**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**




**FORM
      10-KSB**





(MARK
                ONE)**x**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the fiscal year ended December 31,
                2006****OR****o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from  ______________ to
                ______________**




Commission
        file number 333-75956




**NS8
      Corporation**


(Exact
        Name of Small Business Issuer As Specified In Its Charter)








**Delaware**
            **13-4142621**(State
                or other jurisdiction
              of
                incorporation)
            (IRS
                Employer
              Identification
                No.)






200-1311
                  Howe Street, Vancouver, BC, V6Z 2P3(Address
                of principal executive offices) (Zip
                Code)




**(604)
        677.6994**


(Issuer's
      telephone number)








Securities
      registered under Section 12(b) of the Exchange Act:  None




Securities
      registered under Section 12(g) of the Exchange Act: None




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.   Yes oNox





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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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. x





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


State
        registrant's revenues for its most recent fiscal year: $218,349
  As
        of
        March 31, 2007, there were 119,248,701 shares of the registrant's common
        stock,
        par value $0.0001 issued and outstanding, comprised of 117,972,265 shares
        of the
        Company’s Common Stock and 1,276,436 unexchanged shares of CanOnline Global
        Media Inc ("CGMI"). Of the issued and outstanding common shares of the
        registrant, approximately 101,473,909 shares were held by non-affiliates
        of the
        registrant. All of the unexchanged shares of CGMI are held by non-affiliates
        of
        the registrant. The market value of securities held by non-affiliates is
        approximately $4,058,956 based on the closing price of the registrant's common
        stock on March 31, 2007. The market value of the unexchanged shares of CGMI
        is
        $710,992 based on the closing price of the registrant's common stock on March
        31, 2007, had the unexchanged shares be exchanged into shares of the registrant
        on that date.




Transitional
      Small Business Disclosure Format (Check one):  Yes o No x


Documents
        Incorporated By Reference: None
  Table
            of Contents






**TABLE
      OFCONTENTS**








PageForward-Looking
              Statements3PART
                IItem
                1.
            Description
                of Business
            4Item
                2.
            Description
                of Property
            14Item
                3.
            Legal
                Proceedings
            14Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            14PART
                IIItem
                5.
            Market
                for Common Equity, Related Stockholder
                Matters
            14Item
                6.
            Management's
                Discussion and Analysis or Plan of
                Operation
            16Item
                7.
            Financial
                Statements
            21Item
                8.
            Changes
                In and Disagreements With Accountants on Accounting
                and Financial Disclosure
            21Item
                8A.
            Controls
                and Procedures
            21Item
                8B.
            Other
                Information
            21PART
                IIIItem
                9.
            Directors
                and Executive Officers,
                Promoters and Control Persons;Compliance
                with Section 16(A) of the Exchange Act
            21Item
                10.
            Executive
                Compensation
            24Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            27Item
                12.
            Certain
                Relationships and Related Transactions and
                Director Independence
            29Item
                13.
            Exhibits
            31Item
                14.
            Principal
                Accountant Fees and Services
            33






Table
          of Contents


**Forward-Looking
      Statements**




In
      addition to historical information, this Annual Report on Form 10-KSB contains
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
      statements regarding product plans and commercial activities, that involve
      risks
      and uncertainties that could cause actual results to differ materially. Factors
      that might cause or contribute to such differences include, but are not limited
      to, those discussed in this section under "Risk Factors." You should carefully
      review the risks described herein and in other documents we file from time
      to
      time with the Securities and Exchange Commission ("SEC"). When used in this
      report, the words "expects," "could," "would", "may," "anticipates," "intends,"
      "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to,"
      and similar expressions, as well as statements regarding NS8 Corporation's
      focus
      for the future, are generally intended to identify forward-looking statements.
      You should not place undue reliance on these forward-looking statements, which
      speak only as of the date of this Annual Report on Form 10-KSB. We undertake
      no
      obligation to publicly release any revisions to the forward-looking statements
      or reflect events or circumstances after the date of this document.




**Currency**




Unless
      we
      otherwise indicate in this annual report, references to "USD", "Dollars" or
      "$"
      are to the lawful currency of the United States. Any references to "CAD",
      "Dollars Canadian" or similar terms are to the lawful currency of Canada.




3
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          of Contents


PART
      I




**ITEM
      1. DESCRIPTIONOF BUSINESS**




**CORPORATE
      HISTORY**





We
      were
      incorporated under the name "Delivery Now Corp." in the State of Delaware on
      October 3, 2000.




Until
      December 17, 2003, we delivered envelopes by bike messengers and packages by
      van
      in the New York City metropolitan area through our wholly-owned subsidiary
      "BMW
      Messenger Services, Inc." ("BMW"). BMW received phone calls from customers
      seeking such deliveries and then dispatched its messengers via two-way radio
      to
      deliver the envelopes and packages via bicycle or van. BMW obtained these job
      orders through referrals from existing customers and through its sales
      force.




BMW
      was
      formed on September 23, 1999 in the State of New York and operated as an S
      Corporation from inception through October 3, 2000 when we acquired it. On
      October 3, 2000, we acquired 100% of BMW's common stock in exchange for
      2,500,000 shares of our common stock. At the time of the transaction, Michael
      Conte was our sole stockholder.




On
      December 17, 2003, we changed our name to "NS8 Corporation".




On
      December 18, 2003, we discontinued the messenger delivery service business
      in
      connection with the merger transaction described below.




**MERGER
      WITH CANONLINE GLOBAL MEDIA, INC.**





On
      November 3, 2003, we entered into an Agreement and Plan of Merger (the "Merger
      Agreement") with CanOnline Global Media, Inc. ("CanOnline"), a Washington
      corporation, and DLVN Acquisition, Inc. ("Acquisition Subsidiary"), a Delaware
      corporation. Acquisition Subsidiary was our wholly-owned subsidiary prior to
      the
      transaction.




On
      December 18, 2003, the transactions contemplated by the Merger Agreement closed,
      and a merger (the "Merger") was effected among us, CanOnline and Acquisition
      Subsidiary. Pursuant to the Merger Agreement, (i) Acquisition Subsidiary was
      merged into CanOnline, with CanOnline becoming the surviving corporation, (ii)
      the holders of the 66,670,346 shares of issued and outstanding CanOnline common
      stock exchanged their CanOnline common stock for shares of our common stock
      at a
      one for one ratio, receiving in the aggregate 66,670,346 shares of our common
      stock in exchange for their shares of CanOnline common stock, (iii) the holders
      of options to acquire an aggregate of 14,886,702 shares of CanOnline's common
      stock exchanged their options for options to acquire our common stock at a
      one
      for one ratio, receiving in the aggregate options to acquire 14,886,702 shares
      of our common stock, and the 100 shares of common stock of Acquisition
      Subsidiary issued and outstanding prior to the Merger were converted into 100
      shares of CanOnline common stock, with CanOnline becoming our wholly-owned
      subsidiary.




Simultaneously
      with the closing of the Merger, we transferred all of the issued and outstanding
      stock of our wholly-owned subsidiary, BMW, to Michael Conte and Brian Seinwels
      in exchange for 24,950,000 shares of our common stock. Mr. Conte was our
      director, chief executive officer and president, and Mr. Seinwels was our vice
      president until the closing of the Merger. These shares were cancelled and
      restored to our authorized and unissued capital stock.




Prior
      to
      the Merger, our operations consisted primarily of the messenger delivery service
      conducted by BMW. This business is now wholly owned by Mr. Conte and Mr.
      Seinwels and is no longer operated by us.




Our
      primary operation now consists of the operations of CanOnline.




The
      number of shares of our common stock exchanged for the CanOnline common stock
      was determined in arms-length negotiations between our board of directors and
      the board of directors of CanOnline. The negotiations took into account the
      value of CanOnline's financial position, results of operations, products,
      prospects and other factors relating to CanOnline's business. At the time of
      the
      Merger, there were no material relationships between CanOnline and us or any
      of
      our affiliates, any of our directors or officers or any associate of any of
      our
      officers or directors.




The
      number of shares of our common stock transferred to us in exchange for the
      BMW
      common stock was determined by our board of directors, which included Mr. Conte
      and Mr. Seinwels. This transaction was approved and ratified by the board of
      directors of CanOnline, which was independent with respect to this
      transaction.




The
      exchange of CanOnline shares for our shares was exempt from the registration
      requirements of the Securities Act of 1933, as amended, under section 4(2)
      of
      that Act.




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          of Contents


**BUSINESS
      OVERVIEW**




We
      are a
      software development company dedicated to serving the digital media distribution
      industry. We are based in Los Angeles, California, USA and maintain research
      and
      development facilities in Vancouver, British Columbia, Canada. We specialize
      in
      the development of server-based technologies in the areas of content licensing,
      digital media publishing and royalty distribution management. We have combined
      all of our software technologies into one comprehensive solution called
      iWave(TM) Interactive Systems ("iWave").




iWave
      is
      a powerful end-to-end turn-key system for the secure management and distribution
      of on-demand digital content over Internet enabled networks. The iWave system
      can be used by telecommunication companies, Internet service providers, media
      distributors and content owners that are expanding their service offerings
      to
      include on-demand entertainment services in order to attract or retain
      consumers. In addition, iWave is also a solution for producers and distributors
      of digital content that allows them to effectively audit, track and manage
      their
      content licenses and advertising placements that are deployed throughout
      multiple business networks.




iWave
      enables our commercial customers to custom brand their on-demand services and
      extend their offerings to new platforms and customers that already connect
      to
      these networks in multiple ways. This allows leveraging of the increasing
      convergence and interoperability of consumer digital lifestyle peripherals
      such
      as mobile phones, portable devices, media centers and game consoles. These
      are
      all managed through a single, comprehensive integrated solution.




All
      of
      our software architecture surrounding media distribution, revenue tracking,
      advertising auditing, publishing and security management are patent-pending
      technologies. Our software enhances security during the distribution of digital
      media over the Internet and during consumer use. In addition, our software
      simplifies the business and distribution functions of digital media to provide
      our commercial customers with increased delivery efficiency while reducing
      their
      distribution costs through normal high-speed networks. This enhances the overall
      consumer loyalty of our commercial customers by having one service that provides
      both portable as well as home entertainment services to their consumers
      regardless of location as long as those consumers have access to the
      Internet.




**How
      We Generate Revenue**





Currently,
      we derive the majority of our revenue from fees we receive through the licensing
      of our iWave platform to telecommunication companies, Internet service
      providers, media distributors and content owners. Our secondary source of
      revenue is related to development work performed to: (a) satisfy custom software
      development requests from our customers to add or enhance specific functions
      to
      our core product for their consumers' needs; (b) integrate third party
      functionality or services with iWave such as payment and data base systems;
      and
      (c) support other business applications or functionality requirements for our
      customers that might be necessary to fulfill certain industry-related
      regulations or accepted protocols in territories in which our customers are
      marketing.




When
      each
      of our commercial customers begins their consumer deployment, our two
      anticipated primary sources of income will be derived from revenue sharing
      attributed to the sale of content and advertising by our customers. We receive
      a
      percentage share of revenues generated by every rental or purchase of digital
      media and a percentage share of the price rate for impressions on advertising
      that appear on our customers’ licensed system ("Usage Revenues"). Each of these
      Usage Revenues is paid to us on a real-time basis with respect to content
      transactions and on a quarterly basis for advertising usage.




**INDUSTRY**





This
      year
      ushered in an era where consumers have massively adopted broadband-based
      entertainment services. The consumer-driven shift to digital delivery and
      consumption has affected every facet of the entertainment industry. Media
      companies have moved all manner of content online, and have begun experimenting
      with various business models incorporating the digital distribution of content.
      According to a forecast from IDC reported April 19, 2006 via MediaPost
      Communications, Internet video services will generate over $1.7 billion in
      revenues by 2010, an increase of more than $1.5 billion from 2005 totals. The
      latest internetworldstats.com statistics show that worldwide Internet
      penetration has increased to 16.6%, or 1,093,529,692 Internet users. According
      to In-Stat, published by Rider Research in August 2006, broadband households
      will grow from about 194 million to more than 413 million by 2010.





User
      generated content, online video has proliferated





Leading
      user generated content services were acquired by major media companies this
      year. According to a company press release dated November 29, 2006, YouTube
      currently delivers more than 100 million video views daily with 65,000 new
      videos uploaded each day. There are well over 200 web sites listed in the major
      search engines with video featured as their main offering. The mass adoption
      of
      these services demonstrates that consumers crave broadband video, and that
      the
      consumption of specialty content, and its
      packaging and available distribution channels should prove to be an important
      factor in the digital media industry over the next year.


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          of Contents





Business
      Models are in a state of flux





In
      the
      digital music industry, as an example, companies have attempted to develop
      pay
      per view (PPV), subscription, and more recently download-to-own business models.
      Burn-to-DVD is also relatively new and is anticipated to expand the industry
      as
      consumers familiarize themselves with this technology. We believe that a hybrid
      model within a single service offering is likely to be most successful. Online
      advertising continues to grow in importance and will take on an increasingly
      prominent role in the industry. According to eMarketer, as reported by
      Clickz.com on December 7, 2006, online advertising revenue for 2006 (including
      search) is projected to be $16 billion. In the same article, Merrill Lynch
      predicts online advertising will increase by over 20% in 2007.





Telecommunications
      Carriers are moving to avoid commoditization, disintermediation





Commensurate
      with the rapid adoption of broadband by consumers there has been an increase
      in
      supply, a decrease in prices, and less differentiation between services offered
      by telecommunications carriers and cable TV companies. Commoditization of
      broadband services coupled with a convergence of services driven by consumer
      preference for bundles, has forced service providers to upgrade their physical
      plant and at the same time look for innovative ways to deliver and aggregate
      content, such as VOD, IPTV, and broadband entertainment portals. We believe
      that
      as consumer’s familiarity with and desire for broadband entertainment increases,
      service providers will need to diversify by partnering with both content owners
      and other aggregators. If service providers fail to do this, consumers will
      switch to operators with the most interesting broadband service offerings,
      or
      simply choose 3 rd party
      broadband entertainment services delivered over the service provider’s
      network.





**PLAN
      OF OPERATIONS:**





A
      significant portion of our human resources have been allocated toward program
      developers in order to maintain our current delivery schedules with our
      customers. A decline in employment rates along with heightened start-up
      competition within the Province of British Columbia, where our research and
      development facilities are located, have made it difficult for us to hire
      sufficiently skilled personnel to fulfill certain development resource positions
      within our planned time frame. However, we continue to hire personnel on a
      continuous basis and have started employment searches in Los Angeles, California
      for persons having the required qualifications to fulfill our growing need
      for
      development personnel.




We
      continue to attempt to reduce costs in key areas in order to maximize capital
      application toward development and commercial activities. Standard internal
      process controls have been implemented for the purposes of ensuring quality
      control within our process of product development for our customers. In
      addition, we have started to renew certain development equipment to provide
      better computers, monitors and other equipment to our developers in order to
      improve their productivity and general working environment.




**Commercialization**





**True
      Corporation (Thailand)**


Download
      Music Service





In
      March,
      2006 NS8 entered into a development contract with the True Corporation in
      Thailand to provide the music player and backend technology for its on-line
      music distribution service. Through the service offering, True is offering
      secure music downloads to PC’s, mobile phones and other portable devices through
      an a la carte or subscription based service. Content is provided by every major
      and independent record label with an existing library of over seven hundred
      thousand songs available to its consumers.





NS8
      has
      now completed this major development project and is scheduled for consumer
      launch to True Corporation’s 400,000 broadband subscribers in May 2007.





**ADC
      (Buddy Broadband - Thailand)**


iWave
      PC
      Distribution Platform





NS8
      entered into a partnership agreement with Advanced Datanetwork Communications
      Co., Ltd. (“ADC”) for ADC’s Buddy Broadband service in June 2006 to enable its
      consumers to securely deliver premium content to its broadband subscribers
      throughout Thailand. Buddy Broadband will use the iWave PC Content Distribution
      Platform to deliver its collection of Hollywood film titles and local Thai
      programming by using the iWave Interactive video distribution to deliver its
      on-demand services. Both companies will share in the revenue derived from the
      service. ADC and NS8 will be working together to demonstrate the features,
      benefits and security parameters of the platform to gather distribution
      approvals from ADC’s various content providers. This project is on hold pending
      content approvals for delivery over IP.


6
 Table
          of Contents


**ADC
      (Buddy Broadband - Thailand)**


Content
      Distribution Agreement





In
      addition to the service partnership agreement with the iWave PC distribution
      platform, NS8 has secured a content distribution agreement with ADC that will
      allow content licensed by NS8 to be distributed over ADC’s on-demand services.
      Both NS8 and ADC will share in the revenue derived from the video rental and
      sales of this content.





**ReelTime
      (Australia)**


iWave
      PC
      Distribution Platform





Reeltime
      Infotainment Ltd. (“ReelTime)” licensed the iWave PC Distribution Platform for
      its video-on-demand service in Australia. The platform was initially delivered
      in July 2006 and went live to a limited number of subscribers in September
      2006.





Subsequently,
      ReelTime entered into a joint venture with Yahoo7! for carriage and distribution
      of the ReelTime service and is now accessible through Yahoo7! home portal.
      NS8
      is continuing the integration of certain Yahoo7! related functionality within
      its user interface to allow for smoother consumer acquisition to the service.





NS8
      is
      generating revenue from licensing its technology and sharing in all advertising
      revenue.





**ReelTime
      (Australia)**


IPTV
      Platform





ReelTime
      licensed the iWave IPTV platform for its future STB rollout within Australia
      in
      June 2006. This project has been put on hold while both companies are in
      discussions and evaluating the feasibility of adopting a current product line
      with more flexibility to other devices such as Vista, MCE, and Viive.





**ReelTime
      (New Zealand)**


iWave
      PC
      Distribution Platform





In
      December 2006, NS8 and ReelTime extended the territorial rights for the iWave
      PC
      distribution platform to include New Zealand. Expansion of the current ReelTime
      service into New Zealand is expected to go live in the second quarter of
      2007.





**ReelTime
      (Mobile Games)**





In
      November 2006, NS8 and ReelTime entered into an agreement to distribute mobile
      games, ringtones, and other mobile content provided by NS8 to be distributed
      through the ReelTime service that will be operating in Australia. Both NS8
      and
      ReelTime will share the revenue generated by sales of the content. The mobile
      games service is expected to go live in May 2007.





**Outlook
      for 2007**





USA





NS8
      is in
      the final stage of its preparations to launch its direct to consumer video
      download service offering rental and EST (electronic sell through) of content
      to
      broadband subscribers throughout the USA over its iWave PC Distribution
      Platform.





The
      primary business and marketing goal of the service includes white labeling
      its
      video service by offering co-branded user interfaces to tier 2 and 3 Internet
      service providers (ISP’s) throughout the country that consist of a total
      aggregate of over five million broadband subscribers. The participating ISP’s
      will then be able to offer an attractive video content service to their
      subscribers that currently only the larger ISP’s are able to offer. The business
      model includes a per subscriber fee paid to NS8 for the service offering and
      NS8
      will also share a portion of the revenues from rentals, sales and advertising
      with each of the participating ISP’s.





International





NS8
      will
      continue its efforts to license its iWave technology to major ISP’s throughout
      the Asia Pacific region, Europe and South America. Several major ISP’s and other
      service providers throughout Asia have already expressed strong interest in
      licensing our technology. Further licensing arrangements are currently being
      discussed with carriers in Singapore, Taiwan and India.





NS8’s
      licensing model includes license fees, maintenance fees, custom development
      fees, revenue share of content (on a transaction by transaction basis) and
      shared advertising fees.




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          of Contents




Content




NS8
      has a
      current library of over fourteen hundred films, documentaries, music and HD
      programs. NS8 will continue to secure content distribution licensing agreements
      with major Hollywood studios, networks, TV, sports, music and other specialty
      programming to enhance its service offering for both domestic and international
      service offerings.





**RESEARCH
      & DEVELOPMENT:**





Fundamental
      to our research and development (R&D) plans and projections is the
      understanding that the Company participates in highly competitive markets that
      are subject to aggressive pricing and increased competition. To remain
      competitive, the Company believes that increased investment in research and
      development is critical to facilitate innovation of new and improved products
      and technologies, and to maintain and extend its current penetration and
      positioning in the markets where it competes. The Company’s R&D spending is
      mainly focused on delivering timely updates and enhancements to our commercially
      deployed iWave PC system. During the second half of 2006 our development
      department made substantial improvements to the second generation of our iWave
      PC system in areas of extended functionality; improved usability; and extended
      integration with third party services and products. Examples of these
      are:


·
            Integration
                with FluxDVDTM technology to offer our customers in Australia the
                option
                to securely download and burn to DVD video content directly through
                our
                Consumer Programming Guide (CPG) and Download Manager. We plan to
                include
                this function during our 2007 launch in North
                America. ·
            Facilitate
                the path for our users to securely export and view their acquired
                content
                to other peripherals, like MSFT Xbox 360TM (when not limited by
                content licensing agreements). ·
            Complete
                integration with third-party geo-filtering services and systems to
                increase security and compliance with content owner
                requirements. ·
              Responding
                  to market demand, we have developed a complete SMS module that
                  allows the
                  iWave platform to fully handle transactions and integration with
                  third
                  party credit card gateways. We have always offered to our customers
                  an
                  easy integration with their existing billing platforms, if they
                  have one.
                  However, with our SMS module we are responding to the increased
                  demand of
                  clients who don’t have a billing system in place but that are looking to
                  build their business around the provision of on-demand services.
                  This
                  assures a quick time to market for current and potential new affiliates
                  and partners.


Besides
      updates to the existing iWave PC system, the Company’s R&D roadmap is also
      looking to capitalize in the increasingly ubiquitous markets of entertainment
      content consumption (from music and movies to games) and on the convergence
      of
      digital consumer electronics and the computer. We are working on new software
      applications to extend the iWave brand and services to other consumer digital
      lifestyle peripherals such as mobile phones, portable music and video devices,
      home media centers, and game consoles.





As
      an
      example, during 2006 we achieved completion of what we call our IPTV-CPG
      Foundation. This technology provides a way to easily create and transfer
      sophisticated graphical user interfaces across a wide variety of IPTV set top
      boxes. In contrast to HTML or Java based user interface engines (which generally
      provide a slow and unwieldy user experience) and native-code developed user
      interfaces (which take a great deal of time to create and modify), the IPTV-CPG
      Foundation provide a quick method to develop IPTV applications and services,
      while maintaining a compelling look and feel. Furthermore, due to its flexible
      architecture, additional services can easily be developed to enhance and
      differentiate IPTV service offerings.





The
      attributes of our technology, including its ability to manage the end-to-end
      distribution process and commercialization of content through any network (such
      as the Internet and intranets), allow us to easily adhere to many industry
      standards and extend the reach of the iWave services to new platforms and
      consumers that already connect to these networks in multiple ways. Through
      an
      optimized user experience and seamless interoperability with the favorite
      consumer peripherals and devices from other companies (like Apple, Microsoft,
      Creative, etc.) our R&D roadmap is looking to add individual value to our
      operations with each of these integrations. This is uniquely positioning the
      Company and iWave as an attractive and simple solution for current and potential
      partners to manage and capitalize the distribution of entertainment to disparate
      platforms through a simple integrated solution.





**Proprietary
      Technologies**





NS8
      Corporation has three U.S. patent pending applications and two Patent
      Cooperation Treaty (PCT) applications pending with the United States Patent
      and
      Trademark Office:





These
      applications claim priority to U.S. Provisional Patent Application No.
      60/444,672, filed by CanOnline on February 4, 2003, titled "Method and Apparatus
      for Facilitating Third Party Representation Of An Object," which is incorporated
      in its entirety in the new filings:







·
            U.S.
                Patent Application filed on February 4, 2004 for "Method and Apparatus
                For
                Converting Objects Between Weakly And Strongly Typed Programming
                Frameworks";




·
            U.S.
                Patent Application filed on February 4, 2004 for "Method and Apparatus
                For
                Presenting Multimedia Content And For Facilitating Third Party
                Representation Of An Object"; and




·
              Patent
                  Cooperation Treaty Application filed on February 4, 2004 for "Method
                  and
                  Apparatus For Converting Objects Between Weakly And Strongly Typed
                  Programming Frameworks".


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These
      applications claim priority to U.S. Provisional Patent Application filed with
      the United States Patent and Trademark Office, on July 16, 2004 for "Method
      and
      System for Managing the Authorized Use of Digital Works."


·
            U.S.
                Patent Application filed on July 16, 2005 for: "Method and System
                for
                Managing the Authorized Use of Digital Works";
                and


·
            Patent
                Cooperation Treaty Application filed on July 16, 2005 for: "Method
                and
                System for Managing the Authorized Use of Digital
                Works".





These
      patent applications include over 16 technologies within the areas of
      non-resident software systems; automated coding architecture; digital media
      formatting, filtering, conversion and distribution technologies; encrypted
      signatures, processing, sampling, royalty and encoding methods; secure
      communications and collaboration systems; and business processes.





None
      of
      the above-mentioned patent applications have been granted, or rejected, at
      this
      time.





NS8
      Corporation has also filed several trademarks in the United States and
      international territories in an attempt to protect our intellectual property
      as
      part of our internal IP program, which includes patents, trademarks, copyrights,
      and maintaining certain technologies as trade secrets.





**Trademarks**





Certificate
      of Registration of Trademark No. 1181601 was issued by the Register of
      Trademarks of Canada certifying that the trade-mark "CANONLINE" has been
      registered in Canada to CanOnline Global Media, Inc. on September 13, 2005
      under
      registration number TMA647,899. In accordance with the provisions of the
      Trademarks Act of Canada, this trademark is subject to renewal every 15 years
      from the registration date.





On
      April
      30, 2004, CanOnline filed an application for the trademark "SPI" with the United
      States Patent and Trademark Office. The application has since been abandoned
      because it was no longer considered a priority in our business
      plan.





On
      June
      1, 2004, CanOnline filed applications for two classes for the trademark "NS8"
      with the United States Patent and Trademark Office. On July 26, 2004, CanOnline
      filed two new applications for the registration of the trademarks "SECURITY
      PROTOCOL INTEGRATION" and "SECURE DIGITAL CONTENT DISTRIBUTION" with the United
      States Patent and Trademark Office. We have filed a request to change these
      filings from the Principal Register to the Supplemental Register of the United
      States Patent and Trademark Office. On December 13, 2005, Certificate of
      Registration No. 3,027,246 was issued by the United States Patent and Trademark
      Office to CanOnline Global Media, Inc. certifying that the trademark "NS8"
      has
      been registered in the United States. CanOnline received a Notice of Allowance
      in May, 2006 (registered in December 13, 2005 at the USPTO) for the application
      to register "NS8" the trademark application in the United States upon the
      commercial launch of NS8 in the United States. We are preparing to file a
      statement of use the United States. During 2004, we also initiated applications,
      through CanOnline, to file the "NS8" trademark in Canada, China, the European
      Community and Japan, including:


·
            The
                application for registration of the "NS8" trademark in Canada was
                filed,
                with a priority claim, on November 30,
                2004; 
 ·
            Separate
                trademark applications filed in China in Classes 9 and 42, with priority
                claims, on November 29, 2004; 
 ·
            The
                "NS8" trademark application filed in the European Community in Classes
                9
                and 42, with a priority claim, on December 1, 2004;
                and ·
              The
                    "NS8" mark and logo filed as a composite mark in Classes 9 and
                    42 in Japan
                    on December 1, 2004.


None
      of
      these applications have been granted, or rejected, at this time with the
      exception of the trademark "CANONLINE" that has been granted and registered
      in
      Canada and the trademark "NS8" that has been registered in the United States.
      We
      are currently pursuing the filing of other trademarks with the United States
      Patent and Trademark Office in relation to the development of its products
      and
      marketing initiatives.




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EMPLOYEES


As
      of
      December 31, 2006, we had 25 full-time employees, engaged in Operations,
      Marketing, Sales, and Research and Development. We intend to hire additional
      personnel as the development of our business makes such action appropriate.
      The
      loss of the services of key employees could have a material adverse effect
      on
      our business. Since there is intense competition for qualified personnel
      knowledgeable of our industry, we cannot assure you that we will be successful
      in retaining and recruiting needed personnel.




