of the goodwill may
      not be recoverable. SFAS No. 142 also requires the Company to amortize
      intangible assets over their respective finite lives up to their estimated
      residual values.





*Stock-Based
      Compensation* -
      Effective January 1, 2006, the Company adopted SFAS No. 123(R),
“Share-Based Payments,” which revises SFAS 123, “Accounting for Stock-Based
      Compensation” issued in 1995. Prior to the adoption of SFAS 123(R), the Company
      accounted for stock-based employee compensation arrangements using the intrinsic
      value method in accordance with the provisions and related interpretations
      of
      Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued
      to Employees” (“APB 25”). The Company adopted SFAS 123(R) applying the
“modified prospective transition method” under which it continues to account for
      nonvested equity awards outstanding at the date of adoption of SFAS 123(R)
      in
      the same manner as they had been accounted for prior to adoption, that is,
      it
      would continue to apply APB 25 in future periods to equity awards outstanding
      at
      the date it adopted SFAS 123(R), unless the options are modified or
      amended.




F-9


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Under
      the
      provisions of SFAS 123, the Company has elected to continue to recognize
      compensation cost for employees of the Company under the minimum value method
      of
      APB 25 and comply with the pro forma disclosure requirements under SFAS 123
      for
      all options granted prior to January 1, 2006. Stock-based employee
      compensation cost is reflected in net loss related to common stock options
      if
      options granted under the plan have an exercise price below the deemed fair
      market value of the underlying common stock on the date of grant. The following
      illustrates the pro forma effect on net loss if the fair value recognition
      provisions of SFAS 123 had been applied to all outstanding and unvested awards
      granted prior to January 1, 2006 (dollars in thousands except per share
      data):




**December 31,**
                **2005**Net
                  loss, as reported
              
              $
              (1,112
              )Stock-based
                  employee compensation expenses, net of related tax effects, includedin
                  determination of net loss, as reported
              
              
              57Stock-based
                  employee compensation expenses, net of related tax effects, thatwould
                  have been included in the determination of net loss if the fair
                  value
                  basedmethod
                  had been applied to all awards
              
              
              (69
              )Pro
                  forma net loss
              
              $
              (1,124
              )Basic
                  and diluted net loss per common share as reported
              
              $
              (0.05
              )Basic
                  and diluted pro forma net loss per common share
              
              $
              (0.05
              )Shares
                  used to calculate basic and diluted pro forma net loss per common
                  share.
              
              
              24,646


The
      Company calculated the fair value of the options included in the above pro
      forma
      using a risk free rate of 4.1% to 4.3%, expected lives of 4 to 10 years, 0%
      dividend yield and 0% expected volatility.  At the date of the adoption, unamortized
      expense for options issued prior to December 31, 2005 was $574,000, which will
      be amortized as stock compensation costs through September 2009.





For
      grants to employees under the 2004 plan and 2007 plan in the years ended
      December 31, 2007 and 2006, the Company estimated the fair value of each option
      award on the date of grant using the Black-Scholes option-pricing model using
      the assumptions noted in the following table. Expected volatility is based
      on
      the historical volatility of a peer group of publicly traded entities. The
      expected term of the options granted is derived from the average midpoint
      between vesting and the contractual term, as described in the SEC’s Staff
      Accounting Bulletin No. 107, “Share-Based Payment.” The risk-free rate for the
      expected term of the option is based on the U.S. Treasury yield curve in effect
      at the time of grant. The assumptions used to value these employee options
      granted during the years ended December 31, 2007 and 2006 were as follows:





**2007**
            
            **2006**Risk-free
                interest rate
            
            
            3.2
            %
            
            4.3%
                - 4.9
            %Expected
                lives (in years)
            
            
            2.8 – 2.9
            
            
            5.3 –
                5.9Dividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            71%
                - 72
            %
            
            81
            %Forfeiture
                rate
            
            
            0
            %
            
            0
            %




F-10




**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





Prior
      to
      January 1, 2006, the Company accounted for equity instruments issued to
      non-employees in accordance with the provisions of SFAS 123, and Emerging Issues
      Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That are
      Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling
      Goods or Services.” Effective January 1, 2006, the Company accounts for
      equity instruments issued to non-employees in accordance with the provisions
      of
      SFAS 123(R). All transactions in which goods or services are the consideration
      received for the issuance of equity instruments are accounted for based on
      the
      fair value of the consideration received or the fair value of the equity
      instrument issued, whichever is more readily measured. The measurement date
      of
      the fair value of the equity instrument issued is the earlier of the date on
      which the counterparty’s performance is complete or the date on which it is
      probable that performance will occur.





The
      Company calculated the fair value of these non-employee grants as described
      in
      SFAS 123(R) using the following range of assumptions:





**2007**
            
            **2006**
            
            **2005**Risk-free
                interest rate
            
            
            4.4%
                - 4.8
            %
            
            4.2%
                - 4.9
            %
            
            3.5%
                - 4.3
            %Expected
                lives (in years)
            
            
            4.3 –
                5.0 Years
            
            
            5.3 –
                5.8 Years
            
            
            2.5 YearsDividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            89%
                - 93
            %
            
            79%
                -97
            %
            
            44
            %Forfeiture
                rate
            
            
            0
            %
            
            0
            %
            
            0
            %




*Debt
      with Detachable Warrants and/or Beneficial Conversion Feature* –
      The Company accounts for the issuance of detachable stock purchase warrants
      in
      accordance with APB No. 14, whereby it separately measures the fair value of
      the
      debt and the detachable warrants and allocates the proceeds from the debt on
      a
      pro-rata basis to each. The resulting discount from the fair value of the debt
      allocated to the warrant, which is accounted for as paid-in capital, is
      amortized over the estimated life of the debt. In accordance with the provisions
      of EITF Issue No. 98-5 “Accounting for Convertible Securities with Beneficial
      Conversion Features or Contingently Adjustable Conversion Ratios” and Issue No.
      00-27 “Application of EITF Issue No. 98-5 ‘Accounting for Convertible Securities
      with Beneficial Conversion Features or Contingently Adjustable Conversion
      Ratios’ to Certain Convertible Instruments,” the Company allocates a portion of
      the proceeds received to any embedded beneficial conversion feature, based
      on
      the difference between the effective conversion price of the proceeds allocated
      to the convertible debt and the fair value of the underlying common stock on
      the
      date the debt is issued. In addition, for the detachable stock purchase
      warrants, the Company first allocates proceeds to the stock purchase warrants
      and the debt and then allocates the resulting debt proceeds between the
      beneficial conversion feature, which is accounted for as paid-in capital, and
      the initial carrying amount of the debt.





In
      accordance with EITF Issue No. 98-5, the Company recognized the value of
      embedded beneficial conversion features of $0, $200,093 and $0 in the years
      ended December 31, 2007, 2006 and 2005, respectively as additional paid-in
      capital and these amounts were recorded as interest expense at the date of
      issue
      of the related convertible notes as all notes were immediately
      convertible.





*Concentration
      of Credit Risk* -
      Financial instruments that potentially subject the Company to concentrations
      of
      credit risk consist primarily of cash, accounts receivable, accounts payable,
      accrued expenses, and short term debt. The Company maintains its cash with
      a
      major financial institution located in the United States. The balances are
      insured by the Federal Deposit Insurance Corporation up to $100,000 per account.
      Periodically throughout the year the Company maintained balances in excess
      of
      federally insured limits. The Company encounters a certain amount of risk as
      a
      result of a concentration of revenue from a few significant customers and
      services provided from vendors. Credit is extended to customers based on an
      evaluation of their financial condition. The Company generally does not require
      collateral or other security to support accounts receivable. The Company
      performs ongoing credit evaluations of its customers and records an allowance
      for potential bad debts based on available information. To date, such losses,
      if
      any, have been within management’s expectations.




The
      Company had one customer which accounted for 10% of net revenue for the twelve
      months ended December 31, 2007. The Company had two customers which accounted
      for 25% (11% and 14%) of net revenue for the year ended December 31, 2006.
      The
      Company had three customers which accounted for 42% (21%, 11% and 10%
      individually) of net revenue for the year ended December 31, 2005.




F-11


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





One
      customer had an outstanding accounts receivable balance in excess of 10% of
      the
      total accounts receivable at December 31, 2006 which represented 11.1% of
      the total accounts receivable at December 31, 2006. No customer had an
      outstanding accounts receivable balance in excess of 10% of the total accounts
      receivable at December 31, 2007.




*Income
      Taxes* - The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
      for Income Taxes,” which requires recognition of deferred tax liabilities and
      assets for the expected future tax consequences of events that have been
      included in the financial statements or tax returns. Under this method, deferred
      tax liabilities and assets are determined based on the temporary differences
      between the financial statement and tax basis of assets and liabilities using
      presently enacted tax rates in effect. Valuation allowances are established
      when
      necessary to reduce deferred tax assets to the amounts expected to be
      realized.




*Segment
      and Geographic Information* - The
      Company operates in one principal business segment primarily in the United
      States. All of the operating results and identified assets are located in the
      United States.




*Basic
      and Diluted Net Loss per Common Share* - Basic
      net loss per common share excludes dilution for potential common stock issuances
      and is computed by dividing net loss by the weighted-average number of common
      shares outstanding for the period. As the Company reported a net loss for all
      periods presented, the conversion of promissory notes and the exercise of stock
      options and warrants were not considered in the computation of diluted net
      loss
      per common share because their effect is anti-dilutive.




*Recent
      Accounting Pronouncements* - In
      June 2006, the Financial Accounting Standards Board (“FASB”) issued
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
      Interpretation of FASB Statement No. 109” (“FIN 48”), which is an interpretation
      of FASB Statement No. 109. The interpretation provides guidance associated
      with
      the recognition and measurement of tax positions and related reporting and
      disclosure requirements. The Company adopted this interpretation at January
      1,
      2007, and this did not have a material impact on our consolidated financial
      position, results of operations or cash flows.




