Heritage Global Inc. - Quarter Report: 2008 September (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-17973

C2 Global Technologies Inc.

(Exact name of registrant as specified in its charter)

FLORIDA

(State or other jurisdiction of

Incorporation or Organization)

59-2291344

(I.R.S. Employer Identification No.)

40 King St. West, Suite 3200, Toronto, ON M5H 3Y2

(Address of Principal Executive Offices)

(416) 866-3000

(Registrant’s Telephone Number)

N/A

(Registrant’s Former Name)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter time period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer £	Accelerated Filer £

Non-Accelerated Filer R	Smaller reporting company £

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

As of November 4, 2008, there were 22,745,410 shares of common stock, $0.01 par value, outstanding.

TABLE OF CONTENTS

Part I.	Financial Information

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	3

	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007	4

	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period ended September 30, 2008	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4T.	Controls and Procedures	34

Part II.	Other Information

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Submission of Matters to a Vote of Security Holders	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements.

C2 GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,			December 31,
(In thousands of dollars, except share and per share amounts)	2008			2007

ASSETS
Current assets:
Cash and cash equivalents	$	5,523		$	67
Deferred income tax asset (Note 9)		481			1,000
Other current assets		105			17
Total current assets		6,109			1,084
Other assets:
Intangible assets, net (Note 5)		5			20
Goodwill (Note 5)		173			173
Investments (Note 6)		635			519
Deferred income tax asset (Note 9)		525			—
Total assets	$	7,447		$	1,796

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities (Note 5)	$	2,211		$	402
Notes payable to a related party (Note 7)		—			2,335
Total liabilities		2,211			2,737

Commitments and contingencies (Note 11)

Stockholders’ equity (deficit):
Preferred stock, $10.00 par value, convertible, non-redeemable, authorized 10,000,000 shares, issued and outstanding 597 shares at September 30, 2008 and 607 shares at December 31, 2007; liquidation preference of $597 at September 30, 2008 and $607 at December 31, 2007		6			6
Common stock, $0.01 par value, authorized 300,000,000 shares, issued and outstanding 22,745,410 shares at September 30, 2008 and 23,095,010 shares at December 31, 2007		227			231
Additional paid-in capital		274,741			274,672
Accumulated deficit		(269,738	)		(275,850	)

Total stockholders’ equity (deficit)		5,236			(941	)

Total liabilities and stockholders’ equity (deficit)	$	7,447		$	1,796

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

C2 GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share amounts)	2008			2007			2008			2007
Revenue:
Patent licensing	$	9,500		$	—		$	17,625		$	—

Operating costs and expenses:
Patent licensing		6,097			—			10,589			—
Selling, general and administrative		312			318			868			911
Depreciation and amortization		5			5			15			15
Total operating costs and expenses		6,414			323			11,472			926
Operating income (loss)		3,086			(323	)		6,153			(926	)

Other income (expense):

Other income (expense)		3			3			8			(289	)
Interest expense – third party		—			—			—			(12	)
Interest expense – related party (Note 7)		—			(52	)		(43	)		(135	)
Total other income (expense)		3			(49	)		(35	)		(436	)
Income (loss) from continuing operations before income taxes and earnings (loss) of equity accounted investments		3,089			(372	)		6,118			(1,362	)

Income tax expense (recovery) (Note 9)		(936	)		—			(6	)		—
Earnings (loss) of equity accounted investments (net of $0 tax) (Note 6)		(10	)		—			(3	)		—
Income (loss) from continuing operations		4,015			(372	)		6,121			(1,362	)
Income (loss) from discontinued operations (net of $0 tax)		(3	)		(3	)		(9	)		(23	)
Net income (loss)	$	4,012		$	(375	)	$	6,112		$	(1,385	)

Weighted average common shares outstanding		22,745			23,095			22,961			23,095
Weighted average preferred shares outstanding		1			1			1			1

Net income (loss) per share – basic and diluted: (Note 2)

Income (loss) from continuing operations
Common shares	$	0.18		$	(0.02	)	$	0.27		$	(0.06	)
Preferred shares	$	7.05		$	N/A		$	10.65		$	N/A

Income (loss) from discontinued operations
Common shares	$	—		$	—		$	—		$	—
Preferred shares	$	N/A		$	N/A		$	N/A		$	N/A

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

C2 GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the period ended September 30, 2008

(in thousands of dollars, except share amounts)

(unaudited)

	Preferred stock					Common stock						Additional paid-		Accumulated Equity
	Shares			Amount		Shares			Amount			in capital		(Deficit)			Total

Balance at December 31, 2006		611		$	6		23,084,850		$	231		$	274,499	$	(275,205	)	$	(469	)
Conversion of Class N preferred stock		(4	)		—		160			—			—		—			—
Conversion of third party debt		—			—		10,000			—			7		—			7
Stock-based compensation		—			—		—			—			166		—			166
Net loss		—			—		—			—			—		(645	)		(645	)
Balance at December 31, 2007		607		$	6		23,095,010		$	231		$	274,672	$	(275,850	)	$	(941	)
Conversion of Class N preferred stock		(10	)		—		400			—			—		—			—
Cancellation of common stock		—			—		(350,000	)		(4	)		4		—			—
Stock-based compensation		—			—		—			—			65		—			65
Net income		—			—		—			—			—		6,112			6,112
Balance at September 30, 2008		597		$	6		22,745,410		$	227		$	274,741	$	(269,738	)	$	5,236

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

C2 GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months ended September 30,
	2008			2007
Cash flows from operating activities:
Net income (loss) from continuing operations	$	6,121		$	(1,362	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		15			15
Equity interests in significantly influenced companies		3			—
Amortization of discount and debt issuance costs on convertible note payable		—			8
Accrued interest added to notes payable to a related party		—			135
Non-cash cost of prepayment of third party debt		—			224
Stock-based compensation expense		65			130

Changes in operating assets and liabilities:
Decrease (increase) in other assets		(88	)		(8	)
Decrease (increase) in deferred income tax asset		(6	)		—
Increase (decrease) in accounts payable and accrued liabilities		1,809			(39	)
Net cash provided by (used in) operating activities by continuing operations		7,919			(897	)
Net cash used in operating activities by discontinued operations		(9	)		(23	)
Net cash provided by (used in) operating activities		7,910			(920	)

Cash flows from investing activities:
Purchase of portfolio investments		(125	)		(575	)
Redemption of portfolio investments		—			1,100
Cash distributions from portfolio investments		6			—
Net cash provided by (used in) investing activities of continuing and discontinued operations		(119	)		525

Cash flows from financing activities:
Increase in notes payable to a related party		—			2,862
Repayment of notes payable to a related party		(2,335	)		(1,000	)
Repayment of convertible note payable		—			(1,462	)
Net cash provided by (used in) financing activities		(2,335	)		400
Increase in cash and cash equivalents		5,456			5
Cash and cash equivalents at beginning of period		67			3
Cash and cash equivalents at end of period	$	5,523		$	8

Supplemental cash flow information:
Taxes paid		2			6
Interest paid		43			21

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

C2 GLOBAL TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

Note 1 – Description of Business and Principles of Consolidation

The consolidated financial statements include the accounts of C2 Global Technologies Inc. and its wholly-owned subsidiaries, including C2 Communications Technologies Inc. and C2 Investments Inc. These entities, on a combined basis, are referred to as “C2”, the “Company”, “we” or “our” in these unaudited condensed consolidated financial statements. Our unaudited condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the assets, liabilities, revenues, and expenses of all majority-owned subsidiaries over which C2 exercises control. All significant intercompany accounts and transactions have been eliminated upon consolidation.

C2 owns certain patents, including two foundational patents in voice over internet protocol (“VoIP”) technology – U.S. Patent Nos. 6,243,373 (the “VoIP Patent”) and 6,438,124 (together the “VoIP Patent Portfolio”), which it has licensed and continues to seek to license. The VoIP Patent, including a corresponding foreign patent and related international patent applications, was acquired from a third party in 2003. At the time of acquisition, the vendor of the VoIP Patent was granted a first priority security interest in the patent in order to secure C2’s obligations under the associated purchase agreement, as discussed in Note 8. The C2 Patent was developed by the Company.

Licensing of intellectual property constitutes the primary business of the Company. C2’s target market consists of carriers, equipment manufacturers, service providers and end users in the internet protocol (“IP”) telephone market who are using C2’s patented VoIP technologies by deploying VoIP networks for phone-to-phone communications. The Company has engaged, and intends to continue to engage, in licensing agreements with third parties domestically and internationally. At present, no ongoing royalties are being paid to the Company. The Company has begun to obtain licensing and royalty revenue from its target market by enforcing its patents, with the assistance of outside counsel, in order to realize value from its intellectual property.

