VIPER NETWORKS, Inc.: (OTC:VPER.PK)

by Sergiu Lisnic, CFA slisnic@spelmanresearch.com October 22, 2004 VIPER NETWORKS, Inc.: (OTC:VPER.PK) Rating: Speculative Buy We are initiating coverage of VIPER NETWORKS, Inc (VPER) with a Speculative Buy Rating. Our opinion is based on both short-term and long-term factors. In the short term, VPER stock price should get a boost when the company releases financial data, which should occur within the next couple of weeks. We view the sheer fact that the company finally releases audited financial information as a key positive. We cannot stress enough the risks related to the fact that the company is currently trading on the “pink sheets” and does not report to the SEC. Without audited financials we have little hard data about the company which significantly adds to the risk profile of VPER. The filing of a registration statement under the 34 Act, as amended, inclusive of Audited Financials, should eventually clear the way for the company’s common stock to be allowed to trade on the OTC Bulletin board. In earlier press releases, VPER announced expected annualized revenues of $22 million in FY04 and expected booked revenues of $14million in FY04. Management also announced that it expects to reach profitability as early as FY04. In the long-term we believe that VPER’s “retail VoIP” business model, strengthened by a owned global network and no debt, is compelling and provides the basis for future success. Our rating however bears great risks because without SEC filings, information about VPER should be treated with caution. Key investment positives VoIP retail concept and active advertising campaign. VPER is taking VoIP to its next logical level. Gone are the times when VoIP belonged to a selected group of internet pioneers. VPER wants to put its VoIP product on the retail shelf, next to the bottle of milk and make it available to everyone. The company has started in May 2004 a worldwide roll-out of its new advertising and marketing campaign to promote the company name, build brand recognition, and further educate the public on the benefits of utilizing VPER and VoIP technology as an alternative to traditional telephony carriers. The company promotes a new slogan: “Your Internet Phone Company(TM)”, which is scheduled to appear in various electronic, print, radio, and other advertising mediums, including direct mailing. The message of the campaign is to inform potential customers that VPER has built and is expanding an up-to-date global VoIP network, and is ready to be a true alternative to traditional carriers such as SBC, AT&T and Verizon. Positive industry outlook. In terms of usage, VoIP carried 24.5 billion minutes in 2003, jumping to nearly 13% of international minutes; during the last five years VoIP international traffic grew at CAGR of 177%. In 2003 VoIP international traffic grew by 36% yoy, while the PSTN traffic increased by 7%. According to TeleGeography 2002 it is expected that by the end of 2006 International VoIP traffic will exceed 90 billion of minutes, implying a CAGR of 51% compared during 2002-06. The penetration rate of VoIP within international calls traffic is expected to reach 45% by the end of 2006. VPER has announced it is targeting 12% on consumer channels that it addresses (vPhone, IP Phone Adaptor and WiFi Phone). 1As stated by management in a recent on-line slide show presentation about the company available at www.informedinvestors.com/IIF_Forum.asp?ForumID=85128 1

Global owned network. The company has made a series of acquisitions worldwide so it owns its networks – which VPER’s management calls "toll roads" - rather than leasing lines from the major carriers. This gives VPER more flexibility and the ability to adapt quickly to changing market conditions. Unlike many of its competitors, VPER has been focused on international expansion from the very start. Acquisitions and partnership allow the company to enhance its sales by presence in Brasil, India, Germany etc. Altogether the company has 16 network Points Of Presence (POPs) in Europe, 13 in Asia, and it's still growing. In a relatively short period of time VPER managed to cover numerous regions in the world with its own networks and gateways (North and South America, Eastern and Western Europe, Australia and Africa) and it is well on track of increasing its presence in Australia and the islands and plans to have own networks in Asia by the end of next year. At that point the company will practically will have a global VoIP network. That will give the company control of its costs, and multiple revenue channels. We expect that the audited SEC filings to be submitted in the following weeks will provide more details about the location, lengths and other characteristics of VPER networks and gateways. Integrated services offering. The services rendered by VPER enable truly integrated, location independent solutions, with always-on capability and great flexibility: Voice, video and data, all over the same line and the same technology, terminating at a single device which could be client’s PC at home, laptop when traveling, etc. Customers do not need to be connected to a PC, and to enjoy VPER services from a Wi-Fi Phone. No-debt philosophy. While we are still waiting for financial data from the company, it has announced that it is on track of pursuing its strategic goals of debt-free growth. This gives the company a great deal of operational flexibility and sets the company apart from its many telecom competitors. However we cannot make any definitive judgments without audited financial statements. Key investment negatives Pink sheet stock. VPER’s stocks are traded by the National Quotation Bureau as over-the-counter pink sheet stock. Unlike a stock exchange, companies quoted on the pink sheets system are not required to meet minimum standards: for example to register with the SEC or to remain current in their periodic filings. Therefore, we do not have reliable information about the company and our knowledge about VPER is based primarily on press releases. Pink sheets are considered even more risky than the OTCBB. The company is making all efforts, however, to start complying with the requirements to become a reporting entity, including the submission to the SEC of audited financial statements for the past three years. We are expecting to the see audited financial in late October of 2004 and shortly afterwards the company stock should be eligible to trade on the “Bulletin Board”, instead of the pink sheets. This alone should increase investor confidence about the company and affect the price of the stock positively. Increasing competition in the communications market. There is strong competition both from other VoIP and from PSTN service providers. While PSTN operators are still having large market share, they lose ground in favor of VoIP companies. In response, PSTN companies developed their own VoIP subsidiaries and actively compete with newly created VoIP companies; traditional telephony companies tend to have much higher resource base and name recognition. Additional competition comes from other (old and new) VoIP companies that try to benefit from projected market growth. Voice quality of VoIP services. Inferior voice quality and reliability/delay have often been quoted as the main disadvantage of VoIP services. Recent technological advances in VoIP telephony, however, are increasingly taking care of this problem. Latest VoIP applications can be customized to be as reliable as the client wants them to be. The necessary compression technology and the Internet bandwidth within and between most countries exist and are good enough to provide call quality almost undistinguishable from conventional phone calls. VPER has addressed the voice quality issue through the “Adaptive Jitter Buffer” technology installed on its devices. The effect is traffic management and prevention of lost data packets at a 2