In
      September 2006, the FASB issued Statements of Financial Accounting
      Standards (“SFAS”) No. 157, “Fair Value Measurements.” This statement defines
      fair value, establishes a framework for measuring fair value in GAAP, and
      expands disclosures about fair value measurements. The statement is effective
      for the fiscal years beginning after November 15, 2007. The Company is
      currently evaluating the potential impact, if any, on the Company’s consolidated
      financial statements.




In
      September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans,” an amendment of FASB
      Statements No. 87, 88, 106, and 132(R). This statement requires an employer
      to
      recognize the over-funded or under-funded status of a defined benefit
      postretirement plan as an asset or liability in its statement of financial
      position and to recognize changes in that funded status in the year in which
      the
      changes occur through comprehensive income. The funded status of the plan is
      measured as the difference between plan assets at fair value and the benefit
      obligation. The statement was effective for fiscal years ending after
      December 15, 2006. The Company does not have a pension plan or other post
      retirement plan. As such there was no impact on the Company’s financial
      position, results of operations, or cash flows.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities,” including an amendment of FASB
      Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure
      many financial instruments and certain other items at fair value that are not
      currently required to be measured at fair value. Unrealized gains and losses
      on
      items for which the fair value option has been elected are reported in earnings.
      SFAS 159 does not affect any existing accounting literature that requires
      certain assets and liabilities to be carried at fair value. SFAS 159 is
      effective for fiscal years beginning after November 15, 2007. We do not
      expect the adoption of this new standard will have a material effect on our
      financial position, cash flows or results of operations.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations,” (“SFAS No. 141(R)” ). SFAS No. 141(R) requires the
      acquiring entity in a business combination to recognize all (and only) the
      assets acquired and liabilities assumed in the transaction; establishes the
      acquisition-date fair value as the measurement objective for all assets acquired
      and liabilities assumed; and requires the acquirer to disclose to investors
      and
      other users all of the information they need to evaluate and understand the
      nature and financial effect of the business combination. Early adoption of
      the
      statement is not permitted. SFAS 141(R) is effective for business combinations
      which occur in fiscal years beginning on or after December 15, 2008. The
      adoption of SFAS 141(R) will impact the accounting for business combinations
      completed, if any, by the Company on or after January 1, 2009.




F-12


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements, an Amendment of ARB No. 51.” SFAS No. 160
      amends ARB No. 51 to establish accounting and reporting standards for
      noncontrolling interests in subsidiaries and for the deconsolidation of
      subsidiaries. It clarifies that a noncontrolling interest in a subsidiary is
      an
      ownership interest that should be reported as equity in the consolidated
      financial statements. The provisions of SFAS No. 160 are effective for fiscal
      years beginning on or after December 15, 2008, and interim periods within those
      fiscal years. Early adoption is prohibited. The
      Company is evaluating the impact of the adoption of SFAS 160 and believes
      there will be no material impact on our consolidated financial statements or
      financial operations.





In
      March
      2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments
      and Hedging Activities, an amendment of SFAS 133.” This statement requires
      enhanced disclosures about derivative instruments and hedging activities within
      an entity by requiring the disclosure of the fair values of derivative
      instruments and their gains and losses in a tabular format. It provides more
      information about an entity's liquidity by requiring disclosure of derivative
      features that are credit risk related, and it requires cross-referencing within
      footnotes to enable financial statement users to locate important information
      about derivative instruments. It is effective for financial statements issued
      for fiscal years and interim periods beginning after November 15, 2008,
      with early adoption permitted. The Company is evaluating the impact of the
      adoption of SFAS 161 and believes there will be no material impact on our
      consolidated financial statements or financial operations.





In
      December 2007, the SEC issued SAB No. 110, “Certain Assumptions Used in
      Valuation Methods - Expected Term” (“SAB 110”). According to SAB 110, under
      certain circumstances, the SEC staff will continue to accept, beyond December
      31, 2007, the use of the simplified method in developing an estimate of expected
      term of share options that possess certain characteristics in accordance with
      SFAS 123(R). We adopted SAB 110 effective January 1, 2008 and will continue
      to
      use the simplified method in developing the expected term used for our valuation
      of stock-based compensation.





**2
      — Acquisition and Intangible Assets**




In
      March 2006, the Company acquired all of the outstanding stock of Advanced
      Tel, Inc. (“ATI”), a switchless reseller of wholesale long-distance services,
      for a combination of shares of common stock and cash. The Company acquired
      ATI
      to increase its customer base, to add minutes and revenue to its network and
      to
      access new sales channels. The initial portion of the purchase price included
      308,079 shares of the Company’s common stock, a payable of $250,000 to be paid
      over the six-month period following the closing and a two-year unsecured
      promissory note in an amount tied to ATI’s working capital of $150,000. These
      amounts are payable to the former selling shareholder of ATI who was appointed
      President of ATI at the acquisition closing date. The amount of common stock
      consideration paid to the selling shareholder of ATI is subject to adjustment
      (or the payment of additional cash in lieu thereof at the option of the Company)
      if the trading price of the Company’s common stock does not reach a minimum
      price of $4.87 per share during the two years following the closing date. The
      value of this guarantee on the initial shares issued to the selling shareholder
      of ATI has been included in the Company’s determination of the purchase price of
      the ATI acquisition.




The
      selling shareholder of ATI may earn an additional 308,079 shares of the
      Company’s common stock and additional cash amounts during the two-year period
      following the closing upon meeting certain performance targets tied to revenue
      and profitability, which could make the total purchase price of this acquisition
      approximately $3.9 million. The first pay-out for the one year period
      following the transaction close was due to be paid on June 30, 2007; however,
      the earn-out provisions are subject to qualitative factors and we expect to
      negotiate with the seller to determine the amount of earn-out that will be
      paid.
      Consequently, the Company has not accrued an earn-out. The maximum amount that
      could be paid for this earn-out is 154,040 shares of the Company’s common
      stock.





F-13


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      value
      of the Company’s stock given to the selling shareholder of ATI at the closing
      was determined based on standard business valuation approaches, including a
      discounted future cash flow approach and a capital markets approach. The
      discounted future cash flow approach uses estimates of revenues, driven by
      market growth rates, and estimated costs as well as appropriate discount rates.
      These estimates are consistent with the Company’s plans and estimates that
      management uses to manage the business. The capital markets approach to
      valuation was used by identifying publicly traded companies considered
      sufficiently comparable to the Company. In addition, the Company included the
      value implied by recent equity-related financings, the accretive value of its
      business from various milestones (key management hires, volume thresholds
      (minutes and revenues), inroads into the retail distribution channel, positive
      cash flow, etc.). There is inherent uncertainty in making these estimates;
      however, management believes the value ascribed to the Company’s common stock
      given to the selling shareholder of ATI is reasonable as of the transaction
      date.




The
      net
      tangible assets acquired and liabilities assumed in the acquisition were
      recorded at fair value. The Company determined the valuation of the identifiable
      intangible assets acquired in the transaction to be $182,620 using future
      revenue assumptions and a valuation analysis. Additionally, the Company recorded
      goodwill of $1,800,347 associated with the purchase of ATI .




The
      consideration paid for ATI was comprised of (in thousands):





Total
                amounts and notes payable to related party
            
            $
            400Common
                stock (initial 308,079 shares issued)
            
            
            1,500Direct
                acquisition related costs
            
            
            40Total
                consideration
            
            $
            1,940




Any
      future earn-out payments will be added to goodwill.




The
      purchase price of ATI was allocated as follows (in thousands):




Liabilities
                assumed in excess of net assets acquired
            
            $
            (43
            )Goodwill
            
            
            1,800Customer
                relationships
            
            
            183Total
                purchase price
            
            $
            1,940




The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed at the date of acquisition (in thousands):




Cash
            
            $
            459Accounts
                receivable
            
            
            767Other
                current assets
            
            
            10Total
                current assets acquired
            
            
            1,236Net
                fixed assets
            
            
            42Total
                assets acquired
            
            
            1,278Accounts
                payable
            
            
            590Accrued
                liabilities
            
            
            731Total
                current liabilities assumed
            
            
            1,321Liabilities
                assumed in excess of net assets acquired
            
            $
            (43
            )




**Pro
      forma information (Unaudited)**




The
      following unaudited condensed pro forma information presents combined financial
      information as if the acquisition of ATI had been effective at the beginning
      of
      each year presented. The pro forma information includes adjustments reflecting
      changes in the amortization of intangibles and the elimination of InterMetro’s
      revenues reported by ATI as if ATI had been included in the Company’s results of
      operations (in thousands except per share data):


F-14


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




****
            
            **Year
                Ended**
              **December
                31,**
              **2006**
            
            **Year Ended**
              **December 31,**
              **2005**Revenue
            
            $
            22,182
            
            $
            18,432Operating
                loss
            
            $
            (12,124
            )
            $
            (588
            )Net
                loss
            
            $
            (14,096
            )
            $
            (1,242
            )Basic
                and diluted earnings per share
            
            $
            (0.54
            )
            $
            (0.05
            )Number
                of shares outstanding
            
            
            26,148
            
            
            24,954




**3
      — Other Current Assets**




The
      following is a summary of the Company’s other current assets (in
      thousands):





**December
                31,******
            
            **2007******
            
            **2006******Employee
                advances
            
            $
            66
            
            $
            58Federal
                excise tax receivable
            
            
            109
            
            
            -Prepaid
                expenses
            
            
            158
            
            
            157Other current assets
            
            $
            333
            
            $
            215




**4
      — Property and Equipment**




The
      following is a summary of the Company’s property and equipment (in
      thousands):




**December
                31,******
            
            **2007**
            
            **2006**Telecommunications
                equipment
            
            $
            3,218
            
            $
            2,908Computer
                equipment
            
            
            174
            
            
            174Telecommunications
                software
            
            
            107
            
            
            107Leasehold
                improvements, office equipment and furniture
            
            
            86
            
            
            86Total
                property and equipment
            
            
            3,585
            
            
            3,275Less:
                accumulated depreciation and amortization
            
            
            (2,648
            )
            
            (1,638
            )Property
                and equipment, net
            
            $
            937
            
            $
            1,637




Depreciation
      expense included in network costs was $975,000, $734,000 and $558,000 for the
      years ended December 31, 2007, 2006 and 2005, respectively. Depreciation and
      amortization expense included in general and administrative expenses were
      $35,000, $49,000 and $21,000 for the years ended December 31, 2007, 2006 and
      2005, respectively.




