UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Quarterly Period Ended September 30, 2008

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ______________ to ________________

Commission file number 001-15627

Phantom Fiber Corporation

(Exact Name of Small Business Issuer as Specified in Its Charter)

Delaware		042451506
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

144 Front Street, Suite 580

Toronto, Ontario, Canada, M5J 2L7

(Address of Principal Executive Offices)

(416) 703-4007

(Issuer’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the issuer is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

State the number of shares outstanding of each of the issuer's classes of common equity, as of November 20, 2008 - 21,860,433 shares of common stock.

Phantom Fiber Corporation

INDEX

PART I	Financial Information

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	4-5
	Condensed Consolidated Statements of Cash Flows	6-7
	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis or Plan of Operation	20

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	24

Item 4.	Controls and Procedures	24

PART II	Other Information

Item 1.	Legal Proceedings	25

Item 2.	Unregistered Sales of Equity and Use of Proceeds	25

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Submission of Matters to a Vote of Security Holders	25

Item 5.	Other Information	25

Item 6.	Exhibits	26

Signature		27

Phantom Fiber Corporation

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Condensed Consolidated Balance Sheets

As at September 30, 2008 and December 31, 2007

	September 30,			December 31
	2008			2007
	(Unaudited)			(Audited)

ASSETS
Current Assets:
Cash	$	—		$	44,642
Accounts receivable – net of allowance for doubtful accounts of $0 and $21,000 for 2008 and 2007, respectively		221,637			109,504
Investment tax credit receivable		233,872			285,545
Prepaid expenses and other receivables		37,775			7,668
Total current assets		493,284			447,359

Property and Equipment - net		18,540			48,655

Other Assets:
Prepaid expenses and security deposits		33,538			15,020
Deferred financing costs – net		23,951			4,717
TOTAL ASSETS	$	569,313		$	515,751

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY

Current Liabilities:
Bank overdraft	$	59,302		$	—
Accounts payable		157,274			129,628
Payroll taxes payable		469,943			—
Accrued expenses		525,720			854,452
Accounts payable and accrued liabilities to related parties		320,420			280,262
Unearned revenue		297,520			129,229
Short term borrowings		316,000			830,000
Short term borrowings - related party		166,221			305,820
Other borrowings		—			182,300
Current portion of obligation under capital leases		8,740			14,861
Derivative instruments		—			354,344
Senior convertible note		679,510			2,807,000
Total current liabilities		3,000,650			5,887,896

Long-Term Liabilities:
Obligation under capital leases – net of current portion		2,685			8,764
Derivative instruments		689,972			—
Senior convertible note		1,017,338			—
TOTAL LIABILITIES		4,710,645			5,896,660

COMMITMENTS AND CONTINGENCIES

Stockholders’ (Deficit)
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued and outstanding.		—			—
Common stock, $.001 par value, 400,000,000 shares authorized, 21,861,433 shares, issued and outstanding; (17,391,589 shares, December 31, 2007).		21,860			17,391
Additional paid-in capital		7,535,058			6,447,463
Accumulated deficit		(11,696,501	)		(11,786,659	)
Accumulated other comprehensive (loss)		(1,749	)		(59,104	)
Total stockholders’ (deficit)		(4,141,332	)		(5,380,909	)
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)	$	569,313		$	515,751

See notes to condensed consolidated financial statements.

Phantom Fiber Corporation

Condensed Consolidated Statements of Operations and Comprehensive Loss

Nine month periods ended September 30, 2008 and 2007

	2008			2007
	(Unaudited)			(Unaudited)
Revenues
Professional services	$	465,204		$	267,511
User fees and royalties		185,726			153,059

		650,930			420,570

Operating expenses
Research and development		776,757			679,968
Sales and marketing		299,853			301,516
General and administrative		690,002			609,834

Total operating expenses		1,766,612			1,591,318

Loss from operations		(1,115,682	)		(1,170,748	)

Other income (expenses)
Gain on disposal of marketable securities		—			2,455
Gain on restructuring of senior convertible notes		140,755			—
Amortization of deferred financing costs		(10,705	)		(434,177	)
Change in fair value of derivative instruments		2,475,346			1,313,591
Interest expense		(162,657	)		(122,971	)
Interest on accretion of senior convertible debt		(1,249,008	)		(1,365,891	)
Interest income		1,655			5,314
Gain (loss) on foreign exchange		10,454			(31,831	)
Income (loss) before provision for income taxes		90,158			(1,804,258	)
Provision for income taxes		—			—
Net Income (loss)		90,158			(1,804,258	)

Other comprehensive income (loss)
Unrealized gain on marketable securities		—			24,999
Foreign exchange translation gain (loss)		57,355			(51,766	)
		57,355			(26,767	)
Comprehensive income (loss)	$	147,513		$	(1,831,025	)
Net Income (loss) per share
Basic and diluted	$	0.00		$	(0.10	)

Weighted average shares outstanding
Basic and diluted		19,004,579			17,051,171

See notes to condensed consolidated financial statements.

