VoIP service is primarily a substitute or an enhancement to traditional voice services offered by existing telecommunications service providers. The overall telecommunications industry represents one of the largest service markets in the U.S. with sales of approximately $291.7 billion in 2004 according to Federal Communications Commission, or FCC, reports. The market is divided into three industry segments with local services representing approximately $121.9 billion in sales in 2004, long distance services representing an estimated $71.2 billion and wireless voice services representing approximately $98.6 billion. The industry can also be broken into retail and wholesale segments, with the retail market, which includes residential and business end users, totaling $233.3 billion in sales in 2004 and the wholesale segment, which is comprised of carrier to carrier sales, totaling $58.4 billion.

The telecommunications market has been traditionally served by circuit-switched landline local and long distance phone companies and various wireless carriers. However, competition to provide voice services, particularly for retail residential and business customers, has increased significantly due to new entrants in the market including VoIP providers, cable television companies, competitive local exchange carriers, Internet service providers, or ISPs, and wireless IP-based service providers.

In addition, the sale of voice services packaged as calling cards and flat rate subscription services has allowed operators of various retail distribution channels to become participants in the market, such as retail store chains and Internet marketing companies who sell private label voice services. The entry of these competitors has been facilitated in part by the introduction of new technologies such as VoIP.

According to Infonetics Research, there were 4.3 million VoIP subscribers in North America in 2005, expected to grow by 800% to almost 39.0 million in 2009, representing a compound annual growth rate of 73%. Furthermore, a number of other independent research firms expect the VoIP market in the U.S. to expand dramatically from its current size. For example, Forrester Research expects VoIP households to grow from 0.9 million to 11.5 million from 2004-2009, representing a compound annual growth rate of 66%.

Carrier services consist of origination and termination services. Such services are provided over the Company’s VoIP network constructed as a nationwide system of regional IP nodes known as points-of-presence, or PoPs, connected by a fiber-optic backbone and other bandwidth segments utilizing a secure packet technology called asynchronous transfer mode, or ATM.

The Company’s retail VoIP services are sold to consumers and distributed in the form of calling cards or through the distribution of personal identification numbers, or PINs. The Company’s retail services integrate the installation of voice services with billing and customer care functionality and voice and data applications such as on-demand conferencing and find-me/follow-me service. The Company primarily distributes its services through retail distribution partners who hold back a portion of the retail revenue.

The Company expects to enter into arrangements with one or more distribution partners under which they would sell plug-and-play product devices which do not require additional software. These devices would be purchased from manufacturers and would be configured to work exclusively with the Company’s network. The Company has developed three IP devices — the Broadband MetroFone, the VideoLine MetroFone, and the DialLine MetroFone.

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

The Company’s state-of-the-art proprietary VoIP network is comprised of three basic components: switching equipment, software and network facilities. The Company’s software applications, including both third party software and internally developed proprietary software, allow for web-based control of its VoIP switching platform and access to data gathered by its VoIP switches.

Network costs increased $1.9 million, or 188.9%, from $1.0 million for the three months ended March 31, 2005 to $3.0 million for the three months ended March 31, 2006.

Depreciation expense included within network costs for the three months ended March 31, 2005 was $100,000 as compared to $166,000 for the three months ended March 31, 2006.

General and administrative expenses increased $1.4 million, or 206.1%, from $686,000 for the three months ended March 31, 2005 to $2.1 million for the three months ended March 31, 2006.

Interest expense increased $363,000, or 313.6%, from $116,000 for the three months ended March 31, 2005 to $479,000 for the three months ended March 31, 2006.