In
      May
      2004, the Company entered in an agreement with a vendor to provide certain
      network equipment. Under the terms of this agreement, the Company can obtain
      certain telecommunications equipment with a total purchase price of
      approximately $5.2 million to expand its current operations. Repayment for
      these
      assets is based on the actual underlying traffic utilized by each piece of
      equipment, plus the issuance of a warrant to purchase shares of the Company’s
      common stock at an exercise price of the Company’s most recent financing price
      per share. For certain assets that can be purchased under this agreement, the
      Company has an option to issue a predetermined warrant to purchase shares of
      the
      Company’s common stock at an exercise price of the Company’s most recent
      financing price per share as full payment. At December 31, 2007, the Company
      had
      purchased telecommunications equipment under this agreement totaling $1,439,222,
      of which $651,501 and $1.0 million remain to be paid at December 31, 2007 and
      2006, respectively.


F-15


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




In
      May 2006, the Company entered into a strategic agreement with a VoIP
      equipment and support services provider. Under the terms of this agreement,
      the
      Company can obtain certain VoIP equipment to expand its current operations.
      Repayment of these assets is based on the actual underlying traffic utilized
      by
      each piece of equipment or fixed cash payments. At December 31, 2007, the
      Company has purchased VoIP equipment under this agreement totaling
      $691,332. At December 31, 2006, the entire balance remained outstanding and
      at December 31, 2007 $29,216 of this amount has been paid and an additional
      $58,865 has been accrued to be paid based on traffic utilization. Subsequent
      to
      entering into this agreement, the Company and the equipment provider agreed
      to
      delay the initial payment for the equipment until November 2006. Since
      there was no agreement in place to defer any payments past November 2006, for
      the two months ended December 31, 2006 and the three months ended March 31,
      2007,
      the Company expensed an estimate of potential interest due based on the value
      of
      the equipment. In May 2007, the Company and the equipment provider agreed that
      payments would begin for the month ended June 30, 2007, and the
      Company would not incur any charges for the deferment. Accordingly, in the
      quarter ending June 30, 2006, the Company reversed the prior periods’ interest
      expense estimate totaling $90,000.




**5
      — Accrued Expenses**




The
      following is a summary of the Company’s accrued expenses (in
      thousands):




**December
                31,****2007**
            
            **2006**Amounts
                due under equipment agreements
            
            $
            1,394
            
            $
            1,355Commissions,
                network costs and other general accruals
            
            
            1,125
            
            
            3,310Deferred
                payroll and other payroll related liabilities
            
            
            525
            
            
            529Interest
                due on convertible promissory notes and other debt
            
            
            5
            
            
            196Funds
                held for payment to third parties
            
            
            470
            
            
            438Accrued
                expenses
            
            $
            3,519
            
            $
            5,828




**6
      —Convertible and Secured Promissory Notes**




**Series
      A Convertible Promissory Notes**




Historically,
      the Company used capital raised through the issuance of promissory notes to
      fund
      a portion of its operations. The Company had no promissory notes outstanding
      at
      December 31, 2007 and 2006, as all outstanding notes were exchanged for shares
      of common stock as part of the Business Combination as discussed
      below.




*Issuances
      of Series A Convertible Notes* –
      During November
      and December 2003, the Company issued $1,075,000 of Series A convertible
      promissory notes (the “First Round Notes”), bearing interest at a rate of 9% per
      annum, payable in arrears on the maturity date of the convertible promissory
      notes. During June and November 2004, the Company issued $916,824 of Series
      A
      convertible promissory notes (the “Second Round Notes”), bearing interest at a
      rate of 9% per annum, payable in arrears on the maturity date of the convertible
      promissory notes. In January 2006, as part of a series of transactions that
      included amending and restating the Loan and Security Agreement which governed
      the Company’s Series A Notes, the Company sold approximately $575,000 of
      additional Series A Convertible Notes (the “Third Round Notes”) through a
      private offering to the Company’s existing Series A Note holders, bearing
      interest at a rate of 9% per annum, payable in arrears on the maturity date
      of
      the convertible promissory notes. The First Round Notes, Second Round Notes
      and
      Third Round Notes (collectively, the “Notes”) accrued interest was payable in
      additional Series A Convertible Notes.




Under
      the
      Amended and Restated Loan and Security Agreement which governed the Notes,
      the
      First Round Notes had a maturity date in November 2006, the Second Round Notes
      had a maturity date in June 2007 and the Third Round Notes had a maturity date
      in January 2008. The entire principal amount of the Notes and accrued interest
      due, or any portion thereof, was convertible, at the option of the holder at
      any
      time into fully paid and non-assessable shares of the Company’s Series A
      Preferred Stock at a price of $0.20, $0.33 and $0.80 per share, respectively,
      subject to certain anti-dilution protections. Additionally, the Notes
      automatically converted into Series A Preferred Stock at a price of $0.20,
      $0.33 and $0.80 per share in 2006, 2007 and 2008, respectively, subject to
      certain anti-dilution protections, on the date on which the Company’s common
      stock became publicly traded. Each share of Series A Preferred Stock was
      convertible into approximately 0.118 shares, as adjusted for share splits,
      of
      Private Company Common Stock, and was required to convert into Private Company
      Common Stock upon certain events. No shares of Series A Preferred Stock were
      ever issued as the entire principal amount of the Notes and accrued interest
      due
      were exchanged directly for shares of common stock in the Business
      Combination.




F-16


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




*Warrants
      Issued with Series A Convertible Notes* - In
      connection with the issuance of the Second Round Notes, Noteholders were issued
      warrants to purchase approximately 2,157,422 shares of the Company’s common
      stock. The exercise price of these warrants is $0.162 per share and is subject
      to certain exercise price adjustments. The warrants expire on the later of
      (a)
      five years from the date of issuance or (b) five years from the date the shares
      of the Company’s common stock underlying the warrants are registered for resale
      under the Securities Act of 1933, as amended, but in no case later than ten
      years from the date of issuance of the warrants. The Company allocated the
      proceeds received between notes and warrants in accordance with EITF Issue
      No.
      98-5, with the warrants associated with the Second Round Notes valued under
      the
      fair value method. The relative fair value associated with the detachable
      warrants totaled $123,132, and was recorded as an offset to the principal
      balance of the Second Round Notes and was amortized into interest expense using
      the effective interest method. The total expense recorded by the Company for
      the
      years ended December 31, 2007, 2006 and 2005 was $0, $64,098 and $59,034,
      respectively.




In
      connection with the issuance of the Third Round Notes, Noteholders were issued
      warrants to purchase approximately 1,328,651 shares of the Company’s common
      stock. The exercise price of these warrants is $0.406 per share and is subject
      to certain exercise price adjustments. The warrants expire on the later of
      (a)
      five years from the date of issuance or (b) five years from the date the shares
      of the Company’s common stock underlying the warrants are registered for resale
      under the Securities Act of 1933, as amended, but in no case later than ten
      years from the date of issuance of the warrants. The Company allocated the
      proceeds received between notes and warrants in accordance with EITF Issue
      No.
      98-5, with the warrants associated with the Third Round Notes valued under
      the
      fair value method. The value associated with the detachable warrants totaled
      $374,907 and was recorded as an offset to the principal balance of the Third
      Round Notes and was amortized into interest expense using the effective interest
      method. The total expense recorded by the Company for the years ended December
      31, 2007 and 2006 was $0 and $374,907, respectively.




The
      Company calculated the fair value of these grants as described in SFAS 123
      using
      the following assumptions:




**Year
                Ended December 31,****2006**
            
            **2005**Risk-free
                interest rate
            
            
            4.2%–4.6
            %
            
            3.5%–4.3
            %Expected
                lives (in years)
            
            
            2.5
                Years
            
            
            2.5
                YearsDividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            84
            %
            
            44
            %





*Exchange
      and Cancellation of Series A Convertible Notes and Warrants* –
      On December 29, 2006, all of the Noteholders entered into exchange agreements
      with Lucy’s Cafe to exchange their notes for common stock and warrants, if
      applicable, for warrants to purchase common stock. Pursuant to the exchange
      agreements, holders of First Round Notes received 10.4746 shares of common
      stock
      for each $1.70 of principal and accrued interest, holders of Second Round Notes
      received 10.4746 shares of common stock for each $2.805 of principal and accrued
      interest and warrants to purchase common stock in exchange for their warrants
      to
      purchase Private Company Common Stock, and holders of Third Round Notes received
      10.4746 shares of common stock for each $6.80 of principal and accrued interest
      and warrants to purchase common stock in exchange for their warrants to purchase
      Private Company Common Stock. Accordingly, the Noteholders received an aggregate
      of approximately 13,732,379 shares of common stock in exchange for $2,566,824
      of
      Series A Note principal and $545,009 of accrued interest and warrants to
      purchase approximately 3,486,073 shares of common stock in exchange for warrants
      issued in connection with the Second Round Notes and Third Round Notes. All
      of
      the Series A Convertible Notes were cancelled on December 29, 2006, and all
      rights of the Noteholders under the notes and the Amended and Restated Loan
      and
      Security Agreement governing the notes, including rights of conversion, were
      effectively terminated. At the same time the Noteholders entered into the
      exchange agreements, all Noteholders entered into lock-up agreements prohibiting
      the sale of the common stock received by the Noteholders in the Business
      Combination, subject to certain exceptions, until one year after the effective
      date of the registration statement covering shares of common stock sold by
      the
      Company in the private placement which closed concurrently with the Business
      Combination on December 29, 2006.