During the first nine months of 2008, the Company entered into settlement and license agreements with six telecommunications carriers with respect to its intellectual property. In February 2008 the Company entered into agreements with AT&T, Inc. (“AT&T”) and Verizon Communications, Inc. (“Verizon”), and in May 2008 the Company entered into an agreement with Sprint Communications Co. L.P. (“Sprint”). In September 2008 the Company entered into an agreement with Qwest Communications International, Inc., Global Crossing Limited and Level 3 Communications, Inc. This agreement also included Sonus Networks, Inc. Under the terms of the settlement and license agreements, C2 granted each company a non-exclusive, perpetual, worldwide, fully paid up, royalty free license under any of C2’s present patents and patent applications, including the VoIP Patent, to make, use, sell or otherwise dispose of any goods and services based on such patents.

In the third quarter of 2007, the Company began investing in Internet-based e-commerce businesses when it acquired minority positions in MyTrade.com, Inc. (sold in the fourth quarter of 2007), Buddy Media, Inc. and LIMOS.com LLC. In the fourth quarter of 2007 it acquired a one-third interest in Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC. In April 2008, the Company made an additional investment of $124 in Buddy Media, Inc., and an additional investment of $1 in the Internet Fund GP. During the third quarter of 2008, certain non-related investors in LIMOS.com entered into an agreement to purchase the remaining shares of LIMOS.com owned by the investor group that included the Company. The transaction closed in the fourth quarter of 2008. These investments are discussed in more detail in Note 6.

Management believes that the unaudited interim data includes all adjustments necessary for a fair presentation. The December 31, 2007 condensed consolidated balance sheet, as included herein, is derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP. The September 30, 2008 unaudited condensed consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission.

These unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, do not include any adjustments that might result from the outcome of this uncertainty. The independent registered public accounting firm’s report on the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2007 contained an explanatory paragraph regarding the uncertainty of the Company’s ability to continue as a going concern.

The results of operations for the nine-month period ended September 30, 2008 are not necessarily indicative of those to be expected for the entire year ending December 31, 2008.

Note 2 – Summary of Significant Accounting Policies

Net earnings (loss) per share

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

At September 30, 2008 and 2007, the net effect of including the Company’s potential common shares is anti-dilutive, and therefore diluted EPS is not presented in these condensed consolidated unaudited financial statements.

Potential common shares are as follows:

	September 30,
	2008		2007

Assumed conversion of Class N preferred stock		23,880		24,440
Assumed exercise of options and warrant to purchase shares of common stock		1,996,999		1,975,749
		2,020,879		2,000,189

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates include revenue recognition, purchase accounting (including the ultimate recoverability of intangibles and other long-lived assets), valuation of goodwill and intangibles, valuation of deferred tax assets, liabilities, stock-based compensation, and contingencies surrounding litigation. These estimates have the potential to significantly impact our consolidated financial statements, either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature.

Intangible assets and goodwill

The Company accounts for intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. All business combinations are accounted for using the purchase method. Goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually. Intangible assets are recorded based on estimates of fair value at the time of the acquisition.

The Company assesses the fair value of its intangible assets and its goodwill based upon the fair value of the Company as a whole, with the Company’s valuation being based upon its market capitalization. Management believes this to be the most reasonable method at the current time, given the absence of a predictable revenue stream and the Company’s corresponding inability to use an alternative valuation method such as a discounted cash flow analysis. If the carrying amount of the Company’s net assets exceeds the Company’s estimated fair value, intangible asset and/or goodwill impairment may be present. The Company measures the goodwill impairment loss based upon the fair value of the underlying assets and liabilities, including any unrecognized intangible assets, and estimates the implied fair value of goodwill. An impairment loss is recognized to the extent that the Company’s recorded goodwill exceeds its implied fair value.

Goodwill, in addition to being tested for impairment annually, is tested for impairment between annual tests if an event occurs or circumstances change such that it is more likely than not that the carrying amount of goodwill may be impaired. No impairment was present upon the performance of these tests at December 31, 2007 and 2006, and no events have occurred during 2008 to suggest that the carrying amount of goodwill may be impaired. We cannot predict the occurrence of future events that might adversely affect the reported value of goodwill. Such events may include, but are not limited to, strategic decisions made in response to economic and competitive conditions, judgments on the validity of the Company’s VoIP Patent Portfolio, or other factors not known to management at this time.

Investments

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

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

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

Impairments, equity pick-ups, dividends and realized gains and losses on equity securities are included in other income in the consolidated statements of operations. See Note 6 for further discussion of the Company’s investments.

Liabilities

The Company is involved from time to time in various legal matters arising out of its operations in the normal course of business. On a case by case basis, the Company evaluates the likelihood of possible outcomes for this litigation. Based on this evaluation, the Company determines whether a liability accrual is appropriate. If the likelihood of a negative outcome is probable, and the amount is estimable, the Company accounts for the liability in the current period. A change in the circumstances surrounding any current litigation could have a material impact on the financial statements.

Stock-Based Compensation

The Company calculates stock-based compensation in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, as revised December 2004 (“SFAS No. 123(R)”), which it was required to adopt in the first quarter of 2006. SFAS No. 123(R) requires that all equity awards, including options, be expensed at fair value, as of the grant date, over the vesting period. Companies are required to use an option pricing model (e.g. Black-Scholes or Binomial) to determine compensation expense. See Note 4 for further discussion of the Company’s stock-based compensation.

Income taxes

The Company records deferred taxes in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). This statement requires recognition of deferred tax assets and liabilities for temporary differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company periodically assesses the value of its deferred tax asset, which has been generated by a history of net operating and net capital losses and determines the necessity for a valuation allowance. The Company evaluates which portion, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on its use of its net operating and net capital loss carryforwards.

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS 109, and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 effective January 1, 2007. The adoption of FIN 48 had no material effect on the financial position, operations or cash flow of the Company. See Note 9 for further discussion of the Company’s income taxes.

Fair value of financial instruments

The fair value of financial instruments is the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying value at September 30, 2008 and December 31, 2007 for the Company’s financial instruments, which include cash, accounts payable and accrued liabilities, and related party debt, approximates fair value.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, expands the required disclosures regarding fair value measurements, and applies to other accounting pronouncements that either require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years, with early adoption encouraged. SFAS No. 157 is to be applied prospectively, with a limited form of retrospective application for several financial instruments. The Company elected to adopt SFAS No. 157 at January 1, 2007, in order to conform to the adoption of a similar Canadian accounting pronouncement by its parent, Counsel Corporation (together with its subsidiaries, “Counsel”). The Company’s adoption of SFAS No. 157 had no effect on the Company’s financial position, results of operations or cash flows.

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

Recent Accounting Pronouncements

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

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

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

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

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

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

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

On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP FAS 157-3”). FSP FAS 157-3 amends SFAS No. 157 by incorporating an example that illustrates key considerations in determining the fair value of a financial asset in an inactive market. It is intended to clarify application issues, and emphasize the measurement principles of SFAS No. 156, including the objective of fair value measurements, distressed transactions, relevance of observable data and management’s assumptions. FSP FAS 157-3 is effective as of October 10, 2008 and applicable to prior periods for which financial statements have not been issued. The adoption of FSP FAS 157-3 had no effect on the Company’s financial position, results of operations, or cash flows.

Note 3 – Liquidity and Capital Resources

At September 30, 2008 the Company had stockholders’ equity of $5,236, as compared to a stockholders’ deficit of $941 at December 31, 2007. Working capital at September 30, 2008 was $3,898, as compared to a working capital deficit of $1,653 at December 31, 2007. The primary reason for the improvement of the Company’s financial position is the revenue from the settlement and license agreements that the Company entered into in February, May and September 2008. The Company’s cash and cash equivalents increased by $5,456, from $67 at December 31, 2007 to $5,523 at September 30, 2008.

In the first nine months of 2008, the Company realized revenues from continuing operations for the first time since 2004. However, the Company must continue to realize value from its intellectual property through ongoing licensing and royalty revenue, as discussed in Note 1, in order to continue as a going concern. Absent an ongoing revenue stream, the Company may not be able to obtain additional financing to fund its operations without the support of Counsel. Additionally, management believes that the Company does not, at this time, have the ability to obtain additional financing from third parties in order to pursue expansion through acquisition.

