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standards evolve, we may be required to modify our existing products or develop and support new versions of our
products. The failure of our products to comply, or delays in compliance, with various existing and evolving
industry standards could delay or interrupt volume production of our VoIP telephony products, which would have a
material adverse effect on our business, financial condition and operating results.
Future legislation or regulation of the internet and/or voice and video over IP services could restrict our
business, prevent us from offering service or increase our cost of doing business.
At present there are few laws, regulations or rulings that specifically address access to or commerce on the internet,
including IP telephony. We are unable to predict the impact, if any, that future legislation, legal decisions or
regulations concerning the internet may have on our business, financial condition, and results of operations.
Regulation may be targeted towards, among other things, assessing access or settlement charges, imposing taxes
related to internet communications, imposing tariffs or regulations based on encryption concerns or the
characteristics and quality of products and services, imposing regulations and requirements related to the handling of
emergency 911 services, any of which could restrict our business or increase our cost of doing business. The
increasing growth of the broadband IP telephony market and popularity of broadband IP telephony products and
services heighten the risk that governments or other legislative bodies will seek to regulate broadband IP telephony
and the Internet. In addition, large, established telecommunication companies may devote substantial lobbying
efforts to influence the regulation of the broadband IP telephony market, which may be contrary to our interests.
Many regulatory actions are underway or are being contemplated by federal and state authorities, including the FCC
and other state regulatory agencies. On February 12, 2004, the FCC initiated a notice of public rule-making to
update FCC policy and consider the appropriate regulatory classification for VoIP and other IP enabled services. On
February 11, 2004, the California Public Utilities Commission (CPUC) initiated an investigation into voice over IP
providers. As a tentative conclusion of law, the CPUC stated that they believe that VoIP providers are
telecommunications providers and should be treated as such from a regulatory standpoint. There is risk that a
regulatory agency requires us to conform to rules that are unsuitable for IP communications technologies or rules
that cannot be complied with due to the nature and efficiencies of IP routing, or are unnecessary or unreasonable in
light of the manner in which Packet8 offers service to its customers. It is not possible to separate the Internet, or any
service offered over it, into intrastate and interstate components. While suitable alternatives may be developed in the
future, the current IP network does not enable us to identify the geographic nature of the traffic traversing the
Internet. There is also risk that specific E911 requirements imposed by a regulatory agency may impede our ability
to offer service in a manner that conforms to these requirements. While we are developing technologies that seek to
provide access to emergency services in conjunction with our IP communications offerings, the existing
requirements, which are tethered to and dependent upon the legacy PSTN network, neither work in an IP
environment nor take advantage of the significantly enhanced capabilities of the IP network.
The effects of federal or state regulatory actions could have a material adverse effect on our business, financial
condition and operating results.
Increasing interest by U.S. states in the regulation of voice over IP services could result in laws or regulatory
actions that harm our business.
Several states have recently shown an interest in regulating voice over IP, or VoIP, services, as they do for providers
of traditional telephone service. If this trend continues, and if state regulation is not preempted by action by the U.S.
federal government, we may become subject to a "patchwork quilt" of state regulations and taxes, which would
increase our costs of doing business, and adversely affect our operating results and future prospects.
We have already been contacted by several state regulatory authorities regarding our Packet8 service. On September
11, 2003, we received a letter from the Public Service Commission of Wisconsin (the WPSC) notifying us that the
WPSC believes that we, via our Packet8 voice and video communications service, are offering intrastate
telecommunications services in the state of Wisconsin without certification of the WPSC. According to the WPSC's
letter, it believes that we cannot legally provide Packet8-based resold intrastate services in Wisconsin without
certification of the WPSC. In addition, the Commission believes that Packet8 bills for intrastate services to
Wisconsin customers are void and not collectible. The letter also states that if we do not obtain certification to offer
intrastate telecommunications services, the matter will be referred to the State of Wisconsin Attorney General for
enforcement action. The letter also states that even if the Company were certified by the WPSC, the previous
operation without certification may still subject the Company to referral to the State of Wisconsin Attorney General
for enforcement action and possible forfeitures. We consulted with counsel and have responded to the WPSC and