F-17


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**Secured
      Notes**




In
      November and December 2007, the Company received $600,000 in advance payments,
      pursuant to the sale of secured notes with individual investors for general
      working capital in January 2008. $250,000 of the advance payments were from
      a
      related party. As of December 31, 2007, the advance payments carried a 10%
      interest rate. These funds were received prior to the closing of the sale of
      the
      secured notes and grant of stock warrants, which occurred on January 16, 2008
      (see Note 16, Subsequent Events). As of December 31, 2007, the holders of the
      notes did not have the legal rights or recourse to the secured notes, warrants
      or other related features included in these agreements entered into in January
      2008. As a result, the advance payments or notes have been recorded at their
      total amount of $600,000 and the Company will account for the additional notes
      and warrants granted in January 2008 as a modification of the current debt
      agreements under the provisions of Emerging Issue Task Force Issue No. 96-19,
      “Debtor’s accounting for a Modification or Exchange of Debt Instruments.”




**7
      — Preferred Stock**




On
      May
      31, 2007, the Company filed Amended and Restated Articles of Incorporation
      authorizing 10,000,000 shares of preferred stock, par value $0.001 per share,
      none of which are issued and outstanding as of December 31, 2007.




Prior
      to
      the Business Combination, under InterMetro’s then effective Amended and Restated
      Certificate of Incorporation (the “Private Company Articles”), which were
      effectively replaced with the Company’s Amended and Restated Articles of
      Incorporation at the time of the Business Combination which were replace by
      the
      Company’s current Amended and Restated Articles of Incorporation, the Company
      had authorized 10,000,000 shares of preferred stock, of which, 2,000,000,
      2,000,000 and 500,000 shares were designated Series A, Series A-1 and Series
      B
      preferred stock, respectively. No shares of Series A or Series A-1 were ever
      issued. The Company had no Series B preferred stock outstanding at December
      31,
      2006, as all outstanding Series B preferred shares were exchanged for shares
      of
      common stock as part of the Business Combination as discussed
      below.




Historically,
      the Company used capital raised through the issuance of promissory notes
      convertible into shares of preferred stock and the issuance of preferred stock
      to fund a portion of its operations.





*2006
      Issuance of Series B Preferred Stock and Related Warrants* –
      In February 2006,
      the Company concluded a private placement of 117,660 shares of Series B
      Preferred Stock and warrants to purchase 1,232,441 shares of common stock for
      total gross proceeds of $1.0 million. Each warrant entitles the holder to
      purchase one share of the Company’s common stock at a price of $0.406 per share,
      at any time, for a period of two years after the termination date of the
      offering. Each share of Series B Preferred Stock was convertible into one share
      of Private Company Common Stock, $0.001 par value, at any time. The Company
      allocated the proceeds received between stock and warrants in accordance with
      EITF Issue No. 98-5 valued under the fair value method. The value associated
      with the detachable warrants totaled $440,010, and was recorded as an offset
      to
      the proceeds received of the Series B Preferred Stock. The Company incurred
      $14,450 of issuance cost associated with the issuance of the Series B Preferred
      Stock. A member of management owned approximately 14% of the Company’s
      Series B Preferred Stock.




The
      significant provisions of the Company’s Series B Preferred Stock were as
      follows:




*Dividends* –
      Subject to the preferential rights of any other class or series of stock, all
      dividends declared were to be distributed among all holders of Series B
      Preferred Stock and the holders of our Private Company Common Stock in
      proportion to the number of shares of our Private Company Common Stock which
      would be held by each such holder if all shares of the Series B Preferred Stock
      were converted into our Private Company Common Stock at the then effective
      Series B conversion price.




*Conversion* –
      Each share of Series B Preferred Stock was to be automatically converted into
      shares of Private Company Common Stock, based on the then-effective Series
      B
      Conversion Price immediately upon the closing of a firmly underwritten public
      offering pursuant to an effective registration statement under the Securities
      Act of 1933, as amended, covering the offer and sale of the Company’s common
      stock subject to certain requirements. Immediately prior to the Business
      Combination, the Series B Conversion price was $8.50 per share of Private
      Company Common Stock.


F-18


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




*Liquidation
      Preference* –
      Upon liquidation, dissolution or winding up of the Company, whether voluntary
      or
      involuntary, before any distribution or payment is made to the holders of any
      junior shares, as defined, the holders of Series B Preferred Stock were entitled
      to be paid out of the assets of the Company an amount per share of Series B
      Preferred Stock equal to the original issue price plus all accrued and unpaid
      dividends on the Series B Preferred Stock for each share of Series B Preferred
      Stock held by them (the “Series B Liquidation Value”). The aggregate Series B
      Liquidation Value was $1.0 million. If, upon liquidation, dissolution or winding
      up, the assets of the Company were insufficient to make payment in full to
      all
      holders of Series B Preferred Stock of the Series B Liquidation Value, then
      such
      assets were to be distributed among the holders of the Series B Preferred Stock
      at the time outstanding, ratably in proportion to the full amounts to which
      they
      would have been otherwise be respectively entitled.




*Exchange
      and Cancellation of Series B Preferred Stock and Warrants*–
      On December 29, 2006, all of the Series B Preferred Stock holders entered into
      exchange agreements with Lucy’s Cafe to exchange their Series B Preferred Stock
      for common stock and warrants to purchase Private Company Common Stock for
      warrants to purchase common stock. Pursuant to the exchange agreements, holders
      of Series B Preferred Stock received 10.4746 shares of common stock for each
      share of Series B Preferred Stock in the first phase of the exchange and will
      receive warrants to purchase common stock in exchange for their warrants to
      purchase Private Company Common Stock in the second phase of the exchange.
      Accordingly, the Series B Preferred Stock holders received an aggregate of
      approximately 1,232,441 shares of common stock in the first phase of the
      exchange and will receive warrants to purchase approximately 1,232,441 shares
      of
      common stock in the second phase of the exchange. All of the Series B Preferred
      Stock was cancelled on December 29, 2006 and all rights of the Series B
      Preferred Stock holders related to the Series B Preferred Stock, including
      rights of conversion, were effectively eliminated. At the same time the
      Series B Preferred Stock holders entered into the exchange agreements, all
      Series B Preferred Stock holders entered into lock-up agreements prohibiting
      the
      sale of the Company’s common stock received by the Series B Preferred Stock
      holders in the Business Combination until one year after the effective date
      of
      the registration statement covering shares of common stock sold by the Company
      in the private placement which closed concurrently with the Business Combination
      on December 29, 2006.




**8
      — Common Stock**




As
      of
      December 31, 2007, the total number of authorized shares of common stock, par
      value $0.001 per share, was 150,000,000 of which 59,575,194 shares were issued
      and outstanding.




Holders
      of common stock are entitled to receive any dividends ratably, if declared
      by
      the board of directors out of assets legally available for the payment of
      dividends, subject to any preferential dividend rights of any outstanding
      preferred stock. Holders of common stock are entitled to cast one vote for
      each
      share held at all stockholder meetings for all purposes, including the election
      of directors. The holders of more than 50% of the common stock issued and
      outstanding and entitled to vote, present in person or by proxy, constitute
      a
      quorum at all meetings of stockholders. The vote of the holders of a majority
      of
      common stock present at such a meeting will decide any question brought before
      such meeting. Upon liquidation or dissolution, the holder of each outstanding
      share of common stock will be entitled to share equally in our assets legally
      available for distribution to such stockholder after payment of all liabilities
      and after distributions to preferred stockholders legally entitled to such
      distributions. Holders of common stock do not have any preemptive, subscription
      or redemption rights. All outstanding Shares of common stock are fully paid
      and
      nonassessable. The holders of the common stock do not have any registration
      rights with respect to the stock.




*Sale
      of Private Company Common Stock to Employees and Advisor*–
      In January 2004, the Company’s majority common stockholder set aside
      approximately 9,888,023 shares of common stock, as adjusted for share splits
      and
      the Business Combination in the event certain officers, employees and
      individuals exercised their option to purchase such shares from the stockholder.
      These options vested upon the Company’s engagement of an underwriter for the
      public offering of its common stock in January 2006. The Company determined
      that
      the granting of these options was a deemed capital contribution from the
      majority stockholder to the Company. In addition, the Company valued these
      options using the minimum value method at the date of grant which totaled
      approximately $29,408 which was deferred until the date the contingency of
      the
      vesting had lapsed. All of these shares of Private Company Common Stock were
      exchanged, or will be exchanged, for shares of the Company’s common stock as
      part of the Business Combination.


F-19


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




In
      December 2006, in a transaction related to the Business Combination, the
      Company’s majority common stockholder sold 2,500,000 shares of common stock to
      an advisor for a note in the amount of $150,000. The aggregate difference
      between the amount paid for these shares and the value of these shares based
      on
      the price of $1.00 per share paid by investors in the Private Placement was
      $2,350,000, and this amount was deemed a capital contribution from the majority
      stockholder of the Company.




*2006
      Issuance of Common Stock* –
      In December 2006, the Company entered into a Placement Agent Agreement with
      Hunter World Markets, Inc. as placement agent, pursuant to which Hunter World
      Markets, Inc. raised $10,235,000 of capital for the Company through a private
      placement (the “Private Placement”) of shares of common stock for $1.00 per
      share. The Company agreed to file registration statements to register the
      Private Placement shares, certain shares of common stock that were outstanding
      prior to the Business Combination (the “Existing Shares”), and the shares
      underlying bridge financing warrants and placement agent warrants issued to
      Hunter World Markets, Inc. and its affiliates in conjunction with bridge
      financing provided to the Company in December 2006 (See Note 11) and the Private
      Placement for resale. The Company agreed to use its best efforts to have (i)
      the
      registration statement for the Private Placement shares (the “Initial
      Registration Statement”) declared effective by the Securities and Exchange
      Commission within 120 days after the closing of the Business Combination and
      (ii) the registration statement for the Existing Shares and the shares
      underlying the bridge financing warrants and placement agent warrants (the
      “Additional Registration Statement”) filed within six (6) months after the
      Initial Registration Statement is filed, and declared effective within 120
      days
      thereafter. If the Company fails to achieve effectiveness within the prescribed
      periods, or maintain effectiveness, subject to certain exceptions, the Company
      will be liable to the holders for liquidated damages in the amount of 1% of
      the
      purchase price per month. In consideration for raising the capital, the
      placement agent was paid (i) a selling commission of $1,023,500, (ii) warrants
      to purchase 4,094,000 shares of common stock with an exercise price of $1.50
      per
      share, an exercise period of five years from the date of issuance
      (nonexercisable for the first nine months), and a cashless exercise feature,
      and
      (iii) $435,000 for public company acquisition services.