At September 30, 2008 the Company had no related party debt owing to its 91% common stockholder, Counsel, as compared to $2,335 owing at December 31, 2007. Should Counsel make further advances under the existing loan agreements, repayment will be due on the loans’ maturity date of December 31, 2008.

Note 4 – Stock-Based Compensation

At September 30, 2008, the Company had five stock-based compensation plans, which are described more fully in Note 16 to the audited consolidated financial statements contained in our most recently filed Annual Report on Form 10-K.

The Company’s stock-based compensation expense for the three and nine months ended September 30, 2008, respectively, is $18 and $65, as compared to $44 and $130 for the same periods in 2007. The fair value compensation costs of unvested stock options in the first nine months of 2008 and 2007 were determined using the Black-Scholes Option Pricing Model for grant dates between 2004 and 2008. Historical inputs to the model for this period included expected volatility between 79% and 81%, risk-free interest rates between 1.80% and 5.07%, expected terms of 4.75 years, and an expected dividend yield of zero.

As of September 30, 2008, the total unrecognized stock-based compensation expense related to unvested stock options was $133, which is expected to be recognized over a weighted average period of approximately 12 months.

The tables below present information regarding all stock options outstanding at September 30, 2008 and 2007:

	Options			Weighted Average Exercise Price
Outstanding at December 31, 2007		975,749		$	9.88
Granted		40,000		$	0.90
Expired		(18,750	)	$	63.53
Outstanding at September 30, 2008		996,999		$	8.51

Options exercisable at September 30, 2008		694,499		$	11.87

	Options			Weighted Average Exercise Price
Outstanding at December 31, 2006		1,096,326		$	19.52
Granted		30,000		$	0.70
Expired		(150,577	)	$	78.00
Outstanding at September 30, 2007		975,749		$	9.88

Options exercisable at September 30, 2007		507,436		$	18.08

No options were forfeited or exercised during the nine months ending September 30, 2008 or 2007.

The aggregate intrinsic value of options outstanding at September 30, 2008 was $21, based on the Company’s closing stock price of $0.70 as of the last business day of the period ended September 30, 2008. Intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of the options. At September 30, 2008, 691,999 of the outstanding options had exercise prices greater than or equal to $0.70.

The tables below present information regarding unvested stock options outstanding at September 30, 2008 and 2007:

	Options			Weighted Average Grant Date Fair Value
Unvested at December 31, 2007		425,813		$	0.51
Granted		40,000		$	0.56
Vested		(163,313	)	$	0.55
Forfeited		—			—
Unvested at September 30, 2008		302,500		$	0.50

	Options			Weighted Average Grant Date Fair Value
Unvested at December 31, 2006		596,625		$	0.63
Granted		30,000		$	0.46
Vested		(155,812	)	$	0.55
Expired		(2,500	)	$	0.00
Forfeited		—			—
Unvested at September 30, 2007		468,313		$	0.65

The total fair value of stock options vesting during the nine months ending September 30, 2008 was $90, as compared to $86 for the same period in 2007.

Note 5 – Composition of Certain Financial Statements Captions

Intangible assets consisted of the following:

	September 30, 2008
	Amortization period		Cost		Accumulated amortization			Net
Intangible assets subject to amortization:
Patent rights		60 months	$	100	$	(95	)	$	5

	December 31, 2007
	Amortization period		Cost		Accumulated amortization			Net
Intangible assets subject to amortization:
Patent rights		60 months	$	100	$	(80	)	$	20

The Company’s patent rights were acquired in December 2003 and are associated with the VoIP Patent. Aggregate amortization expense of intangibles was $5 for each of the three month periods ended September 30, 2008 and 2007, and $15 for each of the nine month periods ended September 30, 2008 and 2007. The Company expects that the patent rights will be fully amortized during 2008.

The Company’s goodwill of $173 relates to an investment in a subsidiary company that holds certain of the Company’s patent rights.

Accounts payable and accrued liabilities consisted of the following:

	September 30, 2008		December 31, 2007
Regulatory and legal fees	$	85	$	69
Accounting, auditing and tax consulting		100		107
Patent licensing costs		1,828		—
Sales and other taxes		62		62
Remuneration and benefits		86		114
Other		50		50

Total accounts payable and accrued liabilities	$	2,211	$	402

Note 6 – Investments

The Company’s investments as at September 30, 2008 and December 31, 2007 consisted of the following:

	September 30, 2008		December 31, 2007
Buddy Media, Inc.	$	224	$	100
LIMOS.com LLC		392		399
Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC		19		20

Total investments	$	635	$	519

Buddy Media, Inc.

On September 12, 2007, the Company acquired 303,030 shares of convertible Series A Preferred Stock of Buddy Media, Inc. (“Buddy Media”) for a total purchase price of $100. Buddy Media is a leading developer of applications for emerging new media platforms, including Facebook, MySpace and other social media sites. The Company’s investment was less than 5% of Buddy Media on an as-converted basis. The Series A preferred shares vote on an as-converted basis with the common stock, are convertible by a vote of the majority of the Series A preferred stockholders or mandatorily convertible in connection with an initial public offering, and are redeemable in certain circumstances, including a liquidation or sale of Buddy Media. They are entitled to dividends in the event that common stock holders also receive dividends. The material terms of the Company’s Stockholders’ Agreement and Subscription Agreement are standard for early investments in development stage companies and include drag along rights, right of first offer, refusal rights, co-sale rights, limited anti-dilution protection, dividend preference and liquidation preference. The Series A preferred shares have standard piggyback registration rights with customary expiration provisions and are subject to a contractual 180 day market stand-off.

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

The Company’s ownership interest in Buddy Media does not allow it to exercise significant influence over Buddy Media’s operations. The Company intends to hold the investment for an indefinite period of time, and the investment is therefore accounted for under the cost method. At each balance sheet date, the Company estimates the fair value of the securities using the best available information as of the evaluation date. Because Buddy Media’s shares are not traded on an open market, their valuation must be based primarily on investee-specific information. The Company will record an other than temporary impairment of the investment in the event the Company concludes that such impairment has occurred. Based on the Company’s analysis of Buddy Media’s financial statements and projections, at September 30, 2008 there has been no impairment in the fair value of its investment in Buddy Media.

LIMOS.com LLC

On September 21, 2007, the Company acquired 400,000 units of AZ Limos LLC (name subsequently changed to LIMOS.com LLC, “LIMOS.com”) for a total purchase price of $400, representing a 16% ownership interest in LIMOS.com. In the first quarter of 2008, the Company’s interest was reduced to 15.69% as a result of investment in LIMOS.com by investors who are not related to the Company.

LIMOS.com was incorporated in July 2007 in order to acquire the assets and operations of Limos.com (“Limos”), a private company that provides qualified leads for licensed limousine operators. The Company’s investment was part of a $2,500 capital raise by LIMOS.com.

LIMOS.com acquired the assets and operations of Limos for a purchase price of $4,300, $2,300 of which was provided by the $2,500 capital raise and $2,000 of which was provided by financing (the “Loan”) from a third party lender (the “Lender”). The Loan bears an effective interest rate of 10.5% per annum and is secured by all the assets of LIMOS.com. All investors in LIMOS.com have pledged their ownership interests as security for the Loan, and certain of the investors have guaranteed $750 of the Loan. The Company’s majority stockholder, Counsel, has guaranteed $250 of the Loan on the Company’s behalf.

Contemporaneously with the Company’s investment in LIMOS.com and Counsel’s guaranty, Counsel and the Lender entered into a Priorities Agreement. Under the terms of the Company’s note payable to Counsel, which is discussed in more detail in Note 3, Note 7 and Note 10 of these unaudited condensed consolidated financial statements, the Company had pledged all of its assets to Counsel as security for the related party note. The Priorities Agreement subordinates Counsel’s security interest in the Company’s investment in LIMOS.com in favor of the Lender. As well, certain third party investors have a 20% carried interest in LIMOS.com, which is payable after all investors have received an annual 10% return on their capital from earnings generated by LIMOS.com and after all investors have received the return in full of their invested capital. Upon a liquidation event, following the Company’s receipt of its invested capital and its contractual preferred return, the Company’s right to participate in further distributions may be diluted, to a minimum participation of approximately 11.3%, as the result of exercise of options that have been granted to LIMOS.com employees. The exercise of these options is dependent upon both their three-year vesting period and the attainment of certain financial goals to be achieved by LIMOS.com.

