MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking information

This 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 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. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K, including the following discussion, contains trend analysis and other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements in this Annual Report on Form 10-K that are not statements of historical facts are forward-looking statements. These forward looking statements made herein are based on our current expectations, involve a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include without limitation:

• Dependence on key management personnel;

• Competitors with greater financial resources;

• The impact of competitive pricing;

• The ability of management to execute acquisition and expansion plans and motivate personnel in the execution of such plans;

• Adverse publicity related to the company, or the industry.

• An inability to arrange additional debt or equity financing;

• Adverse claims relating to our use of trademarks and/or trade names;

• The adoption of new, or changes in, accounting principles;

• The costs inherent with complying with new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002.

• Economic downturn.

Actual results may differ materially from those set forth in such forward-looking statements as a result of factors set forth elsewhere in this Annual Report on Form 10-K, including under "Risk Factors." More information about factors that potentially could affect the Company's financial results is included in our filings with the Securities and Exchange Commission. The Company is under no obligation and does 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.

General

It is our desire to provide all parties who may read this MD&A an understanding of the Company's past performance, its financial condition and its prospects of going forward in the future. Accordingly, we will discuss and provide our analysis of the following:

• Overview of the business;

• Critical accounting policies;

• Results of operations;

• Overview of business segments;

• Liquidity, capital resources and outlook for 2009;

• New accounting pronouncements.

We are a broadband voice and data service provider which means that we utilize high speed data network access (including the Internet) to furnish a suite of voice, video and data communications services to cable TV network operators, wire network operators, ISP's and small and medium sized businesses. We are often referred to as a hosted service provider because we provide the technology and service components used to furnish Internet Protocol (or "IP") based communication services to our customers and thereby serve as a single point of contact. Our customers use their broadband connection to the Internet to reach our Voice over IP ("VoIP") servers (used to manage and route calls) which direct their call to a national broadband network thereby enabling our customers to connect to any phone at any destination in the world. Our voice and network services reduce our customers communications costs, decrease complexity, and increase productivity.

In September 2007, we executed a Master Service Agreement (the MSA") with Level 3 Communications, Inc. (NASDAQ: LVLT), an international communications company that operates one of the world's largest Internet backbone networks reaching over 40 million customers ("Level 3"). However, and as required by the MSA, we were previously prohibited from announcing the existence of the MSA until after the same had been approved by Level 3's legal department.

VoIP is a protocol used for the transmission of phone calls over privately managed broadband networks (such as our network) and/or the Internet. It converts voice into a digital package of data which is then reassembled at the other end. Unlike traditional telephone networks, VoIP does not use dedicated circuits for each telephone call; rather, the same network can be shared by multiple users for voice, data, and video simultaneously. This 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 potential cost savings that can be passed on to consumers in the form of lower rates or retained by the provider as revenue. Significant cost savings are also possible for international telephone calls because VoIP calls bypass the international settlement process, which represents a significant portion of the international long distance tariffs. VoIP has been used over the past decade by the major phone companies to transport calls over fiber optic lines to make long distance calls. Through recent technological advances, VoIP calls can now be made directly by a caller.

Our service is enabled by three primary components, owned or leased by us:

• Servers and other computer hardware owned by us;

• Computer software acquired under license from independent third parties; and

• Network access provided by our service partners.

While these same components are available to our competitors, we manage these components in a way which we believe provides superior service to our customers. For example, our service allows customers to place and receive telephone calls anywhere in the world, wherever digital network access is available. Our services are carrier agnostic and terminal equipment agnostic.

Unlike traditional telephone networks, VoIP does not use dedicated circuits for each telephone call; instead, VoIP packets are carried on a fiber based network shared by multiple users transmitting voice, data and video simultaneously. This type of data network is more efficient than a dedicated circuit switched network because the data network is not restricted by the one-call, one-line limitation of the PSTN and, as a result, greater quantities of traffic can be transmitted over this data network. This improved efficiency creates cost savings that can be passed on to consumers in the form of lower rates or retained by the IP provider.

Our service solutions are designed specifically for the small to medium business market as well as the residential market. We measure our growth by the number of IP endpoint addresses under management. These endpoints represent unique identifiers for telephones, computers, and servers that link communication services together and manage security and control functions. As of December 31, 2008, we have 6,051 IP endpoint addresses under management. Our goal is to increase this number through internal growth and acquisitions.

