**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**






**______________**




**FORM
      10-QSB**


**______________**





(MARK
                ONE)**x**
            **QUARTERLY REPORT UNDER
                SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the quarterly period ended September 30,
                2007****OR****o**
            **TRANSITION
                REPORT UNDER 13 OR 15(d) OF THE EXCHANGE ACT****For
                the transition period from  ______________ to
                ______________**







Commission
      File Number 000-51995




**TELANETIX,
                INC.**(Exact
                name of small business issuer as specified in its
                charter)**Delaware**
            
            **77-0622733**(State
                or other jurisdiction of incorporation or organization)
            
            (IRS
                Employer Identification No.)**6197
                Cornerstone Court E, Suite 108, San Diego, California
                92121**(Address
                of principal executive offices)**(858) 362-2250**
              (Issuer's
                telephone number)**____________________________________________________________________________**(Former
                name, former address and former fiscal year, if changed since last
                report)


****


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
þNO o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.): YES o  NO þ




As
      of
      November 9, 2007, there were 23,066,915 shares of the issuer's common stock
      outstanding. The common stock is the issuer's only class of common equity
      currently outstanding.





Transitional
      Small Business Disclosure Format (Check one): YES o    NO
þ






Table
          of Contents






**TABLE
      OF CONTENTS**




**Page**FORWARD
                LOOKING STATEMENTS
            3Part
                I   FINANCIAL INFORMATIONItem
                1.
            Financial
                Statements
            4Item
                2.
            Managements
                Discussion and Analysis of Financial Condition and Results of
                Operations
            21Item
                3.
            Controls
                and Procedures
            47Part
                II   OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            48Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            48Item
                3.
            Defaults
                Upon Senior Securities
            49Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            49Item
                5.
            Other
                Information
            49Item
                6.
            Exhibits
            49Signatures
            50











2
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          of Contents







**FORWARD
      LOOKING STATEMENTS**




This
      quarterly report on Form 10-QSB includes forward-looking
      statements.   Forward-looking statements are those that predict
      or describe future events or trends and that do not relate solely to historical
      matters. You can generally identify forward-looking statements as statements
      containing the words
      "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "plan," "assume"
      or other similar expressions, or negatives of those expressions, although not
      all forward-looking statements contain these identifying words.  Such
      statements are based on management's current expectations and are subject to
      a
      number of factors and uncertainties that could cause actual results to differ
      materially from those described in the forward-looking statements. All
      statements other than historical facts contained or incorporated by reference
      in
      this report, including without limitation, statements under the heading "ITEM
      2—MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," below, regarding
      our future strategy, future operations, projected financial position, estimated
      future revenues, projected costs, future prospects, the future of our industries
      and results that might be obtained by pursuing management's current plans and
      objectives are forward-looking statements.




Although
      we believe that the expectations reflected in such forward-looking statements
      are reasonable, we can give no assurance that such expectations will prove
      to
      have been correct. You should not place undue reliance on our forward-looking
      statements because the matters they describe are subject to known and unknown
      risks, uncertainties and other unpredictable factors, many of which are beyond
      our control. Our forward-looking statements are based on the information
      currently available to us and speak only as of the date of the filing of this
      report, or, in the case of forward-looking statements in documents incorporated
      by reference, as of the date of the date of the filing of the document that
      includes the statement. New risks and uncertainties arise from time to time,
      and
      it is impossible for us to predict these matters or how they may affect us.
      Over
      time, our actual results, performance or achievements will likely differ from
      the anticipated results, performance or achievements that are expressed or
      implied by our forward-looking statements, and such difference might be
      significant and materially adverse to our security holders. We do not undertake
      and specifically decline any obligation to update any forward-looking statements
      or to publicly announce the results of any revisions to any statements to
      reflect new information or future events or developments.




We
      have
      identified some of the important factors that could cause future events to
      differ from our current expectations and they include, but are not limited
      to,
      those items discussed under the heading "ITEM 2—MANAGEMENT'S DISCUSSION AND
      ANALYSIS OR PLAN OF OPERATION—Risk Factors," below.  Please consider
      our forward-looking statements in light of those risks as you read this
      report.










3
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          of Contents




**PART
      I--FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL
      STATEMENTS**





**TELANETIX,
                INC.****Condensed
                Consolidated Balance Sheets****(Unaudited)****September
                30, 2007**
            
            
            **December
                31, 2006****ASSETS**Current
                assetsCash
            
            $
            5,628,791
            
            
            $
            3,198,200Accounts
                receivable, net of allowance for doubtful accounts of$179,889
                and $-0- at September 30, 2007 and December 31, 2006,
                respectively
            
            
            2,851,264
            
            
            
            699,985Inventory
            
            
            418,468
            
            
            
            -Prepaid
                expenses and other current assets
            
            
            330,003
            
            
            
            42,976Total
                current assets
            
            
            9,228,526
            
            
            
            3,941,161Property
                and equipment, net
            
            
            5,117,096
            
            
            
            116,919Restricted
                cash
            
            
            292,573
            
            
            
            -Deposits
                and other assets
            
            
            159,974
            
            
            
            15,632Deferred
                financing costs, net
            
            
            516,595
            
            
            
            206,658Goodwill
            
            
            9,862,453
            
            
            
            -Purchased
                intangibles, net
            
            
            17,541,667
            
            
            
            -Total
                assets
            
            $
            42,718,884
            
            
            $
            4,280,370**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                liabilitiesAccounts
                payable
            
            $
            2,334,532
            
            
            $
            361,512Accrued
                liabilities
            
            
            2,077,104
            
            
            
            404,007Deferred
                revenue
            
            
            148,625
            
            
            
            -Deferred
                compensation, current portion
            
            
            54,105
            
            
            
            481,692Current
                portion of capital lease obligations
            
            
            1,048,018
            
            
            
            -Notes
                payable, stockholder
            
            
            -
            
            
            
            1,300,000Convertible
                debentures, current portion
            
            
            3,880,550
            
            
            
            731,905Warrant
                liabilities
            
            
            6,374,681
            
            
            
            542,397Total
                current liabilities
            
            
            15,917,615
            
            
            
            3,821,513Non-current
                liabilitiesCapital
                lease obligations, net of current portion
            
            
            1,467,488
            
            
            
            -Convertible
                debentures, less current portion
            
            
            2,757,306
            
            
            
            1,463,810Deferred
                compensation
            
            
            512,739
            
            
            
            481,692Total
                non-current liabilities
            
            
            4,737,533
            
            
            
            1,945,502Total
                liabilities
            
            
            20,655,148
            
            
            
            5,767,015Stockholders'
                equity (deficit)Preferred
                stock, $.0001; Authorized:10,000,000;Issued
                and outstanding: 13,000 at September 30, 2007 and none at December
                31,
                2006
            
            
            1
            
            
            
            -Common
                stock, $.0001 par value; Authorized: 200,000,000 shares;Issued
                and outstanding: 23,066,915 at September 30, 2007 and 15,557,166
                at
                December 31, 2006
            
            
            2,306
            
            
            
            1,556Additional
                paid in capital
            
            
            41,886,567
            
            
            
            8,515,232Warrants
            
            
            10,000
            
            
            
            10,000Accumulated
                deficit
            
            
            (19,835,138
            )
            
            
            (10,013,433
            )Total
                stockholders' equity (deficit)
            
            
            22,063,736
            
            
            
            (1,486,645
            )Total
                liabilities and stockholders' equity
            
            $
            42,718,884
            
            
            $
            4,280,370The
                accompanying notes are in integral part of these condensed consolidated
                financial statements.




4
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          of Contents




**TELANETIX,
                INC.****Condensed
                Consolidated Statements of Operations****(Unaudited)****Three
                months ended September 30,**
            
            
            **Nine
                months ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                revenues
            
            $
            2,261,715
            
            
            $
            571,125
            
            
            $
            4,769,295
            
            
            $
            647,063Cost
                of revenues
            
            
            1,734,024
            
            
            
            176,726
            
            
            
            3,348,590
            
            
            
            232,649Gross
                profit
            
            
            527,691
            
            
            
            394,399
            
            
            
            1,420,705
            
            
            
            414,414Operating
                expenses:Selling,
                general and administrative
            
            
            1,927,957
            
            
            
            1,613,081
            
            
            
            4,651,221
            
            
            
            2,821,317Research,
                development and engineering
            
            
            473,444
            
            
            
            105,111
            
            
            
            832,551
            
            
            
            304,501Depreciation
            
            
            134,966
            
            
            
            12,854
            
            
            
            171,710
            
            
            
            70,389Amortization
                of purchased intangibles
            
            
            108,333
            
            
            
            -
            
            
            
            108,333
            
            
            
            -Total
                operating expenses
            
            
            2,644,700
            
            
            
            1,731,046
            
            
            
            5,763,815
            
            
            
            3,196,207Operating
                loss
            
            
            (2,117,009
            )
            
            
            (1,336,647
            )
            
            
            (4,343,110
            )
            
            
            (2,781,793
            )Other
                income (expense)Interest
                income
            
            
            47,500
            
            
            
            453
            
            
            
            70,144
            
            
            
            3,003Interest
                expense
            
            
            (2,492,681
            )
            
            
            (19,660
            )
            
            
            (3,581,949
            )
            
            
            (59,201
            )Change
                in fair market value of warrants
            
            
            1,397,000
            
            
            
            -
            
            
            
            (1,971,129
            )
            
            
            -Gain
                (loss) on disposal of fixed assets
            
            
            -
            
            
            
            -
            
            
            
            4,339
            
            
            
            (1,960
            )Total
                other income (expense)
            
            
            (1,048,181
            )
            
            
            (19,207
            )
            
            
            (5,478,595
            )
            
            
            (58,158
            )Loss
                before income taxes
            
            
            (3,165,190
            )
            
            
            (1,355,854
            )
            
            
            (9,821,705
            )
            
            
            (2,839,951
            )Provision
                for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
                loss
            
            
            (3,165,190
            )
            
            
            (1,355,854
            )
            
            
            (9,821,705
            )
            
            
            (2,839,951
            )Series
                A preferred stock dividends and accretion
            
            
            (126,670
            )
            
            
            -
            
            
            
            (126,670
            )
            
            
            -Net
                loss applicable to common stockholders
            
            $
            (3,291,860
            )
            
            $
            (1,355,854
            )
            
            $
            (9,948,375
            )
            
            $
            (2,839,951
            )Net
                loss per share - basic and diluted
            
            $
            (0.17
            )
            
            $
            (0.09
            )
            
            $
            (0.59
            )
            
            $
            (0.20
            )Weighted
                average shares outstanding -basic
                and diluted
            
            
            18,970,142
            
            
            
            14,730,537
            
            
            
            16,926,615
            
            
            
            14,322,439The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.




5
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          of Contents




**TELANETIX,
                INC.****Condensed
                Consolidated Statements of Cash Flows****(Unaudited)****Nine
                months ended September 30,****2007**
            
            
            **2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (9,821,705
            )
            
            $
            (2,839,951
            )Adjustments
                to net loss to cashprovided
                by operating activities:Excess
                and obsolete inventory reserve
            
            
            97,725
            
            
            
            -Depreciation
            
            
            171,710
            
            
            
            70,389(Gain)
                Loss on disposal of fixed assets
            
            
            (4,339
            )
            
            
            1,960Amortization
                of deferred financing costs
            
            
            244,508
            
            
            
            -Amortization
                of intangible assets
            
            
            108,333
            
            
            
            -Amortization
                of fair value of stock options
            
            
            499,059
            
            
            
            460,833Amortization
                of note discounts
            
            
            2,262,364
            
            
            
            -Common
                stock issued for services
            
            
            -
            
            
            
            1,107,000Common
                stock issued for accrued interest
            
            
            61,405
            
            
            
            -Common
                stock issued  for non-registration penalty
            
            
            5,043
            
            
            
            -Common
                stock issued to induce early conversion of debentures
            
            
            804,587
            
            
            
            -Value
                of warrant issued for finance program agreement
            
            
            596,275
            
            
            
            -Change
                in fair value of warrant liabilities
            
            
            1,971,129
            
            
            
            -Changes
                in assets and liabilitiesAccounts
                receivable
            
            
            318,053
            
            
            
            (37,250
            )Inventory
            
            
            (5,545
            )
            
            
            -Prepaid
                expenses and deposits
            
            
            44,916
            
            
            
            (47,591
            )Accounts
                payable and accrued expenses
            
            
            (636,507
            )
            
            
            86,410Deferred
                revenue
            
            
            12,099
            
            
            
            -Deferred
                compensation
            
            
            (396,540
            )
            
            
            -Net
                cash used by operating activities
            
            
            (3,667,430
            )
            
            
            (1,198,200
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (64,615
            )
            
            
            (54,199
            )Proceeds
                from disposal of fixed assets
            
            
            4,900
            
            
            
            13,267Cash
                acquired in purchase of AVS
            
            
            64,253
            
            
            
            -Acquisition
                of AccessLine, including acquisition costs of $1,990,516
            
            
            (13,726,464
            )
            
            
            -Net
                cash used by investing activities
            
            
            (13,721,926
            )
            
            
            (40,932
            )Cash
                flows from financing activities:Proceeds
                from sale of preferred stock
            
            
            12,122,500
            
            
            
            -Proceeds
                from notes payable issued to shareholders
            
            
            -
            
            
            
            1,459,000Proceeds
                from sale of convertible debentures
            
            
            8,351,875
            
            
            
            -Deferred
                financing costs
            
            
            (554,445
            )
            
            
            -Proceeds
                from exercise of warrants
            
            
            1,614,775
            
            
            
            -Proceeds
                from exercise of stock options
            
            
            5,000
            
            
            
            -Payment
                of notes payable issued to a shareholder
            
            
            (1,300,000
            )
            
            
            (31,700
            )Payments
                on lines of credit
            
            
            (419,758
            )
            
            
            -Net
                cash provided by financing activities
            
            
            19,819,947
            
            
            
            1,427,300Net
                increase (decrease) in cash
            
            
            2,430,591
            
            
            
            188,168Cash
                at beginning of the period
            
            
            3,198,200
            
            
            
            47,906Cash
                at end of the period
            
            $
            5,628,791
            
            
            $
            236,074Interest
                paid
            
            $
            265,785
            
            
            $
            -Income
                taxes paid
            
            $
            -
            
            
            $
            -Common
                stock issued in connection with the acquisition of
                subsidiaries
            
            $
            15,435,434
            
            
            $
            -Liabilities
                assumed in acquisition of subsidiaries
            
            $
            7,299,361
            
            
            $
            -Convertible
                debentures converted into common stock
            
            $
            3,251,334
            
            
            $
            -The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.




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          of Contents




**TELANETIX,
      INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**1.**
            **Basis
                of Presentation**




The
      accompanying unaudited financial statements, consisting of the condensed
      consolidated balance sheet as of September 30, 2007, the condensed consolidated
      statements of operations for the three months ended September 30, 2007 and
      2006,
      the condensed consolidated statements of operations for the nine months ended
      September 30, 2007 and 2006, and the condensed consolidated statements of cash
      flows for the nine months ended September 30, 2007 and 2006, have been prepared
      in accordance with accounting principles generally accepted in the United States
      of America for interim financial information and in accordance with the
      instructions to Form 10-QSB. Accordingly, these condensed consolidated financial
      statements do not include all of the information and footnotes typically found
      in the audited consolidated financial statements and footnotes thereto included
      in the Annual Report on Form 10-KSB of Telanetix, Inc. and its subsidiaries
      (the
      "Company"). In the opinion of management, all adjustments (primarily consisting
      of normal recurring adjustments) considered necessary for a fair statement
      have
      been included.




The
      condensed consolidated balance sheet at December 31, 2006 has been derived
      from the audited consolidated financial statements as of that date but does
      not
      include all of the information and footnotes included in the Company's Annual
      Report on Form 10-KSB for the year ended December 31, 2006. For further
      information, refer to the consolidated financial statements and footnotes
      thereto included in the Company's Annual Report on Form 10-KSB for the year
      ended December 31, 2006.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America 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 revenues and expenses
      during the reported period. Actual results could differ from those estimates
      and
      operating results for the three months and for the nine months ended September
      30, 2007 and are not necessarily indicative of the results that may be expected
      for the year ending December 31, 2007.




**2.**
            **Significant
                Accounting Policy Update**




**Revenue
      recognition**





The
      Company recognizes revenue when sufficient evidence of an arrangement exists,
      title has transferred, payment is not contingent upon performance of
      installation or service obligations, the price is fixed or determinable, and
      collectibility is reasonably assured. In instances where final acceptance of
      the
      product is specified by the customer, revenue is deferred until all acceptance
      criteria have been met. VoIP revenues principally consist of: (1) monthly fees
      from communication solutions, which include mobility solutions, PBX
      enhancements, single number solutions and unified messaging, voice messaging,
      and paging; (2) activation fees for new customers; and (3) fees from usage
      including conference calling and long distance.





The
      Company accrues for sales returns and other allowances as a reduction to
      revenues upon shipment based upon its contractual obligations and historical
      experience.





**Internally
      Developed Software**





The
      Company capitalizes payroll and related costs that are directly attributable
      to
      the design, coding, and testing of the Company's software developed for internal
      use. The Company capitalized less than $0.1 million related to the development
      of internal use software during the nine months ended September 30, 2007.
      Internally developed software costs, which are included in property and
      equipment, are amortized on a straight-line basis over a useful life of two
      years. Amortization of these costs was less than $0.1 million for the three
      and
      nine months ended September 30, 2007.




**3.**
            **Acquisitions,
                Goodwill and Intangible
                Assets**




Effective
      September 14, 2007, the Company acquired AccessLine Holdings Inc.
      ("AccessLine"), a Delaware corporation.  AccessLine is a Bellevue,
      Washington-based provider of hosted VoIP solutions to the small-and-medium
      business marketplace. The consideration paid by the Company for AccessLine
      consisted of 3,939,565 shares of the Company's common stock valued at $14.2
      million, $11.7 million in cash, and $2.0 million in acquisition costs for a
      total of $27.9 million. The Company may be required to pay up to an additional
      $9.0 million in the form of 2,500,000 shares of our restricted common stock
      upon
      the achievement of certain future financial objectives.




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Management
      allocated the purchase price to the assets acquired and liabilities assumed
      based on their estimated fair values on the acquisition date. The Company may
      adjust the preliminary purchase price allocation after giving consideration
      to
      final valuation reports from independent appraisers and obtaining more
      information regarding, among other things, asset valuations, liabilities
      assumed, and revisions of preliminary estimates.





The
      preliminary purchase price allocation as of September 15, 2007, subject to
      change pending completion of the final valuation and analysis, is as
      follows:




Tangible
                assets
            
            $
            7,760,991Goodwill
            
            
            8,874,595Developed
                technology
            
            
            13,000,000Trade
                name
            
            
            2,000,000Customer
                relationships
            
            
            2,000,000Total
                assets acquired
            
            
            33,635,586Liabilities
                assumed
            
            
            (5,746,688
            )Net
                assets acquired
            
            $
            27,888,898





The
      primary reason for the acquisition and the factors that contributed to the
      recognition of goodwill of $8.9 million relate to AccessLine's developed
      technology and market presence which provide market access for the Company's
      products. See "Note 5-Goodwill and Purchased Intangibles," below, for additional
      information.





AccessLine's
      results are included in the Company's results of operations from the acquisition
      date. The unaudited financial information table below summarizes the combined
      results of operations of the Company and AVS, on a pro forma basis, as if the
      acquisition had occurred at January 1, 2007 and 2006.  The
      unaudited pro forma financial information combines the historical results of
      operations of the Company and AccessLine for the three and nine months ended
      September 30, 2007 and 2006, and has been prepared for comparative purposes
      only
      and does not purport to be indicative of the actual operating results that
      would
      have been recorded had the acquisition actually taken place on January 1,
      2007 or 2006, and should not be taken as indicative of future consolidated
      operating results.




**Three
                months ended September 30,**
            
            
            **Nine
                months ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                revenue
            
            $
            6,463,315
            
            
            $
            6,638,271
            
            
            $
            19,771,210
            
            
            $
            18,788,483Gross
                profit
            
            
            3,964,165
            
            
            
            3,956,535
            
            
            
            11,423,642
            
            
            
            11,234,698Net
                loss applicable to common stockholders
            
            
            (3,706,886
            )
            
            
            (3,291,663
            )
            
            
            (14,619,502
            )
            
            
            (7,820,038
            )Net
                loss per share - basic and diluted
            
            
            (0.17
            )
            
            
            (0.15
            )
            
            
            (0.71
            )
            
            
            (0.38
            )




Effective
      April 1, 2007, the Company acquired all of the membership interests in AVS
      Installation Limited Liability Company and Union Labor Force One Limited
      Liability Company (together, "AVS"). AVS provides a full range of audio visual
      solutions to clients and end-users as the single point of contact during design
      and project implementation. The consideration paid by the Company for the
      membership interests of AVS consisted of 248,119 shares of the Company's common
      stock valued at $1.3 million and acquisition costs of less than $0.1 million
      for
      a total of $1.3 million. Management allocated the purchase price to the assets
      acquired and liabilities assumed based on their estimated fair values on the
      acquisition date. The Company may adjust the preliminary purchase price
      allocation after giving consideration to final valuation reports from
      independent appraisers and obtaining more information regarding, among other
      things, asset valuations, liabilities assumed, and revisions of preliminary
      estimates.




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The
      preliminary purchase price allocation as of April 1, 2007, subject to change
      pending completion of the final valuation and analysis, is as
      follows:





Tangible
                assets
            
            $
            1,185,815Goodwill
            
            
            987,858Customer
                relationships
            
            
            500,000Trade
                name
            
            
            150,000Total
                assets acquired
            
            
            2,823,673Liabilities
                assumed
            
            
            (1,552,673
            )Net
                assets acquired
            
            $
            1,271,000





The
      primary reason for the acquisition and the factors that contributed to the
      recognition of goodwill of $1.0 million relate to AVS's expertise in the audio
      visual field and their client base, that when combined with the Company's
      existing product offerings, will provide the Company with the ability to provide
      solutions required for videoconferencing and audio visual needs. See "Note
      5-Goodwill and Purchased Intangibles," below, for additional
      information.