At the date of the Company’s investment in LIMOS.com, its ownership interest did not allow it to exercise significant influence over LIMOS.com’s operations, and the investment was accounted for under the cost method. Subsequently, in November 2007, the Company’s parent, Counsel, increased its ownership of an affiliated entity (the “Affiliate”) from 50% to 100%. The Affiliate has voting control of 50% of LIMOS.com, including the 15.69% owned by the Company. In addition, the Affiliate earns a 2% management fee, based on the invested capital of LIMOS.com, in return for managing the operations of LIMOS.com, and holds two of the four seats on LIMOS.com’s Board of Directors. The Company’s Chief Executive Officer, who is also Counsel’s Chief Executive Officer, is a director of the Affiliate. As a result of Counsel’s acquisition of the Affiliate, the Company’s ability to exercise significant influence over LIMOS.com is deemed to have increased, and therefore the Company currently accounts for its investment in LIMOS.com under the equity method. Consequently, the Company recorded a loss of $1 from its investment for the period September 21, 2007 to December 31, 2007, a loss of $1 for the first quarter of 2008, income of $5 for the second quarter of 2008 and a loss of $11 for the third quarter of 2008.

On July 8, 2008, the Affiliate, at the time having voting control of 50% of LIMOS.com, invoked the “shotgun” provision of the LIMOS.com operating agreement. Under the terms of this provision, the Affiliate offered to purchase 49% of the interest in LIMOS.com from the non-related group that holds the interest (the “Investor Group”), or to sell to the Investor Group the 49% interest controlled by the Affiliate. The Investor Group had 60 days to respond to the Affiliate’s offer, and the Investor Group elected to purchase the 49% interest controlled by the Affiliate. The transaction closed on October 29, 2008 and the Company received approximately $780 as net proceeds from the sale of its interest.

The Company did not make any adjustments to the carrying value of its investment in LIMOS.com at September 30, 2008, due to the fact that conditions related to the purchase remained outstanding at that date.

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

The Company acquired a one-third interest in Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC (“Knight’s Bridge GP”), effective December 7, 2007, for a total purchase price of $20. The additional two-thirds interest in Knight’s Bridge GP was acquired by parties affiliated with Counsel. Knight’s Bridge GP was formed to acquire the general partner interests in 2007 Fund 1 LLP (the “Fund”, subsequently renamed Knight’s Bridge Capital Partners Internet Fund No. 1 LP). At September 30, 2008, the Fund held investments in several Internet-based e-commerce businesses. As the general partner of the Fund, Knight’s Bridge GP manages the Fund, in return for which it earns a 2% per annum management fee with respect to the Fund’s invested capital. Knight’s Bridge GP also has a 20% carried interest on any incremental realized gains from the Fund’s investments.

The Company’s one-third ownership of Knight’s Bridge GP allows the Company to exercise significant influence, and therefore the Company accounts for its investment under the equity method. The Company recorded income of $7 as its share of Knight’s Bridge GP’s carried interest when the Fund sold one of its investments in December 2007. Following the Fund’s sale of this investment, the Company received a cash distribution of $7 from Knight’s Bridge GP, which was recorded as a reduction of the Company’s investment. During the first nine months of 2008, the Company invested an additional $1 in Knight’s Bridge GP, recorded $4 as its share of Knight’s Bridge GP’s earnings, and received cash distributions of $6.

Note 7 – Debt

At September 30, 2008 the Company had no outstanding debt other than the accounts payable and accrued liabilities detailed in Note 5. At December 31, 2007, the Company was indebted to Counsel in the aggregate amount of $2,335, consisting of $2,151 principal and $184 accumulated interest. This debt was repaid in full in March 2008 following the Company’s receipt of proceeds from the settlement agreements with AT&T and Verizon that are discussed in Note 1.

For further discussion of the related party notes and other transactions with Counsel, see Note 3 and Note 10.

Convertible note payable to a third party

On October 14, 2004, the Company issued the Note with a detachable warrant to a third party lender, in the principal amount of $5,000, due October 14, 2007. In January 2007, the lender converted a portion of its note into 10,000 common shares of the Company, and the Company prepaid the remaining Note in full by paying 105% of the amount then due.

The Company’s cost to prepay the Note was $293, calculated as follows:

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

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

Warrant to purchase common stock

In addition to the Note, the Company issued a common stock purchase warrant (the “Warrant”) to the third party lender, entitling the lender to purchase up to one million shares of common stock, subject to adjustment. The Warrant entitles the holder to purchase the stock through the earlier of (i) October 13, 2009 or (ii) the date on which the average closing price for any consecutive ten trading dates shall equal or exceed 15 times the exercise price. The exercise price is $1.00 per share as to the first 250,000 shares, $1.08 per share for the next 250,000 shares and $1.20 per share for the remaining 500,000 shares. The exercise price is 125%, 135% and 150% of the average closing price for the ten trading days immediately prior to the issue date of the Warrant, respectively.

At the time it was issued in October 2004, the Warrant was classified as a liability in the consolidated financial statements, as it was linked to a registration payment arrangement and thus met the conditions for this classification under the GAAP in effect at that date. The details of the registration payment arrangement were previously disclosed in the Company’s Report on Form 8-K, filed with the SEC on October 20, 2004. In December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”). According to FSP EITF 00-19-2, financial instrument(s) such as the Warrant should be recorded in the financial statements using appropriate GAAP without regard to the contingent obligation to transfer consideration pursuant to a related registration payment arrangement, and any contingent obligations under the registration payment arrangement should be separately recognized and measured in accordance with GAAP relating to liabilities. Adoption of FSP EITF 00-19-2 is permitted for interim or annual periods for which financial statements or interim reports have not been issued. Retrospective application is not permitted. The Company evaluated the requirements of FSP EITF 00-19-2, determined that it is applicable to the Warrant, and chose to adopt FSP EITF 00-19-2 effective October 1, 2006, the beginning of the Company’s 2006 fourth quarter. The impact of adopting FSP EITF 00-19-2 on the Company’s financial position was as follows: long-term liabilities were reduced by $203, the fair value of the Warrant at October 1, 2006, and stockholders’ equity was increased by $430, the fair value of the Warrant when issued at October 14, 2004. The difference between these two amounts, $227, was recorded as a charge to opening retained earnings. At the date of adoption of FSP EITF 00-19-2, and at September 30, 2008 and December 31, 2007, the Company’s assessment was that payments relating to the registration payment arrangement were not probable, and therefore the Company has not recorded any liability in connection with such a payment.

Note 8 – Patent Participation Fee

In the fourth quarter of 2003, C2 acquired Patent No. 6,243,373 from a third party. The consideration paid was $100 plus a 35% participation fee payable to the third party relating to the net proceeds from future licensing and/or enforcement actions from the C2 VoIP Patent Portfolio. Net proceeds are defined as amounts collected from third parties net of the direct costs associated with the maintenance, licensing and enforcement of the VoIP Patent Portfolio. Prior to the first quarter of 2008, no payments were required, as the relevant costs incurred exceeded licensing revenues. As a result of settlement and license agreements entered into during the first nine months of 2008, the Company incurred a patent participation fee expense of $349 in the first quarter, $321 in the second quarter and $1,830 in the third quarter.

Note 9 – Income Taxes

In the third quarter of 2008, the Company recognized a net deferred income tax recovery of $936. The year-to-date net aggregate deferred income tax recovery is $6. The net recovery in the quarter is primarily due to the tax effect of available tax loss carryforwards expected to be utilized in the fourth quarter of 2008 and in the 2009 year. The net deferred income tax recovery in the current year is primarily comprised of a deferred tax expense relating to the utilization, against year-to-date taxable income, of the available tax losses previously recognized as a deferred tax asset as at December 31, 2007, offset by the deferred income tax recovery recorded in the current quarter. The Company recorded no income tax benefit from its losses in the nine months ended September 30, 2007 due to uncertainty at that time regarding the future realization of the related deferred tax asset.

The Company adopted the provisions of FIN 48 effective January 1, 2007. As a result of the implementation of FIN 48, as of December 31, 2007, the Company recorded a reduction in its deferred tax asset of approximately $13,167, attributable to unrecognized tax benefits of $24,000 associated with prior years’ tax losses, which are not expected to be available primarily due to change of control usage restrictions, and a reduction in the rate of the tax benefit associated with all of its tax attributes. Due to the Company’s historic policy of applying a valuation allowance against its deferred tax assets, the effect of the above was an offsetting reduction in the Company’s valuation allowance. Accordingly, the above reduction had no net impact on the Company’s financial position, operations or cash flow.