much higher quality than fixed jitter buffer technology. Adaptive Jitter Buffer technology is also located in all servers and gateways providing seamless quality. Regulatory issues. VoIP providers have recently come into the spotlight as various governmental agencies inquire into their status. The current status of VoIP is “information providers,” as opposed to “telecommunication providers;” that means that there is a smaller burden on VoIP companies as compared to traditional telephony companies. It may happen in the future that the current philosophy of regulatory freedom for VoIP to develop and grow will be renounced and they will become subject to numerous regulatory burdens consequent to their reclassification as telecommunications provider. The FCC has no current policy on internet-based telephony, but as this industry evolves and become more and more important to the overall communications industry, additional regulatory burdens are inevitable. Recent events Expanded operations in California. On Aug. 6, 2004 VPER announced that it has expanded its operations, and opened another facility In Irvine, Calif. The new Irvine, Calif. location will compliment Viper's facilities in Dusseldorf, Germany; Boston, Mass.; Rochester, Mich. and San Diego. It will also allow for personnel and products to be located near a major transportation hub, since the new facility is located directly across the street from John Wayne Orange County Airport in Irvine. According to VPER’s management this facility should easily handle an additional 20,000 customers. Stock split. On August 4, 2004, VPER’s Management announced an eleven-for-ten forward stock split to shareholders of record as of September 17, 2004. According to VPER’s management, this was made due to positive results achieved by the company, and to reward VPER loyal shareholders. New retail outlets for its products. During the current year (2004), VPER has actively pursued establishing relations with commercial partner for distribution of its products; it signed agreements with a number of major retail electronics catalog companies to begin selling VPER's products. On October 12, 2004 VPER announced that it has expanded its original Master Distribution agreement with Intelligent Networx to include the sales and marketing of VPER complete line of products and services throughout South Africa. Intelligent Networx founder and Managing Director Mr. Peter Lange, commented, "Africa is the fastest growing telecommunications market in the world right now, and South Africa is the largest market in that region.” On September 29, 2004 VPER announced that one of its divisions has signed an agreement for the termination of a significant amount of VoIP (Voice over Internet Protocol) traffic minutes in New Delhi, India. Annual revenues on the contract are estimated to be around $500-700,000. The importance of this contract, aside from increase in revenues/ earnings, is that it is one step forward towards building the wholesale side of business. Selling wholesale will allow VPER to achieve increased economies of scale on its global network. On September 22, 2004 VPER announced that it has signed an agreement with Australian-based Intelligent Networx to distribute Viper's complete line of VoIP (Voice over Internet Protocol) products and services. This partnership will allow VPER to reach Australia and the Pacific Rim with its products and strengthens its international presence. On August 8, 2004 VPER announced that its VoIP (Voice over Internet Protocol) products and services will appear in the upcoming Q1 issues of the in-flight magazine SkyMall(R) as part of a special technology insert by Viper Networks distributor, TigerDirect Inc. Over 1.5 million airline passengers are exposed to SkyMall(R) in- flight magazine each day, which distributes over 4.5 million catalogs quarterly to more than 20 major US airlines including American, Delta, United, America West, Southwest and Continental. SkyMall(R) magazines have an onboard shelf life of 3 months and a marketing shelf life of 6 months. In a recent on-line slide presentation of the company VPER also announced that potential customers will be addressed through yet another channel – direct mailing, which is due to start in the coming weeks. 3