The
      Company allocated the proceeds received between stock and warrants in accordance
      with EITF Issue No. 98-5 valued under the fair value method. The value
      associated with the detachable warrants totaled $2,774,636, and was recorded
      as
      an offset to the proceeds received from the sale of the common
      stock.




The
      Company calculated the fair value of these grants as described in SFAS 123R
      using the following assumptions:




**Year
                Ended**
              **December 31, 2006**Risk-free
                interest rate
            
            
            4.7
            %Expected
                lives (in years)
            
            
            5
                yearsDividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            94
            %




In
      April
      2005, the Company’s Board of Directors approved a 2-for-1 split of the Company’s
      Private Company Common Stock. The Company effected a 1-for-8.5 split of the
      Company’s Private Company Common Stock as a result of the conversion ratio in
      the reincorporation merger which occurred on July 21, 2006 and a 1-for-2 split
      of the Company’s Private Company Common Stock which occurred on September 27,
      2006. On December 29, 2006, the Company issued 10.4746 shares of common stock
      for each share of Private Company Common Stock as part of the Business
      Combination. The common stock share information in the accompanying consolidated
      financial statements has been retroactively restated to reflect the effect
      of
      the stock splits and the Business Combination.




**9
      — Stock Options and Warrants**




*2004
      Stock Option Plan* –
      Effective January 1, 2004, the Company’s Board of Directors adopted the 2004
      Stock Option Plan for Directors, Officers, and Employees of and Consultants
      to
      InterMetro Communications, Inc. (the “2004 Plan”). All stock options to purchase
      Private Company Common Stock issued under the 2004 Plan were converted into
      stock options to purchase shares of common stock in connection with the Business
      Combination. The number of shares subject to the options and the exercise prices
      are presented on a pro forma basis as if the Business Combination had occurred
      at the beginning of the periods presented. The exercise periods and other terms
      and conditions of the stock options remained the same.


F-20


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




A
      total
      of 5,730,222 shares of the Company’s common stock, as adjusted for share splits,
      had been reserved for issuance at December 31, 2007 and 2006. Upon shareholder
      ratification of the 2004 Plan pursuant to the 14C Information Statement filed
      with the Securities and Exchange Commission on March 6, 2007, the Company froze
      any further grants of stock options under the 2004 Plan. Any shares reserved
      for
      issuance under the 2004 Plan that are not needed for outstanding options granted
      under that plan will be cancelled and returned to treasury shares.




The
      number of shares of common stock subject to outstanding options under the 2004
      Plan, as well as the exercise price of outstanding options, may be appropriately
      adjusted for any stock split, reverse stock split, stock dividend, combination
      or reclassification of common stock, merger, reorganization, recapitalization,
      spin-off, change in our capital structure, or certain other transactions. The
      2004 Plan terminates on January 1, 2014, unless sooner terminated by the
      Company’s Board of Directors.




Options
      granted under the 2004 Plan may be either “incentive stock options” as defined
      in Section 422 of the Internal Revenue Code of 1986, as amended, or nonstatutory
      stock options and become exercisable in accordance with terms approved at the
      time of grant. Options may be granted to any employee of, or consultant to,
      the
      Company, or any parent, subsidiary or successor of the Company, including
      employees who are also officers or directors, selected by the Board of Directors
      in its discretion. The 2004 Plan is currently administered by the Company’s
      Board of Directors which has the authority to determine optionees, the number
      of
      shares covered by each option, the type of option (i.e., incentive or
      nonstatutory), the applicable vesting schedule, the exercise price, the method
      of payment and certain other option terms.




The
      exercise price of an option granted under the 2004 Plan may not be less than
      85%, in the case of a nonstatutory stock option, or 100%, in the case of an
      incentive stock option, of the fair market value of the common stock subject
      to
      the option on the date of the option grant. To the extent that the aggregate
      fair market value of the stock subject to incentive stock options that become
      exercisable for the first time during any one calendar year exceeds $100,000
      (as
      determined at the grant date) plus fifty percent (50%) of any unused limit
      carryover from prior years, the options in excess of such limit shall be treated
      as nonstatutory stock options. Options could be granted under the 2004 Plan
      for
      terms of up to ten years and were exercisable in installments in accordance
      with
      a vesting schedule approved by the Board of Directors at the time an option
      is
      granted. Options are not transferable other than upon death or between spouses
      incident to divorce. Options may be exercised at various periods up to 12 months
      after the death or disability of the optionee or up to three months after the
      termination of employment of the optionee, to the extent the option was then
      exercisable.




During
      the year ended December 31, 2006, the Company granted options under the 2004
      Plan to purchase up to 138,632 shares of the Company’s common stock at exercise
      prices of $0.41 (107,826 shares) and $0.97 (30,806 shares) to non-employees.
      The
      resulting charge, using the fair value method in the year ended
      December 31, 2006 was $187,982.




During
      the year ended December 31, 2006, the Company granted options to employees
      under
      the 2004 Plan to purchase up to 770,194 shares of the Company’s common stock at
      exercise prices of $0.41 (597,671 shares) $0.81
      (92,428 shares), and $0.97 (80,095 shares). The resulting charge, using the
      fair
      value method in the year ended December 31, 2006 was $274,396.




During
      the year ended December 31, 2007, no options were granted under the 2004 Plan.
      As of December 31, 2007, the Company has granted a total of 5,714,819 stock
      options to the officers, directors, and employees, and consultants of the
      Company, of which 308,077 were forfeited in September 2007. Of the remaining,
      4,528,724 vest as follows: 20% on the date of grant and 1/16 of the balance
      each
      quarter thereafter until the remaining stock options have vested and 878,018
      of
      which vest as follows: 50% on the date of grant and 50% at one year after the
      date of grant. These stock options are exercisable for a period of ten years
      from the date of grant and are exercisable at exercise prices ranging from
      approximately $0.04 to $0.97 per share.


F-21


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




*Omnibus
      Stock and Incentive Plan* **– Effective
      January 19, 2007, our Board of Directors approved the 2007 Omnibus Stock and
      Incentive Plan (the “2007 Plan”) for directors, officers, employees, and
      consultants. Our shareholders ratified the 2007 Plan pursuant to the Schedule
      14C Information Statement filed with the Securities and Exchange Commission
      which was declared effective on May 10, 2007. The 2007 Plan allows any of the
      following types of awards, to be granted alone or in tandem with other awards:
      (1) Stock options which may be either incentive stock options (“ISOs”), which
      are intended to satisfy the requirements of Section 422 of the Internal Revenue
      Code of 1986, as amended, or nonstatutory stock options (“NSOs”), which are not
      intended to meet those requirements; (2) restricted stock which is common stock
      that is subject to restrictions, including a prohibition against transfer and
      a
      substantial risk of forfeiture, until the end of a “restricted period” during
      which the grantee must satisfy certain vesting conditions; (3) restricted stock
      units which entitle the grantee to receive common stock, or cash (or other
      property) based on the value of common stock, after a “restricted period” during
      which the grantee must satisfy certain vesting conditions or the restricted
      stock unit is forfeited; (4) stock appreciation rights which entitle the grantee
      to receive, with respect to a specified number of shares of common stock, any
      increase in the value of the shares from the date the award is granted to the
      date the right is exercised; and (5) other types of equity-based compensation
      which may include shares of common stock granted upon the achievement of
      performance objectives.




The
      2007
      Plan will be administered by the Compensation Committee once this committee
      is
      formed, until which, the plan is administered by the Board of Directors. Any
      employee or director of, or consultant for, us or any of our subsidiaries or
      other affiliates will be eligible to receive awards under the 2007 Plan. We
      have
      reserved 8,903,410 shares of common stock for awards under the 2007 Plan. In
      addition, on each anniversary of the 2007 Plan’s effective date on or before the
      fifth anniversary of the effective date, the aggregate number of shares of
      our
      common stock available for issuance under the 2007 Plan will be increased by
      the
      lesser of (a) 5% of the total number of shares of our common stock outstanding
      as of the December 31 immediately preceding the anniversary, (b) 4,713,570
      shares, or (c) a lesser number of shares of our common stock that our board,
      in
      its sole discretion, determines. In general, shares reserved for awards that
      lapse or are canceled will be added back to the pool of shares available for
      awards under the 2007 Plan.





Awards
      under the 2007 Plan are forfeitable until they become vested. An award will
      become vested only if the vesting conditions set forth in the award agreement
      (as determined by the Board of Directors or Compensation Committee) are
      satisfied. The vesting conditions may include performance of services for a
      specified period, achievement of performance objectives, or a combination of
      both. The Compensation Committee also has authority to provide for accelerated
      vesting upon occurrence of an event such as a change in control. The 2007 Plan
      specifically prohibits the Compensation Committee from repricing any stock
      options or stock appreciation rights. In general, awards under the 2007 Plan
      may
      not be assigned or transferred except by will or the laws of descent and
      distribution. However, the Compensation Committee may allow the transfer of
      NSOs
      to members of a 2007 Plan participant’s immediate family or to a trust,
      partnership, or corporation in which the parties in interest are limited to
      the
      participant and members of the participant’s immediate family.




The
      Board
      of Directors or the Compensation Committee may amend, alter, suspend, or
      terminate the 2007 Plan at any time. If necessary to comply with any applicable
      law (including stock exchange rules), we will first obtain stockholder approval.
      Amendments, alterations, suspensions, and termination of the 2007 Plan generally
      may not impair a participant’s (or a beneficiary’s) rights under an outstanding
      award. However, rights may be impaired if necessary to comply with an applicable
      law or accounting principles (including a change in the law or accounting
      principles) pursuant to a written agreement with the participant. Unless it
      is
      terminated sooner, the 2007 Plan will terminate upon the earlier of June 23,
      2016 or the date all shares available for issuance under the 2007 Plan have
      been
      issued and vested.