Our
      employees are not represented by a labor union and are not covered by a
      collective bargaining agreement. We believe that we have good relations with
      our
      employees.




ezTel/LDBS
      Transaction




On
      February 10, 2005, we entered into an Option Agreement with ezTel, LLC ("ezTel")
      pursuant to which we were granted an option to purchase 100% of all equity,
      membership and ownership interests in ezTel for $1,500,000. ezTel and its
      subsidiaries provide discount long-distance telephone services and wireless
      broadband Internet services. On July 30, 2002, ezTel and several of its
      subsidiaries filed for protection under Chapter 11 of the Bankruptcy Code.
      EzTel's bankruptcy proceeding is ongoing. The option to acquire ezTel was
      exercisable at our sole discretion, subject to confirmation of the Option
      Agreement by the Bankruptcy Court and confirmation of a revised Plan of
      Reorganization by the Bankruptcy Court in a final, non-appealable order.




As
      consideration for the Option Agreement, we advanced a $200,000 term loan to
      Long
      Distance Billing Services, Inc. ("LDBS"), a wholly-owned subsidiary of ezTel.
      The term loan was due August 1, 2005. If we had chosen to acquire ezTel, ezTel
      was to first repay to us the amount of the term loan to LDBS plus all accrued
      interest. The term loan was evidenced by a promissory note, a Deed of Covenants
      and secured by a Security Agreement charging substantially all of the assets
      of
      LDBS. On February 22, 2005 LDBS filed for protection under Chapter 11 of the
      Bankruptcy Code. Subsequently, we did receive payments from LDBS from our cash
      collateral. From October 2005 to December 2005, we received payments in the
      amount of $150,000 from LDBS, and in February 2006, we received a payment of
      $25,000 from a third-party in consideration of the assignment of our security
      interest in LDBS. Therefore, we are no longer entitled to receive any future
      payments from LDBS.




**RISK
      FACTORS**




We
      are
      subject to various risks that may materially harm our business, financial
      condition and results of operations. You should carefully consider the risks
      and
      uncertainties described below and the other information described below before
      deciding to purchase our common stock. If any of these risks or uncertainties
      actually occurs, our business, financial condition or operating results could
      be
      materially harmed. In that case, the trading price of our common stock could
      decline and you could lose all or part of your investment.




**WE
      HAVE HAD NO PROFITS AND INSIGNIFICANT REVENUES SINCE INCEPTION**




We
      are a
      development stage company and have had no profits and insignificant revenues
      since commencement of operations in March 2000. For the years ended December
      31,
      2006 and 2005, the Company experienced net losses of $10,135,508 and $6,587,391,
      respectively. Our deficit accumulated during the development stage was
      $28,291,026 as of December 31, 2006. Future losses are likely to occur, as
      we
      continue to pay for our ongoing operations. We cannot assure you that we will
      be
      successful in reaching or maintaining profitable operations.
      Accordingly, we may experience liquidity and cash flow problems. If our losses
      continue, our ability to operate may be severely impacted.




**WE
      MAY NEED TO RAISE ADDITIONAL CAPITAL OR DEBT FUNDING TO SUSTAIN OPERATIONS**




Unless
      we
      can become profitable with the existing sources of funds we have available,
      we
      will require additional capital to sustain operations and we may need access
      to
      additional capital or additional debt financing to grow our sales. In addition,
      to the extent that we have a working capital deficit and cannot offset the
      deficit from profitable sales, we may have to raise capital to repay the deficit
      and provide more working capital to permit growth in revenues. We cannot assure
      that financing, whether from external sources or related parties, will be
      available, if needed, or on favorable terms. An inability to obtain adequate
      financing would result in the need to reduce the pace of business operations.
      Any of these events could be materially harmful to our business and may result
      in a lower stock price.




**WE
      MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN**




Our
      consolidated financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. We have a history of operating losses that
      are
      likely to continue in the future. Our auditors have included an explanatory
      paragraph in their Report of Independent Registered Public Accounting Firm
      included in our audited consolidated financial statements for the years ended
      December 31, 2006 and 2005 to the effect that our significant losses from
      operations and our dependence on equity and debt financing raise substantial
      doubt about our ability to continue as a going concern. Our consolidated
      financial statements do not include any adjustments that might be necessary
      should we be unable to continue as a going concern.


10
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          of Contents




**WE
      ARE SUBJECT TO A WORKING CAPITAL DEFICIT, WHICH MEANS THAT OUR CURRENT ASSETS
      ON
      DECEMBER 31, 2006 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES AND,
      THEREFORE, OUR ABILITY TO CONTINUE OPERATIONS IS AT RISK**




As
      of
      December 31, 2006, the date of our most recent audited financial statements,
      we
      had a working capital deficit of $8,131,447, which means that our current
      liabilities as of that date exceeded our current assets by $8,131,447. Current
      assets are assets that are expected to be converted to cash within one year
      and,
      therefore, may be used to pay current liabilities as they become due. We had
      insufficient working capital meaning our current assets were insufficient to
      satisfy all of our current liabilities on December 31, 2006. However, our
      ongoing operations must begin to provide sufficient profitability to improve
      our
      working capital position. If we are unable to become profitable we may have
      to
      raise capital or debt to fund the operations or curtail future plans.




**OUR
      OBLIGATIONS UNDER THE SECURED CONVERTIBLE DEBENTURES ARE SECURED BY ALL OF
      OUR
      ASSETS**




Our
      obligations under the secured convertible debentures which we issued to Cornell
      Capital Partners LP are secured by all of our assets. As a result, if we default
      under the terms of the secured convertible debentures, Cornell Capital Partners
      LP could foreclose its security interest and liquidate all of our assets. This
      would cause us to cease operations.




**WE
      COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL, WHICH COULD BE DETRIMENTAL TO
      OUR
      OPERATIONS**




Our
      success largely depends on the effort and abilities of key executive officers.
      The loss of the services of any of our key executive officers could materially
      harm our business because of the cost and time necessary to replace and train
      a
      replacement. Such a loss would also divert management attention away from
      operational issues. We have taken out a Group Accident Policy on our key
      executives effective January 1, 2005, as well as key-man insurance policies
      on
      our key executive officers. We also have other key employees who manage our
      operations, and if we were to lose their services, senior management would
      be
      required to expend time and energy to replace these employees and train
      replacements. To the extent that we are smaller than our competitors and have
      fewer resources, we may not be able to attract a sufficient number and quality
      of staff.




**SEVERANCE
      PAYMENTS ARE DUE TO THE TOP EXECUTIVE OFFICER IF TERMINATED WITHOUT CAUSE**




Our
      Chief
      Executive Officer has a severance payment clause in his US employment agreement
      stating that if the Principal’s employment is terminated without cause and
      without advance notice, the Employer will continue to provide as severance
      pay,
      the Principal’s base salary in cash at the rate in effect on the termination
      date through the remaining term of Principal’s employment which is December 1,
      2008. The Chief Executive Officer and other corporate
      officers reside in British Columbia and are protected by the British Columbia
      Employment Standards Act, which provides for one week of pay for each year
      of
      service upon termination. The remaining officers' employment agreements do
      not
      have termination dates.




**OUR
      NEW PRODUCTS, SERVICES AND TECHNOLOGIES MAY NEVER BE PROFITABLE**




We
      have
      made significant investments in research, development and marketing for new
      products, services and technologies. Revenue from new product and service
      investments may not be achieved for a number of years, if at all. Moreover,
      these products and services may never be profitable.




**IF
      WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, COMPETITORS
      MAY
      USE OUR TECHNOLOGY AND TRADEMARKS, WHICH WOULD WEAKEN OUR COMPETITIVE POSITION
      AND MAY RESULT IN THE FAILURE OF OUR BUSINESS**




Our
      success depends upon our proprietary technology. We rely on a combination of
      patent pending, copyright, trademark and trade secret rights, confidentiality
      procedures and licensing arrangements to establish and protect our proprietary
      rights. To date, we have filed three U.S. patent applications and two Patent
      Cooperation Treaty applications with the U.S. Patent and Trademark Office,
      and
      the trademark applications all as described above in the Proprietary
      Technologies section. As of this date the trademark "CANOLINE" was granted
      in
      Canada and the trademark "NS8" was granted in the United States. It is possible
      that other companies could successfully challenge the validity or scope of
      our
      patents and that our patents may not be granted or provide a competitive
      advantage to us. In addition, third parties could copy or develop similar
      technology independently. The protection of our proprietary rights may not
      be
      adequate and our competitors could independently develop similar technology,
      duplicate our products, or design around patents and other intellectual property
      rights that we hold.


11
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          of Contents




**OUR
      OPERATIONS ARE SUBJECT TO CHANGING TECHNOLOGY**




The
      Internet and electronic commerce markets are characterized by rapid
      technological change, changes in user and customer requirements, frequent new
      service and product introductions embodying new technologies, and the emergence
      of new industry standards and practices that could render our existing
      technology obsolete. Our performance will depend, in part, on our ability to
      continue to enhance our existing services, develop new technology that addresses
      the increasingly sophisticated and varied needs of its prospective customers,
      license leading technologies, and respond to technological advances and emerging
      industry standards and practices on a timely and cost-effective basis. The
      development of our proprietary technology entails significant technical and
      business risks. We may not be successful in using new technologies effectively
      or adapting other proprietary technology to customer requirements or to emerging
      industry standards. If we were to be unable to adapt to changing technologies,
      our business, results of operations, and financial condition could be materially
      and adversely affected.




**WE
      NEED TO ESTABLISH AND MAINTAIN STRATEGIC LICENSING
      RELATIONSHIPS**




Our
      success will depend in part upon our ability to establish and maintain licensing
      relationships with companies in related business fields, including but not
      limited to communications companies, owners of digital media content, DVD
      authoring facilities and replicators, consumer electronics hardware
      manufacturers, and CD-ROM mastering facilities and replicators. We believe
      that
      these relationships are needed to allow us access to manufacturing, sales and
      distribution resources. However, the amount and timing of resources to be
      devoted to these activities by such other companies are not within our control.
      We cannot assure you that we will be able to maintain our existing relationships
      or enter into beneficial relationships in the future, that other parties will
      perform their obligations as expected or that our reliance on others will not
      result in unforeseen problems. We cannot assure you that our potential licensees
      will not develop or pursue alternative technologies either on their own or
      in
      collaboration with others, including with our competitors. The failure of any
      of
      our current or future collaboration efforts would have a material adverse effect
      on our ability to introduce new products or applications and therefore would
      have a material adverse effect on our business, financial condition and results
      of operations.




**WE
      FACE INTENSE COMPETITION FROM BETTER FUNDED COMPANIES**




We
      face
      intense competition from better funded companies in the fields of Internet
      software services, digital security and asset management, and media
      distribution. We expect that competition will continue to intensify. Our
      competitors may develop products or services that are superior to ours or have
      greater market acceptance than we hope to obtain. If we are unable to compete
      successfully against our competitors our business and financial condition will
      be adversely affected.




**OUR
      COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
      SIGNIFICANTLY, WHICH MAY AFFECT OUR SHAREHOLDERS' ABILITY TO SELL SHARES OF
      OUR
      COMMON STOCK**




To
      date,
      there has been a limited public market for our common stock and there can be
      no
      assurance that a more active trading market for our common stock will develop.
      An absence of an active trading market could adversely affect our stockholders'
      ability to sell our common stock in short time periods, or possibly at all.
      Our
      common stock has experienced, and is likely to experience in the future,
      significant price and volume fluctuations, which could adversely affect the
      market price of our common stock without regard to
      our
      operating performance. In addition, we believe that factors such as quarterly
      fluctuations in our financial results and changes in the overall economy or
      the
      condition of the financial markets could cause the price of our common stock
      to
      fluctuate substantially. These fluctuations may also cause short sellers to
      enter the market from time to time in the belief that we will have poor results
      in the future. We cannot predict the actions of market participants and,
      therefore, can offer no assurances that the market for our stock will be stable
      or appreciate over time. The factors may negatively impact stockholders' ability
      to sell shares of our common stock.




**OUR
      COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
      FOR
      INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY
      REQUIREMENTS**




Our
      common stock is deemed to be "penny stock" as that term is defined in Rule
      3a51-1 promulgated under the Securities Exchange Act of 1934. This
      classification may reduce the potential market for our common stock by reducing
      the number of potential investors. This may make it more difficult for investors
      in our common stock to sell shares to third parties or to otherwise dispose
      of
      them. This could cause our stock price to decline. Penny stocks are stocks:




·
            With
                a price of less than $5.00 per share;  ·
            That
                are not traded on a "recognized" national exchange;  ·
            Whose
                prices are not quoted on the NASDAQ automated quotation system (NASDAQ
                listed stock must still have a price of not less than $5.00 per share);
                or  ·
            In
                issuers with net tangible assets less than $2.0 million (if the issuer
                has
                been in continuous operation for at least three years) or $10.0 million
                (if in continuous operation for less than three years), or with average
                revenues of less than $6.0 million for the last three years.  Broker/dealers
        dealing in penny stocks are required to
        provide potential investors with a document disclosing the risks of penny
        stocks. Moreover, broker/dealers are required to determine whether an investment
        in a penny stock is a
 suitable
        investment for a prospective investor.
  12
 Table
              of Contents
  **THE
        EXERCISE OR CONVERSION OF OPTIONS, WARRANTS, AND CONVERTIBLE SECURITIES COULD
        RESULT IN POTENTIAL DILUTION AND IMPAIR MARKET PRICE OF OUR COMMON
        STOCK**




As
      of
      December 31, 2006, we had outstanding options, warrants, and convertible
      securities to acquire an aggregate of 79,856,000 shares of common stock. To
      the
      extent that the outstanding options, warrants, and convertible securities are
      exercised or converted, existing shareholders will experience dilution in their
      percentage ownership. So long as these options, warrants, and convertible
      securities are exercisable, the holders will have the opportunity to profit
      from
      a rise in the price of the common stock. The additional shares of common stock
      available for sale in the market may have a negative impact on the price and
      liquidity of the common stock that is currently outstanding shares of common
      stock.




**A
      BREACH OF CONFIDENTIAL CUSTOMER INFORMATION COULD EXPOSE US TO EXCESSIVE
      LIABILITY**




Any
      breach of security relating to confidential information of customers could
      result in legal liability for us and a reduction in customer use or the total
      cancellation of their participation. We anticipate that we will receive highly
      confidential information from customers that will be stored in our internal
      or
      third-party computer systems. We anticipates that we will possess sensitive
      customer information or data for storage as part of our services, which could
      be
      valuable to competitors or other similar companies if misappropriated or
      accessed. We will enter into comprehensive customer services and confidentiality
      agreements with all expected customers. Our security procedures and protocols
      to
      protect the customer against the risk of inadvertent disclosure or intentional
      breach of security might fail, thereby exposing customers to the risk of
      disclosure of their confidential information.






**OUR
      PRODUCTS AND SERVICES ARE SUBJECT TO GOVERNMENT REGULATIONS WHICH, IF CHANGED,
      COULD ADVERSELY AFFECT THE AVAILABILITY OF OUR PRODUCTS**




The
      laws
      and regulations that govern our business with respect to e-commerce and online
      content and data distribution are rapidly changing. The U.S. government and
      the
      governments of other states and foreign countries have attempted to regulate
      activities on the Internet. Evolving areas of law that are relevant to our
      business include privacy laws, proposed encryption laws, content regulation
      and
      potential sales and tax laws. Due to this rapidly evolving and uncertain
      regulatory environment, we cannot predict how such proposed or contemplated
      laws
      and regulations might affect our business. In addition, these uncertainties
      will
      make it difficult to ensure compliance with the laws and regulations governing
      the Internet. These laws and regulations could harm our overall growth by
      subjecting us to liability or forcing us to change our method of conducting
      and
      distributing our primary online services and product technologies.




**INVESTOR
      CONFIDENCE AND THE VALUE OF OUR COMMON STOCK MAY BE ADVERSELY IMPACTED IF THE
      MANAGEMENT CONCLUDES THAT OUR INTERNAL CONTROLS OVER FINANCIAL REPORTING ARE
      NOT
      EFFECTIVE**




Section
      404 of the United States' Sarbanes-Oxley Act of 2002 requires the inclusion
      of
      an assessment by management of the effectiveness of the Company’s internal
      control over financial reporting. In addition, the Company’s independent
      registered public accounting firm may be unable to attest to the Company’s
      management's assessment or may issue a report that concludes that the Company’s
      internal controls over financial reporting are not effective. The Company’s
      failure to achieve and maintain effective internal controls over financial
      reporting, or the Company’s independent registered public accounting firm's
      inability to attest to the Company’s management's assessment, or the issuance of
      a report that concludes that the Company’s internal controls over financial
      reporting are not effective, could result in the loss of investor confidence
      in
      the reliability of the Company financial reporting process, which in turn could
      harm the Company business and ultimately could negatively impact the market
      price of our common shares.




**WE
      HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND DO NOT EXPECT TO PAY ANY
      IN
      THE FORESEEABLE FUTURE.**




We
      have
      not paid any dividends on our common stock since our inception and do not intend
      to pay dividends on our common stock in the foreseeable future. Any earnings
      that we may realize in the foreseeable future will be retained to finance our
      growth.




**IF
          WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING,
          THE
          PRICE OF OUR COMMON STOCK MAY BE ADVERCELY AFFECTED**
 Our
        internal control over financial reporting may have weaknesses and conditions
        that need to be addressed, the disclosure of which may have an adverse impact
        on
        the price of our common stock.  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.




13
 Table
          of Contents







**ITEM
      2. DESCRIPTIONOF PROPERTY**




Our
      main
      office and research and development activities are located in Vancouver, British
      Columbia, Canada. We do not own any real property. The following table presents
      certain information about our leased properties:




**Lease****Square**
            
            
            
            **Monthly**
            
            **Expiration****Location**
            
            **Feet**
            
            **Use**
            
            **Rent**
            
            **Date**1311
                Howe Street
            
            4,905
            
            Research
                and
            
            $
                9,365
            
            November
                30, 2008Suite
                700
            
            
            
            Development
                and
            
            (Canadian)Vancouver,
                BC, Canada V6Z 2P3
            
            
            
            Administrative
                offices11400
                W. Olympic Boulevard
            
            195
            
            Administrative
                offices
            
            $
                2,040
            
            April
                30, 2007Suite
                200Los
                Angeles, CA, USA 90064




We
      believe that we can obtain additional facilities required to accommodate our
      projected needs without difficulty and at commercially reasonable prices,
      although we cannot assure you that we will be able to do so.




**INSURANCE**




We
      have
      obtained directors' and officers' liability insurance, property and general
      insurance and intend to obtain other insurance coverage in amounts deemed
      adequate and affordable by management in the future. We cannot assure you that
      any future claims will not exceed applicable insurance coverage.




**ITEM
      3. LEGALPROCEEDINGS**


A
        lawsuit
        was commenced by Maximum Ventures, Inc. (“MVI”) against us in March 2007 in
        connection with a certain settlement agreement made between MVI and us on August
        14, 2006. Under
        t he settlement agreement , the C ompany and
        MVI
        agreed that the Company would issue 1,721,902
        common shares to MVI  in stead
        of
        paying  MVI $137,752
        in consulting advisory fees pursuant
        to the parties advisory agreement . The
        exchange was based on the market value of the common shares as of the date
        of
        the settlement agreement. We
        are
        attempting to take action to resolve this matter before the litigation proceeds
        past the stage of the initial pleadings.




We
      are
      not aware of any other pending or threatened legal proceedings that, if
      adversely determined, would have a material adverse effect on us nor are we
      aware of any proceeding that a government agency is contemplating initiating
      against us.




**ITEM
      4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




None.






**PART
      II**






**ITEM
      5. MARKET FORCOMMON EQUITY AND RELATED STOCKHOLDER MATTERS**




**MARKET
      INFORMATION**




Our
      common stock began trading on the NASD Over-the Counter Bulletin Board ("OTCBB")
      on June 7, 2002 under the symbol "DLVN". Prior to June 7, 2002, there was no
      public trading market on which our common stock was traded. On December 22,
      2003, our symbol changed to "NSEO" in connection with our name change from
      Delivery Now Corp. to NS8 Corporation. The following table sets forth, for
      the
      fiscal quarters indicated, the high and low bid prices per share of our common
      stock as reported on the OTCBB. The quotations reflect inter dealer prices,
      without retail mark-up, mark-down or commissions and may not represent actual
      transactions.




14
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**Year
                Ended December 31, 2006**
            ****
            **High
                Bid**
            ****
            **Low
                Bid**First
                Quarter
            
            $
            0.21
            
            $
            0.05Second
                Quarter
            
            $
            0.19
            
            $
            0.09Third
                Quarter
            
            $
            0.14
            
            $
            0.06Fourth
                Quarter
            
            $
            0.17
            
            $
            0.06**Year
                Ended December 31, 2005**
            ****
            ****
            **High
                Bid**
            ****
            ****
            **Low
                Bid**First
                Quarter
            
            $
            0.46
            
            $
            0.09Second
                Quarter
            
            $
            0.38
            
            $
            0.07Third
                Quarter
            
            $
            0.21
            
            $
            0.10Fourth
                Quarter
            
            $
            0.11
            
            $
            0.04




On
      March
      30, 2007, the closing bid price for our common stock was $0.04.




**HOLDERS**




On
      December 31, 2006, the closing price for our common stock was $0.14. There
      were
      approximately 104 record holders of NS8 common equity and 19 holders of
      unconverted CanOnline common equity as of December 31, 2006.




**DIVIDENDS**




As
      of the
      date of this report, no cash dividends have been declared on our common stock.
      We presently intend to retain future earnings, if any, for use in our business
      and have no present intention to pay cash dividends on our common stock. In
      addition, the debentures we issued to Cornell Capital prohibit the payment
      of
      dividends on our common stock without the prior written consent of the secured
      party to those debentures.




**UNREGISTERED
      ISSUANCES OF EQUITY SECURITIES**




During
      the year ended December 31, 2006, the Company completed the following
      transactions:


·
              On
                  September 28, 2006, the Company issued new convertible debenture
                  to
                  Cornell Capital in the principal amount of $300,000, less fees
                  and
                  expenses of $30,000. The Debenture carries an interest rate of
                  10% per
                  annum, has a term of three years and is convertible into common
                  stock at
                  the lower of $0.075 per share or 90% of the average of the three
                  lowest
                  volume weighted daily average prices of the Company's common stock
                  for the
                  30 days prior to the conversion.
  ·
              During
                  September 2006 through December 2006, the Company issued 6,848,982
                  shares
                  of common stock to Cornell Capital for the conversion of convertible
                  debentures in the amount of $258,989 at per share prices ranging
                  from
                  $0.03 to $0.07. In connection with the conversion of convertible
                  debentures, $110,016 of the derivative liability related to the
                  conversion
                  feature was recorded as additional paid-in
                  capital.
  ·
              On
                  March 7, 2006 the Company issued warrants, which vested upon grant,
                  to
                  purchase 200,000 shares of common stock in connection with a public
                  relations agreement entered during the year. The warrants are exercisable
                  over a five year period at a price of $0.16 per share. The company
                  recorded a consulting expense of $32,000 for the estimated fair
                  value of
                  the warrants based on the Black-Scholes option pricing model.
  ·
              On
                    January 11, 2006 the Company issued 25,000 options to purchase
                    common
                    shares to an employee. The options had an exercise price of $0.09
                    and were
                    cancelled unvested upon employee
                    termination.
  All
          offers and sales of our securities described above were made pursuant to
          Section
          4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder.


**SECURITIES
      AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**




We
      adopted our 2001 Stock Option Plan on June 29, 2001 authorizing 5,000,000 shares
      under the plan. We have not issued any options or rights under this plan.


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We
      adopted our 2004 Stock Option Plan in February 2004, authorizing 30,000,000
      shares under the plan. During 2006, we issued 25,000 options to purchase common
      shares under the plan to certain of our non-executive employees. These options
      have been cancelled as a result of employment termination. The balance of the
      options outstanding as of December 31, 2006 is 16,011,650 options under the
      2004
      Stock Option Plan and 14,486,702 options outside of the 2004 Stock Option Plan.




The
      following table sets forth the securities that have been authorized under equity
      compensation plans as of December 31, 2006.




**Number
                of Securities to Be Issued Upon Exercise of Outstanding Options,
                Warrants
                and Rights (A)**
            
            **Weighted-Average
                Exercise Price of Outstanding Options, Warrants and Rights
                (B)**
            
            **Number
                of Securities Remaining Available For Future Issuance Under Equity
                Compensation Plans (Excluding Securities Reflected in Column
                (A)**Equity
                compensation plans approved by security holders(1)
            
            
            16,011,650
            
            $
            0.38
            
            
            18,988,350Equity
                compensation plans not approved by security holders
            
            
            47,298,703
            
            $
            0.14
            
            
            N/ATotal
            
            
            63,310,353
            
            $
            0.20
            
            
            18,988,350




(1)
      Includes the Company's 2001 and 2004 Stock Option Plan.




**ITEM
      6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




**Critical
      Accounting Policies and Estimates**




This
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements that have been prepared under
      accounting principles generally accepted in the United States of America
      (“GAAP”). The preparation of financial statements in conformity with accounting
      principles generally accepted in the United States of America requires our
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and the disclosure of contingent assets and liabilities
      at the date of the financial statements and the reported amounts of revenue
      and
      expenses during the reporting period. Actual results could materially differ
      from those estimates.




Below
      is
      a discussion of accounting policies that we consider critical to an
      understanding of our financial condition and operating results and that may
      require complex judgment in their application or require estimates about matters
      which are inherently uncertain. A discussion of our significant accounting
      policies, including further discussion of the accounting policies described
      below, can be found in Note 3, "Summary of Significant Accounting Policies"
      of
      our Consolidated Financial Statements.




**Revenue
      Recognition**




We
      recognize revenue in accordance with GAAP that has been prescribed for the
      software industry under Statement of Position ("SOP") 97-2, "Software Revenue
      Recognition", and with the guidelines of the Securities and Exchange Commission
      Staff Accounting Bulletin, or SAB, No. 101 as amended by SAB No. 104 "Revenue
      Recognition in Financial Statements." Revenue recognition requirements in the
      software industry are very complex and are subject to change. We generally
      recognize revenue when persuasive evidence of an arrangement exists, we have
      delivered the product or performed the service, the fee is fixed or determinable
      and collectibility is probable. However, determining whether and when some
      of
      these criteria have been satisfied often involves assumptions and judgments
      that
      can have a significant impact on the timing and amount of revenue reported.
      When
      licenses are sold together with maintenance and implementation services, license
      fees are recognized upon delivery of the product provided that: (1) the above
      criteria have been met; (2) payment of the license fees is not dependent upon
      performance of the consulting and implementation services; and (3) the services
      are not essential to the functionality of the software. For arrangements where
      services are essential to the functionality of the software, both the license
      and services revenue are recognized in accordance with the provisions of SOP
      81-1, "Accounting for Performance of Construction-Type and Certain
      Production-Type Contracts." Arrangements that allow us to make reasonably
      dependable estimates relative to contract costs and the extent of progress
      toward completion are accounted for using the percentage-of-completion method.
      Arrangements that do not allow us to make reasonably dependable estimates of
      costs and progress are accounted for using the completed-contracts method.
      Because the completed-contracts method precludes recognition of performance
      under the contract as the work progresses, it does not reflect current financial
      performance when the contract extends beyond one accounting period, and it
      therefore may result in uneven recognition of revenue, related cost of revenues
      and gross margin.




Maintenance
        and training services to its customers are generally recognized as the services
        are performed, except in instances where services are included in an arrangement
        accounted for under SOP 81-1.
  Revenues
        from licensing our software are generated from licensing agreements primarily
        with Video-On-Demand ("VOD") distributors that generally pay a per-unit royalty
        fee. Consequently, we recognize revenue from these licensing agreements on
        an as
        earned basis, provided amounts are fixed or determinable and collection is
        reasonably assured. We rely on working relationship with these customers
        to
        reasonably and successfully estimate current period volume in order to calculate
        the quarter end revenue accruals.


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If
        we
        change any of these assumptions or judgments, it could cause a material increase
        or decrease in the amount of revenue that we report in a particular period.
        Amounts for fees collected relating to arrangements where revenue cannot
        be
        recognized are reflected on our consolidated balance sheet as deferred revenue
        and recognized when the applicable revenue recognition criteria are satisfied.


**Recoverability
        of Deferred Costs** ***.*** ****
 
 We
        defer
        costs on projects for service revenue. Deferred costs consist primarily of
        direct and incremental costs to customize and install systems, as defined
        in
        individual customer contracts ,
        including costs to acquire hardware and software from third parties and payroll
        costs for our employees and other third parties.
 