We are engaged in the business of optimizing broadband networks for communication requirements for our customers. While we hope to increase our service offerings in the future, we do not anticipate entering a different industry segment.

Going forward, we intend to continue with our recurring service model and expand the product offerings to meet the needs of the markets which we serve. We anticipate that our revenue growth will be achieved through:

• Targeted cable systems in second, third and fourth tier cities for use of our system platform to provide them our hosted services;

• Strategically targeted acquisitions that include need infrastructure and matching services

• Organic growth through a direct sales team and sales agent partner program.

Our costs and operating expenses consist of cost of sales, general and administrative expenses, depreciation amortization, financing and interest expenses, described in more detail as follows:

• Cost of sales consists primarily of leased access, network and collocation facilities that we utilize to provide services to our end-users. The term of our contracts with these providers is generally two years or less, in addition we are in the process of building our own, network and collocation facilities to be able increase our margins on the services provided ;

• General and administrative expenses consist primarily of compensation and benefits for sales, management, operation, customer service, accounting, and administrative personnel, occupancy costs, marketing, legal and accounting fees, and other expenses associated with being a public company;

• Depreciation and amortization expenses are related to the depreciation and amortization of our network equipment, computer software, leaseholds, office furniture, and fixtures;

• Interest expenses consist of cash and non-cash interest costs related to our borrowing activities;

• We have not recorded any income tax benefit for net losses and credits incurred for any period from inception to December 31, 2008. The utilization of these losses and credits depends on our ability to generate taxable income in the future. Because of the uncertainty of our generating taxable income going forward, we have recorded a full valuation allowance with respect to these deferred assets.

Trends in Our Industry and Business

A number of factors in our industry and business have a significant effect on our results of operations and are important to an understanding of our financial statements. These trends include:

Overall Economic Factors. Our operations and earnings are affected by local, regional and global events or conditions that affect supply and demand for telecommunications and other information products and services. These events or conditions are generally not predictable and include, among other things, general economic growth rates and the occurrence of economic recessions; changes in demographics, including population growth rates; and consumer preferences. Our strategy and execution focus is predicated on an assumption that these factors will continue to promote strong desire for the utilization of telephony products and services and that the cost and feature advantages of VoIP alternatives will not be negatively impacted by unforeseen changes in these factors.

Industry. The telecommunications industry is highly competitive. In recent years we have seen new sources of supply for our underlying infrastructure that have reduced our overall costs of operation, and have enjoyed the benefits of competition among these suppliers for a relatively limited amount of viable customers. These decreases were driven largely by reduced vendor pricing. A key component of our competitive position, particularly given the number and range of competing communications products, is our ability to manage operating expenses successfully, which requires continuous management focus on reducing unit costs and improving efficiency.

Consumer Demand. There is significant competition within the traditional telecommunications marketplaces and also with other emergent "next generation" telecommunications providers, including IP telecommunications providers, in supplying the overall telecommunications needs of businesses and individual consumers. We compete with other telecommunications firms in the sale and purchase of various products and services in our markets. Our ability to sell managed IP services is directly linked to the significant growth rate of broadband adoption, and we expect this trend to continue. We benefit from this trend because our service requires a broadband Internet connection and our potential addressable market increases as broadband adoption increases.

Regulatory Factors. Our business has developed in an environment largely free from regulation. However, the United States and other countries have begun to examine how VoIP services should be regulated, and a number of initiatives could have an impact on our business. These initiatives include the assertion of state regulatory and taxing authorities over us, FCC rulemaking regarding emergency calling services, CALEA and Electronic Privacy, and proposed reforms for the inter-carrier compensation system. Complying with regulatory developments will impact our business by increasing our operating expenses, including legal fees, requiring us to make significant capital expenditures or increasing the taxes and regulatory fees we pay. We may impose additional fees on our customers in response to these increased expenses. This would have the effect of increasing our revenues per customer, but not our profitability, and increasing the cost of our services to our customers, which would have the effect of decreasing any price advantage we may have.