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

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

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

Prior to 2008, the Company had a history, since 1991, of generating annual tax losses. All loss taxation years remain open for audit pending their application against income in a subsequent taxation year. In general, the statute of limitations expires 3 years from the date that a Company files a tax return applying prior year tax loss carryforwards against income in the later year. In 2006, the Company applied historic tax loss carryforwards against debt forgiveness income. The Company’s estimated remaining federal tax loss carryforwards at the end of September 2008 were comprised of approximately $53,000 of unrestricted net operating tax losses, $30,000 of restricted net operating tax losses subject to an annual usage restriction of $2,500 per annum until 2008 and $1,700 per annum thereafter, and $35,000 of unrestricted capital losses.

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

In the first quarter of 2006, as discussed in Note 2, the Company adopted SFAS No. 123(R). Effective December 31, 2006, as provided in FASB Staff Position (FSP) No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (“FSP 123(R)-3”), the Company elected to apply “the short cut method”, as outlined in FSP 123(R)-3, as the methodology for recognizing any related windfall tax benefits as a credit to additional paid-in capital. The adoption of SFAS No. 123(R) and “the short cut method” had no immediate impact from an income tax perspective, since SFAS No. 123(R) specifically prohibits the recognition of any windfall tax benefits that have not been realized in cash or in the form of a reduction of income taxes payable. The Company, to date, has not realized such benefits either in cash or in the form a of a reduction in income taxes payable due to the continued availability of net operating tax loss carryforwards. The adoption of the “short cut method” will therefore only have application in the event of the Company incurring an income tax liability at a future date.

Note 10 – Related Party Transactions

During the first quarter of 2008, the Company repaid the $2,335 owing to Counsel at December 31, 2007, as well as $43 in interest accrued during the quarter. No interest expense was incurred for the second or third quarters of 2008. Should Counsel make additional advances under the terms of the existing loan agreements between the Company and Counsel, these advances will accrue interest at 10%, compounded quarterly, and will be due on December 31, 2008. Additionally, any outstanding loan balance will be subject to an accelerated maturity in certain circumstances. For further discussion of the loan transactions with Counsel, see Note 3 and Note 7.

The Chief Executive Officer (“CEO”) of C2 is an employee of Counsel. As CEO of C2, he is entitled to an annual salary of $138, plus a discretionary bonus of 100% of the base salary. No bonus was paid for the year ended December 31, 2007.

Since December 2004, C2 and Counsel have entered into successive annual management services agreements (the “Agreement”). Under the terms of the Agreement, C2 agrees to make payment to Counsel for ongoing services provided to C2 by certain Counsel personnel. The basis for such services charged is an allocation, based on time incurred, of the cost of the base compensation paid by Counsel to those employees providing services. The cost for 2007 was $225. For the first nine months of 2008, the cost was estimated to be $270.

Note 11 – Commitments and Contingencies

Legal Proceedings

Effective June 18, 2008, in order to settle the litigation, and without any admission of liability by either C2 or the other defendants, the parties agreed to the following terms: (i) Counsel and/or certain of its affiliates, other than C2, would pay a total of $520 to the named plaintiffs; (ii) Counsel and/or a subsidiary other than C2 would give the plaintiffs approximately 370,000 common shares of C2, being five common shares of C2 for every share of C2 owned by the plaintiffs when the litigation commenced; (iii) plaintiffs who were also dissenting shareholders in an appraisal action filed by C2 in Florida in June 2004 would withdraw their dissent and C2 would return the shares that they tendered; (iv) Counsel and/or an affiliate would transfer 350,000 common shares to C2 for cancellation to settle the derivative claims of the litigation.

As a result of the transfer of common shares to the plaintiffs and the cancellation of the shares transferred to C2, Counsel’s percentage ownership in C2 decreased from approximately 92.5% to approximately 90.8%.

At our Adjourned Meeting of Stockholders held on December 30, 2003, our stockholders, among other things, approved an amendment to our Articles of Incorporation, deleting Article VI thereof (regarding liquidations, reorganizations, mergers and the like). Stockholders who were entitled to vote at the meeting and advised us in writing, prior to the vote on the amendment, that they dissented and intended to demand payment for their shares if the amendment was effectuated, were entitled to exercise their appraisal rights and obtain payment in cash for their shares under Sections 607.1301 – 607.1333 of the Florida Business Corporation Act (the “Florida Act”), provided their shares were not voted in favor of the amendment. In January 2004, we sent appraisal notices in compliance with Florida corporate statutes to all stockholders who had advised us of their intention to exercise their appraisal rights. The appraisal notices included our estimate of fair value of our shares, at $4.00 per share on a post-split basis. These stockholders had until February 29, 2004 to return their completed appraisal notices along with certificates for the shares for which they were exercising their appraisal rights. Approximately 33 stockholders holding approximately 74,000 shares of our stock returned completed appraisal notices by February 29, 2004. A stockholder of 20 shares notified us of his acceptance of our offer of $4.00 per share, while the stockholders of the remaining shares did not accept our offer. Subject to the qualification that, in accordance with the Florida Act, we may not make any payment to a stockholder seeking appraisal rights if, at the time of payment, our total assets are less than our total liabilities, stockholders who accepted our offer to purchase their shares at the estimated fair value will be paid for their shares within 90 days of our receipt of a duly executed appraisal notice. If we should be required to make any payments to dissenting stockholders, Counsel will fund any such amounts through advances to C2. Stockholders who did not accept our offer were required to indicate their own estimate of fair value, and if we do not agree with such estimates, the parties are required to go to court for an appraisal proceeding on an individual basis, in order to establish fair value. Because we did not agree with the estimates submitted by most of the dissenting stockholders, we have sought a judicial determination of the fair value of the common stock held by the dissenting stockholders. On June 24, 2004, we filed suit against the dissenting stockholders seeking a declaratory judgment, appraisal and other relief in the Circuit Court for the 17^th Judicial District in Broward County, Florida. On February 4, 2005, the declaratory judgment action was stayed pending the resolution of the direct and derivative lawsuits filed in California. This decision was made by the judge in the Florida declaratory judgment action due to the similar nature of certain allegations brought by the defendants in the declaratory judgment matter and the California lawsuits described above. On March 7, 2005, the dissenting shareholders appealed the decision of the District Court judge to the Fourth District Court of Appeals for the State of Florida, which denied the appeal on June 21, 2005. As a result of the settlement of the derivative and securities lawsuits in California, described above, the stay of the Florida declaratory judgment action is expected to be lifted shortly. When the declaratory judgment action resumes with respect to the remaining dissenting stockholders, who exercised their appraisal rights with respect to approximately 27,500 shares, there is no assurance that this matter will be resolved in our favor and an unfavorable outcome of this matter could have a material adverse impact on our business, results of operations, financial position or liquidity.

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

In June 2007, the complaint against Bellsouth Corporation was dismissed without prejudice. As discussed in Note 1, in February 2008, the Company settled the complaints against AT&T and Verizon by entering into settlement and license agreements. In May 2008 the Company settled the complaint against Sprint Nextel Corporation by entering into a similar agreement. In September 2008, C2 effectively concluded the litigation by entering into a similar agreement with Qwest Communications International, Inc., Global Crossing Limited, and Level 3 Communications, Inc., which agreement also includes Sonus Networks, Inc.

The Company is involved in various other legal matters arising out of its operations in the normal course of business, none of which are expected, individually or in the aggregate, to have a material adverse effect on the Company.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated financial statements of the Company and the related notes thereto, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission (“SEC”).

Forward Looking Information

This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may”, "will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties, as noted in the Company’s Annual Report on Form 10-K, filed with the SEC, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

Overview and Recent Developments

C2 Global Technologies Inc. (“C2” or the “Company”) was incorporated in the State of Florida in 1983 under the name “MedCross, Inc.” which was changed to “I-Link Incorporated” in 1997, to “Acceris Communications Inc.” in 2003, and to “C2 Global Technologies Inc.” in 2005. The most recent name change reflects a change in the strategic direction of the Company following the disposition of its Telecommunications business in the third quarter of 2005. In the second quarter of 2006, the Company opened an office in Texas.

C2 owns certain patents, detailed below under “Company History” and “Intellectual Property”, including two foundational patents in voice over internet protocol (“VoIP”) technology – U.S. Patent Nos. 6,243,373 and 6,438,124 (together the “VoIP Patent Portfolio”), which it seeks to license. Subsequent to the disposition of its Telecommunications business, licensing of intellectual property constitutes the primary business of the Company. C2’s target market consists of carriers, equipment manufacturers, service providers and end users in the internet protocol (“IP”) telephone market who are using C2’s patented VoIP technologies by deploying VoIP networks for phone-to-phone communications. The Company has engaged, and intends to continue to engage, in licensing agreements with third parties domestically and internationally. At present, no ongoing royalties are being paid to the Company.