AVS's
      results are included in the Company's results of operations from the acquisition
      date. The unaudited financial information table below summarizes the combined
      results of operations of the Company and AVS, on a pro forma basis, as if the
      acquisition had occurred at January 1, 2007 and 2006.  The
      unaudited pro forma financial information combines the historical results of
      operations of the Company and AVS for the three and nine months ended September
      30, 2007 and 2006, and has been prepared for comparative purposes only and
      does
      not purport to be indicative of the actual operating results that would have
      been recorded had the acquisition actually taken place on January 1, 2007
      or 2006, and should not be taken as indicative of future consolidated operating
      results.




**Three
                months ended September 30,**
            
            
            **Nine
                months ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                revenue
            
            $
            1,226,691
            
            
            $
            1,841,214
            
            
            $
            4,920,872
            
            
            $
            3,479,866Gross
                profit
            
            
            (1,220
            )
            
            
            676,087
            
            
            
            1,018,339
            
            
            
            1,097,877Net
                loss applicable to common stockholders
            
            
            (2,952,621
            )
            
            
            (1,428,910
            )
            
            
            (9,800,587
            )
            
            
            (2,864,788
            )Net
                loss per share - basic and diluted
            
            
            (0.16
            )
            
            
            (0.10
            )
            
            
            (0.58
            )
            
            
            (0.20
            )




**4.**
              **Property
                  and Equipment**


Property
      and equipment consists of the following at September 30, 2007:





**Amount**
            ****
            **Estimated
                Useful Life**Communications
                equipment
            
            $
            4,148,029
            
            2-5
                yearsCapitalized
                software development costs
            
            
            815,691
            
            2
                yearsSoftware
                and computer equipment
            
            
            458,835
            
            3-5
                yearsFurniture
                and fixtures
            
            
            87,937
            
            5-7
                yearsVehicles
            
            
            23,572
            
            5
                yearsLeasehold
                improvements
            
            
            13,607
            
            Life
                of lease5,547,671Accumulated
                depreciation and amortization
            
            
            (430,575
            )$
            5,117,096





As
      of
      September 30, 2007, property and equipment with a cost of $3.4 million was
      financed through capital lease obligations. As of September 30, 2007,
      accumulated amortization for these assets was $0.1 million.




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**5.**
            **Goodwill
                and Purchased Intangibles**




As
      required under Statement of Financial Accounting Standards No. 142 (FAS 142),
      *Goodwill and Other Intangible Assets,* goodwill is separately disclosed
      from other intangible assets on the consolidated balance sheet and not
      amortized, but is tested for impairment on at least an annual
      basis.




At
      September 30, 2007, purchased intangible assets consist of the
      following:







Developed
                technology
            
            $
            13,000,000Customer
                relationships
            
            
            2,500,000Trade
                name
            
            
            2,150,000Total
            
            
            17,650,000Less
                accumulated amortization
            
            
            (108,333
            )Purchased
                intangible assets, net
            
            $
            17,541,667





The
      Company determined that the customer relationships and trade name have
      indefinite lives as the Company expects to generate cash flows related to these
      assets indefinitely. Consequently, customer relationships and trade name are
      not
      amortized, but will be reviewed for impairment at least annually. The value
      attributable to developed technology will be amortized over five
      years.





The
      Company will complete impairment tests on its goodwill and purchased intangible
      assets at December 31, 2007. The Company will continue to perform future
      impairment tests as required by FAS 142 as of December 31 in future years or
      when indicators of impairment are noted.





**6.**
            **Accrued
                Liabilities**




Accrued
      liabilities consist of the following:





**September
                30, 2007**
            
            
            **December
                31, 2006**Accrued
                payroll, benefits and taxes
            
            $
            976,929
            
            
            $
            262,168Accrued
                interest, stockholder
            
            
            -
            
            
            
            137,593Accrued
                interest
            
            
            60,837
            
            
            
            1,829Sales
                tax payable
            
            
            655,165
            
            
            
            2,417Other
            
            
            384,173
            
            
            
            -$
            2,077,104
            
            
            $
            404,007





**7.**
            **Lines
                of Credit**




The
      Company, through AVS, had two revolving credit agreements with Interstate Net
      Bank.  In July 2007, borrowings under those credit agreements were
      paid off, and the credit agreements were cancelled.




On
      August
      8, 2007, the Company entered into a Loan and Security Agreement with Bridge
      Bank, National Association ("Bridge") that provides the Company with up to
      a
      $1.5 million revolving line of credit (the "Line of Credit") based on its
      accounts receivable balance.  Borrowings under the Line of Credit are
      secured by the Company's intellectual and personal property, bear interest
      at
      the prime rate plus 1% and mature August 8, 2009.  Borrowings under
      the Line of Credit are subject to certain financial covenants and restrictions
      on liquidity, indebtedness, financial guarantees, business combinations, revenue
      levels and other related items.  Generally, upon an event of default,
      Bridge may stop making any future advances under the Line of Credit and all
      or a
      portion of the Company's outstanding obligations thereunder may, at Bridge's
      option, become due and payable in full.  The Company paid a facility
      fee of $7,500 upon execution of Loan and Security Agreement for the Line of
      Credit, and a similar fee is due on each anniversary of that date.  In
      connection with the establishment of the Line of Credit, the Company granted
      Bridge a warrant to purchase 12,784 shares of the Company's common stock at
      an
      exercise price of $3.52 per share, which equals 90% of the five day volume
      weighted average price of the Company's common stock immediately before
      issuance.  The warrant is exercisable immediately, expires in three
      years, and contains piggyback registration rights.  At September 30, 2007,
      there were no borrowings outstanding under the Line of Credit.




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**8.**
            **Convertible
                Debentures**




December
      2006 and February
      2007





On
      December 28, 2006, the Company issued original issue discount 6% unsecured
      convertible debentures and common stock purchase warrants to four unaffiliated
      institutional investors. The Company issued an aggregate of $3.7 million
      principal amount of debentures at an original issue discount of 12.5% and
      warrants to purchase an aggregate of 949,907 shares of common
      stock.  Net proceeds to the Company were $3.1 million after deducting
      fees of $0.1 million. The Company incurred legal and other expenses of $0.1
      million, and capitalized $0.2 million of deferred financing costs.




On
      February 12, 2007, the Company issued original issue discount 6% unsecured
      convertible debentures and common stock purchase warrants to the same four
      unaffiliated institutional investors in the December private placement. The
      Company issued an aggregate of $1.5 million principal amount of debentures
      at an
      original issue discount of 12.5% and warrants to purchase an aggregate of
      401,040 shares of common stock.  Net proceeds to the Company were $1.3
      million after deducting fees of less than $0.1 million. The Company incurred
      legal and other expenses of less than $0.1 million, and capitalized $0.1 million
      of deferred financing costs.




The
      debentures issued in both private placements are due December 31, 2008. Interest
      on the debentures accrues at the rate of 6% per annum and is payable quarterly
      on April 1, July 1, October 1, and December 1, commencing on April 1, 2007.
      Monthly redemption payments equal to 1/18th of the principal amount due under
      each debenture begin July 1, 2007 and continue through December 31, 2008.
      Monthly redemption payments must also include any accrued interest on the
      portion of the debentures being redeemed. The Company has the right to pay
      interest and monthly redemption payments in cash, or upon notice to the holders
      and compliance with certain equity conditions (as defined in the debenture),
      the
      Company can pay all or a portion of any such payment in common stock valued
      at
      the price equal to the lesser of the then effective conversion price (initially
      $1.54) or 85% of the average of the volume weighted average price ("VWAP")
      per
      share as reported on Bloomberg for the Company's common stock for the ten
      trading days prior to the payment date or the date that the shares are
      delivered. The Company has the option, subject to compliance with certain equity
      conditions, to redeem the debentures before their maturity by payment in cash
      of
      120% of the then outstanding principal amount of the debenture plus accrued
      interest and other charges.




The
      debentures are convertible at any time at the discretion of the holder at a
      conversion price per share of $1.54, subject to adjustment including
      full-ratchet, anti-dilution protection. The Company also has the right, subject
      to compliance with certain equity conditions and certain limitations on the
      holders beneficial ownership of common stock, to force conversion if the average
      of the VWAP for the Company's common stock exceeds 200% of the effective
      conversion price (initially $3.08) for 20 trading days out of a consecutive
      30
      day trading period.





The
      debentures impose certain covenants on the Company, including restrictions
      against incurring additional indebtedness (other than permitted indebtedness
      as
      defined in the debenture), creating any liens on its property (other than
      permitted liens as defined in the debenture), amending its certificate of
      incorporation or bylaws, redeeming or paying dividends on shares of its
      outstanding common stock, and entering into certain related party transactions.
      The debenture defines certain events of default, including without limitation
      failure to make a payment obligation, failure to observe other covenants of
      the
      debenture or related agreements (subject to applicable cure periods), breach
      of
      representation or warranty, bankruptcy, default under another significant
      contract or credit obligation, delisting of the Company's common stock, a change
      in control, failure to secure and maintain an effective registration statement
      covering the resale of the common stock underlying the debentures and the
      warrants, or failure to deliver share certificates in a timely manner. On the
      occurrence of an event of default, the holders of the debentures have the right
      to accelerate all amounts outstanding under the debentures and demand payment
      of
      a mandatory default amount equal to 130% of the amount outstanding under the
      debenture, plus accrued interest and expenses.




The
      Company also entered into registration rights agreements with the institutional
      investors in both the December and February private placements, pursuant to
      which the Company agreed to file a registration statement covering the resale
      of
      the shares of common stock that may be issued to investors upon the conversion
      of the debentures, payment in kind, and the exercise of the warrants, and to
      maintain the effectiveness of that registration statement (subject to certain
      limitations) for a period of time until the holders can sell the underlying
      common stock without volume restrictions under Rule 144(k).  The
      Company filed a registration statement, which currently remains effective,
      covering the resale of the shares of common stock issued and issuable upon
      conversion of the debentures and exercise of the warrants issued in the December
      2006 private placement.  The Company filed a separate registration
      statement, which currently remains effective, covering the resale of the shares
      of common stock issued and issuable upon conversion of the debentures and
      exercise of the warrants issued in the February 2007 private placement, and
      the
      shares of common stock issued or issuable for interest payments on the December
      2006 debentures.




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The
      debentures and warrants were issued to the institutional investors in private
      placement transactions in accordance with Rule 506 under Regulation D of the
      Securities Act of 1933 (the "Securities Act").  Kaufman Bros., L.P.
      acted as an advisor to the Company in connection with both transactions and
      received fees of $113,775 in connection with its services.




Through
      September 30, 2007, the holders of the debentures issued in December 2006
      converted $1.7 million of principal value into 1,108,658 shares of common stock,
      reflecting a conversion price of $1.54 per share.  Through September
      30, 2007, the holders of the debentures issued in February 2007 converted the
      entire principal balance of $1.5 million into 1,002,598 shares of common stock,
      reflecting a conversion price of $1.54 per share.  To induce the
      holders of the February debentures to convert the debentures early and to accept
      shares of restricted common stock, the Company issued an aggregate of 200,520
      additional shares of restricted common stock.  The Company recorded
      interest expense of $0.8 million related to the issuance of the inducement
      shares.





August
      2007





On
      August
      30, 2007, the Company issued original issue discount 6% unsecured convertible
      debentures and common stock purchase warrants to the five unaffiliated
      institutional investors. The Company issued an aggregate of $8.0 million
      principal amount of debentures at an original issue discount of 12.5%, and
      warrants to purchase an aggregate of 826,190 shares of common
      stock.  Net proceeds to the Company were $6.6 million after
      deducting fees of $0.4 million. The Company incurred legal and other expenses
      of
      $0.1 million, and capitalized $0.5 million of deferred financing
      costs.





The
      debentures issued in August 2007 are due May 1, 2009. Interest on the debentures
      accrues at the rate of 6% per annum and is payable quarterly on April 1, July
      1,
      October 1, and December 1, commencing on October 1, 2007. Monthly redemption
      payments equal to 1/18th of the principal amount due under each debenture begin
      December 1, 2007 and continue through May 1, 2009. Monthly redemption payments
      must also include any accrued interest on the portion of the debentures being
      redeemed. The Company has the right to pay interest and monthly redemption
      payments in cash, or upon notice to the holders and compliance with certain
      equity conditions (as defined in the debenture), the Company can pay all or
      a
      portion of any such payment in common stock valued at the price equal to the
      lesser of the then effective conversion price (initially $3.68) or 85% of the
      average of the volume weighted average price ("VWAP") per share as reported
      on
      Bloomberg for the Company's common stock for the ten trading days prior to
      the
      payment date or the date that the shares are delivered. The Company has the
      option, subject to compliance with certain equity conditions, to redeem the
      debentures before their maturity by payment in cash of 120% of the then
      outstanding principal amount of the debenture plus accrued interest and other
      charges.




The
      debentures are convertible at any time at the discretion of the holder at a
      conversion price per share of $3.68, subject to adjustment including
      full-ratchet, anti-dilution protection. The Company also has the right, subject
      to compliance with certain equity conditions and certain limitations on the
      holders beneficial ownership of common stock, to force conversion if the average
      of the VWAP for the Company's common stock exceeds 200% of the effective
      conversion price (initially $7.36) for 20 trading days out of a consecutive
      30
      day trading period.





The
      debentures impose certain covenants on the Company, including restrictions
      against incurring additional indebtedness (other than permitted indebtedness
      as
      defined in the debenture), creating any liens on its property (other than
      permitted liens as defined in the debenture), amending its certificate of
      incorporation or bylaws, redeeming or paying dividends on shares of its
      outstanding common stock, and entering into certain related party transactions.
      The debenture defines certain events of default, including without limitation
      failure to make a payment obligation, failure to observe other covenants of
      the
      debenture or related agreements (subject to applicable cure periods), breach
      of
      representation or warranty, bankruptcy, default under another significant
      contract or credit obligation, delisting of the Company's common stock, a change
      in control, failure to secure and maintain an effective registration statement
      covering the resale of the common stock underlying the debentures and the
      warrants, or failure to deliver share certificates in a timely manner. On the
      occurrence of an event of default, the holders of the debentures have the right
      to accelerate all amounts outstanding under the debentures and demand payment
      of
      a mandatory default amount equal to 130% of the amount outstanding under the
      debenture, plus accrued interest and expenses.




The
      Company also entered into registration rights agreements with the institutional
      investors, pursuant to which the Company agreed to file a registration statement
      covering the resale of the shares of common stock that may be issued to
      investors upon the conversion of the debentures, payment in kind, and the
      exercise of the warrants, and to maintain the effectiveness of that registration
      statement (subject to certain limitations) for a period of time until the
      holders can sell the underlying common stock without volume restrictions under
      Rule 144(k).  The Company has not yet filed this registration
      statement. If the registration statement is not declared effective by an agreed
      to date, or if the Company fails to maintain the effectiveness of the
      registration statement, it is required to pay to each investor, as partial
      liquidated damages, cash equal to 1.0% of the aggregate purchase price paid
      by
      such investor for the securities purchased in the financing and then held by
      such investor, and must pay to such investor 2.0% for each subsequent 30-day
      period that the default remains uncured.




The
      debentures and warrants were issued to the institutional investors in private
      placement transactions in accordance with Rule 506 under Regulation D of the
      Securities Act of 1933 (the "Securities Act").  Kaufman Bros., L.P.
      acted as an advisor to the Company in connection with both transactions and
      received fees of $0.4 million in connection with its services.





12
 Table
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General





The
      following table summarizes information relative to all of the outstanding
      debentures at September 30, 2007 and December 31, 2006:




**September
                30, 2007**
            
            
            **December
                31, 2006**Convertible
                debentures
            
            $
            9,950,809
            
            
            $
            3,657,143Less
                unamortized discounts:Original
                issue discount - 12.5%
            
            
            (1,101,494
            )
            
            
            (455,247
            )Detachable
                warrants discount
            
            
            (1,026,729
            )
            
            
            (542,396
            )Beneficial
                conversion discount
            
            
            (1,184,730
            )
            
            
            (463,785
            )Convertible
                debentures, net of discounts
            
            
            6,637,856
            
            
            
            2,195,715Less
                current portion
            
            
            (3,880,550
            )
            
            
            (731,905
            )Convertible
                debentures, long term portion
            
            $
            2,757,306
            
            
            $
            1,463,810




Maturities
      of the debentures are as follows:




Due
                through September 30, 2008
            
            $
            5,785,283Due
                from October 1, 2008 to May 1, 2009
            
            
            4,165,526$
            9,950,809




Pursuant
      to Emerging Issues Task Force (EITF) No. 00-19, Accounting for Derivative
      Financial Instruments Indexed to and Potentially Settled in, a Company's Own
      Stock, the fair value of the warrants at the issuance was recorded as a warrant
      liability because (i) the shares issuable upon exercise of such warrants are
      required to be registered and (ii) net cash settlement could
      occur.  EITF No. 00-19 provides that contracts that include any
      provision that could require net cash settlement cannot be accounted for as
      equity of the Company.  See "Note 9-Warrants and Warrant Liabilities,"
      below, for more information.




In
      accordance with Statement of Financial Accounting Standards No. 133, Accounting
      for Derivative Instruments and Hedging Activities ("FASB 133"), the Company
      determined that the conversion feature of the debentures did not meet the
      criteria for bifurcation of the conversion option, as the debt met the
      definition of "conventional convertible debt", as defined under EITF No. 00-19,
      and therefore the conversion feature of the debentures did not need to be
      bifurcated and accounted for as a derivative.




In
      accordance with EITF No. 00-27, Application of Issue No. 98-5 to Certain
      Convertible Instruments, which provides guidance on the calculation of a
      beneficial conversion feature on a convertible instrument, the Company has
      determined that the debentures issued in December 2006 had a non-cash beneficial
      conversion feature of $0.5 million. The beneficial conversion feature was
      determined based on the difference between the calculated conversion value
      after
      the allocation of the full fair value of the warrants issued in connection
      with
      such debentures of $0.5 million to the debt discount and the fair value of
      the
      Company's common stock of $1.48 per share. After the allocation of proceeds
      between the debentures and warrants are made, the conversion price of $1.265
      was
      calculated based on the allocated amount to debts divided by the total number
      of
      shares into which the debentures are convertible. The calculated amount of
      $0.215, the difference of the fair value of the common stock of $1.48 and the
      effective conversion price of $1.265, represents the beneficial value per
      share.  This beneficial value was applied to the total shares into
      which the debentures are convertible to calculate the beneficial conversion
      feature. The discounts on account of the beneficial conversion feature and
      fair
      value of the warrants will be recognized as additional interest
      expense.




13
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          of Contents




The
      Company has determined that the convertible debentures issued in February 2007
      had a non-cash beneficial conversion feature of $0.4 million. The beneficial
      conversion feature was determined based on the difference between the calculated
      conversion value after the allocation of the full fair value of the warrants
      issued in connection with such debentures of $0.6 million to the debt discount
      and the fair value of the Company's common stock of $2.49 per share. After
      the
      allocation of proceeds between the debentures and warrants are made, a
      conversion price of $1.768 was calculated based on the allocated amount to
      debentures divided by the total number of shares into which the debentures
      are
      convertible. The calculated amount of $0.722, the difference of the fair value
      of the common stock of $2.49 and the effective conversion price of $1.768,
      represents the beneficial value per share. This beneficial value was applied
      to
      the total shares into which the debentures are convertible to calculate the
      beneficial conversion feature. The discounts on account of the beneficial
      conversion feature and fair value of the warrants will be recognized as
      additional interest expense.





Similarly,
      the Company has determined that the convertible debentures issued in August
      2007
      had a non-cash beneficial conversion feature of $0.9 million. The beneficial
      conversion feature was determined based on the difference between the calculated
      conversion value after the allocation of the full fair value of the warrants
      issued in connection with such debentures of $1.1 milllion to the debt discount
      and the fair value of the Company's common stock of $3.60 per share. After
      the
      allocation of proceeds between the debentures and warrants are made, a
      conversion price of $3.127 was calculated based on the allocated amount to
      debentures divided by the total number of shares into which the debentures
      are
      convertible. The calculated amount of $0.473, the difference of the fair value
      of the common stock of $3.60 and the effective conversion price of $3.127,
      represents the beneficial value per share. This beneficial value was applied
      to
      the total shares into which the debentures are convertible to calculate the
      beneficial conversion feature. The discounts on account of the beneficial
      conversion feature and fair value of the warrants will be recognized as
      additional interest expense.




**9.**
            **Warrants
                and Warrant Liabilities**




In
      March
      2005, the Company issued warrants to two individuals in exchange for services
      rendered to the Company. These warrants allow each of the individuals to
      purchase up to 50,000 shares at $1.25 per share and expire, if not exercised,
      on
      March 31, 2008.  In July 2005, the Company sold additional warrants to
      these same individuals for a total of $10,000. These warrants allow each of
      the
      individuals to purchase up to 100,000 shares of the Company's common stock
      at
      $1.80 per share and expire, if not exercised, on June 30, 2008.




In
      November 2006, the Company issued warrants to purchase 281,250 shares of its
      common stock at an exercise price of $1.50 per share in conjunction with a
      private placement of its common stock.  The warrants were exercised in
      2007.




On
      December 28, 2006, the Company issued warrants to purchase 949,907 shares of
      common stock at $1.69 per share in conjunction with the sale of its
      debentures.  On February 12, 2007, the Company issued warrants to
      purchase 401,040 shares of common stock at $1.69 per share in conjunction with
      the sale of its debentures. On August 30, 2007, the Company issued warrants
      to
      purchase 1,758,008 shares of common stock at $4.20 per share in conjunction
      with
      the sale of its Series A preferred stock and issued warrants to purchase 826,190
      shares of common stock at $4.20 per share in conjunction with the sale of its
      debentures. Each of these  warrants are immediately exercisable and
      expire five years from the issue date.  Through September 30, 2007,
      410,000 of the warrants have been exercised.




The
      warrants issued in December 2006, February 2007 and August 2007 have
      registration rights for the underlying shares. EITF No. 00-19 provides that
      contracts that include any provision that could require net cash settlement
      cannot be accounted for as equity of the Company.  The warrant
      agreements related to the warrants issued in December 2006, February 2007 and
      August 2007 require net cash settlement, at the option of the holder, if the
      Company fails to issue and deliver common stock on exercise of a warrant within
      three business days of receipt of a written exercise notice by the holder and
      the holder purchases shares of common stock to deliver in satisfaction of a
      sale
      of the common stock the holder anticipated to receive upon exercise of the
      warrant.  Pursuant to EITF No. 00-19, the Company recorded the fair
      value of the warrants at the issue date as a warrant liability.