Phantom Fiber Corporation

Condensed Consolidated Statements of Operations and Comprehensive Loss

Three month periods ended September 30, 2008 and 2007

	2008			2007
	(Unaudited)			(Unaudited)
Revenues
Professional services	$	75,894		$	238,621
User fees and royalties		57,358			55,392

		133,252			294,013
Operating expenses
Research and development		241,751			177,892
Sales and marketing		115,671			87,199
General and administrative		196,125			185,435

Total operating expenses		553,547			450,526

Loss from operations		(420,295	)		(156,513	)

Other income (expenses)
Gain on disposal of marketable securities		—			(1,406	)
Amortization of deferred financing costs		(5,988	)		(229,248	)
Change in fair value of derivative instruments		1,303,014			18,061
Interest expense		(99,406	)		(31,480	)
Interest on accretion of senior convertible debt		(177,219	)		(772,524	)
Interest income		1,309			3,413
Loss on foreign exchange		(2,128	)		(19,572	)
Income (loss) before provision for income taxes		599,287			(1,189,269	)
Provision for income taxes		—			—
Net income (loss)		599,287			(1,189,269	)

Other comprehensive income (loss)
Unrealized gain on marketable securities
Foreign exchange translation gain		—			—
		40,438			9,320
Comprehensive income (loss)	$	639,725		$	(1,179,949	)
Net income (loss) per share
Basic and Diluted	$	0.03		$	(0.07	)
Weighted average shares outstanding
Basic and Diluted		20,116,520			17,130,301

See notes to condensed consolidated financial statements.

Phantom Fiber Corporation

Condensed Consolidated Statements of Cash Flows

Nine month periods ended September 30, 2008 and 2007

	2008			2007
	(Unaudited)			(Unaudited)

Cash Flows From Operating Activities
Net loss	$	90,158		$	(1,804,258	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		40,820			443,424
Gain on sale of securities		—			(2,260	)
Stock-based compensation expense		67,236			203,258
Fair value adjustment on derivative instruments		(2,475,346	)		(1,313,591	)
Stock issued in lieu of payment of bonus		5,016			—
Accretion of interest expense (convertible notes)		1,249,008			1,365,891
Warrants issued as finance for short-term loan		14,785			—
Common stock issued as restructuring debt charge		33,628			—
Forgiveness of accrued interest on convertible notes and short term borrowing		(101,250	)		—
Common stock issued for services		—			21,600
Common stock issued as restructuring debt charge		198,000			—
Waiver of interest due as restructuring debt credit		(338,755	)		—
Bad debt expense		(21,000	)		(18,908	)

Increase (decrease) in cash flows as a result of changes in assets and liability account balances:
Accounts receivable		(93,133	)		(102,460	)
Investment tax credit receivable		51,673			136,435
Prepaid expenses and other receivables		48,625			(3,222	)
Accounts payable and accrued liabilities		695,125			214,893
Unearned revenue		168,291			11,040
Net cash used in operating activities		(367,119	)		(848,158	)

Cash Flows From Investing Activities
Proceeds from sale of marketable securities		—			52,260
Net cash provided by investing activities		—			52,260

Cash Flows From Financing Activities
Repayment of senior convertible notes		(289,261	)		—
Cost of refinancing senior convertible notes		(29,940	)		—
Repayment of capital lease obligation		(12,200	)		(12,362	)
Repayment of short term borrowings		(50,000	)		—
Proceeds from short term borrowings		587,221			1,187,430
Bank overdraft		59,302			—
Net cash (used in) provided by financing activities		265,122			1,175,068

Foreign currency translation gain (loss)		57,355			(51,766	)

Decrease in cash		(44,642	)		327,404

Cash, beginning of period		44,642			29,864

Cash, end of period	$	—		$	357,268

See notes to condensed consolidated financial statements.