On July 19, 2004 VPER has signed an agreement with Zones, Inc. for the catalog and online sales of all Viper VoIP products. Zones offers over 150,000 products from leading manufactures including 3Com, Adobe, Apple, Cisco, Epson, HP, Kingston, Microsoft, Sony and Toshiba, and sells these products through outbound and inbound call center account executives, specialty print and e-catalogs, and the Internet. On July 8, 2004 VPER has signed an agreement with PC Mall, Inc. for the catalog and online sales of all Viper VoIP products. An initial purchase order has already been received and the inventory shipped to the PC Mall distribution center in Memphis, Tennessee. More than 100,000 different products from companies such as Compaq, Microsoft, Apple, IBM and Hewlett-Packard are marketed via PC Mall to business customers using relationship based outbound telemarketing, catalogs and the Internet. On June 16, 2004 VPER announced that its recently signed agreement with TigerDirect, Inc. has been expanded to include the European and Canadian versions of TigerDirect's print and online catalogs for the sale of all Viper products. TigerDirect's US, European, and Canadian catalogs released later will include advertisements for Viper's products. Thus, the magnitude of exposure of VPER products increases as larger audience of potential buyers around the world is targeted. Subsidiary spin-off. On June 23, 2004 VPER announced that its wholly-owned subsidiary NextPhase Technologies, Inc. has prepared to launch operations and become its own publicly traded company. VPER has consolidated all of its non-VoIP divisions into the wholly-owned subsidiary NextPhase Technologies and plans to distribute shares of the forthcoming publicly-traded NextPhase Technologies as a dividend to its shareholders. We see this development as positive for both current and future shareholders. As much similarity as there may be between VoIP services and Wi-Fi and other VPER activities, there are also significant differences, and at this early stage of development, there is a greater chance of success if each product category receives separate management focus and a separate source of funds. Investor may choose more precisely which pioneer industry they want to invest into – VoIP or Wi-Fi. Lawsuit with an important shareholder. One of the VPER’s significant shareholders, Greenland Corp., intended to sell its “restricted” shares of VPER’s stock, but it was “blocked” by VPER management. One of the reasons stated was that VPER does not meet the requirements of 17 CFR 240 15c2-11 that in summary states that the company has adequate public information available including certain financial disclosure. On July 2004 the court rejected VPER's motion for preliminary injunction, while the transfer agent has taken the position that they will not process the sale of their shares until the case is settled. The case was sent to Arbitration and expected Arbitration date is early 2005. VPER may be have to bear the legal costs incurred by Greenland in connection with VPER’s complaint, however we do not feel that either the amount of damages or other consequences of this litigation endanger the future operations and strategy of the company. Company’s background Viper Networks (VPER) is a publicly traded Utah corporation with headquarters in San Diego. VPER was formed on November 15, 2000, through the acquisition, renaming and reorganization of a public company Taig Ventures from Ogden, Utah. VPER’s reissued shares began trading over the counter on September, 16, 2002. After the acquisition and reorganization completed in December 2002, VPER was provided with voice, video and data capabilities. As the Internet becomes the standard for practical and affordable communications domestically and internationally and availability of broadband connections increases, VPER plans to fulfill its long-term business plans of constructing a world wide communications company that uses voice over internet protocol technology (VoIP). VPER has built "Your Internet Phone Company" by refining technology and expanding its up to date global VoIP network that allows calls to be placed to any phone in the world at substantial savings using existing Internet connection, and receive calls through a IP-PSTN switching network. VPER’s major advantage is high quality and low costs of services due to the fact that VPER owns its network. This allows VPER to be more flexible and to adapt quickly to changing market conditions. 4

In addition to being a service provider, VPER also offers its own hardware, the vPhone for example which looks like a normal telephone handset but plugs into the USB port of PC or laptop and enables the client to make VoIP calls using the VPER’s worldwide network. Or the IP Phone Adaptor which connects to clients PC's USB port on one end and any regular telephone, including cordless phones, on the other. The company's own Dialer software enables the clients to make calls with any of these devices via Internet to regular phones anywhere in the world. VPER have offices and partners in the 11 countries on the four continents and Plans to expand into new areas in South America and Australia. • VPER latest acquisitions: In October 2003 VPER purchased Mid-Atlantic International for a combination of cash and stock. This acquisition created VPER’s own Network Operation and Billing Center in Michigan, plus 13 gateways in the Middle East and Africa, coupled with new sales channels. In January 2004 Viper Networks purchased Adoria Communications in Massachusetts for a combination of cash and stock. As a result, VPER created its own wholesale traffic division plus brought gateways in Europe, India, Nepal and Sri Lanka along with new sales channels. In May 2004 VPER purchased a fifty percent (50%) interest in Brazil Communications, LLC which owns operations in Brazil and El Salvador Central America. This acquisition brought additional gateways and sales channels in Latin and Central America plus positioned VPER as an important player in the global IP network arena. Also in 2000 VPER formed NextPhase Technologies and in 2004 decided to spin off all of its non-VoIP divisions to focus all company resources on VoIP. 5