The
      fair
      value of warrants was estimated at the issuance dates and revalued at September
      30, 2007, using a Black Scholes option pricing model with the following
      assumptions: a risk free interest rate of approximately 4.08% to 4.84% at the
      issuance dates and 3.93% on September 30, 2007; no dividend yield; volatility
      factors of 39.21% to 40.83% at the issuance dates and 39.74% to 40.90% at
      September 30, 2007; contractual terms of 5 years; and expected terms based
      upon
      the formula prescribed in SEC Staff Accounting Bulletin 107 of 2.12 years to
      2.46 years. These assumptions use the interest rate prevailing at the time
      of issuance, volatility factors calculated as the weighted average of the stock
      price volatility of ranked comparable public companies, and contractual terms
      equal to the exercise periods of the respective warrants. The decrease in fair
      value of the warrants for the three months ended September 30, 2007 of $1.4
      million was reported as non-operating income in the financial statements. The
      increase in fair value of the warrants for the nine months ended September
      30,
      2007 of $2.0 million was reported as a non-operating expense in the financial
      statements.




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The
      warrant liability related to the debentures issued in the Company's December
      2006, February 2007 and August 2008 private placements totals $6.4 million
      and
      $0.5 million at September 30, 2007 and December 31, 2006,
      respectively.




On
      March
      6, 2007, the Company issued an immediately exercisable warrant to purchase
      250,000 shares of common stock at $2.00 per share in connection with its
      agreement with Aequitas Capital Management, Inc., to provide the Company's
      prospective customers with a leasing alternative for the Company's
      videoconferencing systems. The warrant had a three year term, and was accounted
      for as an equity issuance in the financial statements.  The warrant
      was exercised in 2007.





The
      fair
      value of the warrant issued to Aequitas Capital at the issue date was calculated
      using a Black Scholes option pricing model with the following assumptions:
      a
      risk free interest rate of 4.58%, volatility factor of 43.35%, contractual
      term
      of 3 years and expected term based upon the formula prescribed in SEC Staff
      Accounting Bulletin 107 of 1.5 years. The fair value of the warrant of $0.6
      million was expensed as financing program costs.




The
      following table summarizes warrant activity for the nine months ended September
      30, 2007:




**Number
                of Shares Subject to Warrants**
            
            
            **Weighted
                Average Exercise Price**Balance
                - December 31, 2006
            
            
            1,531,157
            
            
            $
            1.64Issued
            
            
            3,248,022
            
            
            
            3.72Exercised
            
            
            (941,250
            )
            
            
            1.72Forfeited
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -Balance
                - September 30, 2007
            
            
            3,837,929
            
            
            $
            3.38





The
      following table summarizes information about warrants outstanding at September
      30, 2007:




**Exercise
                Prices**
            
            
            **Number
                of Shares Subject to Outstanding Warrants and
                Exercisable**
            
            
            **Weighted
                Average Remaining Contractual Life (years)**$
            1.25
            
            
            
            100,000
            
            
            
            0.50$
            1.69
            
            
            
            940,947
            
            
            
            4.30$
            1.80
            
            
            
            200,000
            
            
            
            0.75$
            3.52
            
            
            
            12,784
            
            
            
            2.86$
            4.20
            
            
            
            2,584,198
            
            
            
            4.923,837,929





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  **10.**
              **Commitments
                  and Contingencies**


The
      Company has non-cancelable operating and capital leases for corporate facilities
      and equipment. The leases expire through February 28, 2013 and include certain
      renewal options. Rent expense under the operating leases totaled $0.1 million
      for both the three and nine months ended September 30, 2007.





Future
      minimum rental payments required under non-cancelable operating and capital
      leases are as follows for the years ending December 31:





**Operating
                Leases**
            
            
            **Capital**
              **Leases**Three
                months ending December 31, 2007
            
            $
            234,236
            
            
            $
            373,0882008
            
            
            1,153,390
            
            
            
            1,207,7792009
            
            
            1,318,377
            
            
            
            849,7402010
            
            
            1,350,738
            
            
            
            412,5372011
            
            
            1,383,159
            
            
            
            189,322Thereafter
            
            
            1,598,062
            
            
            
            34,192Total
                minimum lease payments
            
            $
            7,037,962
            
            
            
            3,066,658Less
                amount representing interest
            
            
            
            
            
            
            551,152Present
                value of minimum lease payments
            
            
            
            
            
            
            2,515,506Less
                current portion
            
            
            
            
            
            
            1,048,018$
            1,467,488





**11.**
            **Preferred
                Stock**





The
      Company is authorized to issue 10,000,000 shares of preferred stock, $0.0001
      par
      value per share, issuable from time to time in one or more
      series.  The Company designated 20,000 preferred shares as the Series
      A Convertible Preferred Stock.





On
      August
      30, 2007, the Company entered into a securities purchase agreement with five
      institutional investors, pursuant to which an aggregate of 13,000 shares of
      our
      Series A Convertible Preferred Stock, or our "Series A Stock," were issued
      at a
      purchase price of $1,000 per share, along with five year warrants to purchase
      1,758,008 shares of our common at a price of $4.20 per share, subject to
      adjustment, including full-ratchet anti-dilution protection.  Net
      proceeds were $12.1 million, after deducting fees and expenses totaling $0.9
      million.  Kaufman Bros., L.P. acted as our advisor in connection with
      the transaction and received a fee of $0.7 million in connection with its
      services.




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The
      following summarizes the terms of our Series A Stock and is qualified by
      reference to the complete certificate of designation for our Series A Stock,
      which is incorporated by reference as an exhibit to this report:





·
            *Stated
                Value*. The stated value of each share is $1,000, subject to increase
                if the Company is unable to pay any dividend payment when due, if
                it does
                not achieve aggregate revenues of at least $30 million during the
                four
                fiscal quarters beginning on October 1, 2007 and ending on September
                30,
                2008, or if on or before March 31, 2008, its common stock is not
                listed on
                a major trading market or exchange other than the OTC Bulletin
                Board.


·
            *Dividends*.
                The Series A Stock accrues cumulative dividends at a rate of 5.7%
                per
                annum through the third anniversary of the date they were issued,
                18% per
                annum thereafter, payable semi-annually on January 1 and July 1,
                beginning
                on January 1, 2008. The dividend rate decreases to zero percent if
                at any
                time the Company is able to force the holders to convert the Series
                A
                Stock into shares of its common stock but such conversion does not
                occur
                because of caps on the holders beneficial ownership of our common
                stock.
                The Company may pay the dividends in cash or with shares of its common
                stock provided that it meets certain equity conditions, including
                having a
                currently effective registration statement covering the shares of
                common
                stock so issued. If the Company pays dividends with shares of its
                common
                stock, the shares issued for such purpose will be valued at 85% of
                the
                average of the VWAPs for the 20 consecutive trading days immediately
                before the applicable dividend payment date. If the Company is unable
                to
                make a dividend payment in cash and the equity conditions are not
                met, the
                holder may elect to waive the equity conditions requirement and receive
                shares of its common stock or elect to have the dividends accrue
                to the
                next dividend payment date or accreted to, and increase, the outstanding
                stated value.


·
            *Conversion*.
                The Series A Stock is convertible by the holders thereof at any time
                into
                a number of shares of common stock equal to the quotient obtained
                by
                dividing the then stated value by the then applicable conversion
                price
                (currently, $2.81). Anytime after the later of the (i) 90th day following
                the effective date of a registration statement covering the shares
                of
                common stock issuable upon conversion of the Series A Stock and (ii)
                the
                date that the Company's common stock is listed for trading on a major
                trading market or exchange other than the OTC Bulletin Board, the
                Company
                may force conversion if the VWAP for our common stock exceeds 250%
                of the
                then effective conversion price for 10 consecutive trading days.
                Any
                forced conversion is subject to meeting certain equity conditions
                including having an effective registration statement and is subject
                to a
                4.99% cap on the beneficial ownership of the Company's shares of
                common
                stock by the holder and its affiliates following such
                conversion.


·
            *Voting
                Rights*. Generally, the Series A Stock has no voting rights. However,
                the Company cannot take certain actions without the consent of a
                majority
                of the then outstanding holders of the Series A Stock, including,
                issuing
                additional securities senior to or on par with the Series A Stock,
                amending its certificate of incorporation or by-laws in any manner
                adverse
                to the rights of the Series A Stock, or adversely changing the rights
                of
                the Series A Stock.


·
            *Other
                Rights*. The Series A Stock has liquidation rights in preference over
                junior securities, including common stock, and has certain anti-dilution
                protection.





**12.**
            **Stock
                Based Compensation**




Prior
      to
      year ended December 31, 2005, the Company elected to use the intrinsic value
      based method and to disclose the pro forma effect of using the fair value based
      method to account for its stock-based compensation. As a result of the recent
      adoption by the Financial Accounting Standards Board of SFAS No. 123 (revised
      2004) "Share-Based Payment" ("SFAS No. 123(R)"), the Company is now required
      to
      apply the fair value method as prescribed in SFAS No. 123 (R) which requires
      all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair
      values.





*Expense
      Information Under SFAS No. 123(R)*




The
      following table summarizes stock-based compensation expense recorded under
      SFAS
      No. 123(R) for the three months and nine months ended September 30, 2007 and
      2006 and its allocation within the condensed consolidated statement of
      operations:




**Three
                months ended September 30,**
            
            
            **Nine
                months ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Cost
                of service revenues
            
            $
            20,644
            
            
            $
            -
            
            
            $
            41,064
            
            
            $
            -Selling,
                general and administrative
            
            
            175,223
            
            
            
            3,857
            
            
            
            353,105
            
            
            
            452,154Research
                and development
            
            
            65,773
            
            
            
            2,893
            
            
            
            104,890
            
            
            
            8,679Stock
                based compensation included in operating expenses
            
            
            240,996
            
            
            
            6,750
            
            
            
            457,995
            
            
            
            460,833Stock-based
                compensation expense related to employee equity awards
            
            $
            261,640
            
            
            $
            6,750
            
            
            $
            499,059
            
            
            $
            460,833




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*Valuation
      Assumptions*




The
      fair
      value of each option award is estimated on the date of grant using the Black
      Scholes option valuation model that uses the assumptions noted in the following
      table. No options were granted during the three months ended September 30,
      2007
      and 2006 The weighted-average grant-date fair value of options exercised during
      the three months ended September 30, 2007 and 2006 was $.20 and $-0-,
      respectively. No options were exercised prior to June 30, 2007.




Because
      the Black Scholes option valuation model incorporates ranges of assumptions
      for
      inputs, those ranges are disclosed. Expected volatilities are based on
      historical volatility of the Company's stock and other factors. The Company
      uses
      historical data to estimate option exercise and employee termination within
      the
      valuation model. The expected term of options granted is derived from estimates
      and represents the period of time that options granted are expected to be
      outstanding. The risk-free rate for periods within the contractual life of
      the
      option is based on the U.S. Treasury yield curve in effect at the time of
      grant.





**September
                30, 2007**
            
            
            **June
                30, 2007**
            
            
            **March
                31, 2007**Expected
                volatility
            
            
            n/a
            
            
            
            58.8
            %
            
            
            60.7
            %Weighted-average
                volatility
            
            
            n/a
            
            
            
            58.8
            %
            
            
            60.7
            %Expected
                dividends
            
            
            n/a
            
            
            
            0.0
            %
            
            
            0.0
            %Expected
                term in years
            
            
            n/a
            
            
            
            6.08
            
            
            
            6.08Risk-free
                rate
            
            
            n/a
            
            
            
            4.5
            %
            
            
            4.7
            %





A
      summary
      of option activity under the 2005 Plan as of September 30, 2007 and December
      31,
      2006, and changes during the periods then ended is presented below:




**Shares**
            
            
            **Weighted-Average
                Exercise Price**
            
            
            **Weighted-Average
                Remaining Contractual Term (Years)**
            
            
            **Aggregate
                Intrinsic Value**Outstanding
                at January 1, 2006
            
            
            3,651,512
            
            
            $
            0.29
            
            
            
            6.9
            
            
            $
            -Granted
            
            
            10,000
            
            
            $
            1.50Exercised
            
            
            -
            
            
            $
            -Forfeited
                or expired
            
            
            (310,000
            )
            
            $
            0.24Outstanding
                at December 31, 2006
            
            
            3,351,512
            
            
            $
            0.29
            
            
            
            6.6
            
            
            $
            -Granted
            
            
            1,185,500
            
            
            $
            4.51Exercised
            
            
            (25,000
            )
            
            $
            0.20Forfeited
                or expired
            
            
            (30,956
            )
            
            $
            0.20Outstanding
                at September 30, 2007
            
            
            4,481,056
            
            
            $
            1.35
            
            
            
            6.97
            
            
            $
            11,409,167Exercisable
                at September 30, 2007
            
            
            3,228,890
            
            
            $
            1.05
            
            
            
            
            
            
            $
            11,045,693






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A
      summary
      of the status of the Company's nonvested options as of September 30, 2007 and
      December 31, 2006, and changes during the periods then ended is presented
      below:




**Shares**
            
            
            **Weighted-Average
                Grant-Date Fair Value**Nonvested
                at January 1, 2006
            
            
            1,232,987
            
            
            $
            0.44Granted
            
            
            10,000
            
            
            $
            -Vested
            
            
            (778,193
            )
            
            $
            0.60Forfeited
            
            
            (179,794
            )
            
            $
            0.20Nonvested
                at December 31, 2006
            
            
            285,000
            
            
            $
            0.20Granted
            
            
            1,185,500
            
            
            $
            2.59Vested
            
            
            (218,334
            )
            
            $
            0.20Forfeited
            
            
            -Nonvested
                at September 30, 2007
            
            
            1,252,166
            
            
            $
            2.46




As
      of
      September 30, 2007, there was $2.7 million of total unrecognized compensation
      cost related to nonvested share-based compensation arrangements granted under
      the 2005 Plan. That cost is expected to be recognized over a weighted-average
      period of 3.45 years. The total fair value of options vested during the nine
      months ended September 30, 2007 and 2006 was less than $0.1 million and $0.5
      million, respectively.


**13.**
              **Basic
                  and Diluted Net Loss per
                  Share**




Basic
      net
      loss per share is based upon the weighted average number of common shares
      outstanding. Diluted net loss per share is based on the assumption that all
      potential diluted stock options and warrants were converted or exercised. The
      calculation of diluted net loss per share excludes potential common stock
      equivalents if the effect is anti-dilutive. The Company's weighted average
      common shares outstanding for basic and dilutive were the same since the effect
      of common stock equivalents was anti-dilutive.




The
      Company has the following dilutive convertible preferred stock, stock options
      and warrants as of September 30, 2007 and December 31, 2006 which were excluded
      from the calculation since the effect is anti-dilutive.




**September
                30, 2007**
            
            
            **December
                31, 2006**Preferred
                Stock
            
            
            4,626,335
            
            
            
            -Stock
                Options
            
            
            4,481,056
            
            
            
            3,351,512Warrants
            
            
            3,837,929
            
            
            
            1,531,157Total
            
            
            12,945,320
            
            
            
            4,882,669




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**14.**
            **Going
                Concern and Operating
                Deficits**




As
      shown
      in the accompanying financial statements, the Company incurred a net loss
      applicable to common stockholders of $9.9 million during the nine months ended
      September 30, 2007, and $3.1 million during the year ended December 31, 2006,
      and has an accumulated deficit of $19.8 million since opening for business.
      These factors create an uncertainty as to the Company's ability to continue
      as a
      going concern. The ability of the Company to continue as a going concern is
      dependent upon the success of raising additional capital through the issuance
      of
      common stock and the ability to generate operating revenue. The financial
      statements do not include any adjustments that might be necessary should the
      Company be unable to continue as a going concern.





**15.**
            **Recent
                Accounting Pronouncements**




In
      September 2006, FASB issued SFAS No. 157, "Fair Value Measurements," which
      defines fair value, establishes a framework for measuring fair value in
      accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. In February 2007, FASB issued SFAS
      No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
      -
      Including an amendment to FASB Statement No. 115." SFAS 159 permits entities
      to
      choose to measure many financial assets and financial liabilities at fair value.
      The objective is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. SFAS No. 159 is expected to expand the use of fair value
      measurement of accounting for financial instruments. The fair value option
      established by SFAS No. 159 permits all entities, including non-profits, to
      measure eligible items at fair value at specified election dates. Both SFAS
      157
      and SFAS 159 are effective for fiscal years beginning after November 15, 2007.
      We are currently assessing the impact the adoption of SFAS 157 and SFAS 159
      will
      have on our financial statements.




In
      December 2006, FASB issued FASB Staff Position EITF 00-19-2 "Accounting for
      Registration Payment Arrangements" which specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement should be separately recognized and measured
      in
      accordance with SFAS No. 5, "Accounting for Contingencies." Adoption of EITF
      00-19-2 was required for fiscal years beginning after December 15, 2006. The
      Company is currently evaluating the potential impact of this
      statement.





In
      February 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities – Including an Amendment of FASB
      Statement No. 115" which is effective for fiscal years beginning after
      November 15, 2007. This statement permits an entity to choose to measure
      many financial instruments and certain other items at fair value at specified
      election dates. Subsequent unrealized gains and losses on items for which the
      fair value option has been elected will be reported in earnings. The Company
      is
      currently evaluating the potential impact of this statement.






20
 Table
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**ITEM
        2. **MANAGEMENT'S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS****




*The
      following discussion and analysis is intended as a review of significant factors
      affecting our financial condition and results of operations for the periods
      indicated.  The discussion should be read in conjunction with our
      consolidated financial statements and the notes presented herein.  See
      "Item 1. Financial Statements," above.  In addition to historical
      information, the following Management's Discussion and Analysis of Financial
      Condition and Results of Operations contains forward-looking statements that
      involve risks and uncertainties. Our actual results could differ significantly
      from those anticipated in these forward-looking statements as a result of
      certain factors discussed in this report.  See "Forward-Looking
      Statements," above.*





Throughout
      this report, the terms the "Company," "our," "we" or "us" refers to Telanetix,
      Inc., a Delaware corporation and its wholly-owned subsidiaries.




**Overview**




**Business**





We
      are an
      IP communications company, offering a range of communications solutions from
      hosted IP voice and conferencing products, to text and data collaboration,
      to
      telepresence videoconferencing products.




From
      2002
      until recently, our sole business was the development and sale of high end
      IP-based videoconferencing solutions.  We were a development stage
      company through 2005.  We completed the development of our initial
      videoconferencing solution and commenced initial sales in
      2005.  During 2005, we established channel partner relationships with
      three of the largest audio visual integrators in the United States and devoted
      a
      substantial portion of our business efforts to establishing customer sales
      through those channels.  In 2006 we focused our business efforts on
      developing our channel partner relationships and securing working capital to
      fund operations.  During the third quarter of 2006, we also began
      selling our videoconferencing systems directly to end-users, and we secured
      our
      first significant customer accounts.




During
      the quarter ended June 30, 2007, we acquired AVS Installation Limited Liability
      Company and Union Labor Force One Limited Liability Company (collectively,
      "AVS").  With that acquisition, we expanded our business to provide
      integration, consultation and implementation solutions for customers desiring
      audio-visual and videoconferencing systems and products.  AVS was one
      of our channel partners who distributed our videoconferencing systems and
      related solutions in New York, New Jersey and nearby regions of the United
      States.  The operations of AVS as our wholly-owned subsidiary have
      remained the same as they did before the acquisition except that we no longer
      have a channel partner relationship with AVS.  AVS continues to
      distribute and integrate our videoconferencing systems as well as third party
      products.




We
      market
      our videoconferencing solutions under the name Digital PresenceTM.  The
      core of our videoconferencing system is our software components, all of which
      are developed internally and pre-loaded on a standard Linux
      server.  Our videoconferencing systems can be designed, built-out and
      installed with a variety of components to meet the application needs of the
      customer.  By delivering Digital PresenceTM to the market in this
      manner, we offer flexibility to customers and can tailor solutions to support
      conference rooms for both small and large audiences.  Our revenues
      through September 14, 2007 have been derived from the sale of videoconferencing
      and audio-visual solutions.




During
      quarter ended September 30, 2007, we further expanded our business by acquiring
      AccessLine Holdings, Inc. ("AccessLine") on September 14,
      2007.  AccessLine is a Bellevue, Washington-based provider of hosted
      VoIP solutions to the small-and-medium business
      marketplace.  AccessLine's product offerings include VoIP phone lines
      and systems, conference calling, online fax services, toll free numbers,
      follow-me numbers, unified messaging and virtual
      reception.  AccessLine continues to operate its business in
      substantially the same manner as such business was operated before the
      acquisition.  The AccessLine acquisition expanded our IP
      communications offerings to include a variety of voice and messaging
      solutions.




Accessline's
      VoIP revenues principally consist of: (1) monthly fees from communication
      solutions, which include mobility solutions, PBX enhancements, single number
      solutions and unified messaging, voice messaging, and paging; (2) activation
      fees for new customers; and (3) fees from usage including conference calling
      and
      long distance. Monthly fees for communications solutions and usage are
      recognized when the solution is provided. Activation fee revenue is recognized
      at inception for new customers.




The
      aggregate purchase price we paid to acquire AccessLine was $27.9 million,
      consisting of $11.7 million in cash to AccessLine creditors and a management
      incentive pool; $14.2 million in the form of 3,939,565 shares of our restricted
      common stock to certain AccessLine stockholders and creditors; and acquisition
      costs of $2.0 million. We may be required to pay up to an additional $9.0
      million in the form of 2,500,000 shares of our restricted common stock upon
      the
      achievement of certain future financial objectives.  The value of the
      shares we issued in connection with the acquisition was based upon a per share
      value of $3.60.