Phantom Fiber Corporation

Condensed Consolidated Statements of Cash Flows (continued)

Nine month periods ended September 30, 2008 and 2007

	2008		2007
	(Unaudited)		(Unaudited)
Interest paid	$	9,283	$	28,982
Non cash transactions:
Common shares and warrants issued for investor relation services		76,352		—
Stock based compensation recorded as deferred finance expense		—		301,547
Short term borrowings and accrued interest converted to convertible debt		1,073,583		—
Conversion and warrants derivative liabilities recorded as a reduction in senior convertible note		2,861,060		—
Common shares issued on conversion of debenture		265,000		245,250
Common shares issued in settlement of related party’s accrued expense		15,675		—
Common shares issued for payment of interest for short term borrowing.		1,700		—
Common share issued in settlement of related party short term borrowings and accrued interst.		450,000		—

See notes to condensed consolidated financial statements.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 1.

Description of Business and Basis of Presentation

Description of Business

The business of Phantom Fiber Corporation (the “Company”) is conducted through its wholly-owned Canadian subsidiary Phantom Fiber Inc. headquartered in Toronto, Canada.

The Company is engaged in the business of the sale and licensing of its proprietary wireless software platform and integration services. Phantom Fiber uses its software platform to extend the rich multimedia content and user experience of its customers’ existing Internet web sites securely and instantly to the Personal Digital Assistants (“PDA’s”) and cell phones of mobile users.

Phantom Fiber derives its revenue from direct sales of various licensing and revenue sharing plans that allow its revenues to grow based upon the adoption rate of its customer’s end users.

Going Concern

These financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business, notwithstanding the continuing operating losses and the accumulated deficit of $11,696,501 as at September 30, 2008. In addition, the Company is delinquent in the remittance of payroll taxes totaling $469,943 withheld from employees as of September 30, 2008. Beginning August 29, 2008, the Company must pay $55,000 for the next twenty months, to the holder of a senior convertible note and 10% of the monthly revenues which exceed $600,000 per month. The ability of the Company to continue as a going concern is dependent on the Company's ability to generate future profitable operations and receive continued support from its lenders, shareholders and raise external financing. Management recognizes this and is currently going through the process of securing additional capital to allow the Company to continue operations unhindered. During 2008, management has been in discussion with a number of potential investors to provide short term and long term financing to meet the ongoing capital requirements of the Company. Management is currently negotiating with these investors in order to ensure the Company receives the optimal terms on these deals. Management has also taken measures to decrease its monthly ongoing expenses. Management’s efforts have also been directed towards the development and implementation of a plan to generate sufficient ongoing revenues to cover all of its present and future costs and expenses. It has amended its pricing model to increase customization fees and has recently secured a number of contracts which it expects will generate sufficient ongoing revenue to generate profits. Management intends to raise sufficient capital to eliminate or greatly reduce its current debt and provide sufficient working capital to achieve profitability.

Note 2.

Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying unaudited financial statements as of, and for the nine month periods ended September 30, 2008 and 2007, have been prepared in conformity with accounting principles generally accepted in the United States of America. The financial information as of December 31, 2007, is derived from Phantom Fiber Corporation (the "Company") financial statements included in the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 2007. Certain information or footnote disclosures in this filing that are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim filings. In the opinion of management, the accompanying financial statements include all adjustments necessary (which are of a normal and recurring nature) for a fair presentation of the results of the interim periods presented. The accompanying financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2007, as included in the Company's Annual Report on Form 10-KSB/A for the year ended December 31, 2007. Operating results for the nine month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2008, or any other portion thereof.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 2.

Summary of Significant Accounting Policies (continued)

Net income (loss) per share

Basic income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution from the exercise or conversion of other securities into Common Stock, but only if dilutive. Such securities, shown below, presented on a common share equivalent basis and outstanding as at September 30, 2008 and 2007, have been excluded from the per share computation because they were anti-dilutive.