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements and accompanying notes, which have been prepared in accordance with accounting principals generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results may differ under different estimates and assumptions. Our significant accounting policies are described in Note 2 to the financial statements. The accounting estimate and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.

Principles of Consolidation

The consolidated financial statements include the accounts of IPtimize, Inc. and its subsidiary IP Solutions, Inc. All significant inter-company balances and transactions are eliminated in the consolidation. The Company is reporting its consolidated operations under the guidance of ARB 51, as amended by FASB 94 for consolidated companies.

Revenue Recognition

We recognize revenue from services at the time the services are completed and revenue from the sale of products at the time that title passes to the buyer.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2008. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, leases payable, lines of credit, and notes payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature, their carrying amounts approximate fair values, or they are receivable or payable on demand. The carrying value of our long-term debt approximated its fair value based on the current market conditions for similar debt instruments.

Stock-based Compensation

We account for equity instruments issued to employees for services based on the fair value of the equity instruments issued and accounts for equity instruments issued to other than employees based on the fair value of the consideration received or the fair value of the equity instruments, whichever is more reliably measurable.

Effective January 1, 2006, we implemented the provisions of SFAS 123(R) "Share-Based Payment," requiring us to provide compensation costs for our stock option plans determined in accordance with the fair value based method prescribed in SFAS 123, as revised. We estimate the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provide for expense recognition over the service period, if any, of the stock option.

Results of Operations

The nature of our operation and the use of new technology in our business create certain challenges and risks to us in our growth and changes in operations. These challenges and risks are discussed in Item 1 of this Annual Report. However, certain of these factors are especially important to this discussion and in understanding our results of operations, financial condition and cash flows, and the reason why historical results may not be indicative of our future performance.

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007.

The following data has been derived from our statements of operations for the two years ended December 31, 2008. The information presented below and in the following discussion was derived from audited financial information.

                                                        Year Ended December 31,
    Statement of Operations Data                         2007             2008
                                                     As restated
    Revenue                                          $  1,025,152     $  1,696,659

    Costs of sales                                        734,463        1,260,706
    Salaries & wages                                      902,378        1,739,501
    Consulting                                            760,244        3,584,110
    Taxes                                                  76,982          281,950
    Rent                                                   77,424          114,975
    Legal & Accounting                                    236,843          153,267
    Marketing                                             233,346        1,260,282
    Insurance                                              82,752          176,296
    Other general & administrative                        137,286          552,442
    Depreciation and amortization                          55,763          174,847

    Total costs and expenses                            3,297,481        9,298,376

    Net operating (loss)                               (2,272,329 )     (7,601,717 )
    Other income (expense)
    Loss on acquisition                                  (250,000 )             -
    Gain on settlement of debt                             37,672          395,635
    Interest income                                            -             5,573
    Interest expense                                     (431,260 )     (1,048,635 )

    Net (loss)                                         (2,915,917 )     (8,249,144 )
    Preferred stock dividend                             (329,700 )       (299,190 )

    Net (loss) attributable to common stockholders   $ (3,245,617 )   $ (8,548,334 )

Revenue. Our total revenue for the year ended December 31, 2008 was $1,696,659 compared to $1,025,152 for the year ended December 31, 2007. Our revenue increased $671,507, or 65.5% due primarily to a focus on growth of our managed IP services, primarily VoicePilot and VoIPConnect.

Our recurring managed IP service revenue increased approximately $615,656 or 72.9% in 2008 versus 2007. Recurring service revenue represented 85% of the total revenue in 2008 versus 56% in 2007. IP endpoints under management represents the number of IP addresses which we bill monthly recurring service fees on. As the number of IP endpoints increases, we see a corresponding increase in our monthly recurring revenues. IP endpoints under management increased from approximately 2,000 to 7,000 from December 31, 2007 to December 31, 2008.

Cost of Sales. Our cost of sales for the year ended December 31, 2008 was $1,260,706 compared to $734,463 for the year ended December 31, 2007. Costs increased $526,243, or 71.7%, due primarily to the increased sales of hosted VoIP Services.