For
      the
      year ended December 31, 2007, InterMetro granted 2,350,000 stock options to
      purchase shares of common stock under the 2007 Plan at an average exercise
      price
      of $0.25 per share to employees and directors. 1,095,000 of the shares granted
      were immediately vested at the date of grant. The Company recognized $228,174
      in
      compensation expense related to the immediate vesting of the stock option
      grants. The remaining fair value is being recognized on a straight line basis
      over the requisite service period, vesting term, of the remaining options.
      As of
      December 31, 2007, none of the Company’s outstanding stock options have been
      exercised.


F-22


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




The
      following presents a summary of activity under the Company’s 2004 and 2007 Plans
      for the years ended December 31, 2005, 2006 and 2007:




**Number**
              **of**
              **Shares**
            
            **Price**
              **per**
              **Share**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted
                Average Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**Options
                outstanding atJanuary
                1, 2005
            
            
            4,189,840
            
            $
            —
            
            $
            0.04Granted
                (weighted average fair value of $0.85 per share)
            
            
            616,153
            
            
            0.22 to 0.27
            
            
            0.25Exercised
            
            
            —
            
            
            —
            
            
            —Forfeited/expired
            
            
            —
            
            
            —
            
            
            —Options
                outstanding at December 31, 2005
            
            
            4,805,993
            
            
            —
            
            
            0.07Granted
                (weighted average fair value of $1.06 per share)
            
            
            908,826
            
            
            0.41 to 0.97
            
            
            0.52Exercised
            
            
            —
            
            
            —
            
            
            —Forfeited/expired
            
            
            —
            
            
            —
            
            
            —Options
                outstanding at December 31, 2006
            
            
            5,714,819
            
            
            
            
            
            0.14Granted
                (weighted average fair value of $.19 per share)
            
            
            2,350,000
            
            
            0.25
            
            
            0.25Exercised
            
            
            —
            
            
            —Forfeited/expired
            
            
            308,077
            
            
            0.04
            
            
            0.04Options
                outstanding at December 31, 2007
            
            
            7,756,742
            
            
            
            
            
            0.18
            
            
            7.56
            
            $
            821,508Options
                vested and expected to vest in the future at December 31,
                2007
            
            
            7,756,742
            
            
            
            
            
            0.18
            
            
            7.56
            
            $
            821,508Options
                exercisable at December 31, 2007
            
            
            6,155,611
            
            
            
            
            
            0.15
            
            
            7.13
            
            $
            816,035




The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (the difference between the Company’s closing stock price on the
      last day of the year ended December 31, 2007 and the exercises price, multiplied
      by the number of in-the-money options) that would have been received by the
      option holders had all option holders exercised their options on June 30, 2007.
      This amount changes based on the fair market value of the Company’s stock. As no
      options were exercised during the years ended December 31, 2007, 2006, and
      2005
      there was no associated intrinsic value for such.


F-23


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Additional
      information with respect to the outstanding options at December 31, 2007 is
      as
      follows:




**Options
                Outstanding**
            
            
            
            **Options
                Exercisable****Exercise
                Prices**
            
            
            **Number**
              **of Shares**
            
            
            **Average**
              **Remaining**
              **Contractual**
              **Life**
              **(in Years**)****
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            
            **Number**
              **of Shares**
            
            
            **Weighted**
              **Average**
              **Exercise Price**$0.04
            
            
            3,173,187
            
            
            6.00
            
            $
            0.04
            
            
            3,173,187
            
            $
            0.040.04
            
            
            154,038
            
            
            6.25
            
            
            0.04
            
            
            152,498
            
            
            0.040.04
            
            
            431,307
            
            
            6.50
            
            
            0.04
            
            
            418,984
            
            
            0.040.04
            
            
            123,231
            
            
            7.00
            
            
            0.04
            
            
            123,231
            
            
            0.040.22
            
            
            277,269
            
            
            7.75
            
            
            0.22
            
            
            194,088
            
            
            0.220.25
            
            
            2,350,000
            
            
            9.75
            
            
            0.25
            
            
            1,199,583
            
            
            0.250.27
            
            
            338,884
            
            
            7.75
            
            
            0.27
            
            
            220,277
            
            
            0.270.41
            
            
            705,495
            
            
            8.00
            
            
            0.41
            
            
            515,720
            
            
            0.410.81
            
            
            110,908
            
            
            8.00
            
            
            0.81
            
            
            65,620
            
            
            0.810.97
            
            
            92,423
            
            
            8.25
            
            
            0.97
            
            
            92,423
            
            
            0.977,756,742
            
            
            
            
            
            
            
            
            6,155,611




For
      option grants prior to January 1, 2006, the intrinsic value per share is being
      recognized over the applicable vesting period which equals the service period.
      For option grants during the year ended December 31, 2007 and 2006, the
      compensation cost was determined based on the fair value of the options, and
      is
      being recognized over the applicable vesting period which equals the service
      period.




At
      December 31, 2007, 1,170,691 of the Company’s outstanding options were granted
      with exercise prices at below fair value. Compensation expense recognized in
      the
      consolidated statements of operations in connection with these options was
      $206,000, $204,000 and $57,000 during the years ended December 31, 2007, 2006
      and 2005, respectively. As of December 31, 2007, there was $621,409 of total
      unrecognized compensation cost related to unvested share based compensation
      arrangements granted under the 2004 and 2007 option plans. The cost is expected
      to be recognized over a weighted average period of 2 years.




*Agent
      Warrants* –
      In December 2003, in connection with the issuance of the First Round Notes,
      a
      party related to certain of the Noteholders was appointed to act as an agent
      (“the Agent”) on behalf of the Noteholders to take various actions on behalf of
      the Noteholders as defined in the Amended and Restated Loan and Security
      Agreement. In addition, the Company entered into an Amended and Restated
      Advisory Agreement pursuant to which an affiliate of the Agent received warrants
      to purchase up to 1,621,479 shares of the Company’s common stock at an exercise
      price of approximately $0.0081 upon satisfaction of certain conditions. During
      the year ended December 31, 2004, warrants to purchase 1,080,989 shares of
      the
      Company’s common stock were earned, with a resulting charge, under the minimum
      value method, of $102,302. These warrants were subject to certain performance
      criteria by the Agent. The Company recorded this expense during the year ended
      December 31, 2004.




During
      the year ended December 31, 2006, the remaining warrants to purchase 540,490
      shares of the Company’s common stock were earned, with a resulting charge under
      the fair value method of $522,947 recorded in the year ended December 31,
      2006.




In
      May
      2006, these warrants were exercised into shares of Private Company Common Stock
      and pursuant to exchange agreements, the shares were exchanged as of December
      29, 2006 for 1,621,479 shares of common stock.




*Financing
      Warrants* –
      As a part of the Company’s issuances of its Second Round Notes, Third Round
      Notes and Series B preferred stock, the Company issued warrants to the
      participating investors. For a detailed description of the warrants issued
      in
      connection with the Second Round Notes and Third Round Notes, see Note 6. For
      a
      detailed description of the warrants issued in connection with the Series B
      preferred stock, see Note 7. On December 29, 2006, all of the holders of
      warrants issued in connection with the Second Round Notes, Third Round Notes
      and
      Series B preferred stock entered into exchange agreements with Lucy’s Cafe to
      exchange their warrants for warrants to purchase common stock.


F-24


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




*Warrants
      Issued to Equipment Vendors* –
      Historically, the Company has issued warrants to providers of equipment
      financing. For a detailed description of the warrants issued in connection
      with
      equipment financing arrangements, see Notes 4 and 12. On December 29, 2006,
      all
      of the holders of warrants issued in connection with equipment financing
      arrangements entered into exchange agreements with Lucy’s Cafe to exchange their
      warrants for warrants to purchase common stock.




*Related
      Party Warrant Agreement* –
      In February 2004, the Company entered into an agreement with a related party
      pursuant to which the related party will receive warrants to purchase up to
      1,232,305 shares of the Company’s common stock at an exercise price of $0.008
      upon satisfaction of certain conditions. These warrants have an exercise period
      of five years from the date of grant with an exercise price of $0.008 per share.
      During the year ended December 31, 2004, warrants to purchase 410,772 shares
      of
      the Company’s common stock were earned. The resulting charge, using the fair
      value method, was $13,802. During the year ended December 31, 2006, warrants
      to
      purchase an additional 410,772 shares of the Company’s common stock were earned,
      with the resulting charge, using the fair value method, of $396,956 recorded.
      On
      December 29, 2006, the related party entered into an exchange with Lucy’s Cafe
      to exchange the warrants for warrants to purchase common stock.




In
      May
      2007 warrants to purchase 410,761 shares of the Company common stock were earned
      by a consultant to the Company, with a resulting charge under the fair value
      method of $818,984. This amount was recorded in general and administrative
      expense in the year ended December 31, 2007.




**10
      — Liability For Options**





As
      of
      December 29, 2006 (the date of the Business Combination), the Company did
      not have a sufficient number of authorized shares for all share, option and
      warrant holders. Accordingly, the exchange of securities pursuant to the
      Business Combination was implemented in two phases with the second phase being
      automatic upon the filing on May 31, 2007 of Amended and Restated Articles
      of
      Incorporation which increased the number of authorized shares of the Company’s
      common stock to 150,000,000 shares.




In
      the
      exchange agreements for the Business Combination, the InterMetro Delaware
      investors agreed to defer the exchange of certain warrants until such time
      that
      the Company increased the number of its authorized shares of common
      stock to 150,000,000. Also, employees of the Company agreed to defer the
      exchange of a portion of their Private Company Common Stock until such time
      that
      the Company had increased the number of  its authorized shares of common
      stock to 150,000,000. The exchange agreements did not provide for a deferral
      of
      exercise rights for options issued under the 2004 Plan and the Company did
      not
      have enough authorized shares to accommodate the exercise of these options.
      Accordingly, effective on December 29, 2006, options under the 2004 Plan
      were not exercisable concurrently on the closing of the Business Combination
      and
      the Company determined that there was a liability for such options and included
      the liability within the accompanying financial statements for the year ended
      December 31, 2006. The options became exercisable without further act on the
      part of the holders thereof on May 31, 2007.