 We
        recognize such costs in accordance with our revenue recognition policy by contract .
        For
        revenue recognized under the completed contract method,
        costs are deferred until the products are delivered, or upon completion of
        services or, where applicable, customer acceptance. For revenue recognized
        under
        the percentage of completion method, costs are recognized as products are
        delivered or services are provided in accordance with the percentage of
        completion calculation. For revenue recognized ratably over the term of the contract ,
        costs
        are recognized ratably over the term of the contract ,
        commencing on the date of revenue recognition. At each balance sheet date,
        we
        review deferred costs, to ensure they are ultimately recoverable. Any
        anticipated losses on uncompleted contracts are
        recognized when evidence indicates the estimated total cost of a contract exceeds
        its estimated total revenue.




**Software
      Development Costs**





Pursuant
      to the provisions of Statements of Financial Accounting Standards (“SFAS”) No.
      86, "Accounting for the Costs of Computer Software to Be Sold, Leased or
      Otherwise Marketed," we capitalize internally developed software and software
      purchased from third parties when the related software product under development
      has reached technological feasibility or
      if
      there are alternative future uses for the purchased software. These costs are
      amortized on a product-by-product basis typically over the estimated life of
      the
      software product using the greater of the ratio that current gross revenue
      for a
      product bears to the total of current and anticipated future gross revenue
      for
      that product or the straight-line method over the remaining estimated economic
      life of the product. At each balance sheet date, we will evaluate on a
      product-by-product basis the unamortized capitalized cost of computer software
      compared to the net realizable value of that product. The amount by which the
      unamortized capitalized costs of a computer software product exceed its net
      realizable value will be written off.





**Accounting
      for Derivative Instruments**




In
      connection with the issuance of certain convertible debentures in May and June
      2004, November 2005 and September 2006, the debentures provided for a conversion
      of the debentures into shares of the Company's common stock at a rate which
      was
      determined to be variable. The Company determined that the variable conversion
      feature was an embedded derivative instrument pursuant to SFAS No. 133,
      "Accounting for Derivative Instruments and Hedging Activities," as amended.
      The
      accounting treatment of derivative financial instruments required that the
      Company record the derivatives and related warrants at their fair values as
      of
      the inception date of the note agreements and at fair value as of each
      subsequent balance sheet date. In addition, under the provisions of Emerging
      Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
      as a
      result of entering into the debenture agreements, the Company was required
      to
      classify all other non-employee options and warrants as derivative liabilities
      and record them at their fair values at each balance sheet date. Any change
      in
      fair value was recorded as non-operating, non-cash income or expense at each
      balance sheet date. If the fair value of the derivatives was higher at the
      subsequent balance sheet date, the Company recorded a non-operating, non-cash
      charge. If the fair value of the derivatives was lower at the subsequent balance
      sheet date, the Company recorded non-operating, non-cash income.




**Stock-Based
      Compensation Expense**




On
      January 1, 2006, we adopted Statement of Financial Accounting Standards No.
      123
      (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which requires the
      measurement and recognition of compensation expense for all share-based payment
      awards made to our employees and directors based on estimated fair values.
      We
      adopted SFAS 123(R) using the modified prospective transaction method, which
      requires the application of the accounting standard as of January 1, 2006,
      the
      first day of our fiscal year 2006. Our consolidated financial statements as
      of
      and for the year ended December 31, 2006 reflect the impact of SFAS 123(R).
      In
      accordance with the modified prospective transition method, our consolidated
      financial statements for prior periods have not been restated to reflect, and
      do
      not include, the impact of SFAS 123(R). The value of the portion of the award
      that is ultimately expected to vest is recognized as an expense over the
      requisite service periods in our consolidated statement of operations. Prior
      to
      the adoption of SFAS 123(R), we accounted for stock-based awards to employees
      and directors using the intrinsic value method in accordance with APB 25 as
      allowed under Statement of Financial Accounting Standards No. 123, "Accounting
      for Stock-Based Compensation" (SFAS 123). As stock-based compensation expense
      recognized in the consolidated statement of operations for 2006 is based on
      awards ultimately expected to vest, it has been reduced for estimated
      forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those
      estimated.  The estimated average forfeiture rate for the year ended
      December 31, 2006, of approximately 3% was based on historical forfeiture
      experience and estimated future employee forfeitures.


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Stock-based
      compensation expense recognized as operating expense under SFAS 123(R) for
      the
      year ended December 31, 2006 was $926,507, determined by the Black-Scholes
      valuation model, and consisting of stock-based compensation expense related
      to
      employee stock options. See Notes 3 and 14 to the consolidated financial
      statements for additional information.





**Income
      Taxes**




As
      part
      of the process of preparing our consolidated financial statements, we are
      required to estimate our income taxes in each of the jurisdictions in which
      we
      operate. This process involves us estimating our actual current tax exposure
      together with assessing temporary differences resulting from differing
      treatments of items for tax and accounting purposes. These differences result
      in
      deferred tax assets and liabilities. We have recorded a full valuation allowance
      as an offset against these otherwise recognizable net deferred tax assets due
      to
      the uncertainty surrounding the timing of the realization of the tax benefit.
      In
      the event that we determine in the future that we will be able to realize all
      or
      a portion of its net deferred tax benefit, an adjustment to deferred tax
      valuation allowance would increase net income in the period in which such a
      determination is made. The Tax Reform Act of 1986 contains provisions that
      may
      limit the utilization of net operating loss carryforwards and credits available
      to be used in any given year in the event of significant changes in ownership
      interest, as defined.




**RESULTS
      OF OPERATIONS**




Revenue.
      Total revenue for the year ended December 31, 2006 (the "2006 Period") and
      December 31, 2005 (the "2005 Period") was $218,349 and $0, respectively. Our
      revenue growth was due to the new contracts to develop and license software
      that
      the Company entered into during the year and consisted of license and
      professional fees pursuant to our software service agreements.


Cost
        of
        Professional Services. Total professional services cost of revenues, which
        includes direct labor and overhead for the year ended December 31, 2006 were
        approximately $187,786 compared $0 for the year ended December 31, 2006.
        The
        increase is due to the Company entering a commercialization stage.


General
      and Administrative Expenses. General and administrative expenses for the 2006
      Period decreased to $3,564,640 from $6,982,118 during the 2005 Period. During
      the 2006 and 2005 Period, the Company employed approximately 11 employees in
      administrative functions. Wages and benefits for sales and marketing personnel
      during the 2006 Period were $380,984 compared to $521,677 during the 2005
      Period. Wages and benefits for general and administrative personnel during
      the
      2006 Period were $2,471,042 compared to $1,052,551 during the 2005 Period.
      The
      difference in general and administrative expenses primarily results from
      compensation charges for stock grants to consultants, partially offset
      by stock options issued to executive level employees.




Consulting
      Expenses. During the 2006 Period, the Company expensed $105,542 in consulting
      fees compared to $3,886,112 during the 2005 Period. The difference in consulting
      fees primarily relates to higher compensation charges for consultants who
      provided advisory services to the board of directors and marketing department
      and were granted options and warrants as specified in their consulting
      agreements during the 2005 Period.




Legal
      and
      Accounting Expenses. Legal and accounting fees for the 2006 Period were $341,241
      compared to $495,285 in the 2005 Period. In 2005 Period, we incurred significant
      legal fees in relation to patent filings and corporate financing compared to
      2006 Period.




Financing
      Expenses. As a result of corporate financing obtained, we incurred finance
      charges on debt and equity arrangements of $167,752 compared to $171,750 for
      the
      2005 Period. This was related to the issuance of the 2005 Convertible
      Debentures.




Share-Based
      Compensation Expense. As a result of implementing SFAS 123(R) as of January
      1,
      2006, the Company recorded share-based compensation expense, a non-cash item,
      of
      $926,507 during the 2006 Period compared to $2,500 in 2005 Period.




Research
      and Development. Research and development expenses were $413,372 and $785,012,
      respectively, during the years ended December 31, 2006 and 2005. During the
      2006
      Period, the Company employed an average of 14 employees for research and
      development, compared to an average of 15 employees in the 2005 Period. In
      the
      past, the Company did not capitalize any research and development costs because
      they either did not meet SFAS No. 86 capitalization criteria or were immaterial.
      At the end of the first quarter of 2006, the Company determined that certain
      of
      its software applications have reached technological feasibility. As a result,
      the Company capitalized related software development costs and wages totaling
      $ 273,423 during
      the 2006 Period, resulting in the decrease of research and development expenses
      reported on its consolidated statement of operations.




As
      a
      result of the foregoing, the Company incurred a loss from operations of
      $3,947,449 during the 2006 Period, as compared to a loss from operations of
      $7,767,130 during the 2005 Period.




Interest
      Expense. Interest expense for the 2006 Period significantly increased to
      $2,238,905 from $688,855 during the 2005 Period. The increase was primarily
      due
      to additional funding to finance operations through the issuance of promissory
      notes and convertible debentures that resulted in higher interest expense
      compared to 2005 Period. In addition, the Company was required to file a
      registration statement, which was filed on December 14, 2005, and have such
      registration statement declared effective by no later than February 27, 2006
      (the "Effectiveness Deadline"). The registration statement was declared
      effective on February 14, 2007 and the Company accrued penalties of
      approximately $863,967 for the year ended December 31, 2006.


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Change
      in
      Fair Value of Derivative Liability. The change in the value of our embedded
      derivative instruments, a non-cash item, related to features embedded in our
      convertible debentures and warrants issued in 2004 and 2005 produced a loss
      of
      $3,954,844 for the 2006 Period compared to a gain of $4,148,850 in the 2005
      Period, respectively, and is primarily due to the fluctuation of our stock
      price.




As
      a
      result of the foregoing, the Company incurred a net loss of $10,135,508 or
      ($0.09) per share during the 2006 Period, as compared to a net loss of
      $6,587,391 or $(0.06) per share during the 2005 Period.




**Liquidity
      and Capital Resources**




We
      had
      negative working capital of approximately $8.1 million at December 31, 2006
      and
      $4.4 million at December 31, 2005. The decrease in working capital is mainly
      attributable to an increase in accounts payable, accrued expenses, deferred
      revenue, amounts due to shareholders and directors, and a portion of the
      convertible debentures becoming current.




At
      December 31, 2006, our principal source of liquidity was proceeds from notes
      payable, convertible debentures and cash received from customers pursuant to
      its
      software licensing agreements and custom development services provided as part
      of those license agreements. The Company’s future liquidity requirements will
      depend on a number of factors including, among other things, the timing and
      level of its sales volumes, the cost of its development and production efforts,
      the success and market acceptance of its future product releases, and other
      related items. Historically, the Company has financed its operations with
      proceeds from the sale of its common stock, the issuance of convertible
      debentures, and loans from its officers, directors and shareholders. The
      following table sets forth the amount of funds received for the periods
      indicated:




**Liquidity
                and Capital Resources**
            
            **2006**
            
            **2005**Sale
                of Common Stock
            
            $
            -
            
            $
            670,400Sale
                of Convertible Debentures, net
            
            
            300,000
            
            
            1,000,000Loans
                and Contributions from officers and shareholders
            
            
            2,111,296
            
            
            1,134,752Short
                Term Loans
            
            
            250,000
            
            
            175,000$
            2,661,296
            
            $
            2,980,152




As
      reported in the Report of Independent Registered Public Accounting Firm on
      our
      December 31, 2006 consolidated financial statements, the Company has suffered
      recurring losses from operations and has a working capital deficit that raises
      substantial doubt about our ability to continue as a going concern.




Additional
      cash is necessary to sustain operations both in the short and long term.
      Additional funding is expected to be obtained from new sources as other
      financing institutions are currently being pursued. The Company's ability to
      meet operating and capital requirements depends upon its ability to generate
      on-going revenues from the licensing and installation of its iWave technology
      and financing from external sources.




The
      Company cannot assure that it will obtain sufficient revenue growth or achieve
      financing to develop profitable operations prior to utilizing all of its current
      capital resources. In addition, if the Company does not generate its revenues
      or
      receive its funds in a timely manner on a scale to meet its needs, it may be
      forced to curtail or downsize its operations which may affect its existing
      commercial activities.




The
      Company has recently signed contracts and agreements with several different
      companies and anticipates expanding its commercial activities and generating
      revenues from the commercialization of its iWave products and services that
      will
      result in future recurring revenues to the Company and produce cash flows to
      meet and sustain its operations. As the Company continues to add more commercial
      customers under the same business model, the Company expects that its cash
      flow
      will meet its monthly working capital requirements by the end of 2007.




During
      the year ended December 31, 2006 the Company generated $218,349 in revenue
      from
      its iWave products and services. Although we expect revenues to increase during
      2007, we cannot be certain that this will occur within that
      period.




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FINANCING ACTIVITIES




The
      Company has raised approximately $826,200 from the issuance of promissory notes
      during the period from January 1, 2007 through April 13, 2007. The Company
      believes that these funds, together with its cash on hand at April 13, 2007
      and
      amounts received from customers will be sufficient to fund its operations
      through April 30, 2007. The Company continues to receive funding commitments
      from certain of its shareholders in the form of promissory notes and expects
      this debt financing to continue as the Company completes its current commercial
      installations of its products.


The
        Company’s management is currently finalizing capital financing with Cornell
        Capital Partners, L. P. to fund the Company’s ongoing operations and
        commercialization of its products and services. The Company plans to sell
        up to
        $3.3 million of secured convertible debentures, which will be funded on multiple
        closings dates. The obligation to purchase convertible debentures in connection
        with each closing will be subject to the satisfaction of certain conditions
        and
        the achievement of specific milestones, which are currently being finalized.
        On
        March 30, 2007, in consideration of the Company’s execution and delivery of this
        agreement, the Company received an advance of $550,000 and issued a promissory
        note to Cornell Capital Partners, L.P. in respect thereof. The $550,000
        promissory note will be converted to form
        part
        of the secured convertible
        debenture as part of the overall financing. In addition, the Company agreed
        to
        issue 250,000,000 warrants in connection with the $3.3 million convertible
        debenture financing. It is anticipated that $1,100,000 of the funding will
        occur
        on or about April 16, 2007.




In
      addition we continue to seek new working capital financing to expand its
      business activities. In addition, the Company may also attract new equity or
      debt financing to fund the expansion of its operations and possibly retire
      some
      of its existing debt. The rate at which the Company used funds in its operations
      as of December 31, 2006, is $275,000 per month.




Its
      current capital resources will enable it to fund its planned operations of
      less
      than a month, and the Company projects that the estimated amount of additional
      funds that the Company will require to ensure operations for a period of 12
      months, not taking into account any anticipated revenue derived from licensing
      and recurring consumer usage fees from its iWave technology from December 31,
      2006, is approximately $2,620,000. The Company anticipates raising these funds
      from private equity and debt financing. There can be no assurance that we will
      be successful in raising sufficient capital to fund our working capital
      requirements on terms acceptable to us, or at all. In addition, the sale of
      additional securities could result in dilution to our current stockholders.
      If
      we are not successful in raising sufficient capital we may not be able to
      continue our business.




The
      Company's ability to meet its operating requirements depends upon its ability
      to
      generate financing and additional recurring usage and licensing revenues from
      the installation of its iWave technologies to commercial customers and from
      external financing sources. The Company cannot guarantee it will develop
      profitable operations prior to utilizing all of its current available financial
      resources.




The
      Company expects this rate to decrease due to recent and planned operational
      changes in 2007 in order to meet its current commercial strategy. The Company
      estimates that its monthly operating costs throughout 2007 will decrease to
      approximately $190,000 per month. Currently, the Company has not implemented
      its
      planned operational changes for 2007 and it continues to maintain its previous
      monthly operating expense of approximately $275,000 per month.





If
      the
      Company is unable to generate sufficient revenue during 2007 and it does not
      receive sufficient working capital from external financing activities in a
      timely manner, the Company may be forced to curtail, downsize or cease its
      operations.




The
      Company has requested an extension of the maturity dates of certain its
      outstanding debts held by its creditors. However, should the Company fail to
      obtain such extensions; it may be subject to certain involuntary creditor
      actions that might impose foreclosure on their security interest in the Company.
      If creditors impose foreclosure on their security interests in the Company,
      its
      common shares may lose a significant portion or all of its market value.




Management's
      strategy to address the $8.4 million of current liabilities reflected in the
      consolidated balance sheet as of December 31, 2006, during the next 12 months
      includes, among other things, a plan to actively seek conversion of certain
      outstanding loans provided by its officers, directors and shareholders into
      equity at prices to be determined at the time such conversions may be agreed
      to
      by those officers, directors and shareholders. In addition, management is
      working with its current financiers to jointly affect a planned reduction of
      all
      outstanding debts of the Company through a series of planned conversions and
      refinancing. As of November 30, 2006 ,
      Management has started to create a series of plans to act on these strategies
      that the Company's board will consider for the best interest of its shareholders
      before implementation. Management anticipates concluding a working plan before
      the end of the Company's second quarter 2007.




Management
      continues to implement its overall corporate strategy, and continues to seek
      more favorable long-term debt and equity financing to effect the re-organization
      of the Company's current long-term financing arrangements. Management
      anticipates providing its board of directors with a plan for review and approval
      before the end of the Company's second quarter 2007. In addition, management
      continues to evaluate the viability of divestiture opportunities for some of
      the
      Company's non-core technology assets for value in the form of partnerships,
      licenses, third party marketing or sale for cash. A market sector of the
      Company's business continues to experience growth with respect to community
      driven network sites and online software accessories. The Company has commercial
      interest with respect to previously developed, turn-key commercial software
      technologies that the Company is not marketing since those technologies are
      not
      commercially aligned with its core iWave technology and current commercial
      focus
      within the interactive video on demand business sector. These particular
      non-core technologies could result in significant revenues for the Company
      in
      the event of their sale or partnered marketing through third parties. Management
      continues to focus on its iWave technologies because of its immediate market
      adoption and greater revenue opportunity with less associated costs with respect
      to its marketing and overall implementation.




The
      continued implementation of these strategies will enable the Company to
      favorably restructure its balance sheet and further its current
      commercialization of its iWave technologies which will potentially result in
      additional revenue opportunities. This will in turn
      enable it to service and manage current liabilities from the normal course
      of
      operations and reduce any existing long-term liabilities unaffected by
      managements planned debt reduction strategies over a 36 month period.


20
 Table
          of Contents




The
      Company continues to use a significant portion of its revenues for the purpose
      of retiring its existing debts. As revenues increase, the use of surplus funds,
      if any, will be used to expand the Company's current development capacity and
      increase commercial productivity for future product development and commercial
      installations of its iWave technology.




The
      imbalance between the Company's current assets and current liabilities has
      had
      and will continue to have the following effects on its operations: it has made
      it difficult for it to obtain more beneficial financing arrangements; it has
      made it more difficult for it to attract and encourage equity investment; and
      it
      has made it more difficult and even interfered to some extent with its ability
      to enter into operational commercial agreements with certain major companies
      and
      to attract commercial partners and customers due to its financial position
      and
      their perception of its ability to perform due to its financial circumstances.




**ITEM
      7. FINANCIALSTATEMENTS**




The
      financial statements are included beginning immediately following the signature
      page to this report.




**ITEM
      8. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE**




None.




**ITEM
      8A. CONTROLSAND PROCEDURES**




**Evaluation
      and Disclosure Controls and Procedures**




As
      of
      December 31, 2006, we carried out an evaluation, under the supervision and
      with
      the participation of our Chief Executive Officer and Chief Financial Officer,
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures. Based on this evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective in ensuring that information required to be disclosed by us in our
      periodic reports is recorded, processed, summarized and reported, within the
      time periods specified for each report and that such information is accumulated
      and communicated to our management, including our principal executive and
      principal financial officers, or persons performing similar functions, as
      appropriate to allow timely decisions regarding required
      disclosure.




**Changes
      in Internal Controls**




As
      discussed in detail in amendments to our annual report on Forms 10-KSB/A for
      the
      year ended December 31, 2005, and subsequent quarterly reports on Forms
      10-QSB/A, during the fourth quarter of 2005 and the first, second and third
      quarter of 2006 we undertook certain improvements to remediate material
      weaknesses related to our internal control over financial reporting that
      originally affected our year-end and quarterly filings for periods ended
      December 31, 2004 and 2005. To remediate these material weaknesses, we made
      the
      following improvements:




During
      the year ended December 31, 2006, the Company employed qualified internal
      accounting personnel and actively engaged qualified external financial
      professionals to provide the Company with up to date, current guidance with
      respect to financial reporting and complex accounting issues. As of December
      31,
      2006, the Company had spent approximately $65,000 to hire new personnel and
      to
      obtain advice from outside professionals to improve the Company’s disclosure
      controls and procedures.




**ITEM
      8B. OTHER INFORMATION**




Not
      applicable.






**PART
      III**




**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
      PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**




Directors
      serve until the next annual meeting of the stockholders, until their successors
      are elected or appointed and qualified or until their prior resignation
      or removal. Officers serve for such terms as determined by our board of
      directors. Each officer holds office until such officer's successor is elected
      or appointed and qualified or until such officer's earlier resignation or
      removal. No family relationships exist between any of our present directors
      and
      officers.




21
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          of Contents




Our
      executive officers, directors and key employees, their positions and their
      ages
      at December 31, 2006 are as follows:


**Name**
              ****
              **Title**
              
              
              **Age**Anthony
                  Alda
              
              Chairman
                  of the Board of Directors, Chief Executive Officer, President and
                  Chief
                  Technology Architect
              
              
              38Leslie
                  J. Ames
              
              Senior
                  Vice President, Legal Affairs, Secretary and Director
              1)
              
              57Carl
                  Segal
              
              Executive
                  Vice President of Media Distribution & Deployment
              
              
              40Brent
                  R. Bysouth
              
              Chief
                  Software Architect and Director
              
              
              34Ricardo
                  Rosado
              
              Chief
                  Financial Officer, Vice President of Product Management and
                  Director
              
              
              39Melanie
                  Thomson
              
              Chief
                  Operating Officer
              
              
              30Michael
                  W. Waage
              
              Director
              
              
              58William
                  Kunzweiler
              
              Director
              1)
              
              56
  1.
          On
          April 12, 2007 Leslie J. Ames and William Kunzweiler resigned as directors
          of
          the Company. The resignations were for personal reasons and did not relate
          to
          any disagreement with the Company on any matter relating to the Company's
          operations, policies or practices.


**EXECUTIVE
      OFFICERS AND DIRECTORS**




Pursuant
      to the terms of the Merger Agreement, effective on December 18, 2003 the
      directors and senior officers of CanOnline became the directors and senior
      officers of NS8 Corporation.




MR.
      ALDA
      is one of the founding principals of CanOnline and NS8 Corporation. From 1999
      to
      2002, Mr. Alda acted as head of business and product development. Mr. Alda
      currently devotes his full-time as the Chairman and Chief Executive Officer
      of
      NS8 Corporation (USA), Chief Technology Architect of CanOnline and its research
      and development center (Canada). He accepted the additional position of
      President of NS8 Corporation in November 2004. He is the principal business
      and
      technology architect of the Reelindie Global Network (RGN) (2001 to June 2003);
      principal creator of Security Protocol Integration (SPI) (March 2000 completed
      in September 2003); co-architect of NS8 (Non-Resident Software) designed in
      July
      2002 completed in June 2003; Morpheus Video on Demand EPG systems November
      2002;
      Kaozz Entertainment Distribution Network launched in November of 2003; and
      co-architect to the NS8-DDN (Digital Distribution Network) Server Management
      and
      IPTV Distribution System (2004). Prior to CanOnline and NS8 Corporation, Mr.
      Alda managed his own management consulting firm from 1994 to 1998 where he
      provided services to U.S. companies in the areas of management buyouts,
      corporate restructuring, and start-up business management.




Since
      its
      incorporation, MR. AMES has served as Corporate Secretary to NS8 Corporation,
      and its wholly-owned subsidiaries, CanOnline and CanOnline Media Corporation
      ("CMC"). In March 2000, he was appointed to the Board of Directors of CanOnline
      and to the position of Senior Vice President, Legal Affairs and since December
      18, 2003, he has also held those positions in NS8 Corporation. In June 2002,
      he
      accepted his appointment as General Legal Counsel to the CanOnline group of
      companies. Mr. Ames graduated from the University of British Columbia with
      a
      Bachelor of Arts Degree (BA) in May 1971 and received a Bachelor of Law Degree
      (LLB) from the University of British Columbia in May 1978. Mr. Ames was a
      partner of the Vancouver law firm of Liddle, Burns & Ames, Barristers &
Solicitors, from 1989 until 1995. In 1995, he established Leslie J. Ames Law
      Corporation and has served as its President since that date.




Prior
      to
      joining NS8, MR. SEGAL was the Senior Vice President of Anytime Pte Ltd., one
      of
      the largest content aggregators supplying Hollywood studio content for video
      on
      demand ("VOD") in Asia. Mr. Segal managed all content distribution initiatives
      of Anytime across Asia. Prior to joining Anytime Pte Ltd., Mr. Segal served
      as
      Vice President of Production for Intertainer Inc. in Los Angeles, where he
      was
      responsible for all content-related production activities for Intertainer's
      domestic IP and cable VOD deployments. From 1995-2000, Mr. Segal was General
      Manager and Vice President of publicly-held VDI Multimedia (Point 360) in Los
      Angeles. Under Mr. Segal's management, VDI Multimedia became one of the largest
      post-production facilities for television and film in the United States. Mr.
      Segal was responsible for managing all studio related operations, including
      Telecine's film transfers, audio, graphic and compression/DVD departments,
      and
      satellite delivery deployments. Mr. Segal successfully negotiated sales and
      distribution agreements with all of the major Hollywood studios, including
      Universal, Sony, Fox, and MGM. From 1993-1995, Mr. Segal managed The Hit Factory
      recording studios in New York City, one of the world's leading recording
      facilities.




22
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          of Contents


MR.
      BYSOUTH is a founding principal and director of CanOnline, and since December
      18, 2003, he has also been a director of NS8 Corporation. Mr. Bysouth continues
      to serve as a director and President of our wholly-owned subsidiary, where
      all
      technology and product development is currently conducted. Mr. Bysouth oversees
      sensitive research and development of core integration applications currently
      deployed on all our products. Mr. Bysouth is the principal developer, inventor
      and co-architect of
      several intellectual properties including AOCA (Automated Object Code
      Architecture), SPi Member Distribution Security process and the integrated
      (AS)
      converters (the database conversion-adaptation system underlying NS8). Mr.
      Bysouth has over 10 years of information technology, program-engineering and
      analytical business experience. During the past several years, Mr. Bysouth
      has
      participated in and managed programming contracts for large Canadian
      corporations such as the Loewen Group Inc. (1997-1999), GE Capital (1996-1998),
      and Chevron Canada Ltd. (1994-1995). His expertise is primarily in the areas
      of
      object-oriented analysis, architecture and programming, specification
      management, development and test administration, and relational database design
      and implementation. Mr. Bysouth attended the University of British Columbia
      (Department of Geography) from 1990 to 1995.




MR.
      ROSADO has served as our Chief Financial Officer and Vice President, Product
      Management since November 2004. In November, 2004, Mr. Rosado resigned as Chief
      Operations Officer as part of our reorganization of our executive officers.
      Mr.
      Rosado is a founding principal and Director of CanOnline and since December
      18,
      2003, he has also been a director of NS8 Corporation. Mr. Rosado joined CMC
      as
      Head of Product Design in November 2000. Mr. Rosado served as Chief Compliance
      Officer of intellectual properties from October 2002 until November 2003, when
      he was named interim Chief Operations Officer and Chief Financial Officer of
      CanOnline. In November 2004, Mr. Rosado resigned as Chief Operations Officer
      so
      that he could contribute and dedicate more of his expertise in product
      architecture and development management. Mr. Rosado has contributed to various
      aspects of our intellectual property claims in the areas of virtual
      collaborative environments, graphic rendering and video filtering applications.
      Mr. Rosado brings us over twelve years of multimedia, film and television
      production and direction; commercial broadcasting and management expertise.
      Prior to CanOnline, Mr. Rosado was one of the original founders of
      Videocomunicacion y Servicios SCP (Videocom's), a renowned multimedia production
      company in the southeast of Mexico, where he also performed as Director/Producer
      and Head of Multimedia Development. Mr. Rosado graduated in 1991 with a Bachelor
      of Arts in Communications Science from University of Mayab in his native Merida,
      Yucatan, Mexico. From 1994 to 1996, Mr. Rosado pursued graduate studies
      obtaining his Master's degree in Strategic Marketing from the University of
      Mayab/Anahuac. He is currently a Ph.D. Candidate in the part-time program at
      the
      University of British Columbia.




