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encryption concerns or the characteristics and quality of products and 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 and local 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 November 9, 2004, the FCC ruled that Vonage DigitalVoice and similar services are jurisdictionally
interstate and not subject to state certification, tariffing and other common carrier regulations, including 911. This
ruling has been subsequently appealed by several states. On February 11, 2004, the California Public Utilities
Commission (CPUC) initiated an investigation into voice over IP providers, including us. 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.
The effects of federal, state or municipal regulatory actions could have a material adverse effect on our
business, financial condition and operating results.
Several U.S. states and municipalities have recently shown an interest in regulating 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, or 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 from 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
disputed their assertions. While we do not believe that the potential amounts of any forfeitures would be material to
us, if we are subject to an enforcement action, we may become subject to liabilities and may incur expenses that
adversely affect our results of operations.
On September 17, 2003, we were contacted by the Ohio Public Utilities Commission, or OPUC, and asked to
respond to a questionnaire on Voice over IP technologies that the OPUC is conducting. The OPUC inquired as to the
nature of our service, how it is provided, and to what Ohio residents the service is made available. The questionnaire
did not contain any assertions regarding the legality of the Packet8 service under Ohio law or any statements as to
whether the OPUC believes we are subject to regulation by the state of Ohio. We responded to this questionnaire on
October 20, 2003.
On September 22, 2003, the California Public Utilities Commission, or CPUC, sent us a letter that alleged that we
are offering intrastate telecommunications services for profit in California without having received formal
certification from the CPUC to provide such service. The CPUC also requested that we file an application with the
CPUC for authority to conduct business as a telecommunications utility no later than October 22, 2003. After
consultation with regulatory counsel, we responded to the CPUC, disputed its assertions and did not file the
requested application. In our October 22, 2003 response to the CPUC, we disagreed with the CPUC's classification
of us as a telephone corporation under the California Public Utilities Code. We asserted that we are an information