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 Table
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**Financings**





During
      the quarter ended September 30, 2007, we also completed two private placements
      raising gross proceeds of $20.0 million, $13.7 of which we used to acquire
      AccessLine and to pay acquisition related costs.  On August 30, 2007,
      we entered into a securities purchase agreement with five institutional
      investors, pursuant to which we issued an aggregate of 13,000 shares of our
      Series A Convertible Preferred Stock, or our "Series A Stock," at a purchase
      price of $1,000 per share, along with five year warrants to purchase 1,758,008
      shares of our common stock at a price of $4.20 per share, subject to adjustment,
      including full-ratchet anti-dilution protection.  We refer to this
      transaction as our "Series A Private Placement".  On that same day, we
      entered into another securities purchase agreement with the same five
      institutional investors that invested in our Series A Private Placement,
      pursuant to which we issued original issue discount 6.0% senior secured
      convertible debentures in the aggregate principal amount of $8.00 million
      (issued at an original issue discount of 12.5%), along with five year warrants
      to purchase 826,190 shares of our common stock at a price of $4.20 per share,
      subject to adjustment, including full-ratchet anti-dilution
      protection.  We refer to this transaction as our "August 2007 Debt
      Private Placement" and together with our Series A Private Placement as our
      "August 2007 Private Placement."





Our
      other
      recent financing transactions consist of the following:





*November
      2006 Private Placements*.  In November 2006, we sold in private
      placements to three accredited investors an aggregate of 562,499 shares of
      our
      common stock at $1.20 per share and issued warrants to purchase 281,250 shares
      of our common stock at $1.50 per share.  We refer to this as our
      November 2006 Private Placements.





*December
      2006 Private Placement*.  In December 2006, we issued in a private
      placement with four institutional investors an aggregate of $3.7 million
      principal amount of debentures at an original issue discount of 12.5% and
      warrants to purchase an aggregate of 949,907 shares of our common
      stock.  We refer to this as our December 2006 Private
      Placement.





*February
      2007 Private Placement*.  In February 2007, we issued in a private
      placement with the same four institutional investors from our December 2006
      Private Placement an aggregate of $1.5 million principal amount of debentures
      at
      an original issue discount of 12.5% and warrants to purchase an aggregate of
      401,040 shares of our common stock.  We refer to this as our February
      2007 Private Placement, and together with our December 2006 Private Placement
      as
      our December/February Private Placements.





In
      July
      and August 2007, the holders of our February debentures elected to convert
      the
      entire principal amount of the debentures into shares of our common
      stock.  The conversion price was $1.54 per share resulting in us
      issuing 1,002,598 shares of common stock upon such conversion.  As a
      result of these conversions, we no longer have any payment obligations under
      these debentures.  We issued an additional 200,520 shares of our
      common stock to the holders of these debentures as an inducement for the early
      conversion and acceptance of unregistered shares.





As
      further discussed under "Liquidity and Capital Resources," below, we believe
      our
      cash balance at September 30, 2007 is sufficient to fund our operations through
      at least September 30, 2008.  If cash reserves are not sufficient to
      sustain operations, we plan to raise additional capital by selling shares of
      capital stock or other debt or equity securities.  However, there are
      no commitments or arrangements for future financings in place at this time,
      and
      there can be no assurance that such capital will be available on favorable
      terms
      to us or at all.





**Going
      Concern Issue**




As
      reported in the Report of Independent Registered Public Accounting Firm on
      our
      December 31, 2006 financial statements, we incurred net losses during 2005
      and
      2006, and have a stockholders' deficit at December 31, 2006.  We have
      yet to establish profitable operations.  These factors, among others,
      create an uncertainty about our ability to continue as a going concern.
      Furthermore, the factors leading to and the existence of the explanatory
      paragraph may adversely affect our relationship with customers and suppliers
      and
      have an adverse effect on our ability to obtain financing.




**Critical
      Accounting Policies Involving Management Estimates and
      Assumptions**




Our
      discussion and analysis of our financial condition and results of operations
      is
      based on our consolidated financial statements.  In preparing our
      consolidated financial statements in conformity with accounting principles
      generally accepted in the United States, we must make a variety of estimates
      that affect the reported amounts and related disclosures.  We have
      identified the following accounting policies that we believe require application
      of management's most subjective judgments, often requiring the need to make
      estimates about the effect of matters that are inherently uncertain and may
      change in subsequent periods.  Our significant accounting policies are
      described in more detail in the notes to consolidated financial statements
      included elsewhere in this filing.  If actual results differ
      significantly from our estimates and projections, there could be a material
      effect on our financial statements.




22
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**Revenue
      Recognition**.  The Company recognizes revenue when sufficient
      evidence of an arrangement exists, title has transferred, payment is not
      contingent upon performance of installation or service obligations, the price
      is
      fixed or determinable, and collectibility is reasonably assured. In instances
      where final acceptance of the product is specified by the customer, revenue
      is
      deferred until all acceptance criteria have been met. VoIP revenues principally
      consist of: (1) monthly fees from communication solutions, which include
      mobility solutions, PBX enhancements, single number solutions and unified
      messaging, voice messaging, and paging; (2) activation fees for new customers;
      and (3) fees from usage including conference calling and long
      distance.





The
      Company accrues for sales returns and other allowances as a reduction to
      revenues upon shipment based upon its contractual obligations and historical
      experience.




**Stock
      Based Compensation**.  Prior to and including the fiscal year
      ended December 31, 2005, we elected to use the intrinsic value based method
      and
      to disclose the pro forma effect of using the fair value based method to account
      for our stock-based compensation.  As of January 1, 2006, we account
      for employee stock-based compensation costs in accordance with Statement of
      Financial Accounting Standards, or SFAS, No. 123R, "Share-Based Payment," which
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the income statement based on their fair
      values.  We utilize the Black-Scholes option pricing model to estimate
      the fair value of employee stock based compensation at the date of grant, which
      requires the input of highly subjective assumptions, including expected
      volatility and expected life.  Changes in these inputs and assumptions
      can materially affect the measure of estimated fair value of our share-based
      compensation.




**Use
      of Estimates**.  The preparation of financial statements in
      conformity with generally accepted accounting principles requires management
      to
      make estimates and assumptions that affect certain reported amounts and
      disclosures. Accordingly, actual results could differ from those
      estimates.




**Allowance
      for Doubtful Accounts**.****We continually evaluate
      the creditworthiness of our customers' financial condition and generally do
      not
      require collateral.  We evaluate the collectability of our accounts
      based on a combination of factors.  In circumstances where we are
      aware of a specific customer's inability to meet its financial obligations
      to
      us, we record a specific reserve for bad debts against amounts
      due.  To date, we have not experienced significant losses on
      uncollectible accounts receivable.




**Deferred
      Tax Valuation Allowance***.*  Deferred tax assets and
      liabilities are recognized for the future tax consequences attributable to
      differences between the financial statements carrying amounts of existing assets
      and liabilities and their respective tax bases.  Deferred tax assets
      and liabilities are measured using enacted tax rates expected to apply to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled.  Valuation allowances are established when
      necessary to reduce deferred tax assets to the amount more likely than not
      to be
      realized.  Income tax expense is the total tax payable for the period
      and the change during the period in deferred tax assets and
      liabilities.





**Results
      of Operations**




**Fluctuations
      in Operating Results**




We
      are in
      the early stages of our operations, and made two acquisitions during the nine
      months ended September 30, 2007. Our results of operations are likely to
      fluctuate from period to period.  We anticipate that our quarterly and
      annual results of operations will be impacted for the foreseeable future by
      several factors, including the timing and volume of sales of our communications
      products, realization of "synergies" or management of integration from our
      recent acquisitions, and the potential impact of future
      acquisitions.  Due to these factors, each of which will have a
      substantial impact on our future operations, we believe that the
      period-to-period comparisons of our operating results are not a good indication
      of our future performance.





**Three
      and Nine Months Ended September 30, 2007 and 2006**





**Revenues**




Net
      revenues for the three months ended September 30, 2007 were $2.3 million,
      an increase of $1.7 million, or 296%, over the same period of 2006. The increase
      in net revenues was primarily due to our acquisition of AVS which was effective
      April 1, 2007 and our acquisition of AccessLine which was effective September
      14, 2007.  We anticipate revenues for the fourth quarter to be
      significantly higher as a result of owning and operating AccessLine for a full
      operating period.




23
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Net
      revenues for the nine months ended September 30, 2007 were $4.8 million, an
      increase of $4.1 million, or 637%, over the same period of 2006. The increase
      in
      net revenues was due to our acquisition of AVS and AccessLine, and increased
      sales of our videoconferencing systems.




To
      date,
      we do not have any international sales and we do not have any regional
      concentrations. One customer accounted for 18% of our revenues for the nine
      months ended September 30, 2007.  One customer accounted for 75% and
      66% of our revenues for the three and nine months ended September 30,
      2006.  With the acquisition of AVS and AccessLine, we have
      substantially expanded our revenue base and significantly reduced our customer
      concentration.




As
      of
      September 30, 2007, we had $0.9 million of order backlog and did not have
      any backlog at September 30, 2006. We include in backlog open purchase orders
      on
      which we expect to deliver and for which we expect to record revenue in the
      following quarter.  Our business is still developing, as a result
      backlog will fluctuate from quarter to quarter based upon our success in
      securing orders and the timing of our ability to ship product, and recognize
      the
      related revenue from our direct and channel sales efforts.  In
      addition, orders from our channel partners are based on the level of demand
      from
      end-user customers. Any decline or uncertainty in end-user demand could
      negatively impact end-user orders, which in turn could negatively affect orders
      from our channel partners in any given quarter. As a result, our backlog could
      decline from current levels.





**Cost
      of Revenues and Gross Margins**




**Three
                months ended September 30,**
            
            
            
            
            
            **Nine
                months ended September 30,****2007**
            
            
            **2006**
            
            
            **Increase
                (Decrease)**
            
            
            **2007**
            
            
            **2006**
            
            
            **Increase
                (Decrease)**Cost
                of Revenues
            
            $
            1,734,024
            
            
            $
            176,726
            
            
            
            881
            %
            
            $
            3,348,590
            
            
            $
            232,649
            
            
            
            1339
            %%
                of Net Revenues
            
            
            77
            %
            
            
            31
            %
            
            46
                pts
            
            
            
            70
            %
            
            
            36
            %
            
            34
                ptsGross
                Margins
            
            
            23
            %
            
            
            69
            %
            
            (46)
                pts
            
            
            
            30
            %
            
            
            64
            %
            
            (34)
                pts





Cost
      of revenues consists primarily of network costs, material, labor, computer
      equipment, audio-visual equipment, and stock based compensation costs. These
      costs are variable, based on the prevailing market rates for these
      items.  Also included in cost of revenues are reserves for excess and
      obsolete inventory.





Cost
      of
      revenues were $1.7 million and $3.3 million for the three and nine months ended
      September 30, 2007, respectively.  Cost of revenues increased in the
      three and nine month periods in 2007 as a result of our acquisition of AVS,
      which was effective April 1, 2007, and our acquisition of AccessLine, which
      was
      effective September 14, 2007, and the corresponding increase in revenues derived
      from the businesses acquired in those transactions.  As a percentage
      of net revenues during the current year periods, cost of revenues were 77%
      and
      70%, respectively, as compared to 31% and 36%, respectively, for the prior
      year
      periods.  Cost of revenues was impacted by inventory reserves of $0.1
      million that were recorded in the current year periods.  We did not
      record any inventory reserves in the prior year periods.  Cost of
      revenues include charges of less than $0.1 million for stock-based compensation
      in the three and nine months ended September 30, 2007 and
      2006.




Gross
      margins were 23% and 30% for the three and nine month periods ended
      September 30, 2007, respectively.  Gross margins decreased in
      comparison to the 2006 periods due to the lower margins realized on the revenues
      generated by AVS and AccessLine.




**Selling,
      General and Administrative Expenses**




Selling,
      general and administrative expenses consist primarily of compensation costs,
      including stock-based compensation costs, consulting fees, professional service
      fees, travel related costs, insurance costs, and office related
      costs.




Selling,
      general and administrative expenses for the three months ended
      September 30, 2007 were $1.9 million, an increase of $0.3 million, or 20%,
      over the same period of 2006. Selling, general and administrative expenses
      for
      the nine months ended September 30, 2007 were $4.7 million, an increase of
      $1.8 million, or 65%, over the same period of 2006.  Selling, general
      and administrative expenses increased $0.8 million and $1.2 million for the
      three months and nine months ended September 30, 2007, respectively, as a result
      of our acquisitions during these periods.  Selling, general and
      administrative expenses will be significantly higher in the fourth quarter
      as a
      result of our owning and operating AccessLine for a full operating
      period.




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Other
      increases and decreases in selling, general and administrative expenses are
      as
      follows:




Stock
      compensation expense increased $0.3 million during the three months ended
      September 30, 2007 compared to the same period in 2006.  The increase
      is attributable to compensation expense on stock option grants made in
      2007.  Stock compensation expense for the nine months ended September 30,
      2007 was flat compared to the same period in 2006.  In the 2007
      period, we recorded stock compensation expense of $0.5 million which was
      primarily attributable to stock option grants made in 2007.  In April
      2006, we recorded stock compensation expense of $0.4 million related to the
      accelerated vesting of an employee's stock options.





Compensation
      related costs increased $0.2 million and $0.4 million for the three and nine
      months ended September 30, 2007, respectively, from the same periods in 2006.
      We
      increased our headcount, not including increases resulting from our acquisition
      of AVS or AccessLine, by two employees and nine employees for the three and
      nine
      months ended September 30, 2007, respectively, and expect our headcount to
      continue to grow as our business grows.




We
      recorded $0.6 million of expense for the nine months ended September 30, 2007
      related to the issuance of a warrant to purchase 250,000 shares of our common
      stock that we issued to Aequitas Capital Management, Inc., in connection with
      our lease financing program.  We did not have a comparable transaction for
      the nine months ended September 30, 2006.




Professional
      service fees increased $0.1 million and $0.4 million for the three and nine
      months ended September 30, 2007, respectively, from the same periods in 2006.
      Our legal and accounting fees increased as a result of the filing of
      registrations statements during the 2007 periods.





During
      the three months ended September 30, 2006, we recorded a non-cash expense of
      $1.1 million for the issuance of 540,000 shares of common stock to our new
      investor relations firm.  We had no such expense in the 2007
      period.




Other
      selling, general and administrative costs and expenses have increased as our
      business has grown and evolved over the last 12 months.




**Research,
      Development and Engineering Expenses**




Research,
      development and engineering expenses are expensed as incurred and consist
      primarily of compensation costs, including stock-based compensation costs,
      and
      outside services.




Research,
      development and engineering expenses for the three months ended
      September 30, 2007 were $0.5 million, an increase of $0.4 million, or 350%,
      over the same period of 2006. Research and development expenses for the nine
      months ended September 30, 2007 were $0.8 million, an increase of $0.5
      million, or 173%, over the same period of 2006.  Research, development
      and engineering expenses increased $0.2 million for both the three months and
      nine months ended September 30, 2007, respectively, as a result of our
      acquisitions during these periods.





We
      recorded stock compensation expense of $0.1 million for both of the periods
      in
      2007, and we recorded stock compensation expense of less than $0.1 million
      for
      both of the periods in 2006.  The increase in stock compensation
      expense relates primarily to stock option grants made in 2007.  The
      remainder of the increase in research, development and engineering expenses
      relates to compensation charges for merit increases, an increase in employee
      headcount, and increased outside consulting services.





**Depreciation
      Expense**





Depreciation
      expense for the three months ended September 30, 2007 was $0.1 million, an
      increase of $0.1 million, or 950%, over the same period of
      2006.  Depreciation expense for the nine months ended
      September 30, 2007 was $0.2 million, an increase of $0.1 million, or 144%,
      over the same period of 2006. Depreciation expense increased during the 2007
      periods because our depreciable asset base increased with the acquisitions
      of
      the AVS and AccessLine businesses.





**Amortization
      of Purchased Intangibles**




We
      recorded amortization expense of $0.1 million in the 2007 periods related to
      the
      purchased intangible assets recorded as a result of the AVS and AccessLine
      acquisitions. We determined that the customer relationships and trade name
      have
      indefinite lives, and recorded no amortization during the periods. We are
      amortizing the developed technology over five years. We may adjust the
      preliminary purchase price allocation once the final valuation report from
      the
      independent appraisers is obtained, which could result in changes to
      amortization of the purchased intangibles in future quarters.  There
      were no purchased intangibles, and correspondingly no amortization of purchased
      intangibles, for the comparable periods in 2006.




25
 Table
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**Interest
      Expense**




The
      debentures we issued in our December/February Private Placements had an original
      face value aggregating $5.2 million. The debentures we issued in our August
      2007
      Debt Private Placement have an original face value aggregating $8.0 million.
      The
      interest rate on such debentures is 6%, and we recorded discounts to the
      debentures for the beneficial conversion feature and for the value of the
      warrants also granted in the aforementioned private placements.  We
      also recorded deferred financing costs related to the aforementioned private
      placements.  We are amortizing the discounts and the deferred
      financing costs to interest expense on a straight line basis through May
      2009.




Following
      is a summary of interest expense for the three and nine months ended September
      30, 2007. Interest expense for the three and nine months ended September 30,
      2006 consisted of interest on the $1.3 million note payable to shareholder
      that
      was paid off in February 2007.




**Three
                  months ended September 30, 2007**
              
              
              **Nine
                  months ended September 30, 2007**Stated
                  interest
              
              $
              80,250
              
              
              $
              224,148Amortization
                  of note discounts
              
              
              1,430,404
              
              
              
              2,262,364Amortization
                  of deferred financing costs
              
              
              143,098
              
              
              
              244,508Inducement
                  shares
              
              
              804,587
              
              
              
              804,587Other
              
              
              34,342
              
              
              
              46,342$
              2,492,681
              
              
              $
              3,581,949


Holders
      of the
      debentures that we issued in ourDecember/February Private Placements
      converted debentures with a face value of $2.5 million and $3.3 million during
      the three and nine months ended September 30, 2007, respectively. As a result
      of
      these conversions, interest expense for the three and nine months ended
      September 30, 2007 included accelerated amortization of note discounts and
      deferred financing costs of approximately $1.3 million and $1.6 million,
      respectively. We issued 200,520 shares of our common stock to the holders
      of debentures issued in our February Private Placement as an inducement for
      the
      early conversion and acceptance of unregistered shares, and recorded interest
      expense of $0.8 million during the three months ended September 30,
      2007.




Assuming
      the remaining debenture balance of $10.0 million is not prepaid before maturity
      and interest payments are made in cash, we anticipate paying $0.6 million in
      interest expense on these debentures through maturity in May 2009. In lieu
      of
      making such interest payments in cash, we have the option of paying the interest
      in shares of our common stock, subject to, among other things, meeting certain
      equity conditions, including having a currently effective registration statement
      covering the shares of common stock issued.  We can also force the
      holders of these debentures to convert the outstanding principal and accrued
      interest into common stock subject to compliance with certain equity conditions,
      including having a currently effective registration statement covering the
      shares of common stock issuable upon conversion of the debentures and subject
      to
      a the applicable cap on the beneficial ownership of our shares of common stock
      by the holder and its affiliates following such conversion contained in the
      debenture being converted.  See "Liquidity and Capital Resources,"
      below.




**Change
      in Fair Value of Warrant Liabilities**




The
      warrants we issued in our December/February Private Placements, Series A Private
      Placement, and August 2007 Debt Private Placement have registration rights
      for
      the underlying shares.  Emerging Issues Task Force (EITF) No. 00-19,
      Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company's Own Stock, provides that contracts that include any
      provision that could require net cash settlement cannot be accounted for as
      equity.  The warrant agreements related to the warrants we issued in
      the aforementioned private placements require net cash settlement, at the option
      of the holder, if we fail to issue and deliver common stock on exercise of
      a
      warrant within three business days of receipt of a written exercise notice
      by
      the holder and the holder purchases shares of common stock to deliver in
      satisfaction of a sale of the common stock the holder anticipated to receive
      upon exercise of the warrant.  Pursuant to EITF No. 00-19, we recorded
      the fair value of the warrants at the issue date as a warrant
      liability.




The
      fair
      value of warrants was estimated at the issuance dates and again at each balance
      sheet date. For the three months ended September 30, 2007, we recorded
      non-operating income of $1.4 million for the decrease in the fair value of
      the
      warrants from July 1, 2007 to September 30, 2007. The decrease in fair value
      of
      the warrants is primarily attributable to a lower per share valuation at
      September 30, 2007. For the nine months ended September 30, 2007, we recorded
      non-operating expense of $2.0 million for the increase in fair value of the
      warrants from January 1, 2007 to September 30, 2007. The increase in fair value
      of the warrants is primarily attributable to the warrants issued in connection
      with the February Private Placement, Series A Private Placement, and the August
      2007 Debt Private Placement. There were no such warrant liability transactions
      during the 2006 periods.





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 Table
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To
      determine the fair market value of the warrants, we used the Black Scholes
      option pricing model with the following assumptions:




**September
                  30, 2007**
              
              **June
                  30, 2007**
              
              **March
                  31, 2007**
              
              **Dates
                  of Issuance**Expected
                  volatility
              
              39.34
                  % to 40.90%
              
              39.24%
                  to 39.46%
              
              39.61%
                  to 39.86%
              
              39.21%
                  to 40.83%Expected
                  dividends
              
              0.0%
              
              0.0%
              
              0.0%
              
              0.0%Contractual
                  term in years
              
              5
              
              5
              
              5
              
              5Expected
                  term in years
              
              2.12
                  to 2.46
              
              2.25
                  to 2.30
              
              2.37
                  to 2.44
              
              2.5Risk-free
                  rate
              
              3.93%
              
              4.87%
              
              4.58%
              
              4.08%
                  to 4.84%




**Liquidity
      and Capital Resources**





Our
      cash
      balance as of September 30, 2007 was $5.6 million and we had a working capital
      deficit of $6.7 million, which includes a warrant liability of $6.4 million.
      Our
      cash balance as of December 31, 2006 was $3.2 million and we had working capital
      of $0.1 million.




Cash
      used
      in operations during the quarter ended September 30, 2007 was $3.7 million.
      This
      was primarily the result of a net loss of $9.8 million which was offset by
      non-cash charges amortization of note discounts and deferred financing costs
      of
      $2.5 million, change in fair value of the warrants of $2.0 million, expense
      related to issuance of common stock to induce early conversion of our February
      2007 debentures of $0.8 million, finance program expense of $0.6 million related
      to the warrant granted in connection with the lease financing program agreement
      we entered into with Aequitas Capital Management, Inc., and stock compensation
      expense of $0.5 million.  Our net decrease in assets and liabilities
      of $0.7 million also contributed to the cash used in operations.  We
      anticipate that our combined operations, including AccessLine, will approach
      breakeven in the fourth quarter of 2007.