	Nine months ended September 30, 2008		Nine months ended September 30, 2007
Stock options		—		150,242
Warrants		—		—
Convertible notes payable		11,601,364		5,882,579

Basic and diluted income (loss) per common share was calculated for all periods in accordance with the requirements of Statement of Financial Accounting Standards No. 128, “Earnings per Share”. The following table sets forth the computation of the basic and diluted income (loss) per share for the periods ended September 30, 2008 and 2007, respectively:

	For the Nine months Ended September 30,						For the Three Months Ended September 30,
	2008			2007			2008			2007
Numerator:
Net Income (loss) to common shareholders	$	90,158		$	(1,804,258	)	$	599,287		$	(1,189,269	)
(Deduct)/Add:
Mark-to-market gain-derivative liability		(2,475,346	)		(1,313,591	)		(1,303,014	)		(18,061	)
Interest on convertible debt		1,249,008			1,365,891			177,219			772,524
Net loss to common shareholders and assumed conversion	$	(1, 136,180	)	$	(1,751,958	)	$	(526,508	)	$	(434,806	)
Denominator:
Share reconciliation:
Weighted average shares used for basic and diluted loss per share		19,004,579			17,051,171			20,116,520			17,130,301
Net loss per share:
Basic and diluted:	$	(0.00	)	$	(0.10	)	$	(0.03	)	$	(0.07	)

Comprehensive loss

Comprehensive loss includes the net exchange differences arising from the translation of our Canadian dollar denominated subsidiary into US dollars.

	Foreign Exchange Translation Gain (Loss)
Beginning balance, January 1, 2008	$	(59,104	)
Foreign exchange translation gain		57,355
Balance September 30, 2008	$	(1,749	)

Stock options

On January 1, 2006, the Company adopted SFAS No. 123(R), “Share Based Payments” (“SFAS 123(R)”), an amendment to SFAS No. 123 “Accounting for Stock-Based Compensation, (“SFAS 123”), using the modified prospective method. SFAS 123(R) requires the Company to recognize compensation expense in an amount equal to the fair value of share based payments granted to employees. (see note 4(c)).

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 2.

Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncement:

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and all interim periods within those fiscal years. In February 2008, the FASB released FASB Staff Position (FSP FAS 157-2 – Effective Date of FASB Statement No. 157) which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The implementation of SFAS No. 157 for financial assets and liabilities, effective January 1, 2008, did not have an impact on the Company’s financial position and results of operations. The Company is currently evaluating the impact of adoption of this statement on its non-financial assets and liabilities in the first quarter of fiscal 2009.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

In December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160 establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not currently expected to have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

In March 2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The company is currently evaluating the impact of adopting SFAS. No. 161 on its financial statements.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 2.

Summary of Significant Accounting Policies (continued)

In May 2008, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. Prior to the issuance of SFAS 162, GAAP hierarchy was defined in the American Institute of Certified Public Accountants ("AICPA") Statement on Auditing Standards ("SAS") No. 69, The Meaning of Present Fairly in Conformity with Generally Accept Accounting Principles. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company is currently evaluating the impact adoption of SFAS 162 may have on the financial statements if any.

Reclassification

Certain prior year amounts have been reclassified to conform to the financial statement presentation adopted in the current period.

Note 3.

Short Term Borrowings and Short Term Borrowings – Related Party

	September 30		December 31
	2008		2007
Loan from an unrelated party, with no specified repayment date and no interest or penalty provisions.	$	21,000	$	—

Loan from unrelated parties, repayable 6 months from receipt with no interest or penalty provisions.		295,000		—

Term loans from unrelated parties, repayable 180 days from receipt, bearing interest at 10% plus 3 year warrants to purchase 1,150,000 common shares at $0.50 per share with registration rights of unlimited piggyback. Interest rate is 15% if not repaid within the 180 days and an extension fee of 100,000 warrants for each $100,000 increment loaned. As of December 31, 2007, three term loans were not paid within the 180 day period, however, the investor had previously waived his right to the additional warrants and in January 2008 waived the additional interest. In January 2008, $400,000 of these term loans and in March 2008 the remaining $50,000 were settled by issuance of convertible debt as described in Note 5.		—		450,000

Term loans from unrelated parties, repayable 180 days from receipt, bearing interest at 10% per annum. Interest rate is 15% per annum if not repaid within the 180 days. In January 2008, these term loans were settled by issuance of convertible debt as described in Note 5.		—		380,000
Total	$	316,000	$	830,000

Advance from a related party, repayable on demand, unsecured, bearing interest at 12% per annum.		166,221		101,940

Advance from a related party, repayable 3 months from drawdown date, secured and bearing interest at 2.5% per month. This advance is past due, however, requires no additional interest or penalty.		—		203,880
Total	$	166,221	$	305,820

The above advances were from a person related to the CEO of the Company. The Company recorded interest expense of $44,448 on related party borrowings for the nine months ended September 30, 2008.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 4.