MS.
      THOMSON has been the Director of Operations and Human Resources for NS8
      Corporation and its subsidiaries CanOnline and CMC from March 2003 until her
      appointment in November 2004 as Chief Operating Officer. Ms. Thomson is
      currently responsible for operations management, human resources functions,
      inter-departmental communication and coordination, establishment and enforcement
      of corporate policies/procedures, and coordination of SEC filings. From December
      2002 to March 2003, Ms. Thomson held the position of Operations and Human
      Resources Manager. In that position, Ms. Thomson was responsible for the
      organization and management of administrative and human resources activities
      of
      NS8 Corporation and its subsidiaries. From August 2000 to January 2002, Ms.
      Thomson worked with Novus Telecom Group, Inc. located in British Columbia in
      the
      Legal and Human Resources departments and was a contributor to the growth of
      Novus from start up to operational maturity. Ms. Thomson completed a Human
      Resource Management Certificate at the British Columbia Institute of Technology
      (BCIT) in 2002 and is currently enrolled at Simon Fraser University working
      toward a degree in Integrated Liberal and Business Studies.




MR.
      WAAGE
      joined CanOnline in October 1999 to contribute to the areas of management
      development, sales and strategic partnerships. On March 15, 2000, Mr. Waage
      was
      appointed to the Board of Directors of CanOnline and served in this capacity
      until January 2005. On December 18, 2003, Mr. Waage was appointed as a Director
      of NS8 Corporation and continues to serve in this role. Since 1995, Mr. Waage
      has been the president of his own firm that provides consulting services in
      areas of mergers, acquisitions and turn-arounds, and management consulting
      throughout the United States. He also served in a senior business development
      position of Advanced Technology Development for Honeywell from the period of
      1987 to 1994. At Honeywell, he continued to provide service with respect to
      sensitive technology development for the department of defense and was awarded
      the Honeywell Top Performers Award in 1989. Prior to his business profession,
      Mr. Waage served in the United States Air Force as a Senior Command Instructor
      and Fighter Pilot for the Air National Guard. Mr. Waage retired from the Air
      Force in 1995, as a Lieutenant Colonel, and received the Distinguished
      Meritorious Service Award in 1991. He was awarded a Masters Certificate of
      Jet
      Flight Instruction and has been a member in good standing with the United States
      Chamber of Commerce, Association of Old Crows (Electronic Warfare), American
      Institute of Aeronautics and Astronautics and U.S. Air Force Reserve Officers
      Association (past President). He has also been a member of the Alumni board
      of
      Directors of Evangel University where he received a Bachelor of Science degree
      in Mathematics & Physics (1970). Mr. Waage also holds a Masters Degree
      (equivalent) from the U.S. Air Force (Management, Leadership, and
      Aviation-Aeronautics) (1990).




MR.
      KUNZWEILER was appointed to the Board of Directors of the Company on August
      22,
      2005. For the past five years, Mr. Kunzweiler has been involved in land
      development in Whistler, B.C., Canada. He holds a B.Sc. in Engineering from
      the
      University of Notre Dame.




**COMPLIANCE
      WITH SECTION 16(A) OF THE EXCHANGE ACT**




Our
      common stock is not registered pursuant to Section 12 of the Exchange Act of
      1934, as amended (the "Exchange Act"). Accordingly, our officers, directors
      and
      principal shareholders are not subject to the beneficial ownership reporting
      requirements of Section 16(a) of the Exchange Act.




**CODE
      OF ETHICS**




In
      December, 2004, a Code of Ethics was adopted by our
      Board of Directors which applies to our executive officers as well as to all
      employees. You may obtain a copy of our Code of Ethics on our website,
      www.NS8corp.net. We do not incorporate by reference any information from our
      website into this report.


23
 Table
          of Contents




**ITEM
      10. EXECUTIVECOMPENSATION**




The
      following table summarizes all compensation recorded by the Company in each
      of
      the last two completed fiscal years for our principal executive officer, each
      other executive officer serving as such whose annual compensation exceeded
      $100,000 USD and up to two individuals for whom disclosures would have been
      made
      in this table but for the fact that the individual was not serving as an
      executive officer of our company at the end of our fiscal year. Such officers
      are referred to herein as our "Named Officers."




Summary
      Compensation Table




**Change
                in****Pension
                Value****and
                Nonqualified****Non-Equty**
            
            **Deferred****Fiscal**
            
            
            
            
            
            **Stock**
            
            **Option**
            
            **Incentive
                Plan**
            
            **Compensation**
            
            **All
                Other****Name
                and Principal Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Awards
                ($)**
            
            **Awards
                ($)**
            
            **Compensation
                ($)**
            
            **Earnings
                ($)**
            
            **Compensation
                ($)**
            
            **Total
                ($)****(a)**
            
            **(b)**
            
            **(c)**
            
            **(d)**
            
            **(e)**
            
            **(f)**
            
            **(g)**
            
            **(h)**
            
            **(i)**
            
            **(j)**Anthony
                Alda
            
            2006
            
            164,093
            (1)
            -
            
            -
            
            -
            
            -
            
            -
            
            12,365
            (3)
            176,458Chairman,
                CEO and President
            
            2005
            
            207,853
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            207,853Carl
                Segal
            
            2006
            
            165,000
            
            -
            
            -
            
            -
            
            -
            
            -
            
            6,000
            (5)
            165,000VP
                of Sales
            
            2005
            
            47,597
            (2)
            -
            
            -
            
            90,000
            (4)
            -
            
            -
            
            1,500
            (5)
            137,597







1)
      Consists of CMC salary of $84,000 CAD ($74,093 USD) and NS8 salary of $90,000
      USD. For purposes of determining the amount of the compensation for this
      schedule, in the case of an executive who receives compensation other than
      in US
      dollars, the amount of any compensation is translated into US dollars by using
      the average exchange rate for the year to which such compensation relates.
      The
      exchange rate used in 2006 and 2005 to translate Canadian compensation into
      US
      dollars was .88 and .83, respectively. As a result of November 1, 2005 voluntary
      salary reduction, described in employment agreements section, the company
      accrued $50,000 USD for the period from November 1, 2005 to March 1, 2006,
      of
      which $27,500 USD still remains unpaid as of the date of this filing. An
      aggregate of $50,000 USD was deferred by Mr. Alda in 2006 and $24,000 of
      personal expenses was waived and not accrued. The payment of the deferred
      amounts of any of the unpaid salary or other compensation was deferred by Mr.
      Alda until the Company has available cash.




2)
      Mr.
      Segal signed an employment agreement with NS8 on September 19, 2005.




3)
      Consists of lease payments on vehicle.




4)
      The
      amounts shown for Mr. Segal represents the grant date fair market value of
      the
      1,500,000 options issued derived using the Black-Scholes stock option pricing
      model in accordance with FAS123R (but disregarding any estimate of forfeitures
      relating to service-based vesting conditions). The following assumptions were
      used in calculation: expected live of 5 years, risk free interest rate of 4%
      and
      volatility of 219%.




5)
      Consists of monthly car allowances.




Anthony
      Alda has an employment agreement dated December 1, 2005, as amended, pursuant
      to
      which he provides us with his services as Chief Executive Officer, for an
      initial period of three years, renewed automatically unless previously
      terminated. The agreement may be immediately terminated by us, without cause
      and
      without advance notice; provided, however, that Mr. Alda receives a severance
      pay equal to the base salary through the remaining term of employment. Mr.
      Alda's current salary is $13,674 USD per month, under both Canadian and US
      agreements, paid vehicle lease plus four weeks of paid annual vacation. In
      2003
      and 2005, he received an option to purchase 6,690,000 shares of our common
      stock
      under 2004 Stock Option Plan, subject to certain conditions and restrictions
      set
      out in the Plan.




24
 Table
          of Contents




Carl
      Segal has an employment agreement dated September 19, 2005, pursuant to which
      he
      provides us with his services as Executive Vice President of Media Distribution
      and Deployment. The agreement may be immediately terminated by us, without
      cause, provided that Mr. Segal receives three months severance pay. Mr. Segal's
      current salary is $13,500 USD per month and a monthly car allowances and
      expenses of approximately $500 USD. In 2005, pursuant to the terms of the
      employment agreement, Mr. Segal received an option to purchase 1,500,000 shares
      of our common stock. These options are subject to the conditions and
      restrictions set out in the 2004 Stock Option Plan and the employment agreement.
      Of the 1,500,000 stock options referred to above, 500,000 stock options vested
      immediately and are considered a signing bonus. Except for the signing bonus
      options, this grant of the stock options to Mr. Segal is conditional upon Mr.
      Segal having met certain performance goals as described in the employment
      agreement. There is also a provision for 1,000,000 bonus options that can be
      granted and vested upon achievement of certain goals as set in the employment
      agreement. Under the terms of his employment agreement a varying number of
      options might be awarded to Mr. Segal depending upon his achievement of his
      future performance goals. There is no guarantee that Mr. Segal will be awarded
      all of the options.




**STOCK
      OPTION PLANS**





**2001
      Stock Option Plan**




We
      adopted our 2001 stock option plan on June 29, 2001. The Plan provides for
      the
      grant of options intended to qualify as "incentive stock options", options
      that
      are not intended to so qualify or "non-statutory stock options" and stock
      appreciation rights. The total number of shares of common stock reserved for
      issuance under the plan is 5,000,000, subject to adjustment in the event of
      a
      stock split, stock dividend, recapitalization or similar capital change, plus
      an
      indeterminate number of shares of common stock issuable upon the exercise of
      "reload options" described below. We have not yet granted any options or stock
      appreciation rights under the plan.




The
      plan
      is presently administered by our board of directors, which selects the eligible
      persons to whom options shall be granted, determines the number of common shares
      subject to each option, the exercise price therefore and the periods during
      which options are exercisable, interprets the provisions of the plan and,
      subject to certain limitations, may amend the plan. Each option granted under
      the plan shall be evidenced by a written agreement between us and the optionee.




Options
      may be granted to our employees (including officers) and directors and certain
      of our consultants and advisors.




The
      exercise price for incentive stock options granted under the plan may not be
      less than the fair market value of the common stock on the date the option
      is
      granted, except for options granted to 10% stockholders which must have an
      exercise price of not less than 110% of the fair market value of the common
      stock on the date the option is granted. The exercise price for non-statutory
      stock options is determined by the board of directors. Incentive stock options
      granted under the plan have a maximum term of ten years, except for 10%
      stockholders who are subject to a maximum term of five years. The term of
      non-statutory stock options is determined by the board of directors. Options
      granted under the plan are not transferable, except by will and the laws of
      descent and distribution.




The
      board
      of directors may grant options with a reload feature. Optionees granted a reload
      feature shall receive, contemporaneously with the payment of the option price
      in
      common stock, a right to purchase that number of common shares equal to the
      sum
      of (i) the number of shares of common stock used to exercise the option, and
      (ii) with respect to non-statutory stock options, the number of shares of common
      stock used to satisfy any tax withholding requirement incident to the exercise
      of such non-statutory stock option.




Also,
      the
      plan allows the board of directors to award to an optionee for each share of
      common stock covered by an option, a related alternate stock appreciation right,
      permitting the optionee to be paid the appreciation on the option in lieu of
      exercising the option. The amount of payment to which an optionee shall be
      entitled upon the exercise of each stock appreciation right shall be the amount,
      if any, by which the fair market value of a share of common stock on the
      exercise date exceeds the exercise price per share of the option.




**2004
      Stock Option Plan**




We
      adopted our 2004 Stock Option Plan on February 4, 2004. The Plan provides for
      the grant of "non-statutory stock options." The total number of shares of common
      stock reserved for issuance under the Plan is 30,000,000, subject to adjustment
      in the event of a stock split, stock dividend, recapitalization or similar
      capital change. In March of 2005, the 2004 Stock Option Plan was amended to
      clarify the continuous employment requirements of the vesting schedule of the
      Company's stock options and to provide for a standardized stock option exercise
      form to be used by optionees wishing to exercise vested stock options.




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




The
      following table presents information concerning unexercised options, stock
      that
      has not vested and equity incentive plan awards held by our Named executive
      officers as of the end of our fiscal year ending December 31, 2006.




25
 Table
          of Contents




Since
      there were no stock awards outstanding as at December 31, 2006, the related
      portion of the schedule has been omitted.




**Option
                Awards**
            ****
            **Stock
                Awards******
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Equity******
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Incentive******
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Equity**
            ****
            **Plan
                Awards:******
            ****
            ****
            ****
            ****
            ****
            **Equity**
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Incentive**
            ****
            **Market
                or******
            ****
            ****
            ****
            ****
            ****
            **Incentive**
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Plan
                Awards:**
            ****
            **Payout******
            ****
            ****
            ****
            ****
            ****
            **Plan
                Awards:**
            ****
            ****
            ****
            ****
            ****
            ****
            ****
            **Market**
            ****
            **Number
                of**
            ****
            **Value
                of******
            ****
            **Number
                of**
            ****
            **Number
                of**
            ****
            **Number
                of**
            ****
            ****
            ****
            ****
            ****
            **Number
                of**
            ****
            **Value
                of**
            ****
            **Unearned**
            ****
            **Unearned******
            ****
            **Securities**
            ****
            **Securities**
            ****
            **Securities**
            ****
            ****
            ****
            ****
            ****
            **Shares
                or**
            ****
            **Shares
                or**
            ****
            **Shares,
                Units**
            ****
            **Shares,
                Units******
            ****
            **Underlying**
            ****
            **Underlying**
            ****
            **Underlying**
            ****
            ****
            ****
            ****
            ****
            **Units
                of**
            ****
            **Units
                of**
            ****
            **or
                Other**
            ****
            **or
                Other******
            ****
            **Unexercised**
            ****
            **Unexercised**
            ****
            **Unexercised**
            ****
            **Option**
            ****
            **Option**
            ****
            **Stock
                that**
            ****
            **Stock
                That**
            ****
            **Rights
                that**
            ****
            **Rights
                that******
            ****
            **Exercisable**
            ****
            **Unexercisable**
            ****
            **Unearned**
            ****
            **Exercise**
            ****
            **Expiration**
            ****
            **Have
                Not**
            ****
            **Have
                not**
            ****
            **Have
                not**
            ****
            **Have
                not****Name**
            ****
            **Options
                (#)**
            ****
            **Options
                (#)**
            ****
            **Options
                (#)**
            ****
            **Price
                ($)**
            ****
            **Date**
            ****
            **Vested
                (#)**
            ****
            **Vested
                ($)**
            ****
            **Vested
                (#)**
            ****
            **Vested
                (#)****(a)**
            ****
            **(b)**
            ****
            **(c)**
            ****
            **(d)**
            ****
            **(e)**
            ****
            **(f)**
            ****
            **(g)**
            ****
            **(h)**
            ****
            **(i)**
            ****
            **(j)**Anthony
                J. Alda
            
            370,000
            
            -
            
            -
            
            0.64
            
            15-Dec-09
            
            -
            
            -
            
            -
            
            -Anthony
                J. Alda
            
            5,920,000
            
            -
            
            -
            
            0.04
            
            18-Dec-08
            
            -
            
            -
            
            -
            
            -Carl
                Segal
            
            1,500,000
            
            -
            
            1,000,000
            
            0.06
            
            20-Oct-10
            
            -
            
            -
            
            -
            
            -Phoenix
                Management Consulting Group Inc.
            
            1,750,000
            
            -
            
            -
            
            0.04
            
            18-Dec-08
            
            -
            
            -
            
            -
            
            -




(1)
      Phoenix Management Consulting Group Inc., a British Columbia, Canada corporation
      ("Phoenix"), holds options to purchase 1,750,000 of our shares. Brent Bysouth,
      co-founder and our Chief Software Architect, owns 100% of Phoenix.




Anthony
      J. Alda has an option until January 1, 2009 to purchase 80% of Phoenix for
      $1,000. Assuming this option will be exercised for the purposes of this table,
      Mr. Alda is deemed to hold an option to purchase 1,400,000 of our shares and
      Mr.
      Bysouth is deemed to hold an option to purchase 350,000 of our shares, out
      of
      the 1,750,000 options held by Phoenix.




In
      2003,
      6,320,000 stock options were issued to Mr. Alda pursuant to an employment
      agreement made between the Company and Mr. Alda. The provision for the issuance
      of stock options pursuant to the employment agreement is intended to provide
      a
      method whereby the Company may be stimulated by the personal involvement of
      the
      employee in the Company's business thereby advancing the interests of the
      Company and all of its shareholders. The stock options were fully vested on
      the
      date of grant and are subject to terms and conditions of our 2004 Stock Option
      Plan. The stock options are not transferable and will terminate after five
      years
      from the date of the option agreement or two years after the date of the
      termination of the employment of the employee. There are no performance-based
      conditions attached to these stock options. In 2006, at the request of Mr.
      Alda,
      the Board agreed to waive the restriction, on a one time basis, on the transfer
      of 400,000 stock options to a non affiliated individual for personal reasons.
      As
      of the date of filing the balance of outstanding stock options held by Mr.
      Alda,
      net of such transfer, amounts to 5,920,000.




In
      2004,
      370,000 stock options were issued to Mr. Alda. Of these stock options 25% vested
      six months after the option grant date, while the remaining 75% of the options
      vested on a pro-rata basis over the next 18 months. The stock options are
      subject to the terms and conditions of our 2004 Stock Option Plan. The options
      are not transferable and will terminate after five years from the date of the
      option agreement or two years after the date of the termination of the
      employment of the employee. The stock options were issued to compensate Mr.
      Alda
      for his past outstanding achievements on behalf of the Company and they are
      not
      subject to performance-based conditions.




26
 Table
          of Contents




In
      2005,
      1,500,000 stock options were granted to Carl Segal pursuant to an employment
      agreement made between the Company and Mr. Segal. The provision for the issuance
      of stock options pursuant to the employment agreement is intended to provide
      a
      method whereby the Company may be stimulated by the personal involvement of
      the
      employee in the Company's business thereby advancing the interests of the
      Company, and all of its shareholders. The options are not transferable and
      will
      terminate after five years from the date of the option agreement or 30 days
      after the date of the termination of the employment of the employee. 500,000
      of
      these options vested immediately upon the date of grant while the balance of
      the
      options will be vested only upon Mr. Segal's achievement of defined performance
      objectives. Mr. Segal's employment agreement also has a provision for 1,000,000
      bonus options to be granted and vested upon completion of certain defined goals
      attributed to the Company's marketing strategy. As at the last completed fiscal
      year, 1,500,000 stock options were completely vested with bonus options to
      be
      granted and vested when the Company is able to do so. The following is a concise
      description of the qualitative goals that will trigger the awarding of the
      bonus
      options to Mr. Segal: 250,000 bonus stock options if contracts for more than
      five bona-fide content provider relationships and over 250 premium content
      titles are completed; 125,000 stock options if greater than three software
      platform deployments completed over a 12 month period; 125,000 stock options
      if
      greater than three IPTV consulting deployments completed over a 12 month period;
      500,000 stock options if all Company's marketing objectives are met and the
      total realizable revenue over a 12 month period exceeds$1,000,000.




**ITEM
      11. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**




The
      following table presents information known to us, as of December 31, 2006,
      relating to the beneficial ownership of common stock by:


·
            each
                person who is known by us to be the beneficial holder of more than
                5% of
                our outstanding common stock; ·
            each
                of our named executive officers, directors and key employees; and ·
              our
                    directors and executive officers as a group.


We
      believe that all persons named in the table have sole voting and investment
      power with respect to all shares beneficially owned by them, except as noted.
      Unless otherwise indicated, the address of each stockholder listed in the table
      is care of CMC, 200-1311 Howe Street, Vancouver, British Columbia, Canada V6Z
      2P3.




Percentage
      ownership in the following table is based on 117,232,572 shares of common stock
      outstanding as of December 31, 2006. A person is deemed to be the beneficial
      owner of securities that can be acquired by that person within 60 days from
      December 31, 2006 upon the exercise of options, warrants or convertible
      securities. Each beneficial owner's percentage ownership is determined by
      dividing the number of shares beneficially owned by that person by the base
      number of outstanding shares, increased to reflect the shares underlying
      options, warrants or other convertible securities included in that person's
      holdings, but not those underlying shares held by any other person.




**Basic**
            
            **Options
                Vested****Name**
            
            **Outstanding**
            
            **(Unexercised)**
            
            **Total**
            
            **Percent
                of Class***Directors
                and Executive Officers:*Brent
                Richard Bysouth(1)
            
            16,826,405
            
            2,900,000
            
            19,726,405
            
            14.40
            %Anthony
                J. Alda(2)
            
            1,975,000
            
            6,290,000
            
            8,265,000
            
            6.59
            %Carl
                Segal
            
            -
            
            1,500,000
            
            1,500,000
            
            1.26
            %Leslie
                J. Ames(3)
            
            3,060,000
            
            1,650,000
            
            4,710,000
            
            3.86
            %William
                Kunzweiler
            
            1,117,512
            
            6,500,000
            
            7,617,512
            
            6.10
            %Ricardo
                Rosado
            
            3,035,667
            
            1,400,000
            
            4,435,667
            
            3.65
            %Michael
                Waage
            
            1,350,000
            
            847,500
            
            2,197,500
            
            1.84
            %Melanie
                Thomson
            
            425,000
            
            362,500
            
            787,500
            
            0.67
            %All
                directors and executive officers as a group (8 persons)
            
            27,789,584
            
            21,450,000
            
            49,239,584
            
            29.58
            %




(1)
      Phoenix Management Consulting Group Inc., a British Columbia, Canada corporation
      ("Phoenix"), owns 4,123,300 shares, and options to purchase 1,750,000 shares,
      of
      Registrant. Brent Bysouth owns 100% of Phoenix. Anthony J. Alda has an option
      until January 1, 2009 to purchase 80% of Phoenix for $1,000. Assuming this
      option will be exercised, currently Mr. Alda has voting control over 3,298,640
      Registrant shares held by Phoenix, which is 80% of the 4,123,300 Registrant
      shares held by Phoenix. Additionally, Mr. Alda has an option to purchase
      1,400,000 options held by Phoenix to purchase 1,750,000 shares of Registrant's
      shares, which is 80% of the options held by Phoenix. Mr. Bysouth has voting
      control over 824,660 Registrant shares held by Phoenix, which is 20% of the
      4,123,300 Registrant shares held by Phoenix. Mr. Bysouth also owns 12,703,105
      shares of Registrant directly.




(2)
      In
      addition to having voting control over 3,298,640 shares held by Phoenix, and
      the
      option to purchase 1,400,000 options held by Phoenix, Anthony J. Alda also
      has
      voting control over the following shares: 850,000 shares held by Anthony J.
      Alda
      in Trust for Brittany Billingsley; . Mr. Alda also owns 1,125,000 shares of
      Registrant directly.




(3)
      This
      includes 2,760,000 shares held by Leslie J. Ames Law Corporation.




27
 Table
          of Contents




**DIRECTOR’S
      COMPENSANTION AND COMMITEES**




We
      have
      not paid and do not presently propose to pay compensation to any director for
      acting in such capacity, except for the grant of shares of common stock or
      options and reimbursement for reasonable out-of-pocket expenses in attending
      meetings. During the last completed fiscal year, no such stock grants were
      made
      to our directors.




We
      do not
      have an audit committee. Accordingly, we have not designated any director as
      an
      "audit committee financial expert", as that term is defined in the rules of
      the
      Securities and Exchange Commission.




The
      Board
      of Directors does not have a standing nominating committee. Nominations for
      election to the Board of Directors may be made by the entire Board of Directors
      or by any shareholder entitled to vote for the election of directors in
      accordance with our bylaws and Delaware law. . We believe that at this stage
      of
      our development the functions of a nominating committee are best performed
      by
      the current group of directors as a whole.




Meetings
      may be held from time to time to consider matters for which approval of our
      Board of Directors is desirable or is required by law.




**EXECUTIVE
      COMPENSATION POLICIES**




Compensation
      of our executives is intended to attract, retain and reward persons who are
      essential to the corporate enterprise. The fundamental policy of our executive
      compensation program is to offer competitive compensation to executives that
      appropriately rewards the individual executive's contribution to corporate
      performance. The Board of Directors utilizes subjective criteria for evaluation
      of individual performance and relies substantially on our executives in doing
      so. The Board focuses on two primary components of our executives' compensation
      program, each of which is intended to reflect individual and corporate
      performance: base salary and long-term incentive compensation.




Executives'
      base salaries are determined primarily by reference to compensation packages
      for
      similarly situated executives of companies of similar size or in comparable
      lines of business with whom we expect to compete for executive talent and with
      reference to revenues, gross profits and other financial criteria. The Board
      also assesses subjective qualitative factors to discern a particular executive's
      relative value to the corporate enterprise in establishing base salaries.




It
      is the
      Board's philosophy that significant stock ownership by management creates a
      powerful incentive for executives to build long-term shareholder value.
      Accordingly, the board believes that an integral component of executive
      compensation is the award of equity-based compensation, which is intended to
      align executives' long-term interests with those of our shareholders. The board
      believes that option grants should be considered on an annual basis.




During
      2004, the Board of Directors created a Compensation Committee to formulate
      control policies with respect to the qualification and treatment of cash,
      benefits and securities compensation for all of our employment agreements and
      consulting agreements. The Compensation Committee created the compensation
      guidelines for its executive officers. The Compensation Committee is comprised
      of up to five people who oversee all matters with respect to compensation
      including the review and evaluation
      of the conduct and performance of our top executives for the purpose of
      assessing their merits and making recommendations as to their respective
      compensation.




28
 Table
          of Contents




**EMPLOYMENT
      AGREEMENTS WITH EXECUTIVE OFFICERS**




The
      Company has executed employment agreements with its Named executive officers.
      Below is a summary of the major terms of these employment agreements.




ANTHONY
      ALDA signed an employment agreement with CMC to act as its Chief Research &
Development Officer. The agreement does not have a termination date. The major
      terms are as follows: base salary of $84,000 CAD per year and a monthly personal
      expense account of $2,000 CAD. On November 1, 2005, Mr. Alda elected to waive
      his monthly personal expense account as part of the restructuring of the
      Company. On May 24, 2002, Mr. Alda signed an employment agreement with CanOnline
      Global Media, Inc. ("CGMI") to serve in the roles of Chief Technology Architect,
      Chairman of the Board of Directors, President and Chief Executive Officer.
      The
      agreement was assumed by the Company on December 18, 2003 when CGMI became
      a
      subsidiary of the Company. Mr. Alda continues to act as Chief Technology Officer
      and a director of CGMI. The agreement does not have a termination date. The
      major terms are as follows: base salary $150,000 USD per year; monthly car
      allowance and expenses of approximately $1,225 USD; monthly personal expense
      account of $2,000 USD; annual vacation travel expense of $6,000 USD; relocation
      fees of $9,500 USD per month, if necessary. This agreement was voluntarily
      terminated on February 1, 2005. Mr. Alda continued to receive only his salary
      and monthly expenses while serving as President and Chief Executive Officer
      of
      the Company while a new management agreement was negotiated between Mr. Alda
      and
      the Board of Directors. On November 1, 2005, Mr. Alda elected to have his salary
      reduced to $90,000 USD per year and he also agreed to waive his monthly personal
      expense account as part of the restructuring of the Company. On November 30,
      2005, the Board of Directors agreed to a three year employment agreement
      effective December 1, 2005, with Mr. Alda to continue to act as the Company's
      Chairman, Chief Technology Architect, President and Chief Executive Officer.
      This agreement provides for a salary of $150,000 USD per year and personal
      expenses of $2,000 USD per month, annual paid vacation of four weeks per year,
      and relocation fees, if necessary, at an amount to then be determined. The
      agreement may be immediately terminated by us, without cause and without advance
      notice; provided, however, that Mr. Alda receives a severance pay equal to
      the
      base salary through the remaining term of employment. In addition, all stock
      options, whether unvested or unexercised, will be immediately vested, and all
      unexercised options will be exercised at the price originally set for those
      options. Upon mutual agreement between Mr. Alda and the Board, the ownership
      and
      rights of any or all patents for inventions by Mr. Alda may be transferred
      to
      Mr. Alda in lieu of payment of severance. Upon termination with cause, Mr.
      Alda
      will have no rights to any unvested benefits or any other compensation or
      payments and shall only be entitled to such benefits and payment if both the
      Board and Mr. Alda sign a mutual general release of claims in a form mutually
      acceptable to both parties. The full salary and expense terms of this agreement
      will not take effect until the Company has sufficient funding to service those
      terms according to the agreement.