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

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

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

The voting control of the Company’s investment in LIMOS.com is held by a related party (the “Affiliate”), as detailed in Note 6 of the unaudited condensed consolidated financial statements included in Item 1 of this report. During the third quarter of 2008, the Affiliate entered into an agreement to sell all of the interests controlled by the Affiliate to the remaining investors in LIMOS.com. The purchase price was approximately two times the value of the original investment, and the Company received approximately $780 as net proceeds when the sale closed on October 29, 2008.

In April 2004, certain shareholders of C2 filed derivative and securities lawsuits in the Superior Court of the State of California against Counsel, C2 and several affiliated companies, as well as four present and former officers and directors of C2. Counsel and C2 believe that the claims are and were without merit, and have defended the actions accordingly. Effective June 18, 2008, in order to settle the litigation, and without any admission of liability by either C2 or the other defendants, the parties agreed to the following terms: (i) Counsel and/or certain of its affiliates, other than C2, would pay a total of $520 to the named plaintiffs; (ii) Counsel and/or a subsidiary other than C2 would give the plaintiffs approximately 370,000 common shares of C2, being five common shares of C2 for every share of C2 owned by the plaintiffs when the litigation commenced; (iii) plaintiffs who were also dissenting shareholders in an appraisal action filed by C2 in Florida in June 2004 would withdraw their dissent and C2 would return the shares that they tendered; (iv) Counsel and/or an affiliate would transfer 350,000 common shares to C2 for cancellation to settle the derivative claims of the litigation. As a result of the transfer of common shares to the plaintiffs and the cancellation of the shares transferred to C2, Counsel’s percentage ownership in C2 decreased from approximately 92.5% to approximately 90.8%.

Company History

In 1994, we began operating as an Internet service provider and quickly identified that the emerging IP environment was a promising basis for enhanced service delivery. We soon turned to designing and building an IP telecommunications platform consisting of proprietary software and hardware, and leased telecommunications lines. The goal was to create a platform with the quality and reliability necessary for voice transmission.

In 1997, we began offering enhanced services over a mixed IP-and-circuit-switched network platform. These services offered a blend of traditional and enhanced communication services and combined the inherent cost advantages of an IP-based network with the reliability of the existing Public Switched Telephone Network (“PSTN”).

In August 1997, we acquired MiBridge, Inc. (“MiBridge”), a communications technology company engaged in the design, development, integration and marketing of a range of software telecommunications products that support multimedia communications over the PSTN, local area networks (“LANs”) and IP networks. The acquisition of MiBridge permitted us to accelerate the development and deployment of IP technology across our network platform.

In 1998, we first deployed our real-time IP communications network platform. With this new platform, all core operating functions such as switching, routing and media control became software-driven. This new platform represented the first nationwide, commercially viable VoIP platform of its kind. Following the launch of our software-defined VoIP platform in 1998, we continued to refine and enhance the platform to make it even more efficient and capable for our partners and customers.

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

In 2002, the U.S. Patent and Trademark Office issued U.S. Patent No. 6,438,124 (the “C2 Patent”) for the Company’s Voice Internet Transmission System. Filed in 1996, the C2 Patent reflects foundational thinking, application, and practice in the VoIP services market. The C2 Patent encompasses the technology that allows two parties to converse phone-to-phone, regardless of the distance, by transmitting voice/sound via the Internet. No special telephone or computer is required at either end of the call. The apparatus that makes this technically possible is a system of Internet access nodes, or Voice Engines, which provide digitized, compressed, and encrypted duplex or simplex Internet voice/sound. The end result is a high-quality calling experience whereby the Internet serves only as the transport medium and as such, can lead to reduced toll charges. Shortly after the issuance of our core C2 Patent, we disposed of our domestic U.S. VoIP network in a transaction with Buyers United, Inc., which closed on May 1, 2003. The sale included the physical assets required to operate our nationwide network using our patented VoIP technology (constituting the core business of the I-Link Communications Inc. (“ILC”) business) and included a fully paid non-exclusive perpetual license to our proprietary software-based network convergence solution for voice and data. The sale of the ILC business removed essentially all operations that did not pertain to our proprietary software-based convergence solution for voice and data. As part of the sale, we retained all of our intellectual property rights and patents.

In 2003, we added to our VoIP patent holdings when we acquired the VoIP Patent, which included a corresponding foreign patent and related international patent applications. The vendor of the VoIP Patent was granted a first priority security interest in the patent in order to secure C2’s obligations under the associated purchase agreement. The VoIP Patent, together with the existing C2 Patent and related international patents and patent applications, form our international VoIP Patent Portfolio that covers the basic process and technology that enable VoIP communication as it is used in the market today. Telecommunications companies that enable their customers to originate a phone call on a traditional handset, transmit any part of that call via IP, and then terminate the call over the traditional telephone network, are utilizing C2’s patented technology. The comprehensive nature of the VoIP Patent is summarized in the patent’s abstract, which, in pertinent part, describes the technology as follows: “A method and apparatus are provided for communicating audio information over a computer network. A standard telephone connected to the PSTN may be used to communicate with any other PSTN-connected telephone, where a computer network, such as the Internet, is the transmission facility instead of conventional telephone transmission facilities.” As part of the consideration for the acquisition of the VoIP Patent, the vendor is entitled to receive 35% of the net proceeds from our VoIP Patent Portfolio.

Revenue and contributions from operations related to our intellectual property, up to December 31, 2004, were based on the sales and deployment of our VoIP solutions, which we ceased directly marketing in 2005, rather than on the receipt of licensing fees and royalties. Revenue in the first nine months of 2008 was the result of entering into the settlement and license agreements with AT&T, Verizon, Sprint, Qwest Communications International, Inc., Global Crossing Limited, Level 3 Communications, Inc. and Sonus Networks, Inc., as described above. We expect to generate ongoing licensing and royalty revenue in this business as we gain recognition of the underlying value in our VoIP Patent Portfolio through the enforcement of our intellectual property rights, as discussed above under “Overview and Recent Developments”.

As discussed above under “Overview and Recent Developments”, in the third quarter of 2007, the Company began investing in Internet-based e-commerce businesses through its acquisitions of minority positions in MyTrade.com, Inc. (sold in the fourth quarter of 2007), Buddy Media, Inc. and LIMOS.com LLC, and it continued its investment activities in the fourth quarter of 2007 with the acquisition of a one-third interest in Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC. At September 30, 2008 the Company’s investment in these businesses totaled $635. The Company’s objective is to realize long-term capital appreciation as the value of these businesses is developed and recognized. In October 2008 the Company closed the sale of its investment in LIMOS.com LLC for net proceeds of approximately $780, almost twice its initial investment amount of $400.

Intellectual Property

In 2005 and 2006, the Company was awarded patents for the VoIP Patent from the People’s Republic of China, Hong Kong, and Canada. In the fourth quarter of 2006, the European Patent Office advised that it intended to grant C2 a European patent that is equivalent to the VoIP Patent. The decision to grant the European patent was subsequently published on March 21, 2007 and in June 2007 the Company applied for the validation of the patent in fifteen European countries. In the fourth quarter of 2006, the Company was awarded a patent in Canada for the C2 Patent. In the third quarter of 2008, it was awarded a patent in South Korea for the C2 Patent.

Below is a summary of the Company’s patents:

Type	Title	Number	Status

VoIP Architecture	Computer Network/Internet Telephone System (“VoIP Patent”)	U.S. No. 6,243,373	Issued: June 5, 2001 Expires: November 1, 2015

		Australia No. 716096	Issued: June 1, 2000 Expires: October 29, 2016

		People’s Republic of China No. ZL96199457.6	Issued: December 14, 2005 Expires: October 29, 2016

		Canada No. 2,238,867	Issued: October 18, 2005 Expires: October 29, 2016

		Hong Kong No. HK1018372	Issued: August 11, 2006 Expires: October 29, 2016

		Europe No. 0873637	Granted March 21, 2007

	Voice Internet Transmission System(“C2 Patent”)	U.S. No. 6,438,124	Issued: August 20, 2002 Expires: July 22, 2018

		People’s Republic of China No. ZL97192954.8	Issued: May 21, 2004 Expires: February 5, 2017

		Canada No. 2,245,815	Issued: October 10, 2006 Expires: February 5, 2017

		South Korea No. 847335	Issued: July 14, 2008 Expires: February 5, 2017

	Private IP Communication Network Architecture	U.S. No. 7,215,663	Issued: May 8, 2007 Expires: June 12, 2017

Conferencing	Delay Synchronization in Compressed Audio System	U.S. No. 5,754,534	Issued: May 19, 1998 Expires: May 6, 2016

	Volume Control Arrangement for Compressed Information Signal Delays	U.S. No. 5,898,675	Issued: April 27, 1999 Expires: April 29, 2016

In addition to the C2 and VoIP Patents, which cover the foundation of any VoIP system, our patent portfolio includes:

Private IP Communication Network Architecture (U.S. Patent No. 7,215,663 granted May 8, 2007) – This invention relates generally to multimedia communications networks. The patent’s Internet Linked Network Architecture delivers telecommunication type services across a network utilizing digital technology. The unique breadth and flexibility of telecommunication services offered by the Internet Linked Network Architecture flow directly from the network over which they are delivered and the underlying design principles and architectural decisions employed during its creation.