The
      Company calculated the value of those options, valued under the fair value
      method, which would be exercisable at a later date based on EITF No.
      00-19, “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company’s Own Stock.” The value associated with the
      liability was estimated at $5,384,000 at December 29, 2006, the date of the
      Business Combination, and was recorded as an offset to additional paid in
      capital on that date. At December 31, 2006, the Company estimated that
      there had been no change in the value of these options since the date of the
      Business Combination. On May 31, 2007, the Company increased the number of
      its authorized shares of common stock and determined that as of that date
      there was no longer a liability for the options and the value associated with
      the liability was credited to additional paid in capital. The Company determined
      the fair market value of this liability to be $10,999,000 at May 31, 2007 and
      as
      such recorded a derivative loss of $5,615,000 for the year ended December 31,
      2007.


F-25


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      Company calculated the fair value of these grants as described in SFAS 123R
      using the following assumptions:





**December 31, 2006**
            
            **May
                31, 2007**Risk-free
                interest rate
            
            
            4.7
            %
            
            4.8
            %Expected
                lives (in
                years)
            
            
            3.6
                years to 5.4
            
            
            2.8
                to 4.5Dividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            84%-101
            %
            
            65%-92
            %




**11
      — Credit Facilities**




In
      August
      2006, the Company entered into unsecured credit facilities of an aggregate
      of
      $525,000, with certain of its directors and officers, for general working
      capital. The facilities had one-year maturities and accrued interest on
      outstanding principal at 10% per annum compounded monthly. Principal and accrued
      interest were payable on August 31, 2007. The Company was also required to
      pay
      an origination fee of 7.25% of the maximum principal amount outstanding (during
      the term) on August 31, 2007 (or at the time of prepayment) and lender legal
      fees and other expenses of $9,500, or less, for each credit facility. Prepayment
      of the credit facilities required payment of interest that would have accrued
      through maturity, discounted by 15%, in addition to principal and accrued
      interest. In August and October 2006, the Company took advances of $450,000
      and
      $75,000 under these facilities, respectively, and in January 2007 the Company
      repaid all of these facilities and all accrued fees and interest.




On
      or
      about December 14, 2006, the Company entered into a Term Credit Agreement
      pursuant to which it borrowed $600,000 from The Hunter Fund Limited, an
      unaffiliated lender, bearing no interest as long as there is no default, and
      all
      principal and accrued interest was to be payable on the earlier of (i) the
      closing of the Private Placement, or (ii) six months from the date of funding,
      or (iii) the effective date of the termination of the placement agent. The
      Company paid a bridge loan origination fee of $42,000 on the closing and was
      obligated to pay an additional fee of $75,000 on the maturity date of the loan.
      The financing was secured by certain assets of the Company. The Company was
      also
      obligated to pay $10,000 for the lender’s legal fees. Under the Term Credit
      Agreement, the Company was also obligated to issue the lender warrants to
      purchase 600,000 shares of the Company’s common stock with an exercise price of
      $0.60 per share, an exercise period of three years from the date of issuance
      and
      a cashless exercise feature. The bridge loan principal and all related fees
      and
      expenses were repaid in January 2007.




The
      Company allocated the proceeds received between stock and warrants in accordance
      with EITF Issue No. 98-5 valued under the fair value method. The value
      associated with the detachable warrants totaled $369,911, and was recorded
      as an
      offset to the proceeds received from the bridge loan.




The
      Company calculated the fair value of these grants as described in SFAS 123R
      using the following assumptions:




**Year Ended December 31, 2006**Risk-free
                interest rate
            
            
            4.7
            %Expected
                lives (in years)
            
            
            3
                yearsDividend
                yield
            
            
            0
            %Expected
                volatility
            
            
            67
            %




**12
      — Commitments and Contingencies**




*Equipment
      Leases* –
      In February 2004, the Company entered into a non-cancelable lease agreement
      to
      purchase network equipment, software and other equipment up to $465,000. As
      part
      of securing this lease facility, the Company issued a warrant to purchase
      143,261 shares of the Company’s common stock at an exercise price of $0.16 per
      share. In August 2005, the Company entered into a similar non-cancelable lease
      agreement to purchase network equipment, software and other equipment up to
      an
      additional $300,000. As part of securing this lease facility, the Company issued
      a warrant to purchase 56,018 shares of the Company’s common stock at an exercise
      price of approximately $0.27 per share. The resulting combined charge for
      warrants issued in connection with these lease arrangements in the year ended
      December 31, 2005, using the minimum value method, was $33,196. The future
      minimum lease payments are discounted using interest rates of 18% to 28% over
      18
      to 30 months. Management believes that assets acquired under this lease facility
      meet the criteria to be accounted for as capital leases under SFAS 13,
“Accounting for Leases.”


F-26


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




In
      May
      2006, the Company entered into a non-cancelable lease agreement to purchase
      network equipment, software and other equipment up to $300,000. As part of
      securing this lease facility, the Company issued a warrant to purchase 21,567
      shares of the Company’s common stock at an exercise price of $0.97 per share.
      The resulting charge, using the fair value method, was $29,408.




The
      Company calculated the fair value of these grants as described in SFAS 123R
      using the following assumptions:





**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Risk-free
                interest rate
            
            
            4.9
            %
            
            3.5%-4.3
            %
            
            2.4%-3.3
            %Expected
                lives (in years)
            
            
            2.5
                Years
            
            
            2.5
                Years
            
            
            2.5
                YearsDividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            91
            %
            
            44
            %
            
            52
            %




In
      connection with the Business Combination, holders of the warrants to purchase
      Private Company Common Stock issued as part of these agreements agreed to
      exchange these warrants for warrants to purchase common stock. The number of
      shares subject to the warrants and the exercise prices are presented as if
      the
      Business Combination had occurred at the beginning of the periods presented.
      The
      exercise periods and other terms and conditions of the warrants remained the
      same.




The
      Company leases certain equipment under capital lease arrangements expiring
      on
      various dates through 2008. Included in property and equipment, net are the
      following assets held under capital lease (dollars in
      thousands):





**December
                31,****2007**
            
            **2006**Telecommunications
                equipment
            
            $
            929
            
            $
            696Telecommunications
                software
            
            
            96
            
            
            96Computer
                equipment
            
            
            33
            
            
            33Leasehold
                improvements, office equipment and furniture
            
            
            8
            
            
            8Total
                property and equipment under capital lease
            
            
            1,066
            
            
            833Less:
                accumulated depreciation
            
            
            (818
            )
            
            (589
            )$
            248
            
            $
            244





Future
      minimum lease payments under non-cancelable capital leases for the years
      following December 31, 2007 are (dollars in thousands):





2008
            
            $
            2112009
            
            
            119Total
                minimum obligations
            
            
            330Less
                amounts representing interest
            
            
            54Present
                value of minimum obligations
            
            
            276Less
                current portion
            
            
            170Total
                long term
            
            $
            106


F-27


**INTERMETRO
      COMMUNICATIONS, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




*Facility
      Lease* –
      The Company leases its facilities under a non-cancelable operating lease
      expiring in March 2009 at an annual expense of approximately $260,000. Rent
      expense for the Company’s facilities for the years ended December 31, 2007, 2006
      and 2005 was $257,000, $231,000 and $146,000, respectively.




*Vendor
      Agreements* –
      The Company has entered into agreements with its network partners and other
      vendors for various services which are, in general, for periods of twelve months
      and provide for month to month renewal periods.




*Vendor
      Disputes*– It is
      not unusual in the Company’s industry to occasionally have disagreements with
      vendors relating to the amounts billed for services provided between the
      recipient of those services and the vendor. As a result, the Company currently
      has disputes with vendors that it believes did not bill certain charges
      correctly.  The Company’s policy is to include amounts that it intends to
      dispute or that it has disputed in a reserve account as an offset to accounts
      payable if management believes that the facts and circumstances related to
      the
      dispute provide probable support that the dispute will be resolved in the
      Company’s favor.  As of December 31, 2007, there are approximately $2.5
      million of unresolved charges in the dispute reserve. This amount includes
      approximately $1.3 million related to a non-recurring charge from a large
      provider of local access services to the Company, approximately $497,000 related
      to various charges from a provider of local access services limited to the
      southern California market with whom the Company has entered into a settlement
      agreement regarding the amounts, and approximately $474,000 related to rates
      per
      minute of use being billed at higher levels than expected due to assumptions
      regarding the nature of the minutes being made by vendors that the Company
      believes are incorrect. As of December 31, 2007, the accrued amount of the
      settlement was included by the Company in accounts payable.




On
      April
      30, 2007, we filed a complaint against KMC Data, LLC (“KMC”) in Federal District
      Court in the State of California asserting the KMC’s tariffed charges are
      unlawful and are not applicable to us. On May 23, 2007 KMC filed counter claims
      attempting to collect on these tariffed charges. There are approximately
      $684,000 of charges that we dispute. We cannot predict the outcome of these
      proceedings at this time. A ruling against us could have a material adverse
      impact on our operating results, financial condition and business performance.




The
      Company is in discussion with some of these vendors, and is preparing to enter
      discussions with the remaining vendors, regarding these charges and it may
      take
      additional action as deemed necessary against these vendors in the future as
      part of the dispute resolution process. Management does not believe that any
      settlement would have a material adverse effect on the Company’s financial
      position or results of operations.  Management reviews available
      information and determines the need for recording an estimate of the potential
      exposure when the amount is probable and reasonably estimable based on SFAS
      5,
“Accounting for Contingencies.”




*Consulting
      Agreement.* On or
      about December 29, 2006, the Company entered into a three-year consulting
      agreement pursuant to which the Company will receive services related to
      strategic planning, investor relations, acquisitions, and corporate governance.
      Pursuant to the consulting agreement, the Company is obligated to pay $13,000
      per month for these services, subject to a minimum increase of 5% per
      year.