CARL
      SEGAL signed an employment agreement with NS8 on September 19, 2005 to act
      as
      its Executive Vice President, Media Distribution and Deployment. The agreement
      does not have a termination date. The agreement may be immediately terminated
      by
      us, without cause, provided that Mr. Segal receives three months severance
      pay,
      if terminated after one year from employment commencement. The major terms
      are
      as follows: base salary of $165,000 USD per year and a monthly business expense
      account of $1,500.00 USD; monthly car allowance and expenses of approximately
      $500.00 USD; travel reimbursement for necessary and reasonable business expenses
      (including air travel, car rental, and accommodation); and an annual vacation
      allotment of 15 days. Mr. Segal also has had 1,500,000 options granted to him
      which vest upon the achievement of certain milestones outlined within the
      employment agreement. He also has 1,000,000 bonus options which are granted
      and
      vested at such time as Mr. Segal achieves certain milestones outlined within
      the
      employment agreement.




**ITEM
      12. CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND
      DIRECTOR INDEPENDENCE**




**Transactions
      with William Kunzweiler**




On
      May
      13, 2005, a loan was received from William Kunzweiler, a director of ours,
      for
      $150,000. The loan was initially due on November 13, 2005 and bore interest
      at
      the rate of 7% per annum, but on December 13, 2005, the loan plus accrued
      interest was fully paid to William Kunzweiler.




On
      May
      27, 2005, a loan was received for $125,000. The note earns interest at 7% per
      annum, and the principal and any unpaid interest is due November 27, 2005.
      The
      maturity date of the note was extended to March 27, 2007. During 2005 fiscal
      year $40,000 of principal was repaid on the note. As of January 31, 2007 there
      were no additional repayments of principal or accrued interest and the
      outstanding principal and accrued interest was $85,000 and $11,543,
      respectively.




On
      July
      15, 2005, a loan was received for $125,000. The note earns interest at 7% per
      annum, and the principal and any unpaid interest is due January 15, 2006. The
      maturity date of the note was extended to March 27, 2007. As of January 31,
      2007
      there were no repayments of principal or accrued interest and the outstanding
      principal and accrued interest was $125,000 and $13,545, respectively.




29
 Table
          of Contents




On
      July
      29, 2005, a loan was received for $83,333. The note earns interest at 7% per
      annum, and the principal and any unpaid interest is due January 29, 2006. The
      maturity date of the note was extended to March 27, 2007. As of January 31,
      2007
      there were no repayments of principal or accrued interest and the outstanding
      principal and accrued interest was $83,333 and $8,806, respectively.




On
      November 1, 2005, the Company entered into a promissory note agreement for
      gross
      proceeds of $65,000. The note earns interest at 7% per annum, and the principal
      and any unpaid interest is due November 1, 2007. As of January 31, 2007 there
      were no repayments of principal or accrued interest and the outstanding
      principal and accrued interest was $65,000 and $5,684, respectively. On March
      31, 2006, the Company entered into a promissory note agreement for gross
      proceeds of $42,808. The note earns interest at 6% per annum, and the principal
      and any unpaid interest is due on demand. As of January 31, 2007 there were
      no
      repayments of principal or accrued interest and the outstanding principal and
      accrued interest was $42,808 and $2,153, respectively.




On
      October 31, 2006, the Company entered into a promissory note agreement for
      gross
      proceeds of $50,000. The note earns interest at 6% per annum, and the principal
      and any unpaid interest is due October 31, 2007. As of January 31, 2007 there
      were no repayments of principal or accrued interest and the outstanding
      principal and accrued interest was $50,000 and $756, respectively.




**Transactions
      with Martin Calvert**




On
      May
      13, 2004, a loan for $95,000 was received from Martin Calvert, then a director
      of the Company. . The loan was due on May 13, 2005 and bore interest at the
      rate
      of 8% per annum. On June 1, 2004, the loan plus accrued interest was fully
      repaid to Martin Calvert. Pursuant to the terms of the loan, upon its repayment,
      we issued to Martin Calvert warrants to purchase 47,500 shares of common stock
      at an exercise price equal to the market price of the shares on the date the
      warrants were issued with a term of two years from the date of issuance. On
      April 25, 2006 the Company's board of directors modified the warrant to extend
      the expiration date from April 25, 2006 to April 25, 2008. The warrants remain
      unexercised and have an exercise price of $0.61 per share.




On
      October 15, 2005, Martin Calvert, then a director of ours, loaned us $25,000.
      The loan is due on demand and bears interest at the rate of 7% per annum. As
      of
      January 31, 2007 there were no repayments of principal or accrued interest
      and
      the outstanding principal and accrued interest was $25,000 and $2,273,
      respectively.




**Transactions
      with Anthony Alda**




On
      March
      15, 2006, a loan for $80,000 was received from Anthony Alda, a CEO of the
      Company. The loan is due on demand and bears interest at the rate of 6% per
      annum. As of January 31, 2007 there were no repayments of principal or accrued
      interest and the outstanding principal and accrued interest was $80,000 and
      $4,235, respectively.




On
      March
      20, 2006, a loan for $55,000 was received from Anthony Alda, a CEO of the
      Company. The loan is due on demand and bears interest at the rate of 6% per
      annum. During 2006, a total of principal of $8,000 was repaid and as of January
      31, 2007 the outstanding principal and accrued interest was $47,000 and $2,584,
      respectively.




On
      March
      27, 2006, a loan for $2,000 was received from Anthony Alda, a CEO of the
      Company. The loan is due on demand and bears interest at the rate of 6% per
      annum. As of January 31, 2007 there were no repayments of principal or accrued
      interest and the outstanding principal and accrued interest was $2,000 and
      $102,
      respectively.




On
      March
      31, 2006, a loan for $10,000 was received from Anthony Alda, a CEO of the
      Company. The loan is due on demand and bears interest at the rate of 6% per
      annum. As of January 31, 2007 there were no repayments of principal or accrued
      interest and the outstanding principal and accrued interest was $10,000 and
      $503, respectively.




On
      April
      13, 2006, a loan for $37,500 was received from Anthony Alda, a CEO of the
      Company. The loan is due on demand and bears interest at the rate of 6% per
      annum. As of January 31, 2007 there were no repayments of principal or accrued
      interest and the outstanding principal and accrued interest was $37,500 and
      $1,806, respectively.




**Transactions
      with Brent Bysouth**




On
      May
      31, 2006, a loan for $367,500,000 was received from Phoenix Management
      Consulting Group Inc., 100% owned by Brent Bysouth, our co-founder, director
      and
      Chief Software Architect. The loan is due on demand and bears interest at the
      rate of 6% per annum. As of January 31, 2007 there were no repayments of
      principal or accrued interest and the outstanding principal and accrued interest
      was $367,500 and $36,851, respectively.


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 Table
          of Contents




On
      July
      14, 2006, a loan for $8,870 was received from Brent Bysouth, our co-founder,
      director and Chief Software Architect. The loan is due on demand and bears
      interest at the rate of 6% per annum. As of January 31, 2007 there were no
      repayments of principal or accrued interest and the outstanding principal and
      accrued interest was $8,870 and $293, respectively.




**Director
      Independence**




We
      are
      not currently subject to any law, rule or regulation requiring that all or
      any
      portion of our Board of Directors include "independent" directors. Our Board
      of
      Directors intends to adopt standards similar to those of the American Stock
      Exchange to determine whether a director may be deemed to be independent. Under
      those standards we do not believe that we have any "independent" directors
      at
      the present time.




**ITEM
      13. EXHIBITS**




(a)
                  Exhibit Number
              
              Description2.1
              
              Agreement
                  and Plan of Merger dated November 3, 2003 among Registrant, DLVN
                  Acquisition, Inc. and CanOnline Global Media, Inc. (1)2.2
              
              Correction
                  Agreement dated November 3, 2003 among Registrant, DLVN Acquisition,
                  Inc.
                  and CanOnline Global Media, Inc. (1)2.3
              
              Certificate
                  of Merger filed with Delaware Secretary of State (1)2.4
              
              Certificate
                  of Merger filed with Washington Secretary of State (1)3.1
              
              Certificate
                  of Incorporation (2)3.2
              
              Amendment
                  of Certificate of Incorporation-dated October 13, 2003 (3)3.3
              
              Amendment
                  of Certificate of Incorporation-dated December 17, 2003 (3)3.5
              
              Amendment
                  of Certificate of Incorporation-dated December 5, 2005 (4)3.4
              
              By-Laws
                  (2)3.5
              
              Amended
                  By-Laws (2)3.5
              
              Amended
                  By-Laws (4)10.1
              
              Stock
                  Option Plan of 2001 (2)10.2
              
              Stock
                  Option Plan of 2004(6)10.3
              
              Amended
                  Stock Option Plan of 200410.3
              
              Employment
                  Agreement of Ricardo Rosado with CanOnline Global Media Corp.
                  (5)10.6
              
              Amended
                  Employment Agreement of Ricardo Rosado with CanOnline Global Media
                  Corp.(6)10.7
              
              Employment
                  Agreement of Anthony Alda with CanOnline Global Media Corp.
                  (5)10.8
              
              Amended
                  Employment Agreement of Anthony Alda with CanOnline Global Media
                  Corp.(6)10.9
              
              Employment
                  Agreement of Leslie J. Ames with CanOnline Global Media Corp.
                  (5)10.10
              
              Amended
                  Employment Agreement of Leslie J. Ames with CanOnline Global Media
                  Corp.(6)10.11
              
              Employment
                  Agreement of Brent S. Bysouth with CanOnline Global Media Corp.
                  (5)10.12
              
              Amended
                  Employment Agreement of Brent S. Bysouth with CanOnline Global
                  Media
                  Corp.(6)10.13
              
              Employment
                  Agreement of Melanie Thomson with CanOnline Global Media Corp.
                  (5)10.14
              
              Amended
                  Employment Agreement of Melanie Thomson with CanOnline Global Media
                  Corp.(6)10.15
              
              Employment
                  Agreement of Melanie Thomson with CanOnline Global Media Corp.
                  (5)10.16
              
              Employment
                  Agreement of Melanie Thomson with CanOnline Global Media
                  Corp.(6)10.17
              
              Termination
                  Agreement with respect to the Standby Equity Distribution Agreement
                  made
                  between the Corporation and Cornell dated May 19, 2004 dated November
                  10,
                  2005(7)10.18
              
              Secured
                  Convertible Debenture No. CCP-3 in the amount of $1,863.430 dated
                  November
                  10, 2005(7)10.19
              
              Secured
                  Convertible Debenture No. CCP-4 in the amount of $500,000 dated
                  November
                  10, 2005(7)


31
 Table
            of Contents
  10.20
              
              Amended
                  and Restated Security Agreement made between the Corporation and
                  Cornell
                  dated November 10, 2005(7)10.21
              
              Securities
                  Purchase Agreement made between the Corporation and Cornell dated
                  November
                  10, 2005(7)10.22
              
              Escrow
                  Agreement made between the Corporation, the Buyers listed in the
                  Securities Purchase Agreement and David Gonzalez, Esq., as Escrow
                  Agent
                  dated November 10, 2005(7)10.23
              
              Subsidiary
                  Security Agreement made between CanOnline Media Corporation and
                  Cornell
                  dated November 10, 2005(7)10.24
              
              Subsidiary
                  Security Agreement made between CanOnline Global Media, Inc. and
                  Cornell
                  dated November 10, 2005(7)10.25
              
              Investor
                  Registration Rights Agreement made between the Corporation and
                  various
                  investors dated November 10, 2005(7)10.26
              
              Pledge
                  and Escrow Agreement made between the Corporation, various Pledgors,
                  Cornell and David Gonzalez, Esq. as Escrow Agent dated November
                  10,
                  2005(7)10.27
              
              Irrevocable
                  Transfer Agent Instructions given to Continental Stock Transfer
&
                  Trust Company by the Corporation on behalf of Cornell dated November
                  10,
                  2005(7)10.28
              
              Warrant
                  No. CCP-001 entitling Cornell Capital to purchase 5,000,000 common
                  shares
                  of the Company at an exercise price of $0.075 per share for a period
                  of
                  five years from November 10, 2005(7)10.29
              
              Warrant
                  No. CCP-002 entitling Cornell Capital to purchase 10,000,000 common
                  shares
                  of the Company at an exercise price of $0.06 per share for a period
                  of
                  five years from November 10, 2005(7)10.30
              
              Warrant
                  No. CCP-003 entitling Cornell Capital to purchase 10,000,000 common
                  shares
                  of the Company at an exercise price of $0.05 per share for a period
                  of
                  five years from November 10, 2005(7)10.31
              
              Master
                  Service Agreement, dated August 4, 2005, between NS8 Corporation
                  and
                  SAVVIS Communications Corporation (incorporated by reference to
                  Exhibit
                  10.1 of the Company's Form 8-K filed on October 6,
                  2005).10.32
              
              Amendment
                  No. 1 to Securities Purchase Agreement between NS8 Corporation
                  and Cornell
                  Capital Partners, LP10.33
              
              Escrow
                  Agreement dated as at February 7, 2006 between NS8 Corporation
                  and
                  Gallagher, Briody & Butler(8)10.34
              
              Amendment
                  No. 1 to Securities Purchase Agreement dated as at February 7,
                  2006
                  between NS8 Corporation and Cornell Capital Partners,
                  LP(8)10.35
              
              Mobile
                  Content Distribution Agreement dated January 9, 2006 between NS8
                  Corporation and Acme Mobile PTE Ltd.(11)10.36
              
              Master
                  Software License and Development Agreement dated April 12, 2006
                  between
                  NS8 Corporation and True Digital Entertainment Company
                  Limited.(10)10.37
              
              iWave
                  IPTV VOD License Agreement dated June 1, 2005 between NS8 Corporation
                  and
                  ReelTime Infotainment Ltd(10).10.38
              
              Service
                  Distribution Agreement dated June 8, 2006 between NS8 Corporation
                  and
                  Advanced Datanetwork Communications Co(10).10.39
              
              Content
                  Supply Agreement dated June 8, 2006 between NS8 Corporation and
                  Advanced
                  Datanetwork Communications Co(10).10.40
              
              Accelerated
                  Payment of $300,000 Agreement dated September 28, 2006 under November
                  10,
                  2005 Securities Purchase Agreement made between the Corporation
                  and
                  Cornell Capital(12).10.41
              
              Settlement
                  Agreement dated August 14, 2006 between NS8 Corporation and Maximum
                  Ventures Inc(12).10.42
              
              Employment
                  Agreement of Carl Segal with NS8 Corporation(13).10.43
              
              Unsecured
                  note to Cornell Capital in the amount of $550,000 dated March 30,
                  2007(14).10.44
              
              Warrant
                  No. CCP-004 entitling Cornell Capital to purchase 250,000,000 common
                  shares of the Company at an exercise price of $0.02 per share for
                  a period
                  of five years from March 30, 2007 (14).10.45
              
              Consulting
                  Agreement of George O’Leary with NS8 Corporation (15)31.1
              
              Rule
                  13(a)-14(a)/15(d)-14(a) Certification of Principal Executive
                  Officer31.2
              
              Rule
                  13(a)-14(a)/15(d)-14(a) Certification of Principal Financial Officer32.1
              
              Section
                  1350 Certification of Chief Executive Officer32.2
              
              Section
                  1350 Certification of Chief Financial Officer


(1) 
        Previously filed in Registrant's Form 8-K/A filed on January 31, 2004
 (2) 
        Previously filed in Registrant's Form SB-2 filed on December 26, 2001
 (3) 
        Previously filed in Registrant's Form 10-KSB for the year ended September
        30,
        2003 filed on January 1, 2004
 (4) 
        Previously filed in Registrant's Form SB-2 filed on December 12,
        2005.
 (5) 
        Previously filed in Registrant's Form 10-KSB for the year ended December
        31,
        2003 filed on April 15, 2004
 (6) 
        Previously filed in Registrant's Form 10-KSB for the year ended December
        31,
        2004 filed on April 5, 2005
 (7) 
        Previously filed in Registrant's Form 10-QSB for the quarter ended September
        30,
        2005 filed on November 22, 2005
 (8) 
        Previously filed in Registrant's Form 8-K filed on February 8,
        2006.
 (9)
         Previously filed in Registrant's Form 10-QSB/A for the quarter ended June
        30, 2006 filed on September 12, 2006.
 (10)
        Previously filed in Registrant's Form 10-QSB/A for the quarter ended June
        30,
        2006 filed on September 12, 2006.
 (11)
        Previously filed in Registrant's Form 10-KSB for year ended December 31,
        2005
        filed on April 17, 2006.
 (12)
        Previously filed in Registrant's Form SB-2/A filed on October 24,
        2006.
 (13)
        Previously filed in Registrant's Form SB-2/A filed on February 13,
        2007.
 (14)
        Previously filed in Registrant's Form 8-K filed on April 6, 2007.
 (15)
        Previously filed in Registrant’s Form 8-K on April 12, 2007




32
 Table
          of Contents




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND
      SERVICES**




(1)
      Audit
      Fees




The
      aggregate fees billed for professional services rendered by our principal
      accountant for the audit of the Registrant's annual financial statements and
      review of the financial statements included in the Registrant's Forms 10-KSB
      and
      10-QSB or services that are normally provided by the accountant in connection
      with statutory and regulatory filings or engagements for fiscal years 2006
      and
      2005 were approximately $132,000 and $65,000, respectively.




(2)
      Audit
      Related Fees




There
      were no audit related fees for professional services rendered for fiscal years
      2006 and 2005.




(3)
      Tax
      Fees




The
      fees
      billed for professional services rendered by our principal accountant for the
      preparation of the registrant's tax returns, including tax planning for fiscal
      year 2006 and 2005 were approximately $2,500 and $3,000, respectively.




(4)
      All
      Other Fees




Not
      applicable.




(5)
      Audit
      Committee Policies and Procedures




The
      Registrant does not have an audit committee. The Board of Directors of the
      Registrant approved all of the services rendered to the Registrant by its
      principal accountant for fiscal years 2006 and 2005.




33
 Table
          of Contents




**SIGNATURES**






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




**NS8
      CORPORATION**


(Registrant)


Date: *April
              16, 2007*
            By:
            */s/
              Anthony
              J. Alda**Anthony J. Alda**CEO
              (Principal*
              *Executive
                officer)*










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




Date: *April
                16, 2007*
              By:
              */s/
                Anthony
                J. Alda**Anthony J. Alda**Chairman
                of
                the Board of*
                *Directors,
                  President and CEO*
                *(Principal
                  Executive Officer)*
  Date: *April
                        16, 2007*
                      By:
                      */s/
                        Ricardo
                        Rosado**Ricardo Rosado**Chief
                        Financial Officer,*
                        *and
                          Director (Principal Accounting
                          Officer)*
 Date: *April
                            16, 2007*
                          By:
                          */s/
                            Michael
                            W. Waage**Michael W. Waage**Director*




Date: *April
                    16, 2007*
                  By:
                  */s/
                    Brent
                    R. Bysouth**Brent R. Bysouth**Director*


34
 Table
          of Contents


**NS8
      CORPORATION**


(A
      DEVELOPMENT STAGE COMPANY)





**CONTENTS**


December
      31, 2006





**Page**Report
                  of Independent Registered Public Accounting
                  Firm
              F-2Consolidated
                  Balance Sheet
              F-3Consolidated
                  Statement of Operations
              F-4Consolidated
                Statements of Comprehensive
                Loss
              F-5Consolidated
                  Statement of Stockholders'
                  Deficit
              F-8Consolidated
                  Statements of Cash Flows
              F-17Notes
                  to Consolidated Financial Statements
              F-19





F-1
 Table
          of Contents




**REPORT
      OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**






Board
      of
      Directors and Stockholders of


NS8
      Corporation




We
      have
      audited the accompanying consolidated balance sheet of NS8 Corporation and
      subsidiaries (a development stage company) (the "Company") as of December 31,
      2006, and the related consolidated statements of operations, comprehensive
      loss,
      shareholders' deficit and cash flows for each of the years in the two-year
      period then ended. These consolidated financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on the consolidated financial statements based on our audits. We did
      not
      audit the cumulative data from June 18, 1999 (inception) to December 31, 2004
      in
      the consolidated statements of operations, comprehensive loss, shareholders'
      deficit and cash flows, which were audited by other auditors whose report dated
      March 31, 2005, which expressed an unqualified opinion (the report was modified
      related to the uncertainty of the Company's ability to continue as a going
      concern) have been furnished to us. Our opinion, insofar as it relates to the
      amounts included for the cumulative period from June 18, 1999 (inception) to
      December 31, 2004 is based solely on the report of the other auditors.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      has determined that it is not required to have, nor were we engaged to perform,
      an audit of its internal control over financial reporting. Our audits included
      consideration of internal control over financial reporting as a basis for
      designing audit procedures that are appropriate in the circumstances, but not
      for the purpose of expressing an opinion on the effectiveness of the Company's
      internal control over financial reporting. Accordingly, we express no such
      opinion. An audit 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 consolidated financial
      statement presentation. We believe that our audits provide a reasonable basis
      for our opinion.




In
      our
      opinion, based on our audit and the report of the other auditors, the
      consolidated financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of NS8 Corporation and
      subsidiaries (a development stage company) as of December 31, 2006, and the
      results of their operations and their cash flows for each of the years in the
      two-year period then ended and for the period from June 18, 1999 (inception)
      through December 31, 2006 in conformity with accounting principles generally
      accepted in the United States of America.




The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. As more fully described in Note 2,
      the
      Company has suffered recurring losses from operations since inception and has
      a
      deficit accumulated during the development stage at December 31, 2006. These
      items, among other matters, raise substantial doubt about the Company's ability
      to continue as a going concern. Management's plans in regard to these matters
      are also described in Note 2. The consolidated financial statements do not
      include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amount and classification
      of
      liabilities that may result from the outcome of this uncertainty.




As
      described in Note 3 to the consolidated financial statements, effective January
      1, 2006, the Company changed its method of accounting for share-based
      compensation to adopt Statement of Financial Accounting Standards No. 123(R),
      “Share-Based Payment.”







*/S/
                KMJ CORBIN & COMPANY LLP*
              *Irvine,
                California*
              *April
                16, 2007*





F-2
 Table
          of Contents




**NS8
                  CORPORATION****(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  BALANCE SHEET****December
                  31, 2006**


**ASSETS****December
                  31, 2006****Current
                  assets**Cash
              
              $
              96,669Accounts
                  receivable
              
              
              21,829Deferred
                  professional services costs
              
              
              74,063Prepaid
                  expenses and other current assets
              
              
              68,278**Total
                  current assets**
              
              
              **260,839****Property
                  and equipment, net**
              
              
              173,648**Capitalized
                  software development costs, net**
              
              
              250,638**Other
                  assets**
              
              
              9,671**Total
                  assets**
              
              **$**
              **694,796****LIABILITIES
                  AND SHAREHOLDERS' DEFICIT****Current
                  liabilities**Accounts
                  payable
              
              $
              401,896Accrued
                  payroll and related expenses
              
              
              257,654Accrued
                  expenses
              
              
              1,862,677Deferred
                  revenue
              
              
              183,530Line
                  of credit
              
              
              8,581Notes
                  payable
              
              
              780,000Due
                  to shareholders and directors
              
              
              4,029,189Current
                  portion of convertible debentures, net of debt discount of
                  $31,341
              
              
              868,759**Total
                  current liabilities**
              
              
              **8,392,286****Convertible
                  debentures,**net
                  of current portion and debt discount of $996,092
              
              
              1,983,349**Derivative
                  liability**
              
              
              7,276,574**Accrued
                  management fees**
              
              
              1,577,161**Total
                  liabilities**
              
              
              **19,229,370****Commitments
                  and contingencies****Shareholders'
                  deficit**Preferred
                  stock, $0.0001 par value;5,000,000
                  shares authorizedno
                  shares issued and outstanding
              
              
              -Common
                  stock, $0.0001 par value;750,000,000
                  shares authorized117,232,572
                  shares issued and outstanding
              
              
              11,723Additional
                  paid-in capital
              
              
              9,809,947Accumulated
                  other comprehensive loss
              
              
              (65,218
              )Deficit
                  accumulated during the development stage
              
              
              (28,291,026
              )Total
                  shareholders' deficit
              
              
              (18,534,574
              )**Total
                  liabilities and shareholders' deficit**
              
              **$**
              **694,796**
  See
      report of independent registered public accounting firm and accompanying notes
      to these consolidated financial statements.


F-3
 Table
          of Contents




**NS8
      CORPORATION**


**(A
                  DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                  STATEMENTS OF
                  OPERATIONS****For
                  the Years Ended December 31, 2006 and 2005 and****for
                  the Period from June 18, 1999 (Inception) to December 31,
                  2006**


**For
                the Year Ended**
            
            **For
                the Period from June 18, 1999 (Inception) to****December
                31,**
            
            **December
                31,****2006**
            
            **2005**
            
            **2006****Revenue:**License
                fees
            
            $
            174,500
            
            $
            -
            
            $
            174,500Professional
                services
            
            
            43,849
            
            
            -
            
            
            43,849Total
                revenue
            
            
            218,349
            
            
            -
            
            
            218,349**Operating
                expenses:**Cost
                of professional services
            
            
            187,786
            
            
            -
            
            
            187,786General
                and administrative
            
            
            3,564,640
            
            
            6,982,118
            
            
            22,757,032Research
                and development
            
            
            413,372
            
            
            785,012
            
            
            3,877,280Total
                operating expenses
            
            
            4,165,798
            
            
            7,767,130
            
            
            26,822,098**Loss
                from operations**
            
            
            (3,947,449
            )
            
            (7,767,130
            )
            
            (26,603,749
            )**Other
                income (expense):**Other
                income (expense)
            
            
            5,690
            
            
            (30,256
            )
            
            31,623Interest
                expense
            
            
            (2,238,905
            )
            
            (688,855
            )
            
            (3,351,788
            )Loss
                on extinguishment of debt
            
            
            -
            
            
            (2,250,000
            )
            
            (2,250,000
            )Change
                in fair value of derivative liability
            
            
            (3,954,844
            )
            
            4,148,850
            
            
            3,882,888Total
                other income (expense), net
            
            
            (6,188,059
            )
            
            1,179,739
            
            
            (1,687,277
            )**Net
                loss**
            
            **$**
            **(10,135,508**
            **)**
            **$**
            **(6,587,391**
            **)**
            **$**
            **(28,291,026**
            **)****Basic
                and diluted loss per common share**
            
            
            **($0.09**
            **)**
            
            **($0.07**
            **)****Weighted
                average common shares outstanding-basic and
                diluted**
            
            
            **112,024,697**
            
            
            **99,600,665**


See
      report of independent registered public accounting firm and accompanying notes
      to these consolidated financial statements.




F-4
 Table
          of Contents




**NS8
                CORPORATION****(A
                DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                STATEMENTS OF COMPREHENSIVE
                LOSS****For
                the Years Ended December 31, 2006 and 2005 and****for
                the Period from June 18, 1999 (Inception) to December 31,
                2006****For
                the Year Ended**
            
            **For
                the Period from June 18, 1999 (Inception) to December 31,
                2006****December
                31,****2006**
            
            **2005****Net
                loss**
            
            $
            (10,135,508
            )
            $
            (6,587,391
            )
            $
            (28,291,026
            )**Other
                comprehensive loss**Foreign
                currency translation loss
            
            
            (11,879
            )
            
            (9,078
            )
            
            (65,218
            )**Comprehensive
                loss**
            
            **$**
            **(10,147,387**
            **)**
            **$**
            **(6,596,469**
            **)**
            **$**
            **(28,356,244**
            **)**





See
      report of independent registered public accounting firm and accompanying notes
      to these consolidated financial statements.