Net
      cash
      used by investing activities was $13.7 million during the nine months ended
      September 30, 2007, which consists primarily of the cash portion of the
      AccessLine purchase price and related acquisition costs.





Net
      cash
      provided by financing activities was $19.8 million during the nine months ended
      September 30, 2007.  During this period we raised funds in three
      private placements.




In
      our
      February 2007 Private Placement we sold an aggregate of $1.5 million of
      principal amount of debentures at an original issue discount of 12.5% and
      warrants to purchase 401,040 shares of our common stock for net proceeds of
      $1.4
      million, which we used to pay off a note payable to shareholder of $1.3
      million.  As explained in further detail below, the holders of such
      debentures elected to convert the entire principal amount of $1.5 million into
      1,002,598 shares of our common stock at a conversion price of $1.54 per
      share.  Therefore, we no longer have any repayment obligations as to
      these debentures.




In
      August
      2007, we completed our August 2007 Private Placements.  See "Recent
      Financings," below.  These financings resulted in net proceeds to us
      of $18.6 million, after deducting fees and expenses.  We used $13.8
      million of the net proceeds to make payments related to our AccessLine
      acquisition.  The balance was contributed to general working
      capital.




During
      the nine months ended September 30, 2007, we also received aggregate net
      proceeds of $1.6 million from the exercise of warrants to purchase an aggregate
      of 941,250 shares of common stock.  We used $0.4 million of such
      proceeds to pay off our line-of-credit balance.




At
      September 30, 2007, we had one credit facility that provides up to a $1.5
      million revolving line of credit (the "Line of Credit") based on our accounts
      receivable balance.  Borrowings under the Line of Credit, bear
      interest at the prime rate plus 1% and mature August 8,
      2009.  Borrowings under the Line of Credit are subject to certain
      financial covenants and restrictions on liquidity, indebtedness, financial
      guarantees, business combinations, revenue levels and other related
      items.   At September 30, 2007, there were no borrowings outstanding
      under the Line of Credit.




We
      believe our cash balance is sufficient to fund our operations through at least
      September 30, 2008.  If cash reserves and Line of Credit are not sufficient
      to sustain operations, we plan to raise additional capital by selling shares
      of
      capital stock or other securities.  However, there are no commitments or
      arrangements for future financings in place at this time, and we can give no
      assurance that such capital will be available on favorable terms or at
      all.  We may need additional financing thereafter until we can achieve
      profitability.  If we cannot, we will be forced to curtail our operations
      or possibly be forced to evaluate a sale or liquidation of our assets.
 Even if we are successful in raising additional funds, there is no
      assurance regarding the terms of any additional investment.  Any future
      financing may involve substantial dilution to existing investors.




27
 Table
          of Contents




**Commitments
      and Contingencies**




In
      May
      2007, holders of our December debentures elected to convert $0.8 million of
      the
      principal amount of December 2006 debentures into 509,610 shares of our common
      stock at a conversion price of $1.54 per share.  In addition, in July
      2007, holders of such debentures elected to convert an additional $0.9 million
      of the principal amount of such debentures into 599,048 shares of our common
      stock at a conversion price of $1.54 per share.  On July 30, 2007 and
      August 8, 2007, holders of our February debentures converted 100% of the
      outstanding balance ($1.5 million) into 1,002,598 unregistered shares of our
      common stock at a conversion price of $1.54.  The unamortized note
      discounts and deferred financing costs totaling $1.0 million associated with
      such debentures will be recognized as interest expense during the three months
      ended September 30, 2007. We issued an additional 200,520 unregistered shares
      of
      our common stock to the holders of our February debentures as an inducement
      for
      the early conversion and acceptance of unregistered shares, and will recognize
      a
      non-operating expense of approximately $0.8 million related to the issuance
      of
      these additional shares.




With
      respect to our August debentures, as of September 30, 2007, the entire principal
      amount ($8.0 million) is outstanding and no payments of principal or interest
      have become due or paid.




Following
      the conversions discussed above, the aggregate remaining face value of our
      outstanding debentures, which consist of our December debentures and our August
      debentures, is $10.0 million.  Further, as a result of conversions,
      monthly principal payments on our December debentures have been satisfied
      through January 2008, and the next monthly principal payment is due
      February 1, 2008.  Our first monthly principal payment on
      our August 2007 debentures is due December 1, 2007.  The total monthly
      principal payment amounts on both our December debentures and August debentures
      are scheduled to be as follows:




**Monthly
                  Principal Payment Amount****Date**
            
            **December
                  Debentures**
            
            
            **August
                  Debentures**
            
            
            **Total**12/1/2007
            
            $
            0
            
            
            $
            444,450
            
            
            $
            444,4501/01/2008
            
            
            0
            
            
            
            444,450
            
            
            
            444,4502/1/2008
            
            
            9,524
            
            
            
            444,500
            
            
            
            454,0243/1/2008
            
            
            111,712
            
            
            
            444,500
            
            
            
            556,2124/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,6755/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,6756/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,6757/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,6758/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,6759/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,67510/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,67511/1/2008
            
            
            203,175
            
            
            
            444,500
            
            
            
            647,67512/1/2008
            
            
            203,173
            
            
            
            444,500
            
            
            
            647,6731/01/2009
            
            
            -
            
            
            
            444,500
            
            
            
            444,4502/01/2009
            
            
            -
            
            
            
            444,500
            
            
            
            444,4503/01/2009
            
            
            -
            
            
            
            444,500
            
            
            
            444,4504/01/2009
            
            
            -
            
            
            
            444,500
            
            
            
            444,4505/01/2009
            
            
            -
            
            
            
            444,500
            
            
            
            444,450$
            1,949,809
            
            
            $
            8,001,000
            
            
            $
            9,950,809





Assuming
      monthly principal payments are made in accordance with the schedule set forth
      above, the amount of interest to be paid through maturity in May 2009 is (i)
      $0.1 million with respect to our December debentures, or on average, $7,000
      per
      month, and (ii) $0.5 million with respect to our August debentures, or on
      average, $26,000 per month.




We
      have
      the right to pay interest and monthly principal payments due in respect of
      the
      debentures in cash, or upon notice to the holders and compliance with certain
      equity conditions, including having a currently effective registration statement
      covering the shares of common stock issuable upon conversion of the debentures,
      which we currently do with respect to our December debentures, we can pay all
      or
      a portion of any such payment in common stock valued at a price equal to the
      lesser of the then effective conversion price (currently $1.54 for our December
      debentures and $3.68 for our August debentures) or 85% of the average of the
      VWAP per share as reported on Bloomberg for our common stock for the 10
      consecutive trading days immediately prior to the applicable payment date.
       On the other hand, if the holders voluntarily elect to convert all or a
      portion of the debentures into common stock, the conversion price will be the
      then effective conversion price.   The conversion of these
      debentures could result in substantial dilution to our existing stockholders.




28
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          of Contents




The
      closing market price of our common stock was $2.71 on November 6, 2007.
 Subject to compliance with certain equity conditions, including having a
      currently effective registration statement covering the shares of common stock
      issuable upon conversion of the debentures and subject to the applicable cap
      on
      the beneficial ownership of our shares of common stock by the holder and its
      affiliates following such conversion, we have the right to force conversion
      of
      the entire amount of principal and accrued interest of the debentures if the
      average of the VWAP for our common stock exceeds 200% of the effective
      conversion price for 20 trading days out of a consecutive 30 trading day
      period.




With
      respect to our December debentures, the current conversion price is $1.54,
      and
      therefore 200% of the conversion price is $3.08.  If the price of our
      common stock is below $3.08 per share but is substantially above $1.54 per
      share, we anticipate that the holders of these debentures will elect to convert
      monthly payments of interest and principal into shares of common stock rather
      than receive cash.  If the price of our common stock is below $1.54, the
      current conversion price, we intend to make principal and interest payments
      in
      cash to the extent that our cash flows from operations provide sufficient
      ability to do so.  If our cash flows from operations are not sufficient to
      make principal and interest payments in cash, we will evaluate other equity
      financing opportunities, the proceeds of which could be used to repay the
      debentures.  If we are unable to pay the principal and interest in cash, we
      will make the payments in our common stock pursuant to the terms of the
      agreements including a conversion price based on the lower of $1.54 or 85%
      of
      the average of the VWAP per share as reported on Bloomberg for our common stock
      for the 10 consecutive trading days immediately prior to the applicable payment
      date.




With
      respect to our August debentures, until our stock price exceeds $7.36, if ever,
      we intend to make principal and interest payments in cash to the extent that
      our
      cash flows from operations provide sufficient ability to do so.  If our
      cash flows from operations are not sufficient to make principal and interest
      payments in cash, we will evaluate other equity financing opportunities, the
      proceeds of which could be used to repay the debentures.  If we are unable
      to pay the principal and interest in cash, we will make the payments in our
      common stock pursuant to the terms of the agreements including a conversion
      price based on the lower of $3.68 or 85% of the average of the VWAP per share
      as
      reported on Bloomberg for our common stock for the 10 consecutive trading days
      immediately prior to the applicable payment date.




**Recent
      Financings**




The
      table
      below provides the following information relative to our November 2006 Private
      Placement, our December/February Private Placements and our August 2007 Private
      Placements: (i) the gross proceeds to us from each of the private placements,
      (ii) each payment we made or may be required to make to the investors, any
      affiliate of the investors or any person with whom the investors have a
      contractual relationship regarding the private placements (other than principal
      and interest payments we will be required to make under the terms of the
      debentures issued in these private placements, or dividend payments in respect
      of our Series A Stock, which are discussed below), and (iii) the net proceeds
      to
      us from each of the private placements.




**Private
                  Placement****Investor
                Name**
            
            **December
                  2006**
            
            
            **February
                  2007 (3)**
            
            
            **August
                  2007 (4)**Enable
                Growth Partners LP
            
            $
            1,700,000
            
            
            $
            717,500
            
            
            $
            11,400,125Enable
                Opportunity Partners LP
            
            
            200,000
            
            
            
            84,875
            
            
            
            3,000,125Pierce
                Diversified Strategy Master Fund LLC, ena
            
            
            100,000
            
            
            
            42,000
            
            
            
            600,375Crescent
                International Ltd.
            
            
            1,200,000
            
            
            
            506,625
            
            
            
            -Hudson
                Bay Fund LP
            
            
            -
            
            
            
            -
            
            
            
            2,150,125Hudson
                Bay Overseas Fund LTD.
            
            
            -
            
            
            
            -
            
            
            
            2,850,125Gross
                proceeds
            
            
            3,200,000
            
            
            
            1,351,000
            
            
            
            20,000,875Less
                fees and expenses:Payment
                to Kaufman Bros., L.P.
                and investor relations firm (1)
            
            
            (80,000
            )
            
            
            (33,775
            )
            
            
            (1,350,000
            )Payment
                to Enable funds
                (2)
            
            
            (30,000
            )
            
            
            -
            
            
            
            -Payment
                to Feldman Weinstein
                & Smith (2)
            
            
            -
            
            
            
            (5,000
            )
            
            
            (40,000
            )(110,000
            )
            
            
            (38,775
            )
            
            
            (1,040,000
            )Net
                proceeds
            
            $
            3,090,000
            
            
            $
            1,312,225
            
            
            $
            18,610,875(1)
                Kaufman Bros. acted as our advisors on the respective
                transactions.(2)
                Reimbursement of legal fees and due diligence costs incurred by the
                investor.(3)
                We used $1.3 million of the proceeds to payoff a note held by a
                stockholder.(4)
                We used $13.8 million of the proceeds to make payments related to
                our
                AccessLine acquisition.







29
 Table
          of Contents




*December
      2006 Private Placement*




As
      of
      September 30, 2007, the holders of our December debentures have elected to
      convert approximately $1.7 million of the principal amount of such debentures
      into shares of our common stock, leaving a principal balance of approximately
      $2.0 million.  Under the terms of such debentures, monthly principal
      payments were to begin July 1, 2007 and end December 31, 2008.  As a
      result of the conversions, we have not made any monthly principal payments
      in
      cash to date and such payments through January 2008 have been
      satisfied.  The next monthly principal payment is due February 1,
      2008.  To date, we have satisfied all interest payments through the
      issuance of shares of our common stock.




We
      received $3.2 million in gross proceeds from our December 2006 Private
      Placement.  Assuming that we pay all remaining principal and interest
      payments due under our December debentures in cash on their respective due
      dates, the total amount of payments that we have made and may be required to
      make under the terms of these debentures is $2.1 million.




We
      received net proceeds of $3.1 million from our December 2006 Private
      Placement.  The ratio of (i) the total amount of payments over the
      term of the debentures to (ii) net proceeds is 67%.




The
      closing market price of our common stock per share was $1.48 on December 28,
      2006, the date we entered into the securities purchase agreement related to
      our
      December 2006 Private Placement.  The initial conversion price for our
      December debentures is $1.54 per share and the exercise price of the related
      warrants is $1.69 per share.  As of December 28, 2006, there was no
      discount to the closing market price for the conversion of the debentures or
      the
      exercise of the warrants.




*February
      2007 Private Placement*




The
      entire principal amount of our February debentures was converted into shares
      of
      our common stock.  As a result, we no longer have any payment
      obligations under these debentures.  We had not made any principal
      payment before conversion, and we paid less than $0.1 million in interest before
      conversion.  In connection with the conversion of the debentures into
      unregistered shares of our common stock, we issued the holders an additional
      aggregate 200,520 unregistered shares of our common stock as an inducement
      for
      the early conversion and acceptance of unregistered shares.  None of
      the warrants issued in our February 2007 Private Placement have been exercised
      as of September 30, 2007.




The
      closing market price of our common stock per share was $2.49 on February 12,
      2007, the date we entered into the securities purchase agreement related to
      our
      February 2007 Private Placement.  The entire principal amount of our
      February debentures was converted at a conversion price of $1.54 per share
      and
      the exercise price of the related warrants is $1.69 per share.  The
      table below provides information about (i) gross proceeds we received from
      each
      investor in our February 2007 Private Placement and (ii) the possible discount
      to the closing market price as of the date of sale of these debentures and
      warrants.  The possible discount was calculated by subtracting the
      total conversion price on the date of sale (February 12, 2007) from the combined
      market price of the total number of shares issued upon conversion of the
      debentures (including the 200,520 shares issued as an inducement for early
      conversion and acceptance of unregistered shares) and warrants on that
      date.




**Investor
                  Name**
            
            **Gross
                  Proceeds**
            
            
            **Discount
                  to Closing Market Price**Enable
                Growth Partners LP
            
            $
            717,500
            
            
            $
            777,403Enable
                Opportunity Partners LP
            
            
            84,875
            
            
            
            91,960Pierce
                Diversified Strategy Master Fund LLC, enaFund
                LLC, ena
            
            
            42,000
            
            
            
            45,506Crescent
                International Ltd.
            
            
            506,625
            
            
            
            548,923$
            1,351,000
            
            
            $
            1,463,792





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 Table
          of Contents




*December/February
      Private Placements in the Aggregate*




As
      of
      September 30, 2007, the holders of the debentures we issued in our
      December/February Private Placements have elected to convert approximately
      $3.3
      million in the aggregate of the principal amount of such debentures into shares
      of our common stock, leaving a principal balance in the aggregate of
      approximately $2.0 million.  Under the terms of such debentures,
      monthly principal payments were to begin July 1, 2007 and end December 31,
      2008.  As a result of conversions, we have not made a monthly
      principal payment in cash and all such payments through January 2008 have been
      satisfied.  The next monthly principal payment is due February 1,
      2008.




We
      received $4.6 million in gross proceeds from our December/February Private
      Placements.  Assuming that we pay all remaining principal and interest
      payments due under our December debentures in cash on their respective due
      dates, the total amount of payments that we have made and may be required to
      make under the terms of both our December debentures and February debentures,
      plus the $42,717 that we paid for accrued interest on our February debentures
      before conversion, is $2.1 million.




The
      aggregate average monthly principal payment due from February 2008 to December
      2008 is $177,255 (no monthly principal payments are due until February 1,
      2008).  The aggregate average monthly interest payment due from
      September 2007 to December 2008 is $10,355.




Assuming
      that we pay all principal and interest payments due under the debentures that
      we
      sold in our December/February Private Placements in cash on their respective
      due
      dates, the total principal and interest payments for such debentures aggregate
      to $2.11 million over their respective terms after taking into account
      conversions of the principal amount of such debentures that have been effected
      as of September 25, 2007.  The possible net discount to the market
      price for such debentures, related warrants, and shares issued as inducement
      for
      early conversion, aggregates to 1,112,787 assuming the conversion price is
      the
      initial conversion price of $1.54 per share, which it currently
      is.  We received net proceeds before expenses of $4.4 million from our
      December/February Private Placements.  The ratio of (i) the total
      amount of payments over the term of the debentures and the total possible
      discount to the market price of the shares underlying the debentures and
      warrants (ii) to the net proceeds is 48%.




*August
      2007 Series A Private Placement*




Our
      Series A Stock accrues cumulative dividends at a rate of 5.7% per annum through
      the third anniversary of the date they were issued, 18% per annum thereafter,
      payable semi-annually on January 1 and July 1, beginning on January 1, 2008.
      The
      dividend rate decreases to zero percent if at any time we are able to force
      the
      holders to convert the Series A Stock into shares of our common stock but such
      conversion does not occur because of caps on the holders beneficial ownership
      of
      our common stock.  We may force conversion of our Series A Stock
      anytime after the later of the (i) 90th day following the effective date of
      a
      registration statement covering the shares of common stock issuable upon
      conversion of the Series A Stock and (ii) the date our common stock is listed
      for trading on a major trading market or exchange other than the OTC Bulletin
      Board, if the VWAP for our common stock exceeds 250% of the then effective
      conversion price for 10 consecutive trading days. Any forced conversion is
      subject to our meeting certain equity conditions including having an effective
      registration statement and is subject to a 4.99% cap on the beneficial ownership
      of our shares of common stock by the holder and its affiliates following such
      conversion.




We
      may
      pay the dividends in cash or with shares of our common stock provided that
      we
      meet certain equity conditions, including having a currently effective
      registration statement covering the shares of common stock so issued. If we
      pay
      dividends with shares of our common stock, the shares issued for such purpose
      will be valued at 85% of the average of the VWAPs for the 20 consecutive trading
      days immediately before the applicable dividend payment date. If we are unable
      to make a dividend payment in cash and the equity conditions are not met, the
      holder may elect to waive the equity conditions requirement and receive shares
      of our common stock or elect to have the dividends accrue to the next dividend
      payment date or accreted to, and increase, the outstanding stated
      value.




31
 Table
          of Contents




*August
      2007 Debt Private Placement*




The
      following table sets forth the (i) gross proceeds we received from each investor
      in our August 2007 Debt Private Placement and (ii) amount of payments that
      we
      may be required to make under the terms of our August debentures assuming all
      such payments are made in cash when due.  Payments begin December 1,
      2007 and continue through May 1, 2009.




****
            
            
            **Payments
                through December 31, 2008**
            
            
            **Payments
                from January 1, 2009 through May 1, 2009****Investor
                Name**
            
            **Gross
                Proceeds**
            
            
            **Principal**
            
            
            **Interest**
            
            
            **Total
                (1)**
            
            
            **Principal**
            
            
            **Interest**
            
            
            **Total
                (2)**Enable
                Growth Partners LP
            
            $
            3,800,125
            
            
            $
            3,136,611
            
            
            $
            232,350
            
            
            $
            3,368,961
            
            
            $
            1,206,389
            
            
            $
            18,096
            
            
            $
            1,224,485Enable
                Opportunity Partners LP
            
            
            1,000,125
            
            
            
            825,500
            
            
            
            61,150
            
            
            
            886,650
            
            
            
            317,500
            
            
            
            4,763
            
            
            
            322,263Pierce
                Diversified Strategy Master Fund LLC, ena
            
            
            200,375
            
            
            
            165,389
            
            
            
            12,252
            
            
            
            177,641
            
            
            
            63,611
            
            
            
            954
            
            
            
            64,565Hudson
                Bay Fund LP
            
            
            860,125
            
            
            
            709,944
            
            
            
            52,591
            
            
            
            762,535
            
            
            
            273,056
            
            
            
            4,096
            
            
            
            277,152Hudson
                Bay Overseas Fund LTD
            
            
            1,140,125
            
            
            
            941,056
            
            
            
            69,710
            
            
            
            1,010,766
            
            
            
            361,944
            
            
            
            5,429
            
            
            
            367,373$
            7,000,875
            
            
            $
            5,778,500
            
            
            $
            428,053
            
            
            $
            6,206,553
            
            
            $
            2,222,500
            
            
            $
            33,338
            
            
            $
            2,255,838(1)
                Averages to $477,427 per month from December 1, 2007 through December
                31,
                2008.(2)
                Averages to $451,167 per month from January 1, 2009 through May 1,
                2009.





The
      closing market price of our common stock per share was $3.60 on August 30,
      2007,
      the date we issued the debentures and warrants in our August 2007 Debt Private
      Placement.  The initial conversion price for such debentures is $3.68
      per share and the exercise price of these warrants is $4.20 per
      share.  As of the date of issuance, there was no discount to the
      closing market price for the conversion of the debentures or the exercise of
      the
      warrants.




Assuming
      that we pay all principal and interest payments due under our August debentures
      in cash on their respective due dates, the total principal and interest payments
      for such debentures aggregate to $8.5 million over their respective
      terms.  We received net proceeds before expenses of $7.0 million from
      our August 2007 Debt Private Placement.  The ratio of (i) the total
      amount of payments over the term of the debentures to (ii) net proceeds is
      121%.




**Other
      Matters Relating to Future Amortizable Charges**




As
      of
      September 30, 2007, we have $3.3 million of debt discount and $0.5 million
      of
      deferred debt issuance costs on our balance sheet, which will be amortized
      to
      interest expense using the straight-line method over the life of the related
      debt. In July and August 2007, debentures with a face value of $2.5 million
      were
      converted into common stock, which will result in accelerated amortization
      of
      note discounts and deferred financing costs of approximately $1.3 million for
      the three months ended September 30, 2007.