In June 2004 VPER formed a new wholesale traffic division combining Adoria and Mid-Atlantics business operations. In August 2004 VPER expanded its operations and opened another facility In Irvine, Calif. to accommodate customer service, technical support, retail sales and operations. The new Irvine, Calif. location will compliment VPER’s facilities in Düsseldorf, Germany; Boston, Mass.; Rochester, Mich. and San Diego. It will also allow for personnel and products to be located near a major transportation hub, since the new facility is located directly across the street from John Wayne Orange County Airport in Irvine. Segments VPER is targeting two segments: residential consumers and corporate consumers. PRODUCTS Consumer products Corporate products Broadband phone adaptor IP phone adaptor Wi-Fi vPhone LAN Phone IP PBX vPhone • Consumer Products Segment vPhone is a device that allows the client to place calls worldwide from any PC with an internet connection, including dial-up. vPhone can also receive incoming calls. Customers need only to plug in phone to PC via supplied USB cable and download software from VPER website. Customer must set up an account with Viper in order to make and receive calls. Calling is "pre paid" and users should have a credit card to set up account. Pay is only for the minutes used with no bundling or minimums. The technology for this product is quite advanced and includes features such as a) adaptive jitter buffer - provides traffic management and prevents lost data packets at a much higher quality than fixed jitter buffer technology; b) network echo canceller; c) acoustic echo canceller; and d) net/ EQ - intelligent software developed by Nokia to moderate voices to sound “normal”. The selling price is around $60. IP phone adaptor is a device that allows the client to place calls worldwide from any PC with an internet connection. It is a device that makes the link between the computer and the regular phone so that phone calls, both local and international, can be made using a regular cordless phone. Included vPhone Dialer software helps the client to manage, store and call all the client’s contacts. IP phone adaptor can be easily installed by plugging the supplied USB cable with any regular telephone, including cordless. It includes the same technology as vPhone. The selling price is around $90. 6

The Wi-Fi vPhone Wi-Fi vPhone is a next generation intelligent IP Communications device which combines SIP based VoIP communications together with Wi-Fi. It acts as a computer and an IP phone and includes the same technology as used in vPhone. The Wi-Fi vPhone Phone is great for Branch offices as well as SoHo and Hot Spot application. Wi-Fi vPhone works on home or "hotspot" wi-fi networks using 802.11B. Customer does not need to be connected to a PC, but must set up an account with Viper Networks online with a major credit card. Calls are "pre paid" and charged per minute. The Broadband Phone Adaptor (BPA) allows regular analog phones to make calls on VoIP network. Using the advantages of broadband internet connectivity, the BPA works with Digital Subscriber Line (DSL), cable modems and other Ethernet connections. It can be connected directly to client’s broadband Internet connection and does not require a PC to be turned on to make or receive calls. It is practical and well-equipped, with built-in router and DHCP server, 2 ethernet ports and 2 phone ports. The quality of sound is assured by use of the same technology as for vPhone. The Headset and Audio Hub. It is the most recent VoIP product offered by VPER in partnership with Platronics that provides the headset products. The offering will include vPhone Dialer Software, access to its Global VoIP network, and a variety of different Plantronics(R) headset models. The entry-level version of the product will be Viper's least expensive VoIP solution, and something that it believes consumers looking to take advantage of Viper's services, but can't afford a vPhone or other more expensive product will try. Originally the product was intended for Australian and Indian markets where many call centers are located, but management has stated in a recent on-line slide show company presentation that the gaming community is also interested in this product. As stated in a recent online slide presentation of the company, VPER has taken very seriously the fact that 64% of the world is still on dial-up rather than broadband and developed a VoIP technology that works equally well regardless of the connection (narrow or broad band). • Corporate Products Segment Viper has expanded its line of VoIP (Voice over Internet Protocol) products to include those aimed at business customers during June 2004. There two products VPER intends to offer to corporate clients: IP PBX and LAN Phone. IP PBX (Internet Protocol Private Branch Exchange) is a phone system that utilizes Ethernet phones for true one-wire to the desktop – converging both voice and data across a single network wire; it enables truly converged communications. Beyond voice and data on the same wire, unified messaging and desktop productivity enhancements, a next generation IP-PBX brings together all of these elements and more in a single, easy to manage solution. Traditional PBXs and PC-PBXs were designed with telephony/voice at their very core and then IP was added on top. The latest generation of IP-PBX is a software-based solution built from the ground up to be a truly convergent enterprise communications system. This architecture ensures linear scalability and costs, resiliency and reliability, ease of administration and management, a wide variety of end-points and network elements (no vendor lock-in), support for legacy equipment, and a fully enabled end-user experience all in a single system that runs on an existing heterogeneous network environment. Office-to-office long distance calls will be free; other features will include Voicemail, speech to text / text to speech and conference. There are two options for installation: VPER hosted network and client hosted network. 7