F-28


**INTERMETRO
        COMMUNICATIONS, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **13
        — Income Taxes**
  At
        December 31, 2007, the Company had net operating loss carryforwards to offset
        future taxable income, if any, of approximately $14.0 million for Federal
        and
        State taxes. The Federal net operating loss carryforwards begin to expire
        in
        2021. The State net operating loss carryforwards begin to expire in
        2008.
  The
        following is a summary of the Company’s deferred tax assets and liabilities
        (dollars in thousands):
  **December
                  31,****2007**
              
              **2006**Current
                  assets and liabilities:Deferred
                  revenue
              
              $
              (58
              )
              $
              338Allowance
                  for doubtful
                  accounts
              
              
              —
              
              
              50Accrued
                  expenses
              
              
              (9
              )
              
              127(67
              )
              
              515Valuation
                  allowance
              
              
              67
              
              
              (515
              )Net
                  current deferred tax asset
              
              $
              —
              
              $
              —Non-current
                  assets and liabilities:Depreciation
                  and amortization
              
              $
              53
              
              $
              46Net
                  operating loss carryforward
              
              
              13,966
              
              
              5,01114,019
              
              
              5,057Valuation
                  allowance
              
              
              (14,019
              )
              
              (5,057
              )Net
                  non-current deferred tax asset
              
              $
              —
              
              $
              —
  The
        reconciliation between the statutory income tax rate and the effective rate
        is
        as follows:
 
 **For
                  the Year Ended**
                **December
                  31,****2007**
              
              **2006**
              
              **2005**Federal
                  statutory tax rate
              
              
              (34
              )%
              
              (34
              )%
              
              (34
              )%State
                  and local taxes
              
              
              (6
              )
              
              (6
              )
              
              (6
              )Valuation
                  reserve for income
                  taxes
              
              
              40
              
              
              40
              
              
              40Effective
                  tax rate
              
              
              —
              %
              
              —
              %
              
              —
              %
  Management
        has concluded that it is more likely than not that the Company will not have
        sufficient taxable income of an appropriate character within the carryforward
        period permitted by current law to allow for the utilization of certain of
        the
        deductible amounts generating the deferred tax assets; therefore, a full
        valuation allowance has been established to reduce the net deferred tax assets
        to zero at December 31, 2007 and 2006.
  F-29
  **INTERMETRO
        COMMUNICATIONS, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **14
        — Cash Flow Disclosures**
  The
        table
        following presents a summary of the Company’s supplemental cash flow information
        (dollars in thousands):
 **Year
                    Ended December 31,****2007**
                
                **2006**
                
                **2005**Cash
                    paid:Interest
                
                $
                298
                
                $
                701
                
                $
                453Income
                    taxes
                
                $
                5
                
                $
                1
                
                $
                1Non-cash
                    information:Common
                    stock issued in connection with acquisition of Advanced Tel,
                    Inc.
                
                $
                —
                
                $
                1,500
                
                $
                —Net
                    liabilities assumed in excess of net assets acquired in connection
                    with
                    acquisition of Advanced Tel, Inc.
                
                $
                —
                
                $
                43
                
                $
                —Net
                    liabilities assumed in excess of net assets acquired in connection
                    with
                    acquisition of Lucy’s Cafe, Inc.
                
                $
                —
                
                $
                138
                
                $
                —Equipment
                    obtained under capital leases
                
                $
                233
                
                $
                123
                
                $
                268Equipment
                    obtained by issuing common stock warrants
                
                $
                —
                
                $
                —
                
                $
                269Equipment
                    obtained under strategic agreement
                
                $
                —
                
                $
                691
                
                $
                —Total
                    amounts and notes payable to former shareholder of ATI
                
                $
                —
                
                $
                400
                
                $
                —Transaction
                    costs accrued on acquisition of ATI
                
                $
                —
                
                $
                40
                
                $
                —Reclassification
                    of options and warrants liability to equity
                
                $
                10,999
                
                $
                —
                
                $
                —Debt
                    issuance costs
                
                $
                —
                
                $
                375
                
                $
                —Common
                    stock issued in connection with private placement
                
                $
                —
                
                $
                10,235
                
                $
                —Cost
                    of capital capitalized in private placement
                
                $
                —
                
                $
                6,646
                
                $
                —Liability
                    for options and warrants
                
                $
                
                
                $
                5,384
                
                $
                —Conversion
                    of Series A Notes payable
                
                $
                —
                
                $
                3,112
                
                $
                —Debt
                    issuance cost of Series B Preferred Stock
                
                $
                —
                
                $
                440
                
                $
                —Fair
                    value of nonemployee option grants
                
                $
                —
                
                $
                191
                
                $
                —
  F-30
  **INTERMETRO
        COMMUNICATIONS, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **15
        — Quarterly Financial Information (Unaudited)**
  The
        following table sets forth the unaudited quarterly financial information
        for
        2007, 2006 and 2005 (dollars in thousands):
 **For
                    the Quarter Ended****March 31,**
                
                **June 30,**
                
                **September 30,**
                
                **December 31,**
                
                **Total****Year
                    Ended 2007**Revenue
                
                $
                5,239
                
                $
                4,931
                
                $
                5,709
                
                $
                6,815
                
                $
                22,694Net
                    loss
                
                
                (9,174
                )
                
                (3,871
                )
                
                (2,230
                )
                
                (1,640
                )
                
                (16,915
                )**Year
                    Ended 2006**Revenue
                
                $
                3,121
                
                $
                5,918
                
                $
                5,886
                
                $
                5,184
                
                $
                20,109Net
                    loss
                
                
                (2,747
                )
                
                (2,150
                )
                
                (2,863
                )
                
                (6,170
                )
                
                (13,930
                )**Year
                    Ended 2005**Revenue
                
                $
                1,357
                
                $
                2,348
                
                $
                3,193
                
                $
                3,682
                
                $
                10,580Net
                    loss
                
                
                (624
                )
                
                (105
                )
                
                (139
                )
                
                (244
                )
                
                (1,112
                )
  **16
        — Subsequent Events**
  *Private
        Placement of Securities –* As
        discussed in Note 6, i n
        November and December 2007, the Company received $600,000 in advance payments,
        pursuant to the sale of secured notes with individual investors for general
        working capital. These funds were received prior to the closing of the sale
        of
        the secured notes, which occurred on January 16, 2008. Subsequent to December
        31, 2007, the Company sold an additional amount of the same secured notes
        totaling $770,000 in the period between January and March 2008, and can continue
        to sell similar secured notes up to a maximum offering of $3 million. The
        secured notes mature 18 months after issuance and bear interest at a rate
        of 10%
        per annum due at the maturity date. The notes contained an origination and
        documentation fee equal to 3% and 2.5%, respectively, of the original principal
        amount of the note that is due on the date the company makes it first prepayment
        or the maturity date. The holder of each note has the right upon the occurrence
        of a financing equal to or greater than $10 million, to convert the entire
        principal plus accrued interest and origination and documentation fee, or
        any
        portion thereof, into either securities sold in the financing at the price
        sold
        or common stock by dividing the conversion amount by $1.00.  The secured
        notes are secured by substantially all of the assets of the Company.
  In
        connection with the notes, the Company issued two common stock purchase
        warrants for every dollar received or 2.74 million common stock purchase
        warrants with an exercise price of $1.00, 1.37 million of which expire on
        January 16, 2013 and 1.37 million of which expire on February 1, 2014. With
        respect to 1.37 million of the total common stock purchase warrants issued
        in
        this financing, if such warrants are still held by the lenders at February
        1,
        2009, the lenders will be entitled to receive a payment (the “Reference
        Payment”) to the extent that the volume weighted average price per share for the
        30 trading days ending January 30, 2009 (the “Reference Price”) is less than
        $1.00.  The Reference Payment will be equal to the difference between $1.00
        and the Reference Price.  The Company, in its sole discretion, will have
        the right, but not the obligation, to make this payment by issuing Common
        Stock,
        in lieu of cash, but in no event will the amount of stock issued be more
        than
        one share per dollar invested by the lenders. If the Company elects to make
        the
        above payment by issuing Common Stock any time after the maturity date of
        the
        note until the first anniversary of the date thereof the holder may submit
        the
        Common Stock to the Company for $0.15 per share of Common Stock.
 
 With
        respect to the remaining 1.37 million common stock purchase warrants issued
        in this financing, if such warrants are still held by the lenders at February
        1,
        2009, the lenders will be entitled to receive a payment (the “Second Reference
        Payment”) to the extent that the volume weighted average price per share for the
        30 trading days ending January 30, 2009 (the “Second Reference Price”) is less
        than $2.00.  The Second Reference Payment will be equal to the difference
        between $2.00 and the Second Reference Price up to a maximum value of
        $1.00.  The Company, in its sole discretion, will have the right, but not
        the obligation, to make this payment by issuing Common Stock, in lieu of
        cash,
        but in no event will the amount of stock issued be more than one share per
        dollar invested by the lenders.
  F-31
  **INTERMETRO
        COMMUNICATIONS, INC.**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 The
        Company will account for the additional notes and warrants granted in January
        2008 as a modification of the secured notes of $600,000 as of December 31,
        2007,
        under the provisions of Emerging Issue Task Force Issue No. 96-19, “Debtor’s
        accounting for a Modification or Exchange of Debt Instruments.”
  *Common
        Stock Issued –* In
        March
        2008, the
        Company issued 635,612 shares of its common stock as part of an addendum
        to a
        strategic agreement with one of its equipment providers. The shares were
        issued
        pursuant to warrants held by the equipment vendor, with the payment of the
        exercise price for these warrants being applied from amounts that were owed
        to
        the equipment vendor at December 31, 2007.
  *Settlement
        Agreement –* In April
        2008, the Company entered into a settlement agreement with a significant
        provider of network services to the Company. The settlement agreement included
        a
        payment arrangement for past due amounts of approximately $3.0 million to
        be
        paid in equal weekly installments, with full repayment to occur prior to
        December 31, 2008. As part of the settlement agreement, the provider credited
        the Company an amount equal to past disputes filed by the Company of
        approximately $1.4 million. If the Company fails to meet the payment plan
        for
        past due amounts, the credit will be reversed.
  F-32