**Recent
      Accounting Pronouncements**




In
      September 2006, FASB issued SFAS No. 157, "Fair Value Measurements," which
      defines fair value, establishes a framework for measuring fair value in
      accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. In February 2007, FASB issued SFAS
      No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities
      -
      Including an amendment to FASB Statement No. 115." SFAS 159 permits entities
      to
      choose to measure many financial assets and financial liabilities at fair value.
      The objective is to improve financial reporting by providing entities with
      the
      opportunity to mitigate volatility in reported earnings caused by measuring
      related assets and liabilities differently without having to apply complex
      hedge
      accounting provisions. SFAS No. 159 is expected to expand the use of fair value
      measurement of accounting for financial instruments. The fair value option
      established by SFAS No. 159 permits all entities, including non-profits, to
      measure eligible items at fair value at specified election dates. Both SFAS
      157
      and SFAS 159 are effective for fiscal years beginning after November 15, 2007.
      We are currently assessing the impact the adoption of SFAS 157 and SFAS 159
      will
      have on our financial statements.




In
      December 2006, FASB issued FASB Staff Position EITF 00-19-2 "Accounting for
      Registration Payment Arrangements" which specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement should be separately recognized and measured
      in
      accordance with SFAS No. 5, "Accounting for Contingencies." Adoption of EITF
      00-19-2 was required for fiscal years beginning after December 15, 2006. We
      are
      currently assessing the impact the adoption of EITF 00-19-2 will have on our
      consolidated financial statements.




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 Table
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In
      February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities – Including an Amendment of FASB
      Statement No. 115" which is effective for fiscal years beginning after
      November 15, 2007. This statement permits an entity to choose to measure
      many financial instruments and certain other items at fair value at specified
      election dates. Subsequent unrealized gains and losses on items for which the
      fair value option has been elected will be reported in earnings. We are
      currently assessing the impact this statement will have on our consolidated
      financial statements.




**Off-Balance
      Sheet Arrangements**




We
      did
      not have any off-balance sheet arrangements as of the year ended December 31,
      2006, nor do we have any as of September 30, 2007.





**RISK
        FACTORS**
  *This
        report includes forward-looking statements about our business and results
        of
        operations that are subject to risks and uncertainties.  See
        "Forward-Looking Statements," above.  Factors that could cause or
        contribute to such differences include those discussed below.  In
        addition to the risk factors discussed below, we are also subject to additional
        risks and uncertainties not presently known to us or that we currently deem
        immaterial.  If any of these known or unknown risks or uncertainties
        actually occur, our business, financial condition or results of operation
        could
        be harmed substantially.*
 
 **Risks
        Related To Our Financial Condition**
  ***We
        have a limited operating history, have experienced significant expenditures
        related to funding our initial product development, and are currently carrying
        a
        net loss.  If our business model is not successful, or if we are
        unable to generate sufficient revenue to offset our start-up expenditures,
        we
        may not become profitable, and the value of your investment may
        decline.***
  We
        have a
        limited operating history from which to evaluate our business and
        prospects.  We incurred a net loss applicable to common stockholders
        of $9.9 million for the nine months ended September 30, 2007 and $3.1 million
        for the year ended December 31, 2006.  We have an accumulated deficit
        of $19.8 million at September 30, 2007.  We cannot assure you that our
        future planned operations will be implemented successfully or that we will
        ever
        have profits.  Furthermore, we are experiencing the initial costs and
        uncertainties of a young operating company, including start-up expenditures,
        unforeseen costs and difficulties, complications, and delays, all of which
        must
        be resolved and/or paid without the benefit of a predictable revenue
        stream.  We cannot be sure that we will be successful in meeting these
        challenges and addressing these risks and uncertainties.  If we are
        unable to do so, our business will not be successful.
  ***Our
        auditors have expressed substantial doubt regarding our ability to continue
        as a
        going concern.***
  As
        of the
        date of our most recent audit, which included the fiscal years ended December
        31, 2006 and December 31, 2005, we had not generated sufficient revenues
        to meet
        our cash flow needs.  As a result, our auditors have expressed
        substantial doubt about our ability to continue as a going
        concern.  Although we have generated revenue, we are still operating
        at a net loss, and may continue to incur losses for a period of
        time.  We incurred a net loss applicable to common stockholders of
        $9.9 million for the nine months ended September 30, 2007 and $3.1 million
        for
        the year ended December 31, 2006.  We cannot assure you that we will
        be able to obtain sufficient funds from our operating or financing activities
        to
        support our continued operations.  If we cannot continue as a going
        concern, we may need to substantially revise our business plan or cease
        operations, which may reduce or negate the value of your
        investment.
  ***The
        sale of the shares of our common stock acquired in private placements could
        cause the price of our common stock to decline.***
  In
        our
        December/February Private Placements, in the aggregate, we issued a total
        of
        $5.2 million principal amount of convertible debentures and warrants to purchase
        1,350,947 shares of our common stock.  In our August 2007 Private
        Placement we issued 13,000 shares of our Series A Stock, $8.0 million principal
        amount of convertible debentures and warrants to purchase 2,584,198 shares
        of
        our common stock.  In connection with our acquisition of AccessLine,
        we issued 3,939,565 shares of our common stock, and may issue up to an
        additional 2,500,000 shares upon the achievement of certain future financial
        objectives.  All of the shares of our common stock underlying the
        debentures and warrants we issued in our December/February Private Placements
        are currently registered for resale by the holders thereof.  Further,
        we have agreed to register for resale by the investors the shares of common
        stock underlying the securities we issued in our August 2007 Private Placements,
        as well as the shares of common stock we issued in connection with our
        acquisition of AccessLine.  You should expect a significant number of
        our shares of common stock that are currently registered or that we are
        obligated to register in the future to be sold.  Depending upon market
        liquidity at the time our common stock is resold by the holders thereof,
        such
        resales could cause the trading price of our common stock to
        decline.  In addition, the sale of a substantial number of shares of
        our common stock, or anticipation of such sales, could make it more difficult
        for us to sell equity or equity-related securities in the future at a time
        and
        at a price that we might otherwise wish to effect sales.
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  ***We
        have significant indebtedness and agreed to certain restrictions as a result
        of
        our recent private placement of debentures.***
  We
        incurred $13.2 million in principal amount of indebtedness as a result of
        the
        issuance of the debentures in our December/February Private Placements and
        our
        August 2007 Private Placement, the principal balance of which is $10.0 million
        as of September 30, 2007.  The debentures carry substantial covenants
        that impose significant restrictions on us, including restrictions against
        incurring additional indebtedness, creating any liens on our property, amending
        our certificate of incorporation or bylaws, redeeming or paying dividends
        on
        shares of our outstanding common stock, and entering into certain related
        party
        transactions.  The debentures also carry substantial covenants that
        impose significant requirements on us, including, among others, requirements
        that:
  ·
              we
                  pay interest and other charges on the
                  debentures;
 ·
              we
                  use the proceeds from the sale of the debentures only for permitted
                  purposes;
 ·
              while
                  the debentures are outstanding, if we issue equity or equity linked
                  securities at a price lower than the conversion price of the debentures,
                  then the conversion price of the debentures will be reduced to
                  the same
                  price of the equity or equity linked securities so
                  issued;
 ·
              we
                  keep reserved out of our authorized shares of common stock sufficient
                  shares to satisfy our obligation to issue shares on conversion
                  of the
                  debentures and the exercise of the related warrants issued in connection
                  with the sale of the debentures;
 ·
              we
                  must file a registration statement with the SEC registering the
                  shares of
                  common stock issuable upon the conversion of the debentures and
                  the
                  exercise of the related warrants on a timely basis, and it must
                  be
                  declared effective within a certain period of time, or else we
                  are
                  required to pay to each investor partial liquidated damages;
                  and
 ·
              we
                  may not, directly or indirectly, redeem, purchase or otherwise
                  acquire any
                  capital stock or set aside any monies for such redemption, purchase
                  or
                  other acquisition.
 
 Our
        ability to comply with these provisions may be affected by changes in our
        business condition or results of our operations, or other events beyond our
        control.  The breach of any of these covenants could result in a
        default under the debentures, permitting the holders thereof to accelerate
        the
        maturity of the debentures and demand repayment in full.  Such actions
        by such holders could impair our ability to operate or cause us to seek
        bankruptcy protection.
  ***Certain
        covenants we agreed to in connection with the debentures may impair our ability
        to issue additional debt or equity.***
  Our
        December debentures and our August debentures impose significant covenants
        on
        us, some of which may impair our ability to issue additional debt or equity,
        if
        necessary.  For example, the investors in our August 2007 Private
        Placement have the right to participate in any financing we undertake through
        the date that is the 12 month anniversary of the effectiveness of the
        registration statement we agreed to file for the re-sale of our shares of
        common
        stock issuable upon conversion and exercise of the securities we issued in
        our
        August 2007 Private Placement.
  ***If
        we pay interest or principal on the debentures in shares of common stock
        when
        our stock price is low, the holders thereof have the ability to negatively
        affect our stock price and to create a greater dilution to our
        stockholders.***
  We
        have
        the right to pay interest and monthly principal payments in cash, or upon
        notice
        to the holders and compliance with certain equity conditions, including having
        a
        currently effective registration statement covering the shares of common
        stock
        issuable upon conversion of the debentures, we can pay all or a portion of
        any
        such payment in common stock valued at a price equal to the lesser of the
        then
        effective conversion price or 85% of the average of the VWAP per share as
        reported on Bloomberg for our common stock for the 10 consecutive trading
        days
        immediately prior to the applicable payment date.  To the extent that
        we pay principal or interest in common stock during a period when our common
        stock price is low, such investor will receive a larger number of shares
        of our
        common stock as a result of the conversion, which such investor could sell
        at
        high volumes to drive the VWAP downward.  Downward pressure on the
        price of our common stock from consecutive conversions could result in the
        investors receiving payment on the debentures at successively lower conversion
        rates, thereby causing a successively greater dilution of our stockholders,
        and
        causing a downward spiraling affect on the price of our stock (a so-called
        "death spiral").  Further, to the extent that conversion of the
        debenture requires us to issue more shares of common stock, we are obligated
        to
        register the additional shares of stock under a new registration
        statement.
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  ***Our
        failure to secure registration of the common stock underlying securities
        sold in
        our recent private placements could result in substantial liquidated
        damages.***
  Under
        the
        terms of the registration rights agreements we entered into with the investors
        in connection with our December/February Private Placements, we agreed to
        file
        two separate registration statements covering the resale of the shares of
        common
        stock underlying the securities we sold in such private placements, and to
        maintain the effectiveness of the registration statements (subject to certain
        limitations) for a period of time until the holders can sell the underlying
        common stock without volume restrictions under Rule 144(k) of the Securities
        Act.  Currently both such registration statements are
        effective.  If we fail to maintain the effectiveness of either of the
        registration statements, we are required to pay to the investors partial
        liquidated damages.
  We
        also
        entered into registration rights agreements with the investors from our August
        2007 Private Placement and the holders that received shares of our common
        stock
        in connection with our AccessLine acquisition that contain terms substantially
        identical to those discussed above.  If those registration statements
        are not declared effective by the SEC by an agreed to date, or if we fail
        to
        maintain the effectiveness of either of the registration statements, we are
        also
        required to pay partial liquidated damages.
  ***Our
        failure to repay the debentures could result in substantial penalties against
        us, and legal action which could substantially impair our
        operations.***
  The
        debentures we issued require monthly principal payments equal to 1/18th of
        the
        principal amount due under each debenture.  Such payments began July
        1, 2007 and continue through December 31, 2008 with respect to our December
        debentures.  Such payments begin on December 1, 2007 and continue
        through May 1, 2009 with respect to our August debentures.  The
        debentures accrue interest at the rate of 6% per annum, payable quarterly
        and on
        each monthly principal payment.  We have the right to pay interest and
        monthly principal payments in cash, or upon notice to the holders and compliance
        with certain equity conditions, we can pay all or a portion of any such payment
        in common stock.  To repay the debentures in cash, we will be required
        to use our limited working capital or raise additional funds.  If we
        are unable to repay the debentures when required, either in cash or in common
        stock, the holders could commence legal action against us.  Any such
        action could impose significant costs on us and require us to curtail or
        cease
        operations.
  In
        addition, the debentures define certain events of default, including without
        limitation failure to make a payment obligation, failure to observe other
        covenants of the debenture or related agreements (subject to applicable cure
        periods), breach of representation or warranty, bankruptcy, default under
        another significant contract or credit obligation, delisting of our common
        stock, a change in control, failure secure and maintain an effective
        registration statement covering the resale of the common stock underlying
        the
        debentures and the warrants, or failure to deliver share certificates in
        a
        timely manner. In the event of default, which is not cured within specified
        grace periods, the holders of the debentures have the right to accelerate
        all
        amounts outstanding under the debentures and demand payment of a mandatory
        default amount equal to 130% of the amount outstanding under the debenture,
        plus
        accrued interest and expenses.  If we were unable to repay the
        mandatory default amount when required, the holders could commence legal
        action
        against us.  Any such action could impose significant costs on us and
        require us to curtail or cease operations.
  ***If
        we need additional financing in the future and are required to issue securities
        which are priced at less than the conversion price of our Series A Stock
        or
        convertible debentures or the exercise price of warrants sold in our recent
        private placements, it will result in additional
        dilution.***
  In
        recent
        private placements, we have issued Series A Stock and debentures convertible
        into, and warrants to purchase, shares of our common stock.  Both our
        Series A Stock, the debentures and the warrants contain provisions that will
        require us to reduce the conversion price and exercise price, as the case
        may
        be, if we issue additional securities while our Series A Stock, the debentures
        or warrants are outstanding which contain purchase prices, conversion prices
        or
        exercise prices less than the conversion price of our Series A Stock or the
        debentures or the exercise price of the warrants.  If this were to
        occur, current investors, other than the investors in our recent private
        placements would sustain material dilution in their ownership
        interest.
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  ***The
        market price of our securities could be adversely affected by sales of
        registered and restricted securities.***
  Actual
        sales or the prospect of future sales of shares of our common stock under
        Rule
        144 may have a depressive effect upon the price of, and market for, our common
        stock.  As of September 30, 2007, 23,066,915 shares of our common
        stock were issued and outstanding. 10,569,212 of these shares are "restricted
        securities" and under some circumstances may, in the future, be under a
        registration under the Securities Act or in compliance with Rule 144 adopted
        under the Securities Act.  In general, under Rule 144, subject to the
        satisfaction of other conditions, a person who has beneficially owned restricted
        shares of common stock for at least one year is entitled to sell, within
        any
        three month period, a number of shares that:
  ·
              does
                  not exceed the greater of 1% of the total number of outstanding
                  shares of
                  the same class; or
 ·
              if
                  the common stock is quoted on NASDAQ or a stock exchange, the average
                  weekly trading volume during the four calendar weeks immediately
                  preceding
                  the sale.
 
 A
        person
        who presently is not and who has not been one of our affiliates for at least
        three months immediately preceding a sale and who has beneficially owned
        the
        shares of common stock for at least two years is entitled to sell these shares
        under Rule 144 without regard to any of the volume limitations described
        above.  We cannot predict what effect, if any, that sales of shares of
        common stock, or the availability of these shares for sale, will have on
        the
        market prices prevailing from time to time.  Nevertheless, the
        possibility that substantial amounts of common stock may be sold in the public
        market may adversely effect prevailing prices for our common stock and could
        impair our ability to raise capital in the future through the sale of equity
        securities.
  In
        addition to the 10,569,212 shares of "restricted securities" that were issued
        and outstanding as of September 30, 2007, an aggregate of 19,551,449 shares
        of
        common stock that have been issued or will be issuable upon the conversion
        and
        exercise of outstanding debentures, preferred stock and warrants are or will
        be
        registered for resale in registration statements, not including shares of
        common
        stock issuable upon conversion of interest accrued on the
        debentures.  The additional overhang represented by these registered
        and to-be registered securities could also have a depressive effect on the
        public trading price of our common stock.
  **Risks
        Related to Our Business**
  ***We
        may encounter difficulties in integrating acquired products, technologies
        or
        businesses, which could adversely affect our
        business.***
  We
        recently acquired products and/or assets from each of AVS and AccessLine,
        and
        may in the future acquire technology, products or businesses related to our
        current or future business. We have limited experience in acquisition activities
        and may have to devote substantial time and resources to the integration
        and
        operation of our newly acquired business or any future acquisitions. Further,
        these past and potential acquisitions entail risks, uncertainties and potential
        disruptions to our business. For example, we may not be able to successfully
        integrate an acquired company's operations, technologies, products and services,
        information systems or personnel into our business. Further, businesses we
        acquire, such as the hosted VoIP business we acquired from AccessLine, may
        not
        provide the intended complementary fit with our existing business.  An
        acquisition may further strain our existing financial and managerial controls,
        and divert management's attention away from our other business
        concerns.  There may also be unanticipated costs and liabilities
        associated with an acquisition that could adversely affect our operating
        results.
  ***We
        face competition from much larger and well-established
        companies.***
  We
        face
        competition from much larger and well-established companies.  In
        addition, with respect to our VoIP business, our competition is not only
        from
        other independent VoIP providers, but also from traditional telephone companies,
        wireless companies, cable companies, competitive local exchange carriers
        and
        alternative voice communication providers.  Some of our competitors
        have or may have greater financial resources, production, sales, marketing,
        engineering and other capabilities with which to develop, manufacture, market
        and sell their products, and more experience in research and development
        than we
        have.  As a result, our competitors may have greater credibility with
        our existing and potential customers.  Further, because most of our
        target market is already purchasing communications services from one or more
        of
        our competitors, our success is dependent upon our ability to attract customers
        away from their existing providers.
  In
        addition, other established or new companies may develop or market products
        competitive with, or superior to, our products.  We cannot assure you
        that our competitors will not succeed in developing or marketing technologies
        or
        products that are more effective or commercially attractive than our products
        or
        that would render our products and services obsolete.  Our success
        will depend in large part on our ability to maintain a competitive position
        with
        our products.
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  ***Lower
        than expected market acceptance of our products or services would negatively
        impact our business.***
  We
        have
        yet to establish significant customer acceptance of our products or
        services.  End-users will not begin to use our products or services
        unless they determine that our products and services are reliable,
        cost-effective and an effective means of communication.  For some
        end-users, our products and services are a major capital purchase and purchase
        decisions are greatly influenced by senior management who are subject to
        increasing pressures to reduce costs.  These and other factors may
        affect the rate and level of market acceptance of our products,
        including:
  ·
              our
                  products price relative to competing products or alternative means
                  of
                  communication;
 ·
              effectiveness
                  of our sales and marketing efforts;
 ·
              capital
                  equipment budgets of our targeted
                  end-users;
 ·
              perception
                  by our targeted end-users of our systems' reliability, efficacy
                  and
                  benefits compared to competing
                  technologies;
 ·
              willingness
                  of our targeted end-users to adopt new technologies;
                  and
 ·
              development
                  of new products and technologies by our
                  competitors.
  If
        our
        products and services do not achieve market acceptance, our ability to achieve
        any level of profitability would be harmed and our stock price would
        decline.
  ***If
        we do not effectively manage our growth, our business may be significantly
        harmed.***
  To
        implement our business strategy, we expect continued growth in our employee
        and
        infrastructure requirements, particularly as we expand our engineering, sales
        and marketing capacities.  To manage our growth, we must integrate and
        augment our operational and financial systems, hire and train additional
        qualified personnel, and expand our marketing and distribution
        capabilities.  We cannot be certain that our personnel, systems,
        procedures and internal controls will be adequate to support our future
        operations.  If we cannot manage our growth effectively, our business
        will suffer.
  ***Price
        competition would negatively impact our business.***
  Our
        profitability could be negatively affected as a result of competitive price
        pressures in the sale of unified communications products, which could cause
        us
        to reduce the price of our products or services.  Any such reduction
        could have an adverse impact on our margins and profitability. Our competitors
        may also offer bundled service arrangements offering a more complete product
        despite the technical merits or advantages of our products.  Moreover,
        our competitors' financial resources may allow them to offer services at
        prices
        below cost or even for free to maintain and gain market share or otherwise
        improve their competitive positions. Any of these competitive factors could
        make
        it more difficult for us to attract and retain customers, cause us to lower
        our
        prices in order to compete.
  ***We
        may lose a key account.***
  We
        currently provide our Smart Number product to approximately 30,000 end users
        for
        a single customer, which generates over $1 million of our revenue on a quarterly
        basis.  That customer informed us that it plans to migrate away from
        the use of our Smart Number product.  Although that customer has not
        yet migrated, we anticipate that this account will eventually migrate to
        another
        carrier.
  ***The
        sales cycle for our videoconferencing system can be long and
        unpredictable.***
  Selling
        our products and services often requires several customer meetings and
        demonstrations and the time from introduction to sale of our videoconferencing
        system can take months as end-users educate themselves on the benefits of
        products and services.  Our quarterly revenues and operating results
        depend upon the timing of orders received during a given quarter and the
        shipment and recognition of resulting revenue during each quarter, each of
        which
        is extremely difficult to forecast.
  ***Our
        future operating results may vary substantially from period to period and
        may be
        difficult to predict.***
  Our
        historical operating results have fluctuated significantly and will likely
        continue to fluctuate in the future, and a decline in our operating results
        could cause our stock price to fall.  Because of a relatively high
        unit price of our videoconferencing system, and the relatively small number
        of units sold each quarter, each sale of our videoconferencing system can
        represent a significant component of our revenue for a particular
        quarter.  Therefore, if we do not sell one of our videoconferencing
        systems when anticipated, our operating results may vary significantly and
        our
        stock price may be materially harmed.  These fluctuations and other
        potential fluctuations mean that you should not rely upon our operating results
        in any particular period as an indication of future
        performance.
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  On
        an
        annual and a quarterly basis, there are a number of factors that may affect
        our
        operating results, many of which are outside our control. These include,
        but are
        not limited to:
  ·
              changes
                  in market demand;
 ·
              the
                  timing of customer orders;
 ·
              timing
                  of when we are able to recognize revenue associated with sales
                  of our
                  system, which varies depending upon the terms of the applicable
                  sales and
                  service contracts
 ·
              customer
                  cancellations;
 ·
              competitive
                  market conditions;
 ·
              lengthy
                  sales cycles and/or regulatory approval
                  cycles;
 ·
              new
                  product introductions by us or our
                  competitors;
 ·
              market
                  acceptance of new or existing
                  products;
 ·
              the
                  cost and availability of
                  components;
 ·
              timing
                  and level of expenditures associated with new product development
                  activities;
 ·
              the
                  mix of our customer base and sales
                  channels;
 ·
              the
                  mix of products sold;
 ·
              continued
                  compliance with industry standards and regulatory requirements;
                  and
 ·
              general
                  economic conditions.
 