C2 also owns intellectual property that solves teleconferencing problems:

Delay Synchronization in Compressed Audio Systems (U.S. Patent No. 5,754,534 granted May 19, 1998) - This invention eliminates popping and clicking when switching between parties in a communications conferencing system employing signal compression techniques to reduce bandwidth requirements.

Volume Control Arrangement for Compressed Information Signals (U.S. Patent No. 5,898,675 granted April 27, 1999) - This invention allows for modifying amplitude, frequency or phase characteristics of an audio or video signal in a compressed signal system without altering the encoder or decoder employed by each conferee in a conferencing setting, so that individuals on the conference call can each adjust their own gain levels without signal degradation.

Industry

The communications services industry continues to evolve, both domestically and internationally, providing significant opportunities and risks to the participants in these markets. Factors that have driven this change include:

entry of new competitors and investment of substantial capital in existing and new services, resulting in significant price competition

technological advances resulting in a proliferation of new services and products and rapid increases in network capacity

The Telecommunications Act of 1996, as amended; and

growing deregulation of communications services markets in the United States and in other countries around the world

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

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

Competition

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

VoIP has become a widespread and accepted telecommunications technology, with a variety of applications in the telecommunications and other industries. While we and many others believe that we will see continued proliferation of this technology in the coming years, and while we believe that this proliferation will occur within the context of our patents, there is no certainty that this will occur, and that it will occur in a manner that requires organizations to license our patents.

Government Regulation

Recent legislation in the United States, including the Sarbanes-Oxley Act of 2002, has increased regulatory and compliance costs as well as the scope and cost of work provided to us by our independent registered public accountants and legal advisors. The Company became subject to Section 404 reporting as of December 31, 2007. As implementation guidelines continue to evolve, we expect to continue to incur costs, which may or may not be material, in order to comply with legislative requirements or rules, pronouncements and guidelines by regulatory bodies.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates required for the preparation of the unaudited condensed consolidated financial statements included in Item 1 of this Report were those related to intangible assets, goodwill, investments, deferred tax assets, liabilities, and contingencies surrounding litigation. These estimates are considered significant because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates and judgments, including those related to intangible assets, contingencies, collectibility of receivables and litigation. Actual results could differ from these estimates.

The critical accounting policies used in the preparation of our consolidated financial statements are discussed in our Annual Report on Form 10-K for the year ended December 31, 2007. To aid in the understanding of our financial reporting, a summary of these policies is provided in Note 2 of the unaudited condensed consolidated financial statements included in Item 1 of this Report.

Management’s Discussion of Financial Condition

Liquidity and Capital Resources

In the first nine months of 2008, the Company realized revenues from continuing operations for the first time since 2004. However, the Company must continue to realize value from its intellectual property through ongoing licensing and royalty revenue, as discussed in Note 1 of the unaudited condensed consolidated financial statements, in order to continue as a going concern. Absent an ongoing revenue stream, the Company may not be able to obtain additional financing to fund its operations without the support of Counsel. Additionally, management believes that the Company does not, at this time, have the ability to obtain additional financing from third parties in order to pursue expansion through acquisition.

Working Capital

Cash and cash equivalents were $5,523 at September 30, 2008 as compared to $67 at December 31, 2007, an increase of $5,456.

Our working capital at September 30, 2008 was $3,898 as compared to a working capital deficit of $1,653 at December 31, 2007. In addition to the increase in cash and cash equivalents, and the repayment of the $2,335 debt owed to Counsel, the Company’s other current assets increased by $88 primarily due to the Company’s prepayment of D&O insurance coverage up to May 2009. Accounts payable and accrued liabilities increased by $1,809, from $402 at December 31, 2007 to $2,211 at September 30, 2008. The majority of the increase is due to patent-related costs of $1,828. The Company’s ability to maintain positive working capital and achieve long-term viability is dependent upon success in the pursuit of licensing arrangements and/or the ability to raise additional funds to meet its business objectives.

Cash flows from operating activities

Cash provided by operating activities of continuing operations during the nine months ended September 30, 2008 was $7,919, as compared to cash used of $897 during the same period in 2007. For the first nine months of 2008 the Company had net income from continuing operations of $6,121, as compared to a net loss of $1,362 for the first nine months of 2007. The difference of $7,483 was primarily due to the fact that in February, May and September 2008 the Company entered into settlement and license agreements related to its patent licensing litigation and realized net patent licensing proceeds of $7,036.

The most significant change in non-cash items during the nine months ended September 30, 2008, as compared to the same period in 2007, was the reduction in debt-related costs, from $367 to $0. In 2007, the Company’s non-cash cost of prepaying debt to its third-party lender was $224, and it also recorded interest and debt amortization costs of $8. There were no similar costs in 2008. As well, in 2007 the Company capitalized $135 in interest on its debt owing to Counsel; as the debt was repaid in 2008 there were no similar items in 2008. The use of cash related to other assets was $88 in the first nine months of 2008 as compared to $8 of cash used in the first nine months of 2007; this was largely due to the Company’s 2008 prepayment of directors and officers liability insurance. Accounts payable increased by $1,809 primarily due to costs associated with the Company’s patent licensing revenue, particularly the third quarter patent participation fee.

Cash flows from investing activities

During the first nine months of 2008, the Company increased its holdings in its existing portfolio investments by investing $124 in Buddy Media, Inc. and $1 in Knight’s Bridge Capital Partners Internet Fund No. 1 GP LLC. It also received a cash distribution of $6 from the latter investment. During the nine months ended September 30, 2007, investing activities provided $525 – the Company received $1,100 from the redemption of its investment in AccessLine Communications Corporation, and invested $575 in MyTrade.com, Inc., Buddy Media, Inc. and LIMOS.com LLC.

Cash flows from financing activities

Financing activities used net cash of $2,335 during the nine months ended September 30, 2008, as compared to providing $400 for the same period in 2007. The sole financing activity in 2008 was the repayment of the debt owing to Counsel at December 31, 2007. During the first nine months of 2007, Counsel advanced $2,862, and the Company repaid $1,000. The remainder of the advances were largely used to fund the repayment in full of the $1,462 third party note that was outstanding at December 31, 2006.

Management’s Discussion of Results of Operations

Patent licensing revenue is derived from licensing our intellectual property. Our VoIP Patent Portfolio is an international patent portfolio covering the basic process and technology that enables VoIP communications. Our patented technology enables telecommunications customers to originate a phone call on a traditional handset, transmit any part of that call via the Internet, and then terminate the call over the traditional telephone network. At present, no royalties are being paid to the Company. The Company’s objective is to obtain licensing and royalty revenue from the target market for its patents, both domestically and internationally. In this regard, in the third quarter of 2005, the Company retained legal counsel with expertise in the enforcement of intellectual property rights, and on June 15, 2006 C2 Communications Technologies Inc., a wholly-owned subsidiary of the Company, filed a patent infringement lawsuit against seven telecommunications companies. During the first nine months of 2008 the Company effectively concluded the litigation by entering into settlement and license agreements with the defendants in the litigation.

We expect to continue to generate licensing and royalty revenue in this business as we gain recognition of the underlying value in our VoIP Patent Portfolio through the enforcement of our intellectual property rights. In connection with the 2003 acquisition of U.S. Patent No. 6,243,373, the Company agreed to remit, to the former owner of the patent, 35% of the net proceeds from future revenue derived from the licensing of the VoIP Patent Portfolio. Net proceeds are defined as amounts collected from third parties net of the direct costs associated with the maintenance, licensing and enforcement of the VoIP Patent Portfolio.