F-5
 Table
          of Contents





**NS8
      CORPORATION**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' DEFICIT**


**For
      the Period from June 18, 1999 (inception) to December 31,
      2006**




**Accumulated**
            
            **Deficit****Other**
            
            **Accumulated****Additional**
            
            
            
            **Comprehensive**
            
            **during
                the****Common
                Stock**
            
            
            
            **Paid-In**
            
            **Deferred**
            
            **Income**
            
            **Development****Shares**
            
            **Amount**
            
            **Capital**
            
            **Compensation**
            
            **(Loss)**
            
            **Stage**
            
            **Total****Balance,
                June 18, 1999 (inception)**
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Issuance
                of shares for cash
            
            
            4,130,000
            
            
            413
            
            
            5,203
            
            
            -
            
            
            -
            
            
            -
            
            
            5,616Conversion
                of debt to common stock
            
            
            29,281,406
            
            
            2,928
            
            
            36,885
            
            
            -
            
            
            -
            
            
            -
            
            
            39,813**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (31,905
            )
            
            (31,905
            )**Balance,
                December 31, 1999**
            
            
            33,411,406
            
            
            3,341
            
            
            42,088
            
            
            -
            
            
            -
            
            
            (31,905
            )
            
            13,524Exercise
                of stock options
            
            
            2,000,000
            
            
            200
            
            
            (200
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Options
                granted for services
            
            
            -
            
            
            -
            
            
            3,400
            
            
            -
            
            
            -
            
            
            -
            
            
            3,400Issuance
                of shares for services
            
            
            20,000
            
            
            2
            
            
            1,018
            
            
            -
            
            
            -
            
            
            -
            
            
            1,020Issuance
                of shares for cash
            
            
            3,239,112
            
            
            324
            
            
            283,815
            
            
            -
            
            
            -
            
            
            -
            
            
            284,139Issuance
                of shares for offering costs
            
            
            150,000
            
            
            15
            
            
            22,485
            
            
            -
            
            
            -
            
            
            -
            
            
            22,500Offering
                costs
            
            
            -
            
            
            -
            
            
            (33,242
            )
            
            -
            
            
            -
            
            
            -
            
            
            (33,242
            )Foreign
                exchange translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (681
            )
            
            -
            
            
            (681
            )**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (232,829
            )
            
            (232,829
            )**Balance,
                December 31, 2000**
            
            
            38,820,518
            
            
            3,882
            
            
            319,364
            
            
            -
            
            
            (681
            )
            
            (264,734
            )
            
            57,831Conversion
                of debt to common stock
            
            
            35,667
            
            
            4
            
            
            5,346
            
            
            -
            
            
            -
            
            
            -
            
            
            5,350Exercise
                of options
            
            
            450,000
            
            
            45
            
            
            (45
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of shares for service
            
            
            50,000
            
            
            5
            
            
            195
            
            
            -
            
            
            -
            
            
            -
            
            
            200Buy-back
                of shares
            
            
            (1,025,000
            )
            
            (103
            )
            
            (2,559
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,662
            )Foreign
                exchange translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,873
            
            
            -
            
            
            5,873**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (391,930
            )
            
            (391,930
            )**Balance,
                December 31, 2001**
            
            
            38,331,185
            
            
            3,833
            
            
            322,301
            
            
            -
            
            
            5,192
            
            
            (656,664
            )
            
            (325,338
            )Conversion
                of debt to common stock
            
            
            7,923,448
            
            
            793
            
            
            151,507
            
            
            -
            
            
            -
            
            
            -
            
            
            152,300Issuance
                of shares for employee compensation
            
            
            2,310,000
            
            
            231
            
            
            80,619
            
            
            (56,000
            )
            
            -
            
            
            -
            
            
            (24,850
            )Cancellation
                of shares
            
            
            (1,000,000
            )
            
            (100
            )
            
            100
            
            
            -
            
            
            
            
            
            
            
            
            -Foreign
                exchange translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,518
            )
            
            -
            
            
            (2,518
            )**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (893,031
            )
            
            (893,031
            )




F-6
 Table
          of Contents




**Balance,
                December 31, 2002**
            
            
            47,564,633
            
            
            4,757
            
            
            554,527
            
            
            (56,000
            )
            
            2,674
            
            
            (1,549,695
            )
            
            (1,043,737
            )Conversion
                of debt
            
            
            12,385,714
            
            
            1,239
            
            
            684,782
            
            
            -
            
            
            -
            
            
            -
            
            
            686,021Issuance
                of shares for cash
            
            
            4,833,334
            
            
            483
            
            
            2,444,517
            
            
            -
            
            
            -
            
            
            -
            
            
            2,445,000Issuance
                of shares for employee services
            
            
            3,720,000
            
            
            372
            
            
            947,933
            
            
            56,000
            
            
            -
            
            
            -
            
            
            1,004,305Issuance
                of shares for services
            
            
            500,000
            
            
            50
            
            
            17,450
            
            
            -
            
            
            -
            
            
            -
            
            
            17,500Issuance
                of shares to pre-reverse merger shareholders
            
            
            15,250,000
            
            
            1,525
            
            
            (1,525
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Foreign
                exchange translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (37,934
            )
            
            -
            
            
            (37,934
            )**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,925,394
            )
            
            (3,925,394
            )**Balance,
                December 31, 2003**
            
            
            84,253,681
            
            
            8,426
            
            
            4,647,684
            
            
            -
            
            
            (35,260
            )
            
            (5,475,089
            )
            
            (854,239
            )Issuance
                of shares for cash
            
            
            597,544
            
            
            60
            
            
            399,940
            
            
            -
            
            
            -
            
            
            -
            
            
            400,000Issuance
                of shares for services
            
            
            525,170
            
            
            52
            
            
            546,947
            
            
            -
            
            
            -
            
            
            -
            
            
            546,999Issuance
                of shares for offering costs
            
            
            934,580
            
            
            93
            
            
            (93
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Offering
                costs
            
            
            -
            
            
            -
            
            
            (21,000
            )
            
            -
            
            
            -
            
            
            -
            
            
            (21,000
            )Compensation
                charge for warrants issued “in the money” to non-employees
            
            
            -
            
            
            -
            
            
            20,000
            
            
            -
            
            
            -
            
            
            -
            
            
            20,000Compensation
                charge for stock options issued “in-the money” to employees
            
            
            -
            
            
            -
            
            
            110,100
            
            
            -
            
            
            -
            
            
            -
            
            
            110,100Foreign
                exchange translation
            
            
            -
            
            
            -
            
            
            (206
            )
            
            -
            
            
            (9,001
            )
            
            -
            
            
            (9,207
            )**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (6,093,038
            )
            
            (6,093,038
            )**Balance,
                December 31, 2004**
            
            
            86,310,975
            
            
            8,631
            
            
            5,703,372
            
            
            -
            
            
            (44,261
            )
            
            (11,568,127
            )
            
            (5,900,385
            )Issuance
                of shares for cash
            
            
            6,451,704
            
            
            645
            
            
            669,753
            
            
            -
            
            
            -
            
            
            -
            
            
            670,398Issuance
                of shares for conversion of promissory notes
            
            
            8,940,724
            
            
            894
            
            
            1,399,106
            
            
            -
            
            
            -
            
            
            -
            
            
            1,400,000Issuance
                of shares for conversion of convertible debt
            
            
            8,680,187
            
            
            868
            
            
            524,032
            
            
            -
            
            
            -
            
            
            -
            
            
            524,900Contribution
                of capital
            
            
            -
            
            
            -
            
            
            34,386
            
            
            -
            
            
            -
            
            
            -
            
            
            34,386Reclassification
                of derivative liability
            
            
            -
            
            
            -
            
            
            149,971
            
            
            -
            
            
            -
            
            
            -
            
            
            149,971Compensation
                charge for stock options issued "in the money" to employees
            
            
            -
            
            
            -
            
            
            2,500
            
            
            -
            
            
            -
            
            
            -
            
            
            2,500Foreign
                exchange translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (9,078
            )
            
            -
            
            
            (9,078
            )**Net
                loss**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (6,587,391
            )
            
            (6,587,391
            )**Balance,
                December 31, 2005**
            
            
            110,383,590
            
            
            11,038
            
            
            8,483,120
            
            
            -
            
            
            (53,339
            )
            
            (18,155,518
            )
            
            (9,714,699
            )Issuance
                of shares for conversion of convertible debt
            
            
            6,848,982
            
            
            685
            
            
            258,304
            
            
            -
            
            
            -
            
            
            -
            
            
            258,989Stock-based
                compensation
            
            
            -
            
            
            -
            
            
            926,507
            
            
            -
            
            
            -
            
            
            -
            
            
            926,507Reclassification
                of derivative liability
            
            
            -
            
            
            -
            
            
            110,016
            
            
            -
            
            
            -
            
            
            -
            
            
            110,016Compensation
                charge for warrants issued to consultants and non employees
            
            
            -
            
            
            -
            
            
            32,000
            
            
            -
            
            
            -
            
            
            -
            
            
            32,000Foreign
                exchange translation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (11,879
            )
            
            -
            
            
            (11,879
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (10,135,508
            )
            
            (10,135,508
            )**Balance,
                December 31, 2006**
            
            
            117,232,572
            
            $
            11,723
            
            $
            9,809,947
            
            $
            -
            
            $
            (65,218
            )
            $
            (28,291,026
            )
            $
            (18,534,574
            )







See
      report of independent registered public accounting firm and accompanying notes
      to these consolidated financial statements.




F-7
 Table
          of Contents


**NS8
                CORPORATION****(A
                DEVELOPMENT STAGE COMPANY)****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****For
                the Years Ended December 31, 2006 and 2005 and****for
                the Period from June 18, 1999 (Inception) to December 31, 2006****For
                the Period from June 18, 1999 (Inception) to December
                31,****For
                the Year Ended****December
                31,****2006**
            
            **2005**
            
            **2006****Cash
                flows from operating activities:**Net
                loss
            
            $
            (10,135,508
            )
            $
            (6,587,391
            )
            $
            (28,291,026
            )Adjustments
                to reconcile net loss to netcash
                used in operating activities:Depreciation
                and amortization of property and equipment
            
            
            62,376
            
            
            65,764
            
            
            223,534Depreciation
                and amortization of capitalized software development costs
            
            
            22,785
            
            
            -
            
            
            22,785Amortization
                of prepaid consulting services
            
            
            -
            
            
            3,098,622
            
            
            3,098,622Compensation
                charge forin-the-money
                stock options
            
            
            -
            
            
            2,500
            
            
            112,600Provision
                for uncollectible note receivable
            
            
            -
            
            
            25,000
            
            
            25,000Compensation
                charge forin-the-money
                warrants
            
            
            -
            
            
            -
            
            
            20,000Amortization
                of debt discount related tonotes
                payable
            
            
            -
            
            
            9,894
            
            
            127,032Amortization
                of debt discount related toconvertible
                debentures
            
            
            676,525
            
            
            254,326
            
            
            1,020,138Issuance
                of stock for services
            
            
            -
            
            
            -
            
            
            565,720Issuance
                of stock for compensation
            
            
            -
            
            
            -
            
            
            1,029,155Estimated
                fair value of warrants grantedfor
                services
            
            
            32,000
            
            
            -
            
            
            5,756,021Estimated
                fair value of options grantedto
                employees
            
            
            926,507
            
            
            -
            
            
            926,507Estimated
                fair value of options grantedfor
                services
            
            
            -
            
            
            375,000
            
            
            1,274,400Loss
                on extinguishment of debt
            
            
            -
            
            
            2,250,000
            
            
            2,250,000Change
                in fair value of derivative liability
            
            
            3,954,844
            
            
            (4,148,850
            )
            
            (3,882,888
            )(Increase)
                decrease in:Accounts
                receivable
            
            
            (21,829
            )
            
            -
            
            
            (21,829
            )Prepaid
                expenses and othercurrent
                assets
            
            
            31,492
            
            
            (13,966
            )
            
            (3,200,132
            )Deferred
                professional services costs
            
            
            (74,063
            )
            
            -
            
            
            (74,063
            )Other
                assets
            
            
            (1,441
            )
            
            (8,230
            )
            
            (9,671
            )Accounts
                payable and accrued expenses
            
            
            1,851,700
            
            
            571,198
            
            
            2,805,051Deferred
                revenue
            
            
            183,530
            
            
            -
            
            
            183,530Accrued
                payroll and related expenses
            
            
            209,737
            
            
            (69,942
            )
            
            1,868,047Net
                cash used in operating activities
            
            
            (2,281,345
            )
            
            (4,176,075
            )
            
            (14,171,467
            )




F-8
 Table
          of Contents




**Cash
                flows from investing activities:**Issuance
                of note receivable
            
            
            -
            
            
            (200,000
            )
            
            (200,000
            )Collections
                on note receivable
            
            
            25,000
            
            
            150,000
            
            
            175,000Purchase
                of property and equipment
            
            
            (26,563
            )
            
            (100,830
            )
            
            (348,161
            )Capitalized
                software development costs
            
            
            (273,423
            )
            
            -
            
            
            (273,423
            )Net
                cash used in investing activities
            
            
            (274,986
            )
            
            (150,830
            )
            
            (646,584
            )**Cash
                flows from financing activities:**Proceeds
                from line of credit, net
            
            
            8,581
            
            
            -
            
            
            8,581Proceeds
                from notes payable
            
            
            250,000
            
            
            175,000
            
            
            750,000Proceeds
                from contribution of capital
            
            
            -
            
            
            34,386
            
            
            34,386Payments
                on convertible debentures
            
            
            -
            
            
            -
            
            
            (400,000
            )Proceeds
                from convertible debentures
            
            
            300,000
            
            
            1,000,000
            
            
            3,400,000Proceeds
                from issuance of commonstock
            
            
            -
            
            
            670,398
            
            
            3,827,652Payments
                on notes payable due toshareholders
                and directors
            
            
            (8,500
            )
            
            (190,000
            )
            
            (763,861
            )Proceeds
                from notes payable due to shareholders and directors
            
            
            2,111,296
            
            
            1,100,366
            
            
            8,229,312Payments
                for redemption of shares
            
            
            -
            
            
            -
            
            
            (2,662
            )Offering
                costs
            
            
            -
            
            
            -
            
            
            (54,242
            )Payments
                on capital lease obligations
            
            
            (5,334
            )
            
            (7,371
            )
            
            (44,780
            )Net
                cash provided by financing activities
            
            
            2,656,043
            
            
            2,782,779
            
            
            14,984,386**Effect
                of exchange rate changes****on
                cash**
            
            
            (11,879
            )
            
            (9,078
            )
            
            (69,666
            )Net
                increase (decrease) in cash
            
            
            87,833
            
            
            (1,553,204
            )
            
            96,669**Cash,
                beginning of period**
            
            
            8,836
            
            
            1,562,040
            
            
            -**Cash,
                end of period**
            
            $
            96,669
            
            $
            8,836
            
            $
            96,669**Supplemental
                disclosures of cash flow information:**Interest
                paid
            
            $
            29,740
            
            $
            5,334**Supplemental
                schedule of non-cash investing****and
                financing activities:**Estimated
                fair value of discount onconvertible
                debenture
            
            $
            119,000
            
            $
            1,500,000Estimated
                fair value of debt-related derivativeliabilities
                reclassified from liabilities to additionalpaid-in
                capital
            
            $
            110,016
            
            $
            149,971Value
                of notes payable - shareholders and accrued interestconverted
                into convertible debentures
            
            $
            -
            
            $
            1,863,430Conversion
                of notes payable - shareholdersinto
                common shares
            
            $
            -
            
            $
            1,400,000Conversion
                of convertible debenturesinto
                common shares
            
            $
            258,989
            
            $
            524,900Reclassification
                of accrued interest to notespayable
            
            $
            246,027
            
            $
            -Reclassification
                of accrued management fees toother
                long term liabilities
            
            $
            1,577,161
            
            $
            -


See
      report of independent registered public accounting firm and accompanying notes
      to these consolidated financial statements.


F-9
 Table
          of Contents





NS8
      CORPORATION


(A
      DEVELOPMENT STAGE COMPANY)


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS




**December
      31, 2006 and 2005**




**NOTE
      1 - ORGANIZATION AND LINE OF BUSINESS**




CanOnline
      Global Media, Inc. ("CGMI") was formed in the state of Washington on March
      15,
      2000. On September 12, 2000, CGMI entered into a Share Consideration,
      Assignment, and Transfer Agreement, whereby it acquired all of the outstanding
      common stock of CanOnline Media Corporation ("CMC") in exchange for an aggregate
      of 38,405,517 shares of newly issued common stock. For accounting purposes,
      the
      transaction has been treated as a recapitalization of CMC, with CMC as the
      accounting acquirer (reverse acquisition). Accordingly, the financial statements
      of CGMI reflect the historical financial statements of CMC from its
      incorporation on June 18, 1999 in Vancouver, British Columbia, Canada, and
      the
      operations of CGMI subsequent to September 12, 2000. CGMI did not have any
      assets or liabilities at the date of the acquisition and did not have any
      operations prior to the acquisition. Therefore, pro forma information is not
      presented.




On
      December 18, 2003, CGMI closed a merger agreement with Delivery Now Corp.,
      a
      Delaware corporation and publicly traded company (the "Parent"), and DLVN
      Acquisition Corp., a Delaware corporation and wholly owned subsidiaries of
      the
      Parent (the "Merger Sub"). Delivery Now Corp. was incorporated in the state
      of
      Delaware on October 3, 2000. As part of the reverse merger, on December 17,
      2003, Delivery Now Corp. changed its fiscal year end from September 30 to
      December 31 and changed its name to NS8 Corporation ("NS8").




NS8,
      CGMI
      and CMC (collectively, the "Company") design and produce online business
      communications and multimedia applications in the areas of streaming software,
      digital media rights, data-content management, audio-video communications,
      and
      corporate collaboration systems.




**NOTE
      2 - GOING CONCERN**




The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. During the
      years ended December 31, 2006 and 2005, the Company incurred net losses of
      $10,135,508 and $6,587,391, respectively, and had negative cash flows from
      operations of $2,281,345 and $4,176,075, respectively. In addition, the Company
      had a deficit accumulated during the development stage of $28,291,026 at
      December 31, 2006. These factors, among others, raise substantial doubt about
      the Company's ability to continue as a going concern.




Recovery
      of the Company's assets is dependent upon future events, the outcome of which
      is
      indeterminable. Management plans to continue to provide for the Company's
      capital needs during the year ended December 31, 2007 by issuing debt and equity
      securities and by the continued development and commercialization of its
      products and services. The consolidated financial statements do not include
      any
      adjustments relating to the recoverability and classification of recorded asset
      amounts or amounts and classification of liabilities that might be necessary
      should the Company be unable to continue in existence .




The
      Company’s management is currently involved in negotiations to secure potential
      capital financing to fund the Company’s ongoing operations and commercialization
      of its products and services.




**NOTE
      3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of NS8 and its
      wholly-owned subsidiaries, CGMI and CMC. All significant inter-company accounts
      and transactions are eliminated in consolidation.





**Development
      Stage Enterprise**





The
      Company is a development stage company as defined in Statement of Financial
      Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
      Stage Enterprises." The Company is devoting substantially all of its present
      efforts to establishing a new business, and its planned principal operations
      have not yet commenced. All losses accumulated since inception have been
      considered as part of the Company's development stage activities.


F-10
 Table
          of Contents





**Comprehensive
      Loss**





The
      Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This statement
      establishes standards for reporting comprehensive loss and its components in
      a
      financial statement. Comprehensive loss ,
      as
      defined, includes all changes in equity (net assets) during a period from
      non-owner sources. The Company's comprehensive loss includes foreign currency
      translation adjustments which are excluded from net loss and are reported as
      a
      separate component of shareholders' deficit as accumulated other comprehensive
      loss.





**Property
      and Equipment**





Property
      and equipment are stated at cost. The Company provides for depreciation and
      amortization using the double-declining method over estimated useful lives
      of
      five to seven years. Expenditures for maintenance and repairs are charged to
      operations as incurred while renewals and betterments are capitalized. Gains
      or
      losses on the sale of property and equipment are reflected in the consolidated
      statements of operations.





**Long-Lived
      Assets**





The
      Company's management assesses the recoverability of its long-lived assets by
      determining whether the depreciation and amortization of long-lived assets
      over
      their remaining lives can be recovered through projected undiscounted future
      cash flows. The amount of long-lived asset impairment, if any, is measured
      based
      on fair value and is charged to operations in the period in which long-lived
      asset impairment is determined by management. At December 31, 2006, the
      Company's management believes there is no impairment of its long-lived assets.
      There can be no assurance, however, that market conditions will not change
      or
      that there will be demand for the Company's products or services, which could
      result in impairment of long-lived assets in the future.





**Fair
      Value of Financial Instruments**





The
      Company's financial instruments include cash, accounts receivable, accounts
      payable, accrued expenses, line of credit, notes payable and amounts due to
      shareholders and directors. The fair value of these financial instruments is
      representative of their carrying amounts due to their short maturities. The
      amounts owed on its line of credit also approximate fair value because current
      interest rates and terms offered to the Company are at current market rates.
      The
      Company cannot determine the estimated fair value of the convertible debentures
      as instruments similar to the convertible debentures could not be found.





**Accounting
      for Derivative Instruments**





In
      connection with the issuance of certain convertible debentures in May and June
      2004 and November 2005 (see Note 12), the debentures provided for a conversion
      of the debentures into shares of the Company's common stock at a rate which
      was
      determined to be variable. The Company determined that the variable conversion
      feature was an embedded derivative instrument pursuant to SFAS No. 133,
      "Accounting for Derivative Instruments and Hedging Activities," as amended.
      The
      accounting treatment of derivative financial instruments requires that the
      Company record the derivatives and related warrants at their fair values as
      of
      the inception date of the note agreements and at fair value as of each
      subsequent balance sheet date. In addition, under the provisions of Emerging
      Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
      as a
      result of entering into the debenture agreements, the Company was required
      to
      classify all other non-employee options and warrants as derivative liabilities
      and record them at their fair values at each balance sheet date. Any change
      in
      fair value was recorded as non-operating, non-cash income or expense at each
      balance sheet date. If the fair value of the derivatives was higher at the
      subsequent balance sheet date, the Company recorded a non-operating, non-cash
      charge. If the fair value of the derivatives was lower at the subsequent balance
      sheet date, the Company recorded non-operating, non-cash income.




In
      addition, the Company was required to file a registration statement, which
      was
      filed on December 14, 2005, and have such registration statement declared
      effective by no later than February 27, 2006 (the "Effectiveness Deadline").
      The
      registration statement was not declared effective by the Effectiveness Deadline,
      and the Company is liable for certain penalties which would require the Company
      to issue certain holders of convertible notes an amount equal to 2% of the
      outstanding borrowings, in cash or shares of the Company's common stock, at
      the
      note holder's option, for each subsequent 30-day period after the Effectiveness
      Deadline. The required registration statement was declared effective on February
      14, 2007 and the penalty ceased accruing. The Company has recorded interest
      expense related to accrued penalties of $863,967 for the period from January
      1,
      2006 through December 31, 2006, which is included in accrued expenses in the
      Company's consolidated balance sheet, and $105,125 from January 1 2007 to
      February 14, 2007.




F-11
 Table
          of Contents




During
      the years ended December 31, 2006 and 2005, the Company recognized other expense
      of $3,954,844 and other income of $4,148,850, respectively, related to recording
      the derivative liability at fair value. At December 31, 2006, the derivative
      liability balance was $7,276,574.




Warrant-related
      derivatives were valued using the Black-Scholes Option Pricing Model with the
      following assumptions during the years ended December 31, 2006 and 2005:
      dividend yield of 0%; annual volatility of 236% and 219%, respectively; and
      risk
      free interest rates ranging from 3.14% to 5% (2006) and 3.32% to 4.30% (2005).




The
      following table summarizes the activity related to the derivative liability
      during the year ended December 31, 2006:




Derivative
                liability at the beginning of the year
            
            $
            3,312,746Derivative
                liability added during the year
            
            
            119,000Reclassification
                of derivative liability
            
            
            (110,016
            )Change
                in fair value of derivative liability
            
            
            3,954,844Total
                derivative liability at the end of the year
            
            $
            7,276,574




**Advertising
      Costs**





The
      Company expenses advertising costs as incurred. For the years ended December
      31,
      2006 and 2005, advertising costs were approximately $92,000 and $94,000,
      respectively.





**Software
      Development Costs**




Pursuant
      to the provisions of SFAS No. 86, "Accounting for the Costs of Computer Software
      to Be Sold, Leased or Otherwise Marketed," the Company capitalizes the costs
      associated with internally developed software and software purchased from third
      parties if the related software product under development has reached
      technological feasibility or if there are alternative future uses for the
      purchased software. These costs are amortized on a product-by-product basis
      typically over the estimated life of the software product using the greater
      of
      the ratio that current gross revenue for a product bears to the total of current
      and anticipated future gross revenue for that product or the straight-line
      method over the remaining estimated economic life of the product. At each
      balance sheet date, the Company evaluates on a product-by-product basis the
      unamortized capitalized cost of computer software compared to the net realizable
      value of that product. The amount by which the unamortized capitalized cost
      of a
      computer software product exceeds its net realizable value is written off.




Capitalization
      of software development costs begins upon the establishment of technological
      feasibility of its products. In the past, the Company did not capitalize any
      software and development costs because they either did not meet SFAS No. 86
      capitalization criteria or were immaterial. At the end of the first quarter
      of
      2006, the Company determined that certain of its software applications reached
      technological feasibility. As a result, the Company capitalized related software
      development costs incurred since then totaling $273,423. The amortization of
      capitalized software development costs began in the fourth quarter of 2006
      using
      the straight-line method over the estimated product life of 1.5 years and
      amounted to $22,785 during 2006.





**Revenue
      Recognition**





The
      Company recognizes revenue in accordance with GAAP that has been prescribed
      for
      the software industry under Statement of Position ("SOP") 97-2, "Software
      Revenue Recognition", and with the guidelines of the SEC Staff Accounting
      Bulletin, or SAB, No. 101 as amended by SAB No. 104 "Revenue Recognition in
      Financial Statements." Revenue recognition requirements in the software industry
      are very complex and are subject to change. The Company generally recognizes
      revenue when persuasive evidence of an arrangement exists, the Company has
      delivered the product or performed the service, the fee is fixed or determinable
      and collectibility is probable. However, determining whether and when some
      of
      these criteria have been satisfied often involves assumptions and judgments
      that
      can have a significant impact on the timing and amount of revenue reported.
      When
      licenses are sold together with maintenance and implementation services, license
      fees are recognized upon delivery of the product provided that: (1) the above
      criteria have been met; (2) payment of the license fees is not dependent upon
      performance of the consulting and implementation services; and (3) the services
      are not essential to the functionality of the software. For arrangements where
      services are essential to the functionality of the software, both the license
      and services revenue are recognized in accordance with the provisions of SOP
      81-1, "Accounting for Performance of Construction-Type and Certain
      Production-Type Contracts." Arrangements that allow the Company to make
      reasonably dependable estimates relative to contract costs and the extent of
      progress toward completion are accounted for using the percentage-of-completion
      method. Arrangements that do not allow the Company to make reasonably dependable
      estimates of costs and progress are accounted for using the completed-contracts
      method. Because the completed-contracts method precludes recognition of
      performance under the contract as the work progresses, it does not reflect
      current financial performance when the contract extends beyond one accounting
      period, and it therefore may result in uneven recognition of revenue, related
      cost of revenues and gross margin.


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Maintenance
      and training services to its customers are generally recognized as the services
      are performed, except in instances where services are included in an arrangement
      accounted for under SOP 81-1.





Revenues
      from licensing the Company's software are generated from licensing agreements
      primarily with Video-On-Demand ("VOD") distributors that generally pay a
      per-unit royalty fee. Consequently, the Company recognizes revenue from these
      licensing agreements on an as-earned basis, provided amounts are fixed or
      determinable and collection is reasonably assured. The Company relies on working
      relationships with these customers to reasonably and successfully estimate
      current period volume in order to calculate the quarter end revenue
      accruals.





If
      the
      Company changes any of these assumptions or judgments, it could cause a material
      increase or decrease in the amount of revenue that the Company reports in a
      particular period. Amounts for fees collected relating to arrangements where
      revenue cannot be recognized are reflected on the Company's consolidated balance
      sheet as deferred revenue and recognized when the applicable revenue recognition
      criteria are satisfied.


**Recoverability
        of Deferred Costs** *.*
 
 We
        defer
        costs on projects for service revenue. Deferred costs consist primarily of
        direct and incremental costs to customize and install systems, as defined
        in
        individual customer contracts ,
        including costs to acquire hardware and software from third parties and payroll
        costs for our employees and other third parties.
 
 We
        recognize such costs in accordance with our revenue recognition policy by contract .
        For
        revenue recognized under the completed contract method,
        costs are deferred until the products are delivered, or upon completion of
        services or, where applicable, customer acceptance. For revenue recognized
        under
        the percentage of completion method, costs are recognized as products are
        delivered or services are provided in accordance with the percentage of
        completion calculation. For revenue recognized ratably over the term of the contract ,
        costs
        are recognized ratably over the term of the contract ,
        commencing on the date of revenue recognition. At each balance sheet date,
        we
        review deferred costs, to ensure they are ultimately recoverable. Any
        anticipated losses on uncompleted contracts are
        recognized when evidence indicates the estimated total cost of a contract exceeds
        its estimated total revenue.