 These
        factors are difficult to forecast and may contribute to substantial fluctuations
        in our quarterly revenues and substantial variation from our projections,
        particularly during the periods in which our sales volume is low.  Any
        failure to meet investor expectations regarding our operating results may
        cause
        our stock price to decline.
  ***We
        may experience delays in introducing products or services to the market and
        our
        products or services may contain defects which could seriously harm our results
        of operations.***
  We
        may
        experience delays in introducing new or enhanced products or services to
        the
        market.  Such delays, whether caused by factors such as unforeseen
        technology issues or otherwise, could negatively impact our sales revenue
        in the
        relevant period.  In addition, we may terminate new product, service
        or enhancement development efforts prior to any introduction of a new product,
        service or enhancement.  Any delays for new offerings currently under
        development or any product defect issues or product recalls could adversely
        affect the market acceptance of our products or services, our ability to
        compete
        effectively in the market, and our reputation, and therefore, could lead
        to
        decreased sales and could seriously harm our results of operations.
  ***We
        depend on third party manufacturers to manufacture many of our products,
        and any
        delay or interruption in manufacturing by these manufacturers may harm our
        business.***
  We
        do not
        have long-term purchase agreements with our third party manufacturers and
        we
        depend on a concentrated group of third party manufacturers for many of our
        products. There can be no assurance that our third party manufacturers will
        be
        able or willing to reliably manufacture our products on a cost-effective
        basis
        or in a timely manner. If we cannot obtain the business of these manufacturers
        or if any of the manufacturers experience financial or other difficulties
        in
        their businesses, our business may be adversely affected.
  ***It
        may be difficult for us to identify the source of the problem when there
        is a
        network problem.***
  We
        must
        successfully integrate our service with products from third party vendors
        and
        carriers. When network problems occur, it may be difficult for us to identify
        its source.  This may result in the loss of market acceptance of our
        products and we may incur expenses in connection with any necessary
        corrections.
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  ***Decreasing
        telecommunications rates may diminish or eliminate our competitive pricing
        advantage.***
  Telecommunications
        rates in the markets in which we do business have and may continue to decrease,
        which may eliminate the competitive pricing advantage of our
        services.  Customers that use our services to take advantage of our
        current pricing advantage, may switch to other providers if such pricing
        advantages diminishes.  Further, continued rate decreases by our
        competitors may require us to lower our rates, which will reduce or possibly
        eliminate any gross profit from our services.
  ***We
        rely on third party service providers for certain aspects of our VoIP
        business.***
  Rather
        than deploying our own network, we leverage the infrastructure of third party
        service providers to provide telephone numbers, public switched telephone
        network, or PSTN, call termination and origination services and local number
        portability for our customers.  Though this has lowered our operating
        costs in the short term, it has also reduced our operating flexibility and
        ability to make timely service changes. If any of the third party service
        providers stop providing the services on which we depend, the delay in switching
        the underlying services to another service provider, if available, and
        qualifying this new service could adversely effect our business.
  While
        we
        believe that we have good relationships with our current service providers,
        we
        can give no assurance that they will continue to supply cost-effective services
        to us in the future or that we will be successful in signing up alternative
        or
        additional providers. Although we believe we could replace our current
        providers, if necessary, our ability to provide service to our customers
        would
        be impacted during this timeframe, which could adversely effect our
        business.
  ***Our
        growth may be limited by certain aspects of our VoIP
        service.***
  Our
        VoIP
        services are not the same in all respects as those provided by traditional
        telephone service providers.  For example:
  ·
              We
                  utilize a data circuit rather than traditional wireline voice circuits
                  to
                  interconnect to existing customer premise equipment.  This
                  requires the additional use of a modem and gateway on the customer's
                  premises, which for many of our customers, is an unfamiliar
                  concept.
  ·
              Our
                  emergency calling service is
                  different.
  ·
              Our
                  customers may experience higher dropped-call rates and other call
                  quality
                  issues because our services depend on data networks rather than
                  traditional voice networks and these services have  more single
                  points of failure than traditional wireline
                  networks.
  ·
              Our
                  customers cannot accept collect
                  calls.
  ·
              Our
                  services are interrupted in the event of a power outage or if Internet
                  access is interrupted.
  Because
        our continued growth depends on our target market adopting our services,
        our
        ability to adequately address significant differences through our technology,
        customer services, marketing and sales efforts is important.  If
        potential customers do not accept the differences between our service and
        traditional telephone service, they may not subscribe to our VoIP services
        and
        our business would be affected adversely.
  ***Our
        growth may be negatively affected if we are unable to improve our process
        for
        local number portability provisioning.***
  Local
        number portability, which is considered an important feature by many customers,
        allows a customer to retain their existing telephone numbers when subscribing
        to
        our services.  The customer must maintain their existing telephone
        service during the number transfer process. Although we are taking steps
        to
        reduce how long the process takes, currently the process of transferring
        numbers
        can take 20 business days or longer. By comparison, generally, transferring
        wireless telephone numbers among wireless service providers takes several
        hours,
        and transferring wireline telephone numbers among traditional wireline service
        providers takes a few days.  The additional time our process takes is
        due to our reliance on third party carriers to transfer the numbers and the
        delay the existing telephone service provider may contribute to the process.
        If
        we fail to reduce the amount of time the process takes, our ability to acquire
        new customers or retain existing customers may suffer.
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  ***We
        could be liable for breaches of security on our web site or suffer harm due
        to
        fraudulent credit card transactions or theft of services or
        if a
        third-party vendor fails to deliver credit card transaction processing
        services.***
  Although
        we have implemented processes designed to protect consumer information, prevent
        fraudulent credit card transactions, theft of services and other security
        breaches, failure to mitigate such fraud or breaches may adversely affect
        our
        business. We rely on third party providers to process and guarantee payments
        made by customers up to certain limits, and we may be unable to prevent our
        customers from fraudulently receiving goods and services. In addition, we
        may
        experience losses due to theft of services.  Parties may obtain access
        to our service without paying for it and international toll calls by unlawfully
        using our service and/or submitting fraudulent credit card
        information.  Any costs we incur as a result of fraudulent or disputed
        transactions could harm our business.
  In
        addition, the functionality of our current billing system relies on third
        party
        vendors delivering certain services. If these vendors stop providing such
        services, we will not be able to charge for our services in a timely or scalable
        manner, which could decrease our revenue and adversely effect our
        business.
  ***Our
        success also depends on our ability to handle a large number of simultaneous
        calls.***
  We
        expect
        the volume of simultaneous calls to increase significantly as our customer
        base
        grows. Our network hardware and software may not be able to accommodate this
        additional volume.  This could result in a decreased level of
        operating performance, disruption of service and a loss of customers, any
        of
        which could adversely effect our business.
  ***A
        higher rate of customer terminations would reduce our revenue or require
        us to
        spend more money to grow our customer base.***
  We
        must
        acquire new customers on an ongoing basis just to maintain our existing level
        of
        customers and revenues due to customers that terminate our service. As a
        result,
        marketing expense is an ongoing requirement of our business. If our churn
        rate
        increases, we will have to acquire even more new customers to maintain our
        existing revenues. We incur significant costs to acquire new customers, and
        those costs are an important factor in determining our net losses and achieving
        future profitability. Therefore, if we are unsuccessful in retaining customers
        or are required to spend significant amounts to acquire new customers, our
        revenue could decrease and our net losses could increase.
  ***Our
        success also depends on third parties in our distribution
        channels.***
  We
        currently sell our products direct to customers and through resellers. We
        may
        not be successful in developing additional distribution relationships.
        Agreements with distribution partners generally provide for one-time and
        recurring commissions based on our list prices, and do not require minimum
        purchases or restrict development or distribution of competitive products.
        Therefore, entities that distribute our products may compete with us. In
        addition, distributors and resellers may not dedicate sufficient resources
        or
        give sufficient priority to selling our products. Our failure to develop
        new
        distribution channels, the loss of a distribution relationship or a decline
        in
        the efforts of a reseller or distributor could adversely effect our
        business.
  ***We
        need to retain key personnel to support our products and ongoing
        operations.***
  The
        development and marketing of our products will continue to place a significant
        strain on our limited personnel, management, and other resources.  Our
        future success depends upon the continued services of our executive officers
        and
        other key employees who have critical industry experience and relationships
        that
        we rely on to implement our business plan.  None of our officers or
        key employees are bound by employment agreements for any specific term. The
        loss
        of the services of any of our officers or key employees could delay the
        development and introduction of, and negatively impact our ability to sell
        our
        products which could adversely affect our financial results and impair our
        growth. We currently do not maintain key person life insurance policies on
        any
        of our employees.
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  **Risks
        Relating to Our Industry**
  ***We
        face risks associated with our products and services and their development,
        including new product or service introductions and
        transitions.***
  The
        unified communications market is an emerging market marked by rapid
        technological changes and frequent introductions of new and enhanced
        products, which may result in products or services that are superior to
        ours.  To compete successfully in this market, we must continue to design,
        develop, manufacture, and sell new and enhanced products and services that
        provide increasingly higher levels of performance and reliability at lower
        cost
        and respond to customer expectations. Our success in designing, developing,
        manufacturing, and selling such products and services will depend on a variety
        of factors, including:
  ·
              our
                  ability to timely identify new technologies and implement product
                  design
                  and development;
 ·
              the
                  scalability of our software products;
                  and
 ·
              our
                  ability to successfully implement service features mandated by
                  federal and
                  state law.
 
 If
        we are
        unable to anticipate or keep pace with changes in the marketplace and the
        direction of technological innovation and customer demands, our products
        or
        services may become less useful or obsolete and our operating results will
        suffer.  Additionally, properly addressing the complexities associated
        with compatibility issues, sales force training, and technical and sales
        support
        are also factors that may affect our success.
  ***Because
        the communications industry is characterized by competing intellectual property,
        we may be sued for violating the intellectual property rights of
        others.***
  The
        unified communications industry is susceptible to litigation over patent
        and
        other intellectual property rights.  Determining whether a product
        infringes a patent involves complex legal and factual issues, and the outcome
        of
        patent litigation actions is often uncertain.  We have not conducted
        an extensive search of patents issued to third parties, and no assurance
        can be
        given that third party patents containing claims covering our products, parts
        of
        our products, technology or methods do not exist, have not been filed, or
        could
        not be filed or issued.
  From
        time
        to time, we have received, and may continue to receive in the future, notices
        of
        claims of infringement, or potential infringement, of other parties' proprietary
        rights.   If we become subject to a patent infringement or other
        intellectual property lawsuit and if the relevant patents or other intellectual
        property were upheld as valid and enforceable and we were found to infringe
        or
        violate the terms of a license to which we are a party, we could be prevented
        from selling our products unless we could obtain a license or were able to
        redesign the product to avoid infringement.  If we were unable to
        obtain a license or successfully redesign our products, we might be prevented
        from selling our products.  If there is an allegation or determination
        that we have infringed the intellectual property rights of a third party,
        we may
        be required to pay damages, or a settlement or ongoing royalties.  In
        these circumstances, we may be unable to sell our products at competitive
        prices
        or at all, our business and operating results could be harmed and our stock
        price may decline.
  ***Inability
        to protect our proprietary technology would disrupt our
        business.***
  We
        rely
        in part on patent, trademark, copyright, and trade secret law, and nondisclosure
        agreements to protect our intellectual property in the United States and
        abroad.  As of November 13, 2007, we had two patents and one patent
        pending relating to IP call processing and security.  We cannot predict
        whether such pending patent applications will result in issued patents that
        effectively protect our intellectual property. We may not be able to protect
        our
        proprietary rights in the United States or abroad, and competitors may
        independently develop technologies that are similar or superior to our
        technology, duplicate our technology or design around any patent of ours.
        Moreover, litigation may be necessary in the future to enforce our intellectual
        property rights. Such litigation could result in substantial costs and diversion
        of management time and resources and could adversely effect our
        business.
  ***Our
        VoIP products must comply with industry standards, which are
        evolving.***
  Market
        acceptance of VoIP is, in part, dependent upon the adoption of industry
        standards so that products from various manufacturers can interoperate.
        Currently, industry leaders do not agree on which standards should be used
        for a
        particular application, and the standards continue to change.  Our
        VoIP telephony products rely significantly on communication standards (e.g.,
        SIP
        and MGCP) and network standards (e.g., TCP/IP and UDP) to interoperate with
        equipment of other vendors. As standards change, we may have to modify our
        existing products or develop and support new versions of our
        products.  The failure of our products and services to comply, or
        delays in compliance, with industry standards could delay or interrupt
        production of our VoIP products or harm the perception and adoption rates
        of our
        service, any of which would adversely effect our business.
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  ***Future
        regulation of VoIP services could limit our growth.***
  The
        VoIP
        industry may be subject to increased regulation.   In addition,
        established telecommunication companies may devote substantial lobbying efforts
        to influence the regulation of the VoIP industry in a manner that is contrary
        to
        our interests.  Increased regulation and additional regulatory funding
        obligations at the federal and state level could require us to either increase
        the retail price for our VoIP services, which would make us less competitive,
        or
        absorb such costs, which would decrease our profit margins.
  ***Our
        emergency and E911 calling services differ from those offered by traditional
        telephone service providers and may expose us to significant
        liability.***
  Traditional
        telephone service providers route emergency calls over a dedicated
        infrastructure directly to an emergency services dispatcher in the caller's
        area. Generally, the dispatcher automatically receives the caller's phone
        number
        and location information. Our E911 service, where offered, operates in a
        similar
        manner.  However, the only location information that our E911 service
        can transmit to an emergency service dispatcher is the information that our
        customers have registered with us. A customer's registered location may be
        different from the customer's actual location at the time of the call, and
        the
        customer, in those instances, would have to verbally inform the emergency
        services dispatcher of his or her actual location at the time of the
        call.
  We
        do not
        currently offer E911 service in all areas where are customers are
        located.  In some areas, emergency calls are delivered with the
        caller’s address or callback number.  In some cases calls may be
        delivered to a call center that is run by a third-party provider, and the
        call
        center operator will coordinate connecting the caller to the appropriate
        Public
        Safety Answering Point, or PSAP, or emergency services provider and providing
        the customer's service location and phone number to those local
        authorities.
  Delays
        our customers encounter when making emergency services calls and any inability
        of the answering point to automatically recognize the caller's location or
        telephone number can result in life threatening consequences.  In
        addition, if a customer experiences an Internet or power outage or network
        failure, the customer will not be able to reach an emergency services provider
        using our services.  Customers may attempt to hold us responsible for
        any loss, damage, personal injury or death suffered as a result of any failure
        of our E911 services and, unlike traditional wireline and wireless telephone
        providers, there are no state or federal provisions that currently indemnify
        or
        limit our liability for connecting and carrying emergency 911 phone calls
        over
        IP networks.
  ***If
        we fail to comply with FCC regulations requiring us to provide E911 services,
        we
        may be subject to significant fines or penalties.***
  In
        May
        2005, the FCC required VoIP providers that interconnect with the PSTN to
        provide
        E911 service.  On November 7, 2005, the Enforcement Bureau of the FCC
        issued a notice stating the information required to be submitted to the FCC
        in
        E911 compliance letters due by November 28, 2005. In this notice, the
        Enforcement Bureau stated that, although it would not require providers that
        had
        not achieved full E911 compliance by November 28, 2005 to discontinue the
        provision of interconnected VoIP services to any existing customers, it did
        expect that such providers would discontinue marketing VoIP services, and
        accepting new customers for their services, in all areas where they are not
        transmitting 911 calls to the appropriate PSAP in full compliance with the
        FCC's
        rules. On November 28, 2005, we filed our E911 compliance report. On March
        12,
        2007, we received a letter from the Enforcement Bureau requesting that we
        file
        an updated E911 Status Report no later than April 11, 2007. On April 11,
        2007,
        we responded to the FCC and indicated that (i) 95.4% of our VoIP subscribers
        receive 911 service in full compliance with the FCC’s rules, (ii) we do not
        accept new VoIP customers in areas where it is not possible to provide 911
        service in compliance with the FCC rules, (iii) we currently serve only a
        very
        small number of existing subscribers in areas where we have not yet deployed
        a
        911 network solution that is fully compliant with the FCC’s regulations and were
        provisioned with new service after November 28,2005, and (iv) we have procedures
        in place to ensure that no new subscribers are being provisioned in
        non-compliant areas.
  The
        FCC
        may determine that services we may offer based on nomadic emergency calling
        do
        not satisfy the requirements of its VoIP E911 order because, in some instances,
        a nomadic emergency calling solution may require that we route an emergency
        call
        to a national emergency call center instead of connecting subscribers directly
        to a local PSAP through a dedicated connection and through the appropriate
        selective router. The FCC may issue further guidance on compliance requirements
        in the future that might require us to disconnect those subscribers not
        receiving access to emergency services in a manner consistent with the VoIP
        E911
        order.  The effect of such disconnections, monetary penalties, cease
        and desist orders or other enforcement actions initiated by the FCC or other
        agency or task force against us could have a material adverse effect on our
        financial position, results of operations, cash flows or business
        reputation.  On June 1, 2007, the FCC released a Notice of Proposed
        Rulemaking in which they tentatively conclude that all interconnected VoIP
        service providers that allow customers to use their service in more than
        one
        location (nomadic VoIP service providers) must utilize an automatic location
        technology that meets the same accuracy standards which apply to providers
        of
        commercial mobile radio services (mobile phone service providers). The outcome
        of this proceeding cannot be determined at this time and we may or may not
        be
        able to comply with any such obligations that may be adopted. At present,
        we
        currently have no means to automatically confirm the physical location of
        a
        subscriber if the service is such that the subscriber is connected via the
        Internet. The FCC's VoIP E911 order has increased our cost of doing business
        and
        may adversely affect our ability to deliver our service to new and existing
        customers in all geographic regions or to nomadic customers who move to a
        location where emergency calling services compliant with the FCC's mandates
        are
        unavailable. We cannot guarantee that emergency calling service consistent
        with
        the VoIP E911 order will be available to all of our subscribers. The FCC's
        current VoIP E911 order or follow-on orders or clarifications or their impact
        on
        our customers due to service price increases or other factors could have
        a
        material adverse effect on our business, financial position and results of
        operations.
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  ***Our
        inability to comply with the requirements of federal law enforcement agencies
        could adversely affect our business.***
  Broadband
        Internet access services and VoIP services are subject to the Communications
        Assistance for Law Enforcement Act, or CALEA.  All interconnected VoIP
        providers, such as us, were to become fully CALEA compliant by May 14,
        2007.  We engaged a third party to help us develop a solution to be
        CALEA compliant.  In February 2007, we notified the FCC that we did
        not expect to have  a CALEA compliant solution completed by May 14,
        2007, but that we instead expected to have the development complete by September
        1, 2007.  Our formal CALEA compliance testing with the third party was
        completed on September 28, 2007.  Currently, our CALEA solution is
        fully deployed in our network.  However, we could be subject to an
        enforcement action by the FCC or law enforcement agencies for any delays
        related
        to meeting, or if we fail to comply with, any current or future CALEA
        obligations.  Such enforcement actions could subject us to fines,
        cease and desist orders, or other penalties, all of which could adversely
        effect
        our business.
  ***Our
        inability to comply with the requirements of federal and other regulations
        related to customer proprietary network information could adversely affect
        our
        business.***
  We
        recently became subject to the customer proprietary network information,
        or
        CPNI, rules. CPNI includes information such as the phone numbers called by
        a
        consumer; the frequency, duration, and timing of such calls; and services
        purchased by the consumer, such as call waiting, call forwarding, and caller
        ID.  Under the current rules, generally, except in connection with
        providing existing services to a customer, carriers may not use CPNI without
        customer consent.  We do not currently use our customer's CPNI in a
        manner which would require us to obtain consent, but if we do in the future,
        we
        will be required to adhere to specific CPNI rules.  By December 8,
        2007, we must implement internal processes to be in compliance with all of
        the
        CPNI rules.  Our inability to comply with the requirements of federal
        and other regulations related to CPNI or otherwise, could adversely affect
        our
        business.
  ***We
        may be subject to liabilities for past sales and additional
        taxes.***
  Based
        upon a new Internal Revenue Service ruling, we ceased collecting federal
        excise
        tax on August 1, 2006 on services and usage revenues that arise from long
        distance.  We have not collected or accrued liabilities for E911 taxes
        for VoIP services prior to July 1, 2006, and it is possible that substantial
        claims for back taxes may be asserted against us.  Also, we are
        currently working to obtain Inter Exchange Carrier (IXC) certification in
        Alaska, Maryland and Mississippi.  Our current certification status in
        these three states may leave us liable for fees and penalties that could
        decrease our ability to compete with traditional telephone companies. In
        addition, future expansion of our service, along with other aspects of our
        evolving business, may result in additional sales and other tax
        obligations.  One or more taxing authorities may seek to impose sales,
        use or other tax collection obligations on us.  We have received
        inquiries or demands from numerous state authorities and are currently under
        audit by two states. A successful assertion by one or more taxing authorities
        that we should collect sales, use or other taxes on the sale of our services
        could result in substantial tax liabilities for past sales, could decrease
        our
        ability to compete with traditional telephone companies, and could adversely
        effect our business.
  ***Our
        business may suffer if we fail to comply with funding requirements of state
        or
        federal funds, or if our customers cancel service due to the impact of these
        price increases to their service.***
  In
        June
        2006, the FCC concluded that VoIP providers must contribute to the Federal
        Universal Service Fund, or USF.  The FCC established a contribution
        safe harbor percentage of 64.9% of total VoIP service
        revenue.  Alternatively, VoIP providers are permitted to calculate
        their contribution based on FCC pre-approved traffic studies. We began
        contributing to the USF on October 1, 2006. For a period of at least two
        quarters beginning October 1, 2006, we were required to contribute to the
        USF
        for our customers' retail revenues as well as through our underlying carriers'
        wholesale charges.  On June 1, 2007, the U.S. Court of Appeals for the
        District of Columbia ruled that although the FCC could require VoIP service
        providers to contribute to the USF, the requirement that traffic studies
        be
        pre-approved by the FCC and the requirement that contributions to the USF
        be
        made for two quarters from our underlying carriers' wholesale charges were
        struck down.
  On
        May
        31, 2007, the FCC extended the disability access requirements of Sections
        225
        and 255 of the Communications Act, which applied to traditional phone services,
        to VoIP providers and to manufacturers of specially designed equipment used
        to
        provide those services. Section 255 of the Communications Act generally requires
        service providers to ensure that its equipment and service is accessible
        to and
        usable by individuals with disabilities. In addition, the FCC stated that
        VoIP
        providers were subject to the requirements of Section 225, including
        contributing to the Telecommunications Relay Services, or TRS, fund and that
        they must offer 711 abbreviated dialing for access to relay
        services.  Although we contribute to the TRS fund as required, we have
        not yet implemented a solution for the 711 abbreviated dialing
        requirement.
  There
        is
        also a risk that states may attempt to assert state universal service fund
        contribution requirements and other state and local charges. At this time,
        at
        least one state contends that providers of interconnected VoIP services,
        like
        us, should contribute to its universal service fund.
  We
        cannot
        predict the impact of these types of obligations on our business or our ability
        to comply with them. We will likely pass these additional costs on to our
        customers and the impact of this price increase or our inability to recoup
        our
        costs or liabilities or other factors could adversely effect our business.
        We
        may be subject to enforcement actions if we are not able to comply with these
        new requirements.
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  ***Our
        ability to offer new services outside the United States is subject to the
        local
        regulatory environment.***
  The
        regulations and laws applicable to the VoIP market outside the United States
        are
        various and often complicated and uncertain.  Because of our
        relationship with certain resellers, some countries may assert that we are
        required to register as a provider in their country.  The failure by
        us, our customers or our resellers to comply with applicable laws and
        regulations could adversely effect our business.
  **Risks
        Related to the Market for Our Common Stock**
  ***We
        may experience significant fluctuations in the market price of our common
        stock.***
  The
        market price of our common stock may experience significant
        fluctuations.  These fluctuations may be unrelated or out of
        proportion to our operating performance, and could harm our stock
        price.  Any negative change in the public's perception of the
        prospects of companies that employ similar technology or sell into similar
        markets could also depress our stock price, regardless of our actual
        results.
  The
        market price of our common stock may be significantly affected by a variety
        of
        factors, including:
  ·
              the
                  announcement of new products, product enhancements, new services
                  or
                  service enhancements by us or our
                  competitors;
 ·
              announcements
                  of strategic alliances or significant agreements by us or by our
                  competitors;
 ·
              technological
                  innovations by us or our
                  competitors;
 ·
              quarterly
                  variations in our results of
                  operations;
 ·
              acquisition
                  of one of our competitors by a significantly larger
                  company;
 ·
              general
                  market conditions or market conditions specific to technology
                  industries;
 ·
              sales
                  of large blocks of our common stock;
                  and
 ·
              domestic
                  and international macroeconomic
                  factors.
  ***Our
        board of directors has the right to issue additional shares of common stock
        or
        preferred stock, without stockholder consent, which could have the effect
        of
        creating substantial dilution or impeding or discouraging a takeover
        transaction.***
  Pursuant
        to our certificate of incorporation, our board of directors may issue additional
        shares of common or preferred stock as it did in our August 2007 Series A
        Private Placement.  Any additional issuance of common stock or the
        issuance of preferred stock could have the effect of impeding or discouraging
        the acquisition of control of us by means of a merger, tender offer, proxy
        contest or otherwise, including a transaction in which our stockholders would
        receive a premium over the market price for their shares, and thereby protects
        the continuity of our management.  Specifically, if in the due
        exercise of its fiduciary obligations, our board of directors was to determine
        that a takeover proposal was not in the best interest of the Company or our
        stockholders, shares could be issued by our board of directors without
        stockholder approval in one or more transactions that might prevent or render
        more difficult or costly the completion of the takeover by:
  ·
              diluting
                  the voting or other rights of the proposed acquirer or insurgent
                  stockholder group;
 ·
              putting
                  a substantial voting block in institutional or other hands that
                  might
                  undertake to support the incumbent board of directors;
                  or
 ·
              effecting
                  an acquisition that might complicate or preclude the
                  takeover.
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  ***If
        the holders of our outstanding convertible securities convert or exercise
        such
        securities into common stock, we will issue up to 15,133,450 shares, which
        will
        materially dilute the voting power of our currently outstanding common stock
        and
        possibly result in a change of control of our
        company.***
  As
        of
        September 30, 2007, we had 23,066,915 shares of common stock
        outstanding.  As of September 30, 2007, we also have Series A Stock
        that convert into 4,626,335 shares of common stock (assuming conversion at
        the
        current conversion price of $2.81), debentures which convert into 3,440,296
        shares of common stock (assuming conversion at their respective current
        conversion price and assuming payment of all accrued interest in cash), warrants
        which are exercisable for 3,837,929 shares of common stock and stock options
        exercisable for 3,228,890 shares of common stock.  The conversion
        price and exercise price, respectively, of the securities we issued in our
        recent private placements is subject to adjustment.  If such
        conversion price or exercise price is adjusted, this would lead to the issuance
        of additional shares upon conversion or exercise, as applicable.  If
        the holders of our Series A Stock, debentures, warrants, and stock options
        convert or exercise their securities into common stock, it will materially
        dilute the voting power of our outstanding common stock and may result in
        a
        change of control of our company.
  ***An
        investment in our company may be diluted in the future as a result of the
        issuance of additional securities, the conversion of debentures, or the exercise
        of options or warrants.***
  To
        raise
        additional capital to fund our business plan, we may issue additional shares
        of
        common stock or securities convertible, exchangeable or exercisable into
        common
        stock from time to time, which, as further explained in the risk factor above,
        could result in substantial dilution to current stockholders.  The
        issuance of additional debt securities would result in increased expenses
        and
        could result in covenants that would restrict our operations.  No
        arrangements for any such offering exist, and no assurance can be given
        concerning the terms of any future offering or that we will be successful
        in
        issuing common stock or other securities at all.  If adequate funds
        are not available, we may not be able to continue our operations or implement
        our planned additional research and development activities, any of which
        would
        adversely affect our results of operations and financial condition.
  ***We
        may be the subject of securities class action litigation due to future stock
        price volatility.***
  In
        the
        past, when the market price of a stock has been volatile, holders of that
        stock
        have often instituted securities class action litigation against the company
        that issued the stock.  If any of our stockholders brought a lawsuit
        against us, we could incur substantial costs defending the
        lawsuit.  The lawsuit could also divert the time and attention of our
        management.
  ***We
        have never paid dividends on our capital stock, and we do not anticipate
        paying
        any cash dividends in the foreseeable future.***
  We
        have
        paid no cash dividends on any of our classes of capital stock to
        date.  In addition, we are currently restricted from paying any
        dividends on our common stock under the terms of our outstanding
        debentures.  Even absent such restriction, we currently intend to
        retain our future earnings, if any, to fund the development and growth of
        our
        business.  In addition, the terms of any future debt or credit
        facility, if any, may preclude us from paying dividends.  As a result,
        capital appreciation, if any, of our common stock will be your sole source
        of
        gain for the foreseeable future.
  ***As
        a result of being a public company, we incur increased costs that may place
        a
        strain on our resources or divert our management’s attention from other business
        concerns.***
  As
        a
        public company, we incur legal, accounting and other expenses that a private
        company does not incur. The Exchange Act requires us to file annual, quarterly
        and current reports with respect to our business and financial condition,
        which
        requires us to incur legal and accounting expenses. The Sarbanes-Oxley Act
        of
        2002 requires us to maintain effective disclosure controls and procedures
        and
        internal control over financial reporting. To maintain and improve the
        effectiveness of our disclosure controls and procedures and internal control
        over financial reporting, significant resources and management oversight
        are
        required. The rules and regulations of the SEC increase our legal and financial
        compliance costs and make some activities more time consuming and costly.
        These
        requirements place a strain on our systems and resources and divert our
        management’s attention from other business concerns, which could have a material
        adverse effect on our business, financial condition and results of
        operations.
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  ***Because
        we will be required to comply with the internal control attestation provisions
        of Section 404 of the Sarbanes-Oxley Act of 2002 beginning for the fiscal
        year
        ended December 31, 2007, our compliance with the SEC's rules concerning internal
        controls will be costly, time-consuming and difficult for
        us.***
  The
        Sarbanes-Oxley Act of 2002, or "SOX," that became law in July 2002 requires
        changes in some of our corporate governance, public disclosure and compliance
        practices.  Currently, the SEC's rules under Section 404 of SOX will
        require us to have our management attest to the adequacy of our internal
        controls in our annual report on Form 10-KSB for the year ended December
        31,
        2007.  No member of our management has any experience in complying
        with Section 404.  Furthermore, we have been advised by our
        independent registered public accounting firm that we will be required to
        make
        substantial changes to our internal controls in order for our management
        to be
        able to attest that as of December 31, 2007, our internal controls are
        effective.  Larger public companies which have been required to comply
        with Section 404 have encountered significant expenses, both from diversion
        of
        management time and attention, the acquisition of new computer software,
        the
        employing of additional personnel and training and third party internal controls
        consultants.  While our business is not as sophisticated or complex as
        these larger companies, we anticipate it will be time-consuming, costly and
        difficult for us to develop and implement the internal controls necessary
        for
        our management to attest that our internal controls are effective as of December
        31, 2007.  We may need to hire additional financial reporting and
        internal controls personnel, acquire software and retain a third party
        consultant during 2007.  If our management is unable to attest that
        our internal controls are effective as of December 31, 2007, investors may
        react
        by selling our stock and causing its price to fall.
  ***Our
        common stock is traded on the OTC Bulletin Board, which may be detrimental
        to
        investors.***
  Our
        common stock is currently traded on the OTC Bulletin Board.  Stocks
        traded on the OTC Bulletin Board generally have limited trading volume and
        exhibit a wide spread between the bid/ask quotation.  Accordingly, you
        may not be able to sell your shares quickly or at the market price if trading
        in
        our stock is not active.
  ***Our
        directors, executive officers and 5% stockholders beneficially own approximately
        29.9% of our outstanding common stock, which could limit your ability to
        influence the outcome of key transactions, including changes of
        control.***
  As
        of
        September 30, 2007, our directors, executive officers, and holders of 5%
        or more
        of our outstanding common stock, beneficially own, in the aggregate,
        approximately 29.9% of our outstanding common stock.  As a result, a
        small number of shareholders will have voting control and would be able to
        control the election of directors and the approval of significant corporate
        transactions.  This concentration of ownership may also delay, deter
        or prevent a change of control of our company and will make some transactions
        more difficult or impossible without the support of these
        shareholders.
  ***Our
        common stock is subject to penny stock rules.***
  Our
        common stock is subject to Rule 15g-1 through 15g-9 under the Securities
        Exchange Act of 1934, as amended, or the "Exchange Act," which imposes certain
        sales practice requirements on broker-dealers which sell our common stock
        to
        persons other than established customers and "accredited investors" (generally,
        individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
        $200,000 (or $300,000 together with their spouse)).  For transactions
        covered by this rule, a broker-dealer must make a special suitability
        determination for the purchaser and have received the purchaser's written
        consent to the transaction prior to the sale.  This rule adversely
        affects the ability of broker-dealers to sell our common stock and purchasers
        of
        our common stock to sell their shares of such common
        stock.  Additionally, our common stock is subject to the SEC
        regulations for "penny stock."  Penny stock includes any non-NASDAQ
        equity security that has a market price of less than $5.00 per share, subject
        to
        certain exceptions.  The regulations require that prior to any
        non-exempt buy/sell transaction in a penny stock, a disclosure schedule set
        forth by the SEC relating to the penny stock market must be delivered to
        the
        purchaser of such penny stock.  This disclosure must include the
        amount of commissions payable to both the broker-dealer and the registered
        representative and current price quotations for the common stock.  The
        regulations also require that monthly statements be sent to holders of penny
        stock which disclose recent price information for the penny stock and
        information of the limited market for penny stocks.  These
        requirements adversely affect the market liquidity of our common
        stock.