LAN Phone is a full-featured IP-based telephone set for office telephony via Ethernet base communication. It provides IP-PBX solution such as station-to station call, IP call and local PSTN/PBX extension call via PSTN Gateway. LAN Call Phone can be configured through the web browser or by using the phone menu directly. Additional features include acting as a digital answering machine, speed dialer, providing caller ID, call hold, call transfer, and telephone directory services for everyday convenience in a competitive and demanding consumer marketplace. LAN Phone users can call each others for free with excellent voice quality. Management Ronald G. Weaver Sr. - Chief Executive Officer. Mr. Weaver has been active in the VoIP industry since the inception holding senior executive positions with Netrue, Franklin Telecom, Global IP and most recently Digital Services Group. He guided the launch of VoIP projects in Eastern Europe, Latin America and South East Asia utilizing fiber and satellite technologies. Mr. Weaver attended UCLA and the University of New Mexico majoring business and economics. Farid Shouekani. - Chief Technical Officer. Mr. Shouekani has several years experience in VoIP, telecommunications and engineering with such Companies as TEC Cellular, Robotron and Crescent International. Most recently he helped design, build and deploy Mid Atlantic International's World Wide VoIP (Voice over Internet Protocol) network which was acquired by Viper Networks in 2003. Mr. Shouekani has a Bachelor of Science Degree in Electrical Engineering and a Masters of Science Degree in Computer Engineering from Florida Tech. James Balestraci – Chief of International Wholesale Operations. Mr. Balestraci joins Viper Networks with over 11 years of successful telephony engineering and sales experience having worked for some of the premier firms in the industry. This includes 9 years with Network Plus, Inc. where he created international revenues in excess of $60,000,000 and was recognized as their #1 producer in both international revenue and margin in 2000 and 2001. He most recently founded Adoria Communications, which was acquired by Viper Networks in 2004 Paul Atkiss – Chief Financial Officer. Mr. Paul Atkiss has over 25 years of accounting and finance experience with privately held and publicly traded corporations. He spent 12 years with Jaycor, most recently as Controller, where he was responsible for the accounting systems, consolidated reporting, financial and tax audits, banking, and insurance. Mr. Atkiss is well versed in Merger and Acquisition analysis, due diligence, and financial integration. In addition, he prepared the financial reporting and disclosure for a $100,000,000 Initial Public Offering (IPO). Mr. Atkiss holds a Bachelor of Science degree from San Diego State University and is a California CPA. Bob Ducey - Retail Sales Manager. Mr. Ducey has over 25 years of IT sales and management including channel sales development, OEM and enterprise account development, and catalog and e-commerce sales through companies he has founded, Most recently at HardwareStreet.com, a company he founded, an e- commerce retailer selling over 60,000 products, he grew the business from startup to over $22 million in four years and then sold it to a public company. Mr. Ducey has worked in sales management for technology companies such as Honeywell and PerkinElmer and in research at Brookhaven National Laboratories. Mr. Ducey served in the U.S. Coast Guard and attended Long Island University majoring in Physics. 8