Our gross profit margin for 2008 was 26%, down from 29% for 2007. This reflects the change in our focus from one-time equipment sales to a recurring revenue business model based on managed services. Despite the decreased margin, we believe that the revenue from our current model is more sustainable and will benefit us in the long term. In addition the purchasing of the above described will allow us to provide more of the services internally and not have to purchase the use of these services from an outside vendor for a higher cost. Our long term plan to increase the margins to approximately 50% are based on the purchase of a soft switch which allows us to operate without purchasing the soft switch services from a wholesaler. We will save the markup that the wholesaler charges for the services that we can provide on our own soft switch. We believe that we will have the soft switch up and begin saving on our margin by the second quarter of 2009. We have purchased the hardware, installed the equipment and are in the process of purchasing the balance of the software needed to be fully operational.

General and Administrative. Our General and Administrative expenses for the year ended December 31, 2008 were $5,037,970 compared to $2,563,018 for the year ended December 31, 2007 representing a increase of $2,474,952.

Salaries and wages increased to $1,739,501 for the year ended December 31, 2008 from $902,378 for the year ended December 31, 2007. The increase in salaries and wages is a result of an increase in the workforce, from 7 on December 31, 2007 to 27 on December 31, 2008, this increase was $837,123 or 92.8%. This increase included charges of $452,523 for the period costs of the issuance of opinions issued in late 2007 and early 2008.

The consulting fees increased from $760,244 for the year ended December 31, 2007 to $3,584,110 for the year ended December 31, 200 or a increase of $2,823,866 or 371.4%. The increase is mostly due to the termination of consulting contracts that were set up to be amortized over three years and terminated in the fourth quarter of 2008. In addition, we had several outside business consultants that were helping with the business plan, financing, and business strategies. All of these consultants were paid with unregistered common stock. There was a decrease in the consulting expense paid in cash as a result of a reduced need for the services rendered by the consultants in the IT area.

Taxes increased to $281,950 for the year ended December 31, 2008 from $76,982 for the year ended December 31, 2007. The increase reflects the payroll tax increase related to a larger staff in 2008. It also includes an estimate of penalties and interest that maybe due to the Internal Revenue Service because the payroll taxes for 2004 through 2007 were not paid until March 2008 of $176,000.

Rent increased to $114,975 for the year ended December 31, 2008 from $77,424 for the year ended December 31, 2007, a 48.5% increase. This increase is due to the expiration of an office lease and the move to new offices. Legal and accounting was $153,267 for the year ended December 31, 2008 as compared to $236,843 for the year ended December 31, 2007 a decrease of $83,576 (35.9%) The decrease in legal and accounting was the result of filing a Form 10 with the SEC, two years audits, and the due diligence on a proposed acquisition for the year ended December 31, 2007 verse less filings, less legal, and one audit for the year ended December 31, 2008. The Marketing expense for the year ended December 31, 2008 was $1,260,282 as compared to $233,346 for the year ended December 31, 2007. The increase was $1,026,936 or 440.1% and was due to the termination of a contract for public relations that was being amortized over three years. The remaining balance of $1,041,250 was included in the December 31, 2008 expense. Insurance for the year ended December 31, 2008 was $176,296 as compared to $82,752 for the year ended December 31, 2007. The increase includes D&O insurance, additional health insurance costs, and additional liability insurance costs for 2008. The Other General and administrative expenses increased to $552,442 for the year ended December 31, 2008 from $137,286 for the year ended December 31, 2007, an increase of $415,155 or 302.4%. These costs increased as a result of increase overhead related to growth of sales, building the structure to manage the sales growth and customer service demand related to the soft switches.

Depreciation and amortization increased to $174,847 for the year ended December 31, 2008 from $55,763 for the year ended December 31, 2007, an increase of $119,084. The increase was due to addition depreciation on switch and server hardware and amortization of the covenant not to compete and customer list for the AFS transaction.

Other Income and (Expense). Our total other expense for the year ended December 31, 2008 was $(647,427) compared to $(643,588) for the year ended December 31, 2007. The Other Income and (expense) for the year ended December 31, 2008 includes income from debt settlement of $395,635 and interest income of $5,573 that is an increase from the same period 2007 of $363,536. Interest expense for the year ended December 31, 2008 was $880,801 or an increase of $517,265 due to increased debt.

Net Loss.

Our net loss attributable to common stockholders for the year ended December 31, . . .