Three-Month Period Ended September 30, 2008 Compared to Three-Month Period Ended September 30, 2007

Patent licensing revenues were $9,500 during the three months ended September 30, 2008 and $0 during the same period in 2007. These revenues, as noted above, were from a settlement and license agreement entered into with the remaining parties to the Company’s patent litigation that commenced in June 2006.

Patent licensing expense was $6,097 during the three months ended September 30, 2008 and $0 during the same period in 2007. This expense includes four components: disbursements directly related to patent licensing, contingency fees earned by our legal counsel, ongoing business expenses related to patent licensing, and the participation fee of 35% payable to the vendor of the VoIP Patent.

Selling, general, administrative and other expense was $312 during the three months ended September 30, 2008 as compared to $318 for the three months ended Septmeber 30, 2007. The significant items included:

Compensation expense was $52 in the third quarter of 2008, compared to $78 in the third quarter of 2007. The quarterly salary earned by the CEO of C2 remained unchanged at $34; however, stock-based compensation expense decreased by $26, from $44 in 2007 to $18 in 2008.

Legal expense was $43 in the third quarter of 2008, compared to $63 in the third quarter of 2007.

Accounting and tax consulting expenses were $28 in the third quarter of 2008, compared to $47 in the third quarter of 2007.

Directors’ fees were $32 in the third quarter of 2008, an increase of $6 from $26 in the third quarter of 2007. The increase reflects the addition of a Class III director in January 2008.

Management fees charged by our controlling stockholder, Counsel, were $90 in the third quarter of 2008 as compared to $56 in the third quarter of 2007. The increase reflects the additional use of Counsel resources in connection with the patent licensing litigation and the Company’s investments in Internet-based e-commerce businesses.

Directors and officers liability insurance expense was $37 in the third quarter of both 2008 and 2007.

Patent maintenance fees were $21 in the third quarter of 2008. There were no similar expenses in the third quarter of 2007.

Depreciation and amortization– This expense was $5 in the third quarter of both 2008 and 2007, and relates to the amortization of the cost of the VoIP Patent.

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

In the third quarter of 2008, the Company recorded a loss of $10 relating to its equity accounted investments. This consists of $11 representing the Company’s share of the loss of LIMOS.com, partially offset by $1 representing the Company’s share of the earnings of Knight’s Bridge GP. There were no similar items in the third quarter of 2007.

In the third quarter of both 2008 and 2007, the Company had other income of $3, consisting of interest on cash deposits.

Discontinued operations– In the third quarter of both 2008 and 2007, the Company had a loss of $3 (net of tax of $0) from discontinued operations, consisting of telecommunications-related regulatory fees.

Nine-Month Period Ended September 30, 2008 Compared to Nine-Month Period Ended September 30, 2007

Patent licensing revenues were $17,625 during the nine months ended September 30, 2008 and $0 during the same period in 2007. These revenues, as noted above, were from settlement and license agreements entered into with the parties to the Company’s patent litigation that commenced in June 2006.

Patent licensing expense was $10,589 during the nine months ended September 30, 2008 and $0 during the same period in 2007. This expense includes four components: disbursements directly related to patent licensing, contingency fees earned by our legal counsel, ongoing business expenses related to patent licensing, and the participation fee of 35% payable to the vendor of the VoIP Patent.

Selling, general, administrative and other expense was $868 during the nine months ended September 30, 2008 as compared to $911 for the nine months ended September 30, 2007. The significant items included:

Compensation expense was $168 in the first nine months of 2008, compared to $233 in the first nine months of 2007. The salary earned by the CEO of C2 remained unchanged at $103; however, stock-based compensation expense decreased by $65, from $130 in 2007 to $65 in 2008.

Legal expenses in the first nine months of 2008 were $78, compared to $106 in the first nine months of 2007.

Accounting and tax consulting expenses were $85 in the first nine months of 2008, compared to $116 in the first nine months of 2007.

Fees paid to the members of our Board of Directors were $95 in the first nine months of 2008, as compared to $79 in the first nine months of 2007. The increase reflects the addition of a Class III director in January 2008.

Management fees charged by our controlling stockholder, Counsel, were $270 in the first nine months of 2008 as compared to $169 in the first nine months of 2007. The increase reflects the additional use of Counsel resources in connection with the patent licensing litigation and the Company’s investments in Internet-based e-commerce businesses.

Directors and officers liability insurance expense was $113 in the first nine months of both 2008 and 2007.

Patent maintenance fees were $21 in the first nine months of 2008. There were no similar expenses for the same period in 2007.

In the second quarter of 2007, the Company incurred expenses of $60 with respect to filing fees for patents being issued in various European countries. There was no corresponding expense in 2008.

In the second quarter of 2007, the Company recorded a credit of $12 to tax expense due to a change in estimate. There were no similar items in 2008.

Depreciation and amortization– This expense was $15 in the first nine months of both 2008 and 2007, and relates to the amortization of the cost of the VoIP Patent.

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

In the first nine months of 2008, the Company recorded a loss of $3 relating to its equity accounted investments. This consists of $7 representing the Company’s share of the loss of LIMOS.com, partially offset by $4 representing the Company’s share of the earnings of Knight’s Bridge GP. There were no similar items in the first nine months of 2007.

In the first nine months of 2008, the Company had other income of $8, as compared to other expense of $289 during the first nine months of 2007. In 2008 this consists of $6 interest income and $2 received as a reduction of prior years’ insurance premiums. The expense in 2007 primarily consists of the $293 cost incurred by the Company related to its repayment of the debt owed to the third party lender, as noted above.

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

Discontinued operations– In the first nine months of 2008, the Company reported a loss of $9 (net of tax of $0) from discontinued operations, as compared to a loss of $23 (net of tax of $0) reported in the first nine months of 2007. The 2008 loss consisted of telecommunications-related regulatory fees. The 2007 loss primarily consisted of $14 of network expenses relating to liabilities that were retained when the Company sold its telecommunications operations in 2005, with the balance being telecommunications-related taxes and regulatory fees.

Inflation. Inflation did not have a significant impact on our results during the last fiscal quarter.

Off-Balance Sheet Transactions. We have not engaged in material off-balance sheet transactions.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our exposure to market risk is limited to interest rate sensitivity, which is affected by changes in the general level of interest rates. Due to the fact that our cash and cash equivalents are deposited with major financial institutions, we believe that we are not subject to any material interest rate risk as it relates to interest income. As to interest expense, we do not believe that we are subject to material market risk on our fixed rate debt with Counsel in the near term, which had a zero balance at September 30, 2008.

We did not have any foreign currency hedges or other derivative financial instruments as of September 30, 2008. We do not enter into financial instruments for trading or speculative purposes and do not currently utilize derivative financial instruments. Our operations are conducted primarily in the United States and as such are not subject to material foreign currency exchange rate risk.

Item 4T. Controls and Procedures.

As of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”) conducted evaluations of our disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were effective.

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Please see Note 11 of the unaudited condensed consolidated financial statements, which are included in Part I of this Report, and hereby incorporated by reference into this Part II, for a discussion of the Company’s legal proceedings.

Item 1A. Risk Factors

Other than as reported below, there have been no significant changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC on March 11, 2008.

We originally reported the following:

If we were to default on any of our related party loans, Counsel could foreclose on our assets.

At December 31, 2007 Counsel owned 92.51% of the equity of the Company. Counsel had previously committed, by means of a Keep Well agreement (the “Keep Well”) that expired on December 31, 2006, to fund the operating cash requirements of the Company. Although Counsel funded our minimal cash requirements during 2007, and has indicated that it will continue to do so until at least December 31, 2008, which is the maturity date of the outstanding loan payable to Counsel, it has not formally committed to long-term funding of our operations. Our assets serve as collateral for our related party debt. In the event that we were to default on this debt, and Counsel foreclosed on our assets, we would be unable to continue our operations as they are presently conducted, if at all. Our aggregate total debt to Counsel at December 31, 2007 was $2,335. See the section entitled “Transactions with Counsel” in Item 13 of this Report.

At September 30, 2008, the Company has no debt owing to Counsel and has net working capital of $3,898, significantly reducing the risk of foreclosure by Counsel.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

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.

(a) Exhibits

Exhibit No.		Identification of Exhibit

10.1		Settlement and License Agreement dated as of September 25, 2008.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

	C2 Global Technologies Inc.

Date: November 7, 2008	By:	/s/ Allan C. Silber
		Allan C. Silber Chairman of the Board and Chief Executive Officer

	By:	/s/ Stephen A. Weintraub
		Stephen A. Weintraub Chief Financial Officer and Corporate Secretary