VPER vs. Competition We have made a general overview of several VoIP providers and believe that VPER is well-positioned to take advantage of market opportunities in spite of the large and increasing number of industry players. The basic concept is the same for all competitors – take speech, convert it into packs of data and send it over the internet in a cost-efficient manner, undercutting traditional telephony companies. What will differentiate companies is the quality of sound (premised by software performance), accessibility and availability of products and customer support. In February 2004, Viper Networks attended the International VoIP Conference in Miami, Fl, taking "Best of Show" award for its vPhone product. This is an indication of the quality of products VPER offers and indicative of future success of the company. The quality of sound and customer support characteristics are still to be seen – over longer periods of time and reflective of the then-current scope of operations – but we feel that at this early stage of development of the VoIP industry, VPER has a competitive offering. Pricewise, VPER phones are well-positioned, with competitor phones (either VoIP providers directly or through their partners) ranging from $100-500, while VPER vPhone is about $60. Call pricing varies: some VoIP providers bundle their US & Canada minutes and offer 500-1000 minutes per package at $20-30. Some of the offers are split into several components, including initial fees, basic account maintenance, per minute charge etc. International rates range from 4 to 7 cents for popular destinations, but can sometimes get as low as 2 cents from certain competitors. VPER prices, with 2.5 cents for UK and Italy and 2.9 cents for France, are quite competitive. Some competitors provide free downloadable software that allows free VoIP communication between users with the same software. Not all VoIP providers, however, have full compatibility with PSTN telephones. Speed required for proper quality sound is quoted at minimums of 33.6 to 64 kbp/s. Elements of valuation From the company release dated July 15, 2004, we extracted that “Viper Networks is a debt-free company with approximately 110,000,000 common shares issued and outstanding, of which the officers and directors beneficially own roughly 65%.” Therefore, at the current share price of $0.35, the market value of VPER is around $38.5 million. Management-announced annualized revenues of the company are around $22 million and expected booked revenues for FY04 are 14 million (July 2004 management info). That makes VPER a company trading at 1.75x its sales, when taking the current sales potential, and 4.5x on its FY04E sales. As we expect the company to grow at two-digit rates of growth for a prolonged period of time, and probably exceed 100% during the next 2-3 years, we feel that the current valuation of the company is very low. The main factor is, we believe, the lack of solid financial information, confirmed by a respected auditor. There are additional company-specific risks – its thin stock trading, operating risks, uncertainties regarding the pace of growth of company revenues, the speed of consumer acceptance of the VoIP concept etc. Therefore, an interested investor should carefully consider the attractiveness of the company proposition and the potential of the industry with the currently available data about the company. Industry trends As a result of regulatory changes in 1984, AT&T - the former telecom monopoly was forced to divest its Bell Operating Companies and compete with other companies for customers of its long distance services. That was the starting point of a period of growth for the U.S. telecommunication industry. Over the next twenty years the industry has changed beyond recognition and it is continuing to do so; where the industry will end up in twenty more years is hard to predict. One thing is for sure: the domestic telecommunications market is growing rapidly. According to Telecom Industry Association, (TIA), total U.S spending in the 2003 was estimated $720.5 billion. It is anticipated that U.S. telecommunication industry will grow at 9.2% compound annual growth in the next few years, reaching $1 9

trillion in 20072. The U.S. telecom market grew 1.3% in 2002 and 4.7% in 20033 and is forecasted to increase 6.8% for 2004. The growth is largely impacted by new services, especially those which combine aspects of the telecommunications, cable television, broadcast television, computer, Internet and utility industries. The highest increase was recorded by wireless services, specialised service such as unified communications, video and audio conferencing as well as high speed Internet. VoIP service availability was a direct result of growth in High Speed Data (HSD)/broadband usage. Global HSD broadband data suggests rising penetration rates among both consumer and SoHo users which in turn means that customers can get VoIP services onto their already existing cable. U.S. broadband penetration in May 2004 reached 48.61% of active Internet users at home. Moreover, cable telephony services continue to proliferate as cable TV operators expand their video, data and voice service portfolios. According to In-Stat/MDR, worldwide cable telephony subscribers are likely to increase from an estimated 10 million by the end of 2003 to over 19 million in 2007. Similarly, In-Stat/MDR expects 7 million VoIP phones to be in use by 2007. Also In-Stat/MDR forecasts a significant growth for VoIP services over the next years. Worldwide revenues are expected jump at a CAGR of 105.7% from 2002-2007.4 In a recent report on VoIP, Merrill Lynch5 (ML) had the following HSD sub growth forecasts: ♦ For the U.S., up to 8.0mn new subs for 2004E from previous estimate of 6.4mn, with 4.4mn cable HSD sub additions (revised from 3.1mn) and 3.6mn DSL sub additions (revised from 3.2mn). In its new forecast, broadband penetration rises to 27% of U.S. homes by YE04E, up 6.2 pts during the year, and to 32% by YE05E, up 5.1 pts (revised from 30%). ♦ For Canada, up to 963K new subs for 2004E from previous estimate of 929K (vs 1,042K in 2003) which brings YE04 penetration to 42.4% of homes, up 6.7 pts YoY (vs. 7.1 pts in 2003 and 7.5 pts in 2002). It is estimated 47.4% penetration by YE05E (revised from 47.0%). ♦ Over time, ML expects broadband penetration to reach at least 50% in the U.S. Internationally, Europe continues to account for the lion's share of cable telephony subscribers. As of late 2003, there were approximately 5.9 million cable telephony subscribers in Europe, compared to 2.7 million in the United States. Worldwide revenues from cable telephony service are projected to hit $3.7 billion in 2003, and rise to more than $6 billion in 2007. The high speed Internet access is the major factor which determines the availability and quality of VoIP services. The recent trends and estimates regarding broadband penetration are very promising for VoIP market. 2 http://www.tiaonline.org/media/press_releases/index.cfm?parelease=04-03 3 http://www.rednova.com/news/stories/3/2004/01/31/story106.html 4 http://www.usta.org/SiteObjects/files/exec_feature_2_04.pdf 5 Source: ‘Everything Over IP’, dated 12 March’04 10