**Stock-Based
      Compensation**




On
      January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
      "Share-Based Payment," ("SFAS 123(R)") which establishes standards for the
      accounting of transactions in which an entity exchanges its equity instruments
      for goods or services, primarily focuses on accounting for transactions where
      an
      entity obtains employee services in share-based payment transactions. SFAS
      123(R) requires a public entity to measure the cost of employee services
      received in exchange for an award of equity instruments, including stock
      options, based on the grant-date fair value of the award and to recognize it
      as
      compensation expense over the period the employee is required to provide service
      in exchange for the award, usually the vesting period. SFAS 123(R) supersedes
      the Company's previous accounting under Accounting Principles Board Opinion
      No. 25, "Accounting for Stock Issued to Employees," ("APB 25") for periods
      beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission
      issued Staff Accounting Bulletin ("SAB") No. 107, "Valuation of Share-Based
      Payment Arrangements for Public Companies" ("SAB No. 107") relating to SFAS
      123(R). The Company has applied the provisions of SAB No. 107 in its adoption
      of
      SFAS 123(R).




The
      Company adopted SFAS 123(R) using the modified prospective transition method,
      which requires the application of the accounting standard as of January 1,
      2006, the first day of the Company's fiscal year 2006. The Company's
      consolidated financial statements as of and for the year ended December 31,
      2006
      reflect the impact of SFAS 123(R). In accordance with the modified prospective
      transition method, the Company's consolidated financial statements for prior
      periods have not been restated to reflect, and do not include, the impact of
      SFAS 123(R).




SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in the Company's consolidated
      statement of operations. Prior to the adoption of SFAS 123(R), the Company
      accounted for stock-based awards to employees and directors using the intrinsic
      value method in accordance with APB 25 as allowed under SFAS No. 123, "
      Accounting for Stock-Based Compensation" ("SFAS 123"). Under the intrinsic
      value
      method, no stock-based compensation expense was recognized in the Company's
      consolidated statements of operations, other than for option grants to employees
      below the fair market value of the underlying stock at the date of grant. 
Option-based employee compensation cost was recognized in the consolidated
      statement of operations for the year ended December 31, 2005, for any options
      granted under these plans that had an exercise price less than the fair market
      value of the underlying common stock on the date of grant, which totaled $2,500
      for the year ended December 31, 2005.




Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period. Stock-based compensation expense recognized in the Company's
      consolidated statement of operations for the year ended December 31, 2006
      included compensation expense for share-based payment awards granted prior
      to,
      but not yet vested as of December 31, 2005 based on the grant date fair
      value estimated in accordance with the pro forma provisions of SFAS 123 and
      compensation expense for the share-based payment awards granted subsequent
      to
      December 31, 2005 based on the grant date fair value estimated in
      accordance with the provisions of SFAS 123(R). As stock-based compensation
      expense recognized in the consolidated statement of operations for the year
      ended December 31, 2006 is based on awards ultimately expected to vest, it
      has
      been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to
      be
      estimated at the time of grant and revised, if necessary, in subsequent periods
      if actual forfeitures differ from those estimates. The estimated average
      forfeiture rate for the year ended December 31, 2006, of approximately 3% was
      based on historical forfeiture experience and estimated future employee
      forfeitures. The estimated pricing term of option grants for 2006 was five
      years. In the Company's pro forma information required under SFAS 123 for the
      periods prior to fiscal 2006, the Company accounted for forfeitures as they
      occurred.





SFAS
      123(R) requires the cash flows resulting from the tax benefits resulting from
      tax deductions in excess of the compensation cost recognized for those options
      to be classified as financing cash flows. Due to the Company's loss position,
      there were no such tax benefits
      during the year ended December 31, 2006. Prior to the adoption of SFAS 123(R)
      those benefits would have been reported as operating cash flows had the Company
      received any tax benefits related to stock option
      exercises.


F-13
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          of Contents





**Issuance
      of Stock for Non-cash Consideration**





All
      issuances of the Company's common stock for non-cash consideration have been
      assigned a dollar amount equaling either the market value of the shares issued
      or the value of consideration received whichever is more readily determinable.
      The majority of the non-cash consideration received pertains to services
      rendered by consultants and others and has been valued at the market value
      of
      the shares issued. In certain issuances, the Company may discount the value
      assigned to the stock issued for illiquidity and restrictions on resale.





**Net
      Loss Per Common Share**




The
      Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per share is
      computed using the weighted average number of common shares outstanding during
      the period. Diluted loss per share is computed using the weighted average number
      of common and potentially dilutive shares outstanding during the period.
      Potentially dilutive shares consist of the incremental common shares issuable
      upon the exercise of stock options and warrants and conversion of convertible
      debentures. Potentially dilutive shares are excluded from the computation if
      their effect is antidilutive.




At
      December 31, 2006 and 2005 the outstanding potentially dilutive common shares
      totaled approximately 79,856,000 and 81,595,000, respectively.





However,
      as the Company incurred net losses for the years ended December 31, 2006 and
      2005, none of the incremental shares outstanding during each of the periods
      presented was included in the computation of diluted loss per share as they
      were
      antidilutive.





The
      following table sets forth for all periods presented the computation of basic
      and diluted net loss per share, including the reconciliation of the numerator
      and denominator used in the calculation of basic and diluted net loss per
      share:


**Year
                  Ended December 31,**
              ********
              **2006**
              
              **2005**Basic
                  loss per share:Net
                  income loss
              
              $
              (10,135,508
              )
              $
              (6,587,591
              )Weighted-average
                  common shares outstanding, basic
              
              
              112,024,697
              
              
              99,600,665Basic
                  income loss per share
              
              $
              (0.09
              )
              $
              (0.07
              )








**Patent
      Expenses**





Patent
      and patent related expenditures are expensed as general and administrative
      expenses as incurred.





**Income
      Taxes**





The
      Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
      the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each year-end based on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.





**Foreign
      Currency Translation**





Assets
      and liabilities in foreign currencies are translated at the exchange rate
      prevailing at the balance sheet date. Revenues and expenses are translated
      at
      the exchange rate prevailing at the transaction date, and the resulting gains
      and losses are reflected in the statements of operations. Gains and losses
      arising from translation of a subsidiary's foreign currency financial statements
      are shown as a component of shareholders' deficit as accumulated other
      comprehensive income (loss).


F-14
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          of Contents





**Use
      of Estimates**





The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period. Significant
      estimates made by management include, among others, the realizability of
      accounts receivable, recoverability of deferred professional services costs,
      recoverability of property and equipment, capitalized software development
      costs
      and valuation of stock-based compensation, warrants, derivative liabilities
      and
      deferred taxes. Actual results could differ from those estimates.





**Concentrations
      of Credit Risk**





Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist of cash and accounts receivable. The Company places its cash with
      high credit, quality financial institutions. At times, such cash may be in
      excess of the Federal Deposit Insurance Corporation insurance limit of $100,000.
      The Company has not experienced any losses in such accounts and believes it
      is
      not exposed to any significant credit risk on cash.


For
          the
          fiscal year ended December 31, 2006, two customers accounted for 90% and
          10% of
          net sales and one customer for 98% of accounts receivable. The Company's
          sales
          are mainly to customers in Thailand and Australia.


**Recent
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      interpretation No. 48 (“FIN 48”), “ Accounting
      for Uncertainty in Income Taxes” - an interpretation of FASB Statement No.
      109 .
      FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in a
      company’s financial statements in accordance with FASB Statement No. 109,
“ Accounting
      for Income Taxes” .
      FIN 48
      also prescribes a recognition threshold and measurement standard for the
      financial statement recognition and measurement of an income tax position taken
      or expected to be taken in a tax return. In addition, FIN 48 provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition.





The
      provisions of FIN 48 will be effective for the Company on January 1, 2007 and
      are to be applied to all tax positions upon initial application of this
      standard. Only tax positions that meet the more-likely-than-not recognition
      threshold at the effective date may be recognized or continue to be recognized
      upon adoption. The cumulative effect of applying the provisions of FIN 48 will
      be reported as an adjustment to the opening balance of retained earnings for
      the
      fiscal year of adoption. The Company is currently evaluating the impact of
      its
      adoption of FIN 48 and has not yet determined the effect on its earnings or
      financial position.





In
      September 2006, the Securities and Exchange Commission published SAB No. 108,
      “ Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements” .
      The
      interpretations in this SAB are being issued to address diversity in practice
      in
      quantifying consolidated financial statement misstatements and the potential
      under current practice to build up improper amounts on the balance sheet. This
      guidance applies to the first fiscal year ending after November 15, 2006. The
      adoption of SAB 108 did not have a material impact on our consolidated financial
      position, results of operations or cash flows.





In
      December 2006, the FASB released SFAS No. 157, “ Fair
      Value Measurements” .
      This
      statement defines fair value in GAAP, and expands disclosures about fair value
      measurements. This standard applies under other accounting pronouncements that
      require or permit fair value measurements and is intended to increase
      consistency and comparability. This statement shall be effective for financial
      statements issued for fiscal years beginning after November 15, 2007. The
      adoption of FASB No. 157 is not expected to have a material impact on our
      consolidated financial position, results of operations or cash
      flows.




**NOTE
      4 - NOTE RECEIVABLE**




On
      February 3, 2005, ezTel, LLC ("ezTel") granted the Company an option (the
      "Option") to make an equity investment in ezTel of $1,500,000 following which
      100% of all equity, membership and ownership interests in and to ezTel would
      be
      issued to and held by NS8. The foregoing was subject to confirmation of the
      Option agreement and confirmation of a revised Plan of Reorganization by the
      Bankruptcy Court in a final non-appealable order. The Option was exercisable
      only in writing and at the sole discretion of NS8. The Company did not exercise
      the Option.





As
      consideration for the Option, the Company advanced a Term Loan (the "Loan")
      in
      the amount of $200,000 to Long Distance Billing Services, Inc., a wholly-owned
      subsidiary of ezTel ("LDBS") pursuant to a Promissory Note, Security Agreement
      and Deed of Covenants all dated February 3, 2005. The Loan was in the principal
      amount of $200,000, contained customary events of default and provided for
      an
      annual rate of interest equal to 12%. The entire principal balance and accrued
      interest on the Loan was due and payable on August 1, 2005. On February 22,
      2005, LDBS filed for protection under Chapter 11 of the Bankruptcy Code. During
      2005 the Company collected $150,000 of the Loan. During the first quarter of
      2006, the Company received a final installment of $25,000 from
      a
      third-party in consideration of the assignment of its security interest in
      LDBS.
      The Company recorded a bad debt provision of $25,000 during the year ended
      December 31, 2005 for the remaining balance of the Loan that was determined
      to
      be uncollectible.


F-15
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**NOTE
      5 - PROPERTY AND EQUIPMENT**




Property
      and equipment at December 31, 2006 consisted of the following:




**December
                31, 2006**Computer
                equipment and software
            
            $
            228,301Furniture
                and equipment
            
            
            125,456Leasehold
                improvements
            
            
            13,528367,285Less
                accumulated depreciation and amortization
            
            
            (193,637
            )Total
            
            $
            173,648





Depreciation
      and amortization expense was $62,376, $65,764, and $223,534 for the
      years ended December 31, 2006 and 2005 and the period from June 18, 1999
      (inception) to December 31, 2006, respectively.




**NOTE
      6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS**





Capitalized
      software development costs at December 31, 2006 consisted of the following:





**December
                31, 2006**Capitalized
                software development costs
            
            $
            273,423Less
                accumulated amortization
            
            
            (22,785
            )Total
            
            $
            250,638





Amortization
      expense for capitalized software development costs was $22,785, $0, and $22,785
      for the years ended December 31, 2006 and 2005 and the period from June 18,
      1999
      (inception) to December 31, 2006, respectively.





**NOTE
      7 - LINE OF CREDIT**





The
      Company has a revolving unsecured line of credit of $10,000 CND. The interest
      rate is 9% per annum. As at December 31, 2006, the Company has borrowed the
      maximum amount allowed under the line of credit, which was $8,581
      USD.




**NOTE
      8 - ACCRUED EXPENSES**





The
      accrued expenses as of December 31, 2006 consisted of the following:





**December
                31, 2006**Interest
                on notes payable
            
            $
            88,148Interest
                on amounts due to shareholders and directors
            
            
            211,360Interest
                on convertible debentures
            
            
            483,215Penalties
                on convertible debentures
            
            
            863,967Accrued
                consulting fees
            
            
            137,752Other
            
            
            78,235Total
            
            $
            1,862,677





See Notes
      10,
      11 and 12 for
      details on interest expense recognized during the years ended December 31,
      2006
      and 2005.


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NOTE
      9 - ACCRUED MANAGEMENT FEES




On
      September 30, 2006, certain individuals elected to defer the payment of the
      outstanding management fees owed to them by the Company. The management fees
      will be deferred to April 1, 2008 and such deferral does not restrict or prevent
      the Company from repaying the management fees when and if sufficient funds
      become available to the Company. As a result of this deferral the Company
      reclassified $1,577,161 from accrued payroll and related expenses to accrued
      management fees on the accompanying consolidated balance sheet.  The
      Company has once outstanding agreement, whichprovides
      for a salary of $150,000 USD per year and personal expenses of $2,000 USD per
      month, annual paid vacation of four weeks per year, and relocation fees, if
      necessary, at an amount to then be determined. The agreement may be immediately
      terminated by the Company, without cause and without advance
      notice.




**NOTE
      10 - NOTES PAYABLE**





Amounts
      due under notes payable as of December 31, 2006 include the following:




·
            Unsecured
                promissory notes for principal of $275,000. The notes bear interest
                at 7%
                per annum and are payable on demand. 
 ·
            Unsecured
                promissory note for principal of $150,000. The note bears interest
                at 7%
                per annum, and the principal and any unpaid interest are payable
                on August
                16, 2007. 
 ·
            Unsecured
                promissory note for principal of $100,000. The note bears interest
                at 10%
                per annum, and the principal and any unpaid interest are payable
                on July
                1, 2007. 
 ·
            Unsecured
                short term loans for principal of $255,000. The loans bear interest
                at 8%
                per annum, and are payable on demand.


Interest
      expense was $38,244, $32,332 and $105,254 for the years ended December 31,
      2006
      and 2005 and the period from June 18, 1999 (inception) to December 31, 2006,
      respectively. Accrued interest on the notes was $88,148 at December 31, 2006
      and
      is included in accrued expenses in the accompanying consolidated balance sheet.





**NOTE
      11 - RELATED PARTY TRANSACTIONS**





**Due
      to shareholders and directors** ****





Due
      to
      shareholders and directors at December 31, 2006 consisted of loans from several
      shareholders and directors to finance the Company's operations and during 2006
      the
      Company repaid $8,500 of principal. At
      December 31, 2006, the balance due amounted to $4,029,189. Various due dates
      and
      interest rates are stated below for the amounts due at December 31,
      2006:





During
      the three months ended December 31, 2006, the Company borrowed and
      aggregate of $709,499 from various shareholders for notes with original
      principal balances ranging between $50,000 and $130,901. All of the notes bear
      interest at a rate of 6% per annum and the principal and any unpaid interest
      are
      payable on demand except for the note made out to William Kunzweiler on Oct
      31,
      2006 for $50,000 in which the principal and any unpaid interest are payable
      on
      Oct 31, 2007.





During
      the three months ended September 30, 2006, the Company borrowed an aggregate
      of
      $225,761 from various shareholders for notes with original principal balances
      ranging between $8,870 and $51,071. All of the notes bear interest at a rate
      of
      6% per annum and the principal and any unpaid interest are payable on demand.




During
      the three months ended June 30, 2006, the Company borrowed an aggregate of
      $662,500 from various shareholders for notes with original balances ranging
      between $37,500 and $367,500. The notes bear interest at 6% and are due on
      demand.




During
      the three months ended March 31, 2006, the Company borrowed an aggregate of
      $506,217 from various shareholders for notes with original principal balances
      ranging between $2,000 and $125,000. The notes bear interest at rates ranging
      between 6% and 7% and are due on demand.




Between
      May and November 2005, the Company borrowed an aggregate $598,333 from various
      shareholders for notes with original principal balances ranging between $25,000
      and $150,000. During 2005 the Company repaid $190,000 of principal. All of
      the
      notes bear interest at a rate of 7% per annum and are due on demand.




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On
      April
      1, 2006, notes owed to various shareholders in the aggregate principal amount
      of
      $1,300,000 that had originally been borrowed between March and October 2004
      with
      original principal balances ranging between $150,000 and $250,000 were
      transferred to another shareholder and replaced by new notes. All of the new
      notes bear interest at a rate of 10% per annum and are due on demand. The
      aggregate principal amount of the new notes is $1,515,884, which includes
      $215,884 of accrued interest. Provided that upon repayment of the $250,000
      loan
      owed under the original note issued on March 11, 2004, the holder of the
      promissory note would be granted warrants to purchase 100,000 shares of the
      Company's common stock for gross proceeds of $100,000. The promissory note
      bears
      interest at 10% per annum, and the principal and any unpaid interest is due
      on
      demand. Upon exercise, each warrant entitles the holder to purchase one share
      of
      the Company's common stock at $1.00 per share, and expires two years from the
      date of issuance. The fair value of the warrants of $51,587, as calculated
      using
      the Black-Scholes option pricing model, was recorded as a debt discount and
      will
      be recognized as interest expense over the period until the note matures or
      is
      converted. In addition, under the provisions of EITF Issue No. 00-19, the fair
      value of the warrants was recorded as a derivative liability and is recorded
      in
      the accompanying consolidated balance sheet (see Note 3).





During
      fiscal 2006 and 2005 the Company borrowed $7,319 and $2,033, respectively,
      from
      a director. Both amounts are unsecured, non-interest bearing, due on demand
      and
      not evidenced by promissory notes.





Interest
      expense on amounts due to shareholders was $236,938, $375,346, and $708,011
      for
      the years ended December 31, 2006 and 2005 and the period from June 18, 1999
      (inception) to December 31, 2006, respectively. Accrued interest on the notes
      was $211,360 at December 31, 2006 and is included in accrued expenses in the
      accompanying consolidated balance sheet.





**NOTE
      12 - CONVERTIBLE DEBENTURES**




**2004
      Debentures**




During
      May and June 2004, the Company issued two secured convertible debentures ("2004
      Debentures") in the amount of $750,000 each to one investment company, Cornell
      Capital Partners, LP ("Cornell Capital"), for a total of $1,500,000. The 2004
      Debentures bear interest at 5.0% per annum and mature on May 19, 2007 and June
      25, 2007, respectively. The debentures are secured by all of the assets of
      the
      Company.




The
      secured debentures are convertible into the Company's common stock at the
      holder's option any time up to maturity at a conversion price equal to the
      lower
      of:




·
              120%
                    of the closing bid price of the common stock as of the closing
                    date, or ·
              80%
                    of the lowest closing bid price of the common stock during the
                    five
                    trading days immediately preceding the conversion date.




At
      maturity, the Company has the option to either pay the holder the outstanding
      principal balance and accrued interest or to convert the debentures into shares
      of common stock at a conversion price similar to the terms described above.
      The
      Company has the right to redeem the debentures upon three business days notice
      for 120% of the amount redeemed. Upon such redemption, the holder shall receive
      warrants equal to 50,000 shares of common stock for each $100,000 redeemed
      on a
      pro rata basis.




Each
      warrant entitles the holder to purchase one share of the Company's common stock
      at an exercise price equal to 120% of the closing bid price of the common stock
      on the closing date. The warrants have "piggy-back" and demand registration
      rights and shall survive for two years from the closing date. If the Company
      elects to redeem a portion or all of the debentures prior to maturity the amount
      allocated to the warrants as a debt discount will be calculated and recognized
      as an expense at that time. In connection with the issuance of the 2004
      Debentures, the Company recorded a debt discount of $428,571, consisting of
      an
      embedded put option, which was recorded as a derivative liability upon issuance
      of convertible debenture. The Company is amortizing the discount using the
      effective interest method through June 2007. The derivative liability will
      be
      recorded as additional paid-in capital upon conversion or repayment of the
      debentures.





On
      December 22, 2006, Cornell Capital converted $75,000 of debt into 1,008,065
      shares of restricted common stock. As a result of this conversion, the Company
      reclassified $21,429 of derivative liability to additional paid-in capital.





On
      December 31, 2006, the outstanding principal balance of the 2004 Debentures
      was
      $900,100, less the remaining debt discount of $31,341. The Company recognized
      interest expense of $95,284 and $212,659 in the accompanying consolidated
      statements of operations for the years ended December 31, 2006 and 2005,
      respectively, related to the amortization of the debt discount.





The
      fair
      value of the remaining derivative liability related to the embedded put option
      is $257,171 at December 31, 2006 and is included in the accompanying
      consolidated balance sheet.




**2005
      Debentures**




On
      November 14, 2005, the Company issued two new convertible debentures to Cornell
      Capital. One debenture replaced previously issued promissory notes in the amount
      of $1,863,430, which represented unconverted principal of $1,600,000, plus
      accrued interest.




F-18
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          of Contents




The
      second debenture was for $500,000, which was new financing, less fees and
      expenses payable to Cornell Capital. On December 8, 2005, the Company issued
      a
      third debenture to Cornell Capital in the amount of $500,000 which also
      represented new financing for the Company, less fees and expenses in the amount
      of $145,000 which was included in the debt discount. The last secured
      convertible debenture in the principal amount of $300,000, less fees and
      expenses of $30,000, which was included in the debt discount, was closed on
      September 28, 2006. These debentures will collectively be referred to as the
      "2005 Debentures." The 2005 Debentures carry an interest rate of 10% per annum,
      mature on November 14, 2008,
      except
      for $300,000 which matures on September 28, 2009, and are secured by all of
      the
      assets of the company. and are secured by all of the assets of the
      company.




The
      secured debentures are convertible into Company’s common stock at the holder’s
      option any time up to maturity at a conversion price equal to the lower
      of:


·
                $0.075
                        per share, or ·
                90%
                        of the average of the three lowest volume weighted daily
                        average prices of
                        the Company's common stock for the 30 days prior to the conversion
                        date.




The
      Company has also issued warrants to Cornell Capital to purchase 5,000,000 shares
      of common stock at an exercise price of $0.075 per share, 10,000,000 shares
      of
      common stock at an exercise price of $0.06 per share and 10,000,000 shares
      of
      common stock at an exercise price of $0.05 per share. The warrants were valued
      at $2,250,000 on the date of grant using the Black-Scholes option pricing model
      and are included in derivative liability (see Note 3) at fair value in the
      accompanying consolidated balance sheet.




The
      amendment of the promissory notes into the 2005 Debentures represents a
      modification of terms of the promissory notes. Pursuant to EITF No. 96-19,
      "Debtors' Accounting for a Modification or Exchange of Debt Instruments," and
      EITF Issue No. 05-7, "Accounting for Modifications to Conversion Options
      Embedded in Debt Instruments and Related Issues," the Company accounted for
      this
      modification as an extinguishment of debt and the issuance of new debt.
      Accordingly, during the year ended December 31, 2005, the Company recorded
      a
      loss on extinguishment of debt of $2,250,000 related to the value of the
      warrants issued in connection with the 2005 Debentures.




In
      connection with the issuance of the 2005 Debentures, the Company recorded an
      aggregate debt discount of $1,619,000, consisting of an embedded put option,
      which was recorded as a derivative liability upon note issuance. $119,000 of
      the
      recorded discount relates to $300,000 borrowing received in September 2006.
      The
      Company is amortizing the discount using the effective interest method through
      November 2008. The derivative liability will be recorded as additional paid-in
      capital upon conversion or repayment of the 2005 Debentures.




On
      September 21, 2006 Cornell Capital, converted $183,989 of debt to 5,840,917
      shares of restricted common stock. As a result of this conversion, the Company
      has recorded $88,587 of derivative liability as additional paid-in
      capital.




On
      December 31, 2006, the outstanding principal balance of the 2005 Debentures
      was
      $2,979,441, less the remaining debt discount of $996,092. The Company recognized
      interest expense of $581,241 and $41,667 in the accompanying consolidated
      statements of operations for the year ended December 31, 2006 and 2005,
      respectively, related to the amortization of the debt discount.





Interest
      expense on the principal balance of 2004 and 2005 convertible debentures was
      $344,442, $393,099 and $906,722 for the years ended December 31, 2006 and 2005
      and the period from June 18, 1999 (inception) to December 31, 2006,
      respectively. Accrued interest on the convertible debentures was $483,215 at
      December 31, 2006 and is included in accrued expenses in the accompanying
      consolidated balance sheet (see Note 8).





Future
      minimum payments under these debentures at December 31, 2006 were as follows:





**Year
                Ending December 31,**2007
            
            $
            900,1002008
            
            
            2,679,4412009
            
            
            300,000Total
                principal
            
            
            3,879,541Less
                discount
            
            
            (1,027,433
            )Convertible
                debentures, net
            
            $
            2,852,108


F-19
 Table
            of Contents
  **NOTE
        13 - COMMITMENTS AND CONTINGENCIES**
 
 **Leases**


The
      Company leases its facilities under various non-cancelable operating leases,
      which require monthly payments ranging from $2,040 to $8,230 and expire through
      December 2008.





Future
      minimum lease payments under these non-cancelable operating lease obligations
      at
      December 31, 2006 were as follows:





**Year
                Ending December 31,**2007
            
            $
            258,0002008
            
            
            122,000Total
                future minimum lease payments
            
            $
            380,000





Rent
      expense was $174,709, $230,570, and $733,275 for the years ended December 31,
      2006 and 2005 and the period from June 18, 1999 (inception) to December 31,
      2006, respectively.





**Employment
      Agreements and Employee Resignations**





On
      January 10, 2005, as part of a corporate reorganization the Company terminated
      the Senior Vice President, Global Sales and Marketing of NS8 and CanOnline
      Global Media Inc. In addition, the individual was also given notice of
      termination as a Director of CanOnline Global Media Inc.; however, the
      individual will continue to act as a Director of the Company. As a consequence
      of the termination, the Company agreed to pay two and one-half months of
      severance totaling $16,250 and the cost of continuing his employee benefits
      until March 31, 2005. In addition, the individual received options to purchase
      97,500 immediately exercisable shares of the Company's common stock at an
      exercise price of $0.20 per share.




On
      January 21, 2005 the Chief Scientist of the Company resigned. As a consequence
      of the resignation, the Company agreed to pay one and one-half months of
      severance totaling $22,500, and the cost of continuing his employee benefits
      until March 31, 2005. The employee retained his 2,000,000 stock options for
      the
      full amount of the remaining term in accordance with the Stock Option Agreement.
      As a result of this modification, the options were remeasured at December 31,
      2005. The Company did not record any adjustments as a result of the
      modification.




On
      February 18, 2005 the Chief Marketing Officer of the Company resigned. As a
      consequence of the resignation, the Company agreed to pay one month of severance
      totaling $10,417, and continuation of employee benefits until March 31, 2005.
      The stock option agreement received by the employee on February 20, 2004 for
      1,500,000 stock options was rescinded and replaced with a new stock option
      agreement for 525,000 immediately exercisable options at an exercise price
      of
      $0.22 per share. As a result of this modification, the options were remeasured
      at December 31, 2005. The Company did not record any adjustments as a result
      of
      the modification.





**Litigation** ****




A
        lawsuit
        was commenced by Maximum Ventures, Inc. (“MVI”) against the Company in March
        2007 in connection with a certain settlement agreement made between MVI and
        the
        Company on August
        14, 2006. Under
        t he settlement agreement , the C ompany and
        MVI
        agreed that the Company would issue 1,721,902
        common shares to MVI  in stead
        of
        paying  MVI $137,752
        in consulting advisory fees pursuant
        to the parties advisory agreement, reported on our consolidated balance sheet
        (see Note 8) . The
        exchange was based on the market value of the common shares as of the date
        of
        the settlement agreement.
 
 Management
        is taking action to resolve this claim before the litigation proceeds past
        the
        stage of the initial pleadings.





The
      Company may become involved in certain legal proceedings and claims which arise
      in the normal course of business. Management does not believe that the outcome
      of any such matter will have a material effect on the Company's consolidated
      financial position or results of operations.





**Indemnities
      and Guarantees**





During
      the normal course of business, the Company has made certain indemnities and
      guarantees under which it may be required to make payments in relation to
      certain transactions. The Company indemnifies its directors, officers, employees
      and agents to the maximum extent permitted under the laws of the State of
      Delaware. These indemnities include certain agreements with the Company's
      officers under which the Company may be required to indemnify such person for
      liabilities arising out of their employment relationship. In connection with
      its
      facility leases, the Company has indemnified its lessors for certain claims
      arising from the use of the facilities. The duration of these indemnities and
      guarantees varies and, in certain cases, is indefinite. The majority of these
      indemnities and guarantees do not provide for any limitation of the maximum
      potential future payments the Company could be obligated to make. Historically,
      the Company has not been obligated to make significant payments for these
      obligations and no liabilities have been recorded for these indemnities and
      guarantees in the accompanying consolidated balance sheet.