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**ITEM
      3. CONTROLS AND
      PROCEDURES**




**Disclosure
      Controls and Procedures**




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that the information required to be disclosed by a company in the reports
      that it files or submits under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the SEC's rules
      and forms.  Disclosure controls and procedures include, without
      limitation, controls and procedures designed to ensure that information required
      to be disclosed in the reports that a company files or submits under the
      Exchange Act is accumulated and communicated to management, including the
      principal executive officer and principal financial officer, as appropriate
      to
      allow timely decisions regarding required disclosure.




We
      maintain disclosure controls and procedures designed to ensure that material
      information related to our company is recorded, processed, summarized and
      reported within the time periods specified in the SEC rules and forms, and
      that
      such information is accumulated and communicated to our management, including
      our chief executive officer and chief financial officer, as appropriate, to
      allow timely decisions regarding required disclosure.




As
      of the
      end of the period covered by this report, under the supervision and with the
      participation of our chief executive officer and our chief financial officer,
      we
      evaluated the effectiveness of the design and operation of our disclosure
      controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
      Exchange Act.  Based upon that evaluation, our chief executive officer
      and chief financial officer concluded that as of September 30, 2007, our
      disclosure controls and procedures were designed and functioning effectively
      to
      provide reasonable assurance that the information required to be disclosed
      by us
      in reports filed under the Exchange Act is (i) recorded, processed, summarized
      and reported within the time periods specified in the SEC's rules and forms
      and
      (ii) accumulated and communicated to management including our chief executive
      officer and chief financial officer, as appropriate to allow timely decisions
      regarding disclosure.




**Changes
      in Internal Controls over Financial Reporting**




During
      our most recently completed fiscal quarter we complete the acquisition of
      AccessLine.  The AccessLine acquisition was substantial in relation to
      our operations, involving the acquisition of a new line of business, new
      financial and accounting systems, and a substantial increase in
      personnel.  The acquisition may have materially affected or is
      reasonably likely to materially affect our internal controls over financial
      reporting.




**Limitations
      on Disclosure Controls and Procedures**




Our
      disclosure controls and procedures are designed to provide reasonable assurances
      that material information related to our company is recorded, processed,
      summarized and reported within the time periods specified in the SEC rules
      and
      forms, and that such information is accumulated and communicated to our
      management, including our chief executive officer and chief financial officer,
      as appropriate, to allow timely decisions regarding required
      disclosure.  Our chief executive officer and chief financial officer
      have determined that as of September 30, 2007, our disclosure controls were
      effective at that "reasonable assurance" level.  Our management,
      including our chief executive officer and chief financial officer, does not
      expect that our disclosure controls or internal controls over financial
      reporting will prevent all errors or all instances of fraud.  A
      control system, no matter how well designed and operated, can provide only
      reasonable, not absolute, assurance that the control system's objectives will
      be
      met.  Further, the design of a control system must reflect the fact
      that there are resource constraints, and the benefits of controls must be
      considered relative to their costs.  Because of the inherent
      limitations in all control systems, no evaluation of controls can provide
      absolute assurance that all control issues and instances of fraud, if any,
      within our company have been detected.  These inherent limitations
      include the realities that judgments in decision-making can be faulty, and
      that
      breakdowns can occur because of simple error or mistake.  Controls can
      also be circumvented by the individual acts of some persons, by collusion of
      two
      or more people, or by management override of the controls.  Because of
      the small size of our current operations, supervision of financial controls
      is
      concentrated in a few individuals and we have limited opportunity to segregate
      duties or implement checks and balances.  The design of any system of
      controls is based in part upon certain assumptions about the likelihood of
      future events, and any design may not succeed in achieving its stated goals
      under all potential future conditions.  Over time, controls may become
      inadequate because of changes in conditions or deterioration in the degree
      of
      compliance with policies or procedures.  Because of the inherent
      limitation of a cost-effective control system, misstatements due to error or
      fraud may occur and not be detected.




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**PART
      II--OTHER INFORMATION**




**ITEM
      1.                      LEGAL
      PROCEEDINGS**




From
      time
      to time and in the course of our business, we may become involved in various
      legal proceedings seeking monetary damages and other relief. The amount of
      the
      ultimate liability, if any, from such claims cannot be determined. However,
      in
      the opinion of our management, there are no legal claims currently pending
      or
      threatened against us that would be likely to have a material adverse effect
      on
      our financial position, results of operations or cash flows.




**ITEM
      2.                      UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**




On
      September 14, 2007, in connection with our acquisition of AccessLine Holdings,
      Inc., we issued 3,939,565 shares of our common stock to certain AccessLine
      stockholders and creditors.  The value of the shares we issued in
      connection with the acquisition was based upon a per share value of
      $3.60.




On
      August
      30, 2007, we entered into a securities purchase agreement with five
      institutional investors for the sale of original issue discount 6% convertible
      debentures and common stock purchase warrants.  We issued in the
      aggregate $8.0 million face amount of debentures and warrants to purchase
      826,190 shares of our common stock in exchange for net proceeds of $6.6 million
      after deducting fees and offering expenses.




On
      August
      30, 2007, we entered into a separate securities purchase agreement with same
      five institutional investors that purchased our debentures and warrants
      described above.  Under this securities purchase agreement we sold an
      aggregate of 13,000 shares of our Series A Stock at $1,000 per share and
      warrants to purchase 1,758,008 shares of our common stock in exchange for net
      proceeds of $12.1 million after deducting fees and offering
      expenses.




On
      August
      8, 2007, we issued an aggregate of 375,974 shares of our common stock upon
      conversion of $0.6 million in principal amount of a debenture we issued in
      our
      February 2007 Private Placement, which reflects a conversion price of $1.54
      per
      share.  We issued an additional 75,195 unregistered shares of our
      common stock to the holder of this debenture as an inducement for the early
      conversion and acceptance of unregistered shares.




On
      August
      8, 2007, in connection with loan and security agreement we entered into with
      a
      lender that granted us a line of credit, we issued such lender an immediately
      exercisable warrant to purchase 12,784 shares of our common stock at an exercise
      price of $3.52 per share, which equals 90% of the five day volume weighted
      average price of our common stock immediately before issuance.  The
      warrant expires in three years and gives the lender piggyback registration
      rights.




On
      August
      3, 2007, we issued 250,000 shares of our common stock upon exercise of a warrant
      held by Aequitas Capital Management, which we issued to Aequitas Capital on
      March 6, 2007.  On that same day we issued an additional 208,333
      shares of our common stock upon exercise of warrants held by Aequitas Hybrid
      Fund, LLC.  We received gross proceeds of $0.8 million upon exercise
      of the foregoing warrants.




On
      July
      30, 2007, we issued an aggregate of 599,048 shares of our common stock upon
      conversion of an aggregate principal amount of $0.9 million of the debentures
      we
      issued in our December 2006 Private Placement, which reflects a conversion
      price
      of $1.54 per share.  On the same date, we also issued 250,000 shares
      of our common stock to the holders of such debentures upon the exercise of
      warrants issued in connection with such debentures at an exercise price of
      $1.69
      per share, which resulted in gross proceeds to us of $0.4 million.




On
      July
      30, 2007, we issued an aggregate of 626,624 shares of our common stock upon
      conversion of an aggregate principal amount of $1.0 million of the debentures
      we
      issued in our February 2007 Private Placement, which reflects a conversion
      price
      of $1.54 per share.  We issued an additional 125,325 shares of our
      common stock to the holders of these debentures as an inducement for the early
      conversion of such debentures and acceptance of unregistered
      shares.




Each
      of
      the transactions described above was exempt from registration under the
      Securities Act pursuant to Section 4(2) thereof.  None of the
      transactions was conducted in connection with a public offering, and no public
      solicitation or advertisement was made or relied upon by any of the investors
      in
      connection with any offering.




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**ITEM
      3.                     DEFAULTS
      UPON SENIOR SECURITIES**




None.




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




None.




**ITEM
      5.                      OTHER
      INFORMATION**




None.




**ITEM
      6.                      EXHIBITS**




**Exhibit
                No.**
            **Description**2.1
            Agreement
                and Plan of Merger dated as of September 1, 2007, by and among Telanetix,
                Inc., a Delaware corporation, Endzone Acquisition Corp., a Delaware
                corporation, and AccessLine Holdings, Inc., a Delaware corporation
                (1)3.1
            Certificate
                of Designation of Preferences, Rights and Limitations of Series A
                Convertible Preferred Stock (1)4.1
            Form
                of common stock purchase warrant issued in connection with the August
                2007
                financing (1)4.2
            Form
                of original issue discount 6.0% senior secured convertible debenture
                issued in connection with the August 2007 financing (1)10.1
            Securities
                Purchase Agreement dated as of August 30, 2007 by and among Telanetix,
                Inc., a Delaware corporation, and the purchasers identified therein
                related to the Series A Convertible Preferred Stock offering
                (1)10.2
            Securities
                Purchase Agreement dated as of August 30, 2007 by and among Telanetix,
                Inc., a Delaware corporation, and the purchasers identified therein
                related to the original issue discount 6.0% senior secured convertible
                debenture offering (1)10.3
            Registration
                Rights Agreement dated as of August 30, 2007 by and among Telanetix,
                Inc.,
                a Delaware corporation, and the purchasers identified therein
                (1)10.4
            Security
                Agreement dated as of August 30, 2007 by and among Telanetix, Inc.,
                a
                Delaware corporation, all of its subsidiaries and the holders of
                the
                original issue discount 6.0% senior secured convertible debenture
                issued
                in connection with the August 2007 financing (1)31.1*
            Certification
                pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act,
                as
                amended, by Chief Executive Officer31.2*
            Certification
                pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act,
                as
                amended, by Chief Financial Officer32.1*
            Certification
                pursuant to 18 U.S.C. §1350 by Chief Executive Officer32.2*
            Certification
                pursuant to 18 U.S.C. §1350 by Chief Financial Officer*
            Filed
                as an exhibit to this report(1)
            Incorporated
                by reference to the registrant's Current Report on Form 8-K filed
                on
                September 4, 2007




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**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.






**TELANETIX,
                INC.**Dated:
                November 14, 2007
            By:
            /s/
                Richard M. OnoRichard
                M. OnoChief
                Financial Officer
              (Principal
                Financial Officer)







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