U.S. broadband penetration in May 2004 reached 48.6% of active Internet users at home and 38% of U.S. households.6 Based on www.websiteoptimization.com opinion, the Broadband penetration rate will increase to 58% among US users and to 44% among US households. Currently VoIP major market is international calls, due to high prices charged by PSTN companies. As Internet develops and its penetration rate increases, VoIP will replace traditional telephony. • International calls traffic 1998 1999 2000 2001 2002 2003E CAGR VoIP Traffic (millions of minutes) 150 1,655 5,954 10,147 18,045 24,519 177% PSTN Traffic (millions of minutes) 93,000 108,000 132,027 146,095 155,165 166,615 12% VoIP Share of International Traffic 0.20% 1.50% 4.30% 6.50% 10.40% 12.80% Source: http://www.primetrica.com/press_releases/2003-12-10.html In terms of usage, VoIP carried only 5.9 billion minutes of international traffic or just 4.3% of the total minutes of international traffic carried in 2000. Three years later, TeleGeography estimated that VoIP carried 24.5 billion minutes in 2003, jumping to nearly 13% of international minutes. IDC also estimates that VoIP now carries about 10% of all voice traffic, international and domestic. Starting with 1998 VoIP international traffic increased with a CAGR of 177%. In 2003 comparing to 2002 the growth of VoIP international traffic was about 36%, while the PSTN traffic increased 7%. In fact, considering the technological advantage VoIP has in relation to traditional telephony (efficient bandwidth usage) and the rate of technological improvements to VoIP, as well as the multitude of new feature VoIP offers, we believe that it is only a matter of time before VoIP will replace traditional telephony altogether. Sophisticated audio and video internet-based communications will rule out the old telephone line systems in the time it takes one generation to change (around 25 years) at most. The early success of the industry is also likely to come very quickly having in mind the fundamental factor for VoIP – current HSD penetration. 6 http://www.websiteoptimization.com/bw/0406/ 11

• International VoIP calls trends 100,000 50% 80,000 40% 60,000 30% 40,000 20% 20,000 10% 0 0% 2002 2006 2002 2006 VoIP international trafic, millions of minutes VoIP international trafic, penetration rate % Source: www.h323forum.org/papers/supercomm_web.pdf According to TeleGeography it is expected that by the end of 2006 International VoIP traffic will exceed 90 billions of minutes, equivalent to CAGR of 51% during 2002-06. Meanwhile the penetration rate of VoIP within international calls traffic will reach 45%. • The major players on the International VoIP market7 100% 90% 80% Other VoIP 70% carriers 60% 50% Primus Net2Phone 40% 30% Deltathree iBasis 20% 10% ITXC 0% 1998 2000 2002 The biggest players in this segment of the VoIP business are ITXC (backed by AT&T and Vocaltec) and iBasis, both having about 40% of VoIP international traffic market (2002). These companies are gaining market share from Net2Phone and Deltathree. During the same period new companies are penetrating this market, gaining market share from older players. This market is perceived as a great opportunity for start-ups, it is in the growth stage and is expected a further increase in the number of companies. At the same time, we believe that the pace of growth of the market will be greater than the number of companies stepping in, so that for the next 3-5 years there will be little real competition between the players, as customer adoption rates of the service will be sufficiently high to avoid serious price wars on existing VoIP customers. Voice over Internet Protocol (VoIP) Technology 7 www.h323forum.org/papers/supercomm_web.pdf 12

What is VoIP? Internet Protocol (IP) telephony is an emerging technology system of hardware and software that allows Internet users to transmit voice communications to any other Internet user or other telephone customer. Analog voice signals are digitized by the VoIP and converted into data packets that are sent over IP-based networks. VoIP is best utilized by means of high speed broadband Internet access. VoIP market potential In 2002, the North American wholesale VoIP sales were estimated to be around $400 million. VoIP equipment sales consist of VoIP gateways, soft switches, including IP Private Branch Exchange (IP PBX), and VoIP application servers. Total sale of VoIP equipment is expected to reach $12 billion by 2006, of which wired enterprise IP phones may account for $2.7 billion8. ⇒ Why the customer should use VoIP? There are few means of voice communication. Each of them has their benefits and drawbacks. VoIP is considered to have the following benefits comparing to other segments: i) Lower operating and maintenance cost. VoIP services are cheaper than similar services offered via other technologies. VoIP technology allows integrating data and voice communication traffics into a single network, reducing the total costs of ownership. Additionally, call servers, application servers, and client devices can be more easily integrated. VoIP systems are increasingly demonstrating greater cost effectiveness than traditional voice networks. As long as VoIP technology evolves, the cost-benefit ratio, efficiency and flexibility in implementation improves. The Forester Research group performed some calculations, comparing few scenarios on evolution of costs at the enterprises that have 10,000 users, 50 % of employees are divided between two large locations and the remainder among 12 local branches. The analysts are obviously in favor of replacing an IP PBX instead of keeping existing infrastructure or replace the old PBX with a new one9. IP Private Branch Exchange (IP PBX) is the best option if enterprise intends to reduce deployment and maintenance costs 8 http://msdn.microsoft.com/embedded/getstart/devplat/voip/voiptrends/default.aspx 9 http://msdn.microsoft.com/embedded/devplat/voip/voiptrends/default.aspx 13