F-20
 Table
          of Contents


**NOTE
      14 - SHAREHOLDERS' DEFICIT**




**Preferred
      Stock**





The
      Company has 5,000,000 authorized shares of non-voting preferred stock with
      a
      $0.0001 par value. The preferred stock may be issued in series, from time to
      time, with such designations, rights, preferences, and limitations as the Board
      of Directors may determine by resolution. The Company did not have any preferred
      stock issued and outstanding at December 31, 2006.





**Common
      Stock**





Included
      in the Company's issued and outstanding shares of common stock are 7,100,722
      shares issued in connection with the reverse acquisition (see Note 1) that
      have
      not been exchanged for shares of the Company.




During
      the year ended December 31, 2006, the Company completed the following
      transactions:




·
            During
                September 2006 through December 2006, the Company issued 6,848,982
                shares
                of common stock to Cornell Capital for the conversion of convertible
                debentures in the amount of $258,989 at per share prices ranging
                from
                $0.03 to $0.07. In connection with the conversion of convertible
                debentures, $110,016 of the derivative liability related to the conversion
                feature was recorded as additional paid-in capital (see Note 12).  ·
            On
                August 14, 2006, the Company entered into an agreement with MVI to
                issue
                1,721,902 shares, valued at $137,752, based on the closing market
                price on
                the measurement date, to settle all liabilities in consideration
                of the
                terms and conditions contained in original consulting agreement dated
                as
                of May 18, 2004 whereby MVI was to provide advisory services in connection
                with potential financing by or of the Company. The advisory fees
                to be
                settled with stock relate to new convertible debentures issued to
                Cornell
                Capital in November 2005 (see Note 12). Due to delays in the Company’s
                registration statement the shares have not been issued and the Company
                accrued $137,752 of consulting expenses in the accompanying consolidated
                balance sheet (see Note 8).  ·
            On
                March 7, 2006, the Company issued warrants, which vested upon grant,
                to
                purchase 200,000 shares of common stock in connection with a public
                relations agreement entered during the year. The warrants are exercisable
                over a five year period at a price of $0.16 per share. The Company
                recorded a consulting expense of $32,000 for the estimated fair value
                of
                the warrants based on the Black-Scholes option pricing model.  ·
            On
                January 11, 2006, the Company issued 25,000 options to purchase common
                shares to an employee. The options had an exercise price of $0.09
                and were
                cancelled unvested upon employee
                termination.





During
      the year ended December 31, 2005, the Company completed the following
      transactions:




·
            On
                December 9, 2005, the Company filed a Certificate of Amendment with
                the
                Secretary of State for the State of Delaware amending its Certificate
                of
                Incorporation to increase its authorized share capital from 500,000,000
                common shares with a par value of $0.0001 per share and 5,000,000
                preferred shares with a par value of $0.0001 per share to 750,000,000
                common shares with a par value of $0.0001 per share and 5,000,000
                preferred shares with a par value of $0.0001 per share.  ·
            During
                March 2005 and September 2005, the Company issued 6,451,704 shares
                of
                common stock for cash totaling $670,398 at per share prices ranging
                from
                $0.07 to $0.28. Offering costs were not incurred with these transactions.  ·
            During
                January 2005 and July 2005, the Company issued 8,940,724 shares of
                common
                stock to Cornell Capital for the conversion of promissory notes payable
                in
                the amount of $1,400,000 at per share prices ranging from $0.07 to
                $0.31.  ·
            During
                February 2005 through October 2005, the Company issued 8,680,187
                shares of
                common stock to Cornell Capital for the conversion of convertible
                debentures in the amount of $524,900 at per share prices ranging
                from
                $0.04 to $0.14. In connection with the conversion of convertible
                debentures, $149,971 of the derivative liability related to the conversion
                feature was recorded as additional paid-in capital.  ·
            During
                the year one of the Company's officers contributed capital of $34,386.  ·
            The
                Company recorded expense and additional paid-in capital of $2,500
                related
                to stock options granted at an exercise price less than the fair
                market
                price on that date to employees. F-21
 Table
                of Contents





During
      the year ended
      December 31, 2004, the Company completed the following transactions:


·
            On
                May 19, 2004, the Company entered into a Standby Equity Distribution
                Agreement ("SEDA") with Cornell Capital. Under the SEDA agreement
                the
                Company may issue and sell to Cornell Capital common stock for a
                total
                purchase price of up to $20,000,000. Cornell Capital received a one-time
                commitment fee of 925,234 registered shares of the Company's common
                stock
                valued at $990,000 which has been recorded as an offering cost in
                the
                accompanying financial statements. Cornell Capital was paid a fee
                equal to
                5% of each advance, which was retained by them from each advance.
                At the
                same time, the Company entered into a Placement Agent Agreement with
                a
                registered broker-dealer in connection with the SEDA. Pursuant to
                the
                Placement Agent Agreement, the Company paid a one-time placement
                agent fee
                of 9,346 restricted shares of the Company's common stock valued at
                $10,000. The Company terminated the SEDA agreement and the Placement
                Agent
                Agreement as part of its November 14, 2005 refinancing with Cornell
                Capital Partners.  ·
            In
                November 2004, the Company issued 5,597,544 common shares to Cornell
                Capital through the SEDA Agreement valued at $400,000.  ·
            In
                October 2004, the Company issued 500,000 common shares to MVI in
                connection with financial advisory services rendered valued at $510,000.  ·
            In
                January and February 2004, the Company entered into employment agreements
                with its President and its Chief Marketing Officer at annual salaries
                of
                $180,000 and $125,000, respectively. In addition, each officer was
                granted
                2,000,000 restricted, unregistered shares of common stock and options
                to
                purchase 2,000,000 and 1,500,000 shares of common stock, respectively,
                at
                exercise prices equal to the Company's stock price on the date of
                the
                employment agreement. Also, the stock vests over one year from the
                date of
                employment agreements. The Company recorded deferred compensation
                of
                $5,460,000 for the value of the shares. In November 2004, the employees
                voluntarily forfeited their stock grants, 4,000,000 shares were returned
                to the Company.  ·
            Issued
                25,170 shares of common stock to a third party for services rendered
                valued at $37,000.  ·
            Recorded
                compensation cost of $110,100 for the value of stock options granted
                to
                employees at exercise prices less than the Company's stock price
                on the
                date of grant.


During
      the year ended December 31, 2003, the Company completed the following
      transactions:


·
            Issued
                2,100,000 shares of common stock for cash totaling $495,000. Offering
                costs were not incurred in connection with this transaction.  ·
            Issued
                1,166,667 units for an aggregate of cash proceeds of $1,750,000.
                This
                offering is being conducted pursuant to Regulation D and Regulation
                S as
                adopted by the Securities and Exchange Commission pursuant to the
                Securities Act of 1933. Each unit consists of two shares of the Company's
                common stock and one warrant to purchase one share of the Company's
                common
                stock at a purchase price of $1.50 per unit. The warrants vest immediately
                and expire two years from the date of grant. As offering costs, the
                Company issued warrants exercisable into 233,333 shares of the Company's
                common stock at an exercise price of $1 per share. The warrants vest
                immediately and expire two years from the date of grant. The value
                of the
                warrants was determined to be immaterial.  ·
            Issued
                400,000 shares of common stock for cash proceeds of $200,000. This
                offering was conducted pursuant to Regulation D as adopted by the
                Securities and Exchange Commission pursuant to the Securities Act
                of 1933.  ·
            Issued
                3,720,000 shares of common stock valued at $1,004,305 to employees
                of the
                Company as compensation. Between October 2002 and October 2003, certain
                employees of CGMI were granted shares by CGMI's Board in recognition
                of
                exemplary service. The Company did not have a stock ownership plan
                at the
                time of any of the stock grants. The shares vested over 18 months
                from the
                grant date. One of the terms of the vesting of the shares was that
                all
                shares would immediately become vested if more than 50% of the voting
                shares of CGMI were sold or transferred or otherwise disposed of
                to an
                individual or entity. This transfer of voting control was deemed
                to have
                occurred when Delivery Now Corp. acquired 100% of the outstanding
                shares
                of CGMI on December 18, 2003 and the vesting of the shares was accelerated
                so that the shares were fully vested on that date.  ·
            Issued
                500,000 shares of common stock to a third party for services rendered
                valued at $17,500.  ·
            Issued
                12,385,714 shares of common stock for the conversion of loans from
                officers/shareholders and accrued interest payable totaling $686,021. F-22
 Table
              of Contents


During
        the year ended December 31, 2002, the Company completed the following
        transactions:


·
            Issued
                7,923,448 shares of common stock for the conversion of a note payable
                of
                $152,300.  ·
            Between
                October and December 2002, the Company issued 2,310,000 shares of
                common
                stock valued at $80,850 to employees of the Company in recognition
                of
                exemplary service. The shares vest over 18 months from the grant
                date. The
                Company recognized $24,850 in compensation expense during the year
                ended
                December 31, 2002 for the vested portion of the shares issued and
                recorded
                deferred compensation of $56,000 for the value of the unvested portion
                of
                the shares issued.  ·
            Canceled
                1,000,000 shares of common stock that were transferred to a Board
                advisor
                as a result of terminating this individual's position on the Board.


During
      the year ended December 31, 2001, the Company completed the following
      transactions:


·
            Issued
                50,000 shares of common stock to a third party for services rendered
                valued at $200.  ·
            Issued
                35,667 shares of common stock for the conversion of a note payable
                of
                $5,350.  ·
            Redeemed
                1,025,000 shares of common stock in exchange for $2,662.  ·
            Issued
                450,000 shares of common stock upon the exercise of stock options
                on a
                cashless basis.


During
      the year ended
      December 31, 2000, the Company completed the following transactions:


·
            Issued
                20,000 shares of common stock to a third party for services rendered
                valued at $1,020.  ·
            Issued
                2,000,000 shares of common stock upon the exercise of stock options
                on a
                cashless basis.  ·
            Granted
                500,000 stock options as payment for services rendered by third parties
                valued at $3,400.  ·
            Issued
                3,239,112 shares of common stock for cash totaling $284,139. Offering
                costs consisting of cash of $10,742 and 150,000 shares of common
                stock
                valued at $22,500 were incurred in connection with these transactions.


During
      the period from June 18, 1999 (inception) to December 31, 1999, the Company
      completed the following transactions:


·
              Issued
                  29,281,406 shares of common stock for the conversion of notes payable
                  to
                  officers of $39,813.
 ·
                Issued
                    4,130,000 shares of common stock for cash totaling $5,616. Offering
                    costs
                    were not incurred in connection with this transaction.


F-23
 Table
          of Contents




**Stock-Based
      Compensation**





**2001
      Stock Option Plan**




The
      Company adopted its 2001 stock option plan (the "2001 Plan") on June 29, 2001.
      The 2001 Plan provides for the grant of options intended to qualify as
      "incentive stock options," options that are not intended to so qualify or
      "non-statutory stock options" and stock appreciation rights. The total number
      of
      shares of common stock reserved for issuance under the 2001 Plan is 5,000,000,
      subject to adjustment in the event of a stock split, stock dividend,
      recapitalization or similar capital change, plus an indeterminate number of
      shares of common stock issuable upon the exercise of "reload options" described
      below. The Company has not yet granted any options or stock appreciation rights
      under the 2001 Plan.




**2004
      Stock Option Plan**




The
      Company adopted its 2004 stock option plan (the "2004 Plan") on February 4,
      2004. The 2004 Plan provides for the grant of "non-statutory stock options."
      The
      total number of shares of common stock reserved for issuance under the 2004
      Plan
      is 30,000,000, subject to adjustment in the event of a stock split, stock
      dividend, recapitalization or similar capital change.


In
        March
        2005, the 2004 Plan was amended to clarify the continuous employment
        requirements of the vesting schedule of the Company's stock options and to
        provide for a standardized stock option exercise form to be used by optionees
        wishing to exercise vested
        stock options. If no vesting schedule is specified at the time of the grant,
        the
        options vest in full over the course of two years from the date of grant
        as
        follows: 25% vest six months from the date of grant and 75% vest pro rata
        monthly over eighteen months.




A
        summary
        of option activity as of December 31, 2006, and changes during the years
        ended
        December 31, 2006 and 2005 is presented below:




**Weighted****Weighted**
              
              **Average****Average**
              
              **Remaining**
              
              
              **Aggregate****Exercise**
              
              **Contractual**
              
              
              **Intrinsic****Options**
              
              **Price**
              
              **Life**
              
              
              **Value**Outstanding
                  at January 1, 2005
              
              
              23,176,114
              
              $
              0.38Granted
              
              
              11,317,875
              
              
              0.09Exercised
              
              
              -
              
              
              -Forfeited
                  or expired
              
              
              (3,055,662)
              
              
              1.19Outstanding
                  at December 31, 2005
              
              
              31,438,327
              
              $
              0.22Granted
              
              
              25,000
              (1)
              
              0.09Exercised
              
              
              -
              
              
              -Forfeited
                  or expired
              
              
              (964,975)
              
              
              0.15Outstanding
                  at December 31, 2006
              
              
              30,498,352
              
              $
              0.21
              
              2.8
              
              $
              2,145,721Exercisable
              
              
              29,724,042
              
              $
              0.21
              
              2.8
              
              $
              2,140,682Options
                  vested or expected to vest
              
              
              30,475,123
              
              $
              0.21
              
              2.8
              
              $
              2,145,721








Notes:





(1)  On
      January 11, 2006, the Company issued 25,000 options to purchase common shares
      to
      an employee. The options had an exercise price of $0.09 and were cancelled
      unvested upon employee termination. There were no other option grants during
      the
      year.




F-24
 Table
          of Contents




The
      estimated fair value of stock options granted in 2006 and 2005 was derived
      using
      the Black-Scholes stock option pricing model. Expected volatility is based
      on
      historical volatility of the Company’s stock over a period equal to the expected
      term. The Company uses historical exercise data to estimate the expected term
      that represents the period of time that options granted to employees are
      expected to be outstanding. The risk-free rate is based on the U.S. Treasury
      yield curve in effect at the time of grant that covers the expected term of
      the
      stock options. The following table shows the average assumptions used in the
      pricing model during the following years:




**Year
                Ended December 31,****2006**
            
            
            **2005**Expected
                lives in years
            
            
            5
            
            
            5Risk
                free interest rates
            
            
            4.8
            %
            4.3
            %Volatility
            
            
            236
            %
            219
            %Dividend
                yield
            
            
            0
            %
            0
            %




For
      the
      year ended December 31, 2006, the Company recognized compensation expense of
      $926,507, comprised of compensation expense related to employees of $730,503
      and
      non-employees of $196,004, which is included in general and administrative
      expenses in the accompanying consolidated statement of operations, as a result
      of the adoption of SFAS 123(R). As of December 31, 2006, the total compensation
      expense related to non-vested awards not yet recognized is insignificant.




The
      effect of the change in applying the provisions of SFAS 123(R) resulted in
      increasing net loss and basic and diluted loss per share as follows:




**SFAS
                123(R)**
            
            
            **APB
                25**Loss
                before income taxes
            
            
            $
            (10,135,508)
            
            $
            (9,405,005)Net
                loss
            
            
            $
            (10,135,508)
            
            $
            (9,405,005)Basic
                and diluted net loss per share
            $
            (0.09)
            
            $
            (0.08)





**Pro
      Forma Information for Periods Prior to 2006**




In
      periods prior to the year ended December 31, 2006, the Company followed the
      disclosure-only provisions of SFAS 123 (see Note 3). The following table
      illustrates the effect on net loss and loss per share for the year ended
      December 31, 2005 as if the fair value recognition provisions of SFAS 123 had
      been applied to options granted during the period:




**2005**Net
                loss, as reported
            
            $
            (6,587,391)Add
                stock based compensation expense included in net loss
            
            
            2,500Deduct:
                Pro forma stock option compensation expense for stockoptions
                granted using a fair value method
            (1,055,291)Pro
                forma net loss
            
            $
            (7,640,182)Basic
                net loss per common share:Basic
                and diluted - as reported
            
            $
            (0.07)Basic
                and diluted - pro forma
            
            $
            (0.08)




F-25
 Table
          of Contents




**Accuracy
      of Fair Value Estimates**




The
      Company develops its assumptions based on the Black-Scholes model. The Company
      is responsible for determining the assumptions used in estimating the fair
      value
      of share-based payment awards. Its determination of fair value of share-based
      payment awards on the date of grant using an option-pricing model is affected
      by
      the Company's stock price as well as assumptions regarding a number of highly
      complex and subjective variables. These variables include, but are not limited
      to the Company's expected stock price volatility over the term of the awards,
      and actual and projected employee stock option exercise behaviors.






Because
      the Company's employee stock options have certain characteristics that are
      significantly different from traded options, and because changes in the
      subjective assumptions can materially affect the estimated value, in
      management's opinion, the existing valuation models may not provide an accurate
      measure of the fair value of the Company's employee stock options. Although
      the
      fair value of employee stock options and restricted stock awards is determined
      in accordance with SFAS 123(R) and SAB No. 107 using an option-pricing model,
      that value may not be indicative of the fair value observed in a willing
      buyer/willing seller market transaction.




**Warrants**




On
      April
      25, 2006 and June 1, 2006, the Company's board of directors modified certain
      warrants to extend the expiration dates from April 25, 2006 to April 25, 2008
      and from June 1, 2006 to June 1, 2008, respectively,. The value of these warrant
      modifications, as determined using the Black-Scholes valuation model, was
      $17,150 (which is the difference between the value of the original warrants
      immediately prior to the modification and the value of the extended warrants).
      In connection with this modification, the warrant holders did not provide any
      additional stated or unstated rights, privileges, or agreements to the Company.
      Accordingly, this transaction has been reflected in change in fair value of
      derivative liability in the accompanying consolidated statement of operations.




On
      March
      7, 2006, the Company entered into a public relations agreement with Rubenstein
      Investor Relations Inc. ("RIR") based in New York. RIR specializes in
      introducing and positioning small-and mid cap companies to appropriate
      communities of investors and will provide shareholders and the investment
      community with a communications link to NS8's ongoing corporate activities
      as
      the Company executes its business plan. Upon the execution of the agreement,
      NS8
      issued to RIR and certain of its associates warrants, which vested upon grant,
      to purchase 200,000 shares of common stock. The warrants are exercisable over
      a
      five year period at a price of $0.16 per share. The Company recorded consulting
      expense of $32,000 for the year ended December 31, 2006.




The
      following summarizes the warrant transactions. See additional discussion of
      warrants throughout the notes to the consolidated financial statements:


**2006**
              
              **2005****Weighted**
              
              
              
              **Weighted****Average**
              
              
              
              **Average****Exercise**
              
              
              
              **Exercise****Warrants**
              
              **Price**
              
              **Warrants**
              
              **Price**Outstanding
                  at January 1, 2006
              
              
              32,712,001
              
              $
              0.19
              
              
              9,112,001
              
              $
              0.61Granted
              
              
              200,000
              
              
              0.16
              
              
              25,000,000
              
              
              0.06Expired
              
              
              (100,000
              )
              
              0.61
              
              
              (1,400,000
              )
              
              0.61Exercised
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding
                  and exercisable at December 31, 2006
              
              
              32,812,001
              
              $
              0.19
              
              
              32,712,001
              
              $
              0.19Weighted
                  average fair value of warrants issued
              
              
              
              
              $
              0.16
              
              
              
              
              $
              0.09









**Warrants
                Outstanding and exercisable**
            ********
            ****
            ****
            ****
            **Weighted**
            ****
            ****
            ********
            ****
            ****
            ****
            **Average**
            ****
            **Weighted**
            ********
            ****
            ****
            ****
            **Remaining**
            ****
            **Average**Range
                of
            
            
            
            **Contractual**
            ****
            **Exercise**Exercise
                Prices
            
            **Warrants**
            ****
            **Life
                (Years)**
            ****
            **Price**$.05
                to $.16
            
            
            25,200,000
            
            
            4.1
            
            $
            0.06$0.61
            
            
            7,612,001
            
            
            1.8
            
            
            0.6132,812,001
            
            
            2.8
            
            $
            0.19




F-26
 Table
          of Contents




**NOTE
        15 - INCOME TAXES**
 
 The
        provision for income taxes differs from the amount that would result from
        applying the federal statutory rate for the years ended December 31, 2006
        and
        2005 as follows




**2006**
              
              **2005**Statutory
                  federal income benefit rate
              
              
              (34.0
              )%
              
              (34.0
              )%State
                  income taxes, net of federal benefit
              
              
              (6.0
              )
              
              (6.0
              )Change
                  in valuation allowance
              
              
              43.0
              
              
              42.0Other
              
              
              (3.0
              )
              
              (2.0
              )Total
              
              
              -
              %
              
              -
              %




The
        components of the deferred income tax assets (liabilities) at December 31,
        2006
        were as follows:


**2006**Net
                  operating loss carry-forwards
              
              $
              11,330,000Derivative
                  liabilities
              
              
              1,345,000Accrued
                  payroll
              
              
              661,00013,336,000Valuation
                  allowance
              
              
              (13,336,000
              )Total
              
              $
              -
  The
          valuation allowance increased by approximately $4,326,000 during the year
          ended
          December 31, 2006. As of December 31, 2006, the Company had net operating
          loss
          carryforwards of approximately $29,056,000. The net operating loss carryforwards
          begin expiring in 2021 and 2011, respectively. The utilization of net operating
          loss carryforwards may be limited due to the ownership change under the
          provisions of Internal Revenue Code Section 382 and similar state provisions.




**NOTE
      16 - CONTRACTS**




On
      June
      13, 2005, the Company entered into a consulting services agreement with Paradigm
      Technology Partners, LLC ("Paradigm"). The services to be performed by Paradigm
      relate to sales and marketing initiatives, and any other duties as assigned
      by
      Company management. The term of the consulting services agreement was six months
      ending December 31, 2005, unless terminated by Paradigm or the Company on 30
      days prior notice. Paradigm was paid a consulting fee of $13,200 per month.
      Paradigm was also to receive non-qualified stock options to purchase 450,000
      shares of the Company's common stock at an exercise price of $0.16 per share.
      The Company terminated the consulting services agreement and rescinded the
      450,000 stock options previously granted as the services to be provided to
      earn
      the options were not performed.




On
      April
      14, 2005, the Company entered into an advisory services agreement with Mr.
      William Kunzweiler. Mr. Kunzweiler provides advisory services to the Board
      of
      Directors and its Executives with respect to sales, management strategies,
      strategic acquisitions, financing and capital acquisition policies, executive
      compensation and recruitment. The term of the advisory services agreement is
      two
      years ending April 14, 2007. Mr. Kunzweiler has been compensated for his
      advisory services in the form of 4,500,000 fully vested stock options to
      purchase the Company's common stock at an exercise price of $0.09 per share,
      exercisable for a period of five years from April 14, 2005. The options were
      determined to have a value of $315,000 based on the Black-Scholes option pricing
      model and is recorded as a derivative liability at fair value (see Note 3)
      in
      the accompanying consolidated balance sheet.




During
      the year ended December 31, 2005, the company granted options to purchase an
      aggregate of 1,500,000 shares of the Company's common stock to various
      consultants for services rendered. The options vested upon grant, had exercise
      prices of $0.04 and were valued at $60,000 based on the Black-Scholes option
      pricing model.




During
      September 2004, the Company entered into a Letter of Understanding with Lifelong
      Educational Properties Inc. ("LEAP"). LEAP agreed to assist the Company with
      the
      marketing and sales of the Company's products in certain countries in Europe,
      Asia and Latin America. The term of the agreement was two years, and was to
      continue thereafter until terminated by either party on 90 days notice. In
      consideration for LEAP's services, the Company was to pay LEAP $20,000 per
      month, $10,000 in cash and $10,000 as an accrual of debt. The debt accrual
      was
      to be paid when the Company has adequate capital from revenues or financing
      transactions. At the election of LEAP, the debt accrual may be paid with Company
      common stock. LEAP was to earn commissions of 7% of sales it completes and
      5% of
      compensation realized from strategic partnerships it arranges. The Company
      also
      issued to LEAP warrants to purchase 2,000,000 shares of the Company's common
      stock. The exercise price is $1.03 per share for 1,000,000 of the warrants
      and $1.13 per share for the other 1,000,000 warrants. The warrants were issued
      on October 7, 2004, and have a term of five years. The warrants were determined
      to have a value of $1,590,000 using the Black-Scholes option pricing model
      and
      are included in derivative liability at the fair value (see Note 3) in the
      accompanying balance sheet. During December 2004, due to fluctuations in the
      price of the Company's common stock all warrants outstanding were re-priced
      to
      an exercise price of $0.61 per share. The Company did not record any adjustments
      to consulting expense as a result of the warrant re-pricing. The Company
      recorded expense of approximately $1,390,000 and $200,000 in the years ended
      December 31, 2005 and 2004, respectively. The LEAP agreement was terminated
      by
      the Company in 2005.




F-27
 Table
          of Contents




**NOTE
      17 - SUBSEQUENT EVENTS**





**Notes
      Payable**




Between
      January and April 16, 2007, the Company borrowed $276,200 from various
      shareholders for notes with original principal balances ranging between $127,800
      and $148,400. All of the notes bear interest at a rate of 6% per annum and
      are
      due on demand.




On
      January 31, 2007, the Company transferred a promissory note from Ming Capital
      Enterprises Ltd. to Epsilon Partners Ltd. in the amount of $107,000, which
      includes principal and accrued interest at an interest rate of 7% per
      annum.




**Note
      and Warrant to Shareholder**




The
          Company’s management is currently finalizing capital financing with Cornell
          Capital Partners, L. P. to fund the Company’s ongoing operations and
          commercialization of its products and services. The Company plans to sell
          up to
          $3.3 million of secured convertible debentures, which will be funded on
          multiple
          closings dates. The obligation to purchase convertible debentures in connection
          with each closing will be subject to the satisfaction of certain conditions
          and
          the achievement of specific milestones, which are currently being finalized.
          On
          March 30, 2007, in consideration of the Company’s execution and delivery of this
          agreement, the Company received an advance of $550,000 and issued a promissory
          note to Cornell Capital Partners, L.P. in respect thereof. In addition,
          the
          Company agreed to issue 250,000,000 warrants in connection with the $3.3
          million
          convertible debenture financing. It is anticipated that $1,100,000 of the
          funding will occur on or about April 16, 2007. The terms of the promissory
          note
          and warrants agreement are as follows:
  The
          promissory note was issued for the principal sum of $550,000, net of $50,000
          financing fees. The note is unsecured and has a maturity date of July 1,
          2007
          and bears interest at 14% per annum. In the event of default, the entire
          principal balance and accrued interest outstanding under this note will
          be
          immediately due and payable with interest to accrue on the unpaid balance
          at the
          rate of 24% per annum or the highest rate permitted by applicable law,
          if lower.
          The $550,000 promissory note will be converted to form part of the secured
          convertible debenture as part of the overall financing.


The
      warrant entitles the holder to purchase up to 250,000,000 shares of the
      Company’s common stock. The warrants are exercisable over a five year period at
      a price of $0.02 per share .





**Conversion
      of Debt and Issue of New Common Stock**





On
      March
      28, 2007, the Company converted $50,000 of principal amount of the 2004
      debenture into 2,016,129 registered common shares at a price of $0.0248 per
      share.





**Contracts**





On
      April
      11, 2007, the Company entered into a one year consulting agreement with Mr.
      George O’Leary, the President of SKS Consulting of South Florida Corp.
      ( *“SKS”* ).
      Pursuant to the terms of the
      Company ’s
      consulting agreement with SKS, SKS will earn $1,500 per day for services
      actually performed, with up to two weeks committed to the
      Company per
      month. The
      Company will
      also issue to SKS on a monthly basis 100,000 restricted shares of Company common
      stock, and a warrant to purchase an additional 100,000 shares of Company common
      stock at an exercise price of $0.02 per share with a contractual life of five
      years. SKS can earn up to an additional 500,000 warrants with an exercise price
      of $0.04 per share and a contractual life of five years, upon achievement of
      the
      following milestones: (i) warrant to purchase 125,000 shares after successful
      organizational restructuring by April 30, 2007, (ii) warrant to purchase 125,000
      shares for completing a short term financing by April
      30,
      2007 ,
      (iii)
      warrant to purchase 125,000 shares after the
      Company operates
      at monthly breakeven by January
      1, 2008 ,
      and
      (iv) warrant to purchase 125,000 shares after the
      Company ’s
      stock
      price reaches $0.06 per share for a consecutive 30-day period. There is no
      family relationship between Mr. O’Leary and any other director or executive
      officer of the Company.







F-28