ii) More efficient network utilization. VoIP system offers increased bandwidth efficiency and by that reducing the cost and increasing quality of service. Silence elimination, redundancy minimization and more efficient data transmission offer to the VoIP the advantage compared to other technologies: Elimination of silence. The PSTNs systems are based on time division multiplex (TDM) technology, where the communication capacity is continuously allocated to a user, even when the person is not speaking. Therefore around half normal voice interaction is silence, meaning that half the capacity of the networks remains unused. Contrary, in the VoIP technology, capacity is not continuously allocated but rather is made available as defined by the system. Redundancy reduction. Approximately 20% of human speech consists of repetitive patterns. Conventional TDM networks do not exploit reduction methods to eliminate redundant voice signals while VoIP systems provide these methods. Efficient data throughput. IP telephony provide more efficient speech channel throughput than TDM networks. iii) Greater operational flexibility. VoIP technology is more flexible than traditional voice transmission technologies as the transport, call control and application layers are disaggregated into separate components that can each be integrated or substituted as needed in the overall system compared to other traditional technologies. Also, the Session Initiation Protocol (SIP) technology is based on the concept that user preferences will change over time, therefore SIP acts as an ideal protocol for adapting to change. It is flexible and scalable thus suitable to a large set of usage scenarios, applications, and infrastructures. iv) Enhancing user productivity. VoIP systems provide enhanced advantageous features to end users. Most common end-user value-added features and services are the following: Unified Messaging (UM), Interactive Voice Recognition (IVR), Call Center Administration, Voice Mail (VM), Conferencing Services, Database Queries, Customer Relationship Management (CRM), Instant Messaging and Web Browsing. Also, when VoIP is linked to a computer (such as a softphone for example), relatively simple software allows users o have increasingly complex communication features at little additional cost. ⇒ The Future of Voice-over-Internet Protocol (VoIP) Telephony Currently, the corporate intranets and commercial extranets are the most promising areas for VoIP. The telecom carriers most likely will rely on the public Internet to provide telephone service especially between geographic regions that today are high-tariff areas. Regarding VoIP’s quality of service, performance is 14

improving greatly so that premises are set for significant growth in VoIP. Moreover, public Internet will be able to handle voice and video services quite reliably most probably within the next three to five years. On the other hand, FAXoIP products and services via the public Internet will become viable more quickly than voice and video, primarily because the technical roadblocks are less challenging. Throughout the remainder of this decade, videoconferencing with data collaboration will become the normal method of corporate communications, as network performance and interoperability increase and business organizations appreciate the economics of telecommuting.10 10 http://www.iec.org/online/tutorials/int_tele/topic05.html 15

VPER’s Stock Price Performance versus S&P500 and TLS11 Last: Change: Open: 0.34 High: 0.36 Low: 0.34 Volume: 432,00 0.35 0.0 Yield: n/a P/E Ratio: n/a 52-Wk Range: 0.07 to 1.73 Sergiu Lisnic, CFA worked as an analyst for Evanston Capital Advisors for a year and a half, and subsequently served for two years as a financial analyst with a gas distribution and a FMCG company. He was primarily responsible for financial statement analysis, budgeting and reporting to shareholders. He earned the CFA title in September 2003. Spelman Research Associates, ltd, is an independent research, publishing and distribution firm whose analyst adhere to the ethics and standards of the Association for Investment Research Management. The views expressed in this research report reflect the analyst's personal views about the issuer and its securities. Opinions and recommendations contained in this report are submitted solely for advisory and information purposes and are not intended as an offering or a solicitation to buy or sell the securities mentioned above. The analysts are responsible only to the public and this report is not a service to the company. . We received a fee of $19,500 from the company for one year’s coverage We do not inform any company in advance of the nature or conclusions of our analysts' reports in advance. Neither the Analysts nor the company own equity or debt securities of the companies on which our contract analysts report. More information about Spelman Research's policies are available at www.spelmanfinancial.com <http://www.spelmanfinancial.com> Spelman Research Associates, Ltd., 545 Madison Avenue, Suite 200, New York City, NY 10028 Phone: (212) 838 5520 Fax: (212) 838 5352 Web: www.spelmanfinancial.com Email: info@spelmanfinancial.com <mailto:info@spelmanfinancial.com> 11http://cbs.marketwatch.com/tools/industry/stockchart.asp?bcind_ind=&bcind_o_symb=&bcind_sid=443662&bcind_ period=6mo&bcind_compidx=SP500%7E3377&bcind_comp=&bcind_compind=tls%7E171605&stockchartmanual.x=38 &stockchartmanual.y=10 16

VIPER NETWORKS, Inc.: (OTC:VPER.PK)

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