Capital Structure

(a)

Warrants:

The composition and exercise prices of the warrants outstanding at September 30, 2008 are as follows:

	Number			Weighted average
	of warrants			exercise price			Expiration Date

January 1, 2008		9,602,093		$	1.09
Warrants granted		2,828,769			0.50
Warrants expired		(5,702,633	)		(1.11	)

September 30, 2008		6,728,229		$	0.87

Comprised of:
		250,000			4.00			December 15, 2010
		1,249,730			0.56			January 9, 2009
		1,249,730			1.50			January 9, 2009
		300,000			0.50			April 18, 2010
		300,000			0.50			May 18, 2010
		300,000			0.50			June 12, 2010
		150,000			0.50			October 10, 2010
		100,000			0.50			October 24, 2010
		2,165,674			0.50			January 15, 2011
		238,095			0.50			March 25, 2011
		100,000			0.40			May 12, 2010
		100,000			0.60			May 12, 2010
		100,000			0.80			May 12, 2010
		125,000			0.20			July 9, 2011
		6,728,229		$	0.87

(b) Equity Transactions:

In January 2008, the Company issued 330,000 unrestricted common shares to a senior convertible debt holder who exercised his right to convert to common shares at $0.50 per share.

On February 11, 2008, certain employees exercised their option agreement to purchase 90,749 restricted common shares which had previously vested. The options were exercised at $0.228 per share. In lieu of cash receipt in the amount of $20,691, $15,675 was offset against a liability due to an employee/shareholder and the balance of $5,016 was charged to employee bonus expense.

In March 2008, the Company issued 900,000 restricted common shares to a senior convertible debt holder as part of restructuring the convertible debt. See Note 5 for further explanation.

On March 25, 2008, the Company issued 238,095 restricted common shares to this investor who exercised his right to convert to common shares at $0.42 per share.

On May 12, 2008, the Company issued 400,000 restricted common shares, 100,000 warrants with an exercise price of $0.40 per share, 100,000 warrants with an exercise price of $0.60 per share and 100,000 warrants with an exercise price of $0.80 per share. The fair value of these equity awards of $76,352 were issued in payment of investor relation services and will be recognized as an expense over the 24 month contract period.

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 4.

Capital Structure (continued)

On July 9, 2008 the Company issued a promissory note payable in exchange for a $25,000 advance. This promissory note had attached 3 year warrants to purchase 125,000 shares of common stock at an exercise price of $0.20 per share. These warrants were valued at $14,785.

On August 14, 2008 the Company issued 10,000 shares in exchange for accrued interest on loans payable totaling $50,000. These loans were repaid during the quarter. These shares were valued at $1,700 which represents the market price on the date of issue.

On September 2, 2008 the Company issued 2,500,000 shares to a relative of the Company’s president. These chares were issued in exchange for outstanding debt and accrued interest totaling $416,372. These shares were valued at $450,000 which represents the market price on the date of issue.

In connection with a reverse acquisition in July 2004, the Company’s stock option plan was amended to increase the number of options to be issued under the plan from a maximum of 150,000 options to a maximum of 2,000,000 options.

Effective January 1, 2006, the Company’s Plan is accounted for in accordance with the recognition and measurement provisions of Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"), which replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. FAS 123 (R) requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements. In addition, the Company adheres to the guidance set forth within Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views regarding the interaction between FAS No. 123(R) and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies.

In adopting FAS 123(R), the Company applied the modified prospective approach to transition. Under the modified prospective approach, the provisions of FAS 123 (R) are to be applied to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro-forma disclosures under FAS 123.

The Company's results for the nine and three months ended September 30, 2008 and 2007 include share-based compensation expense of $67,236, $11,354 and $203,258, $36,066, respectively. The options were granted on February 11, 2002 and July 14, 2006 and the vesting period ranges from immediately to 3 years. These amounts have been included in the Consolidated Statements of Operations within operating expenses. No income tax benefit has been recognized in the income statement for share-based compensation arrangements due to a history of operating losses.

Stock option compensation expense in 2008 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award.

During 2008, the Company took into consideration guidance under FAS 123R and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The expected volatility is based upon historical volatility of our stock and other contributing factors. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees. The fair value of options granted during the six month periods were estimated using the Black-Scholes option pricing model with the following assumptions:

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 4. Capital Structure (continued)

	Nine months ended September 30, 2008		Nine months ended September 30, 2007

Expected term (in years)		N/A		4.00
Expected stock price volatility		N/A		132.57	%
Risk free interest rate		N/A		4.54	%
Expected dividend yield		N/A		0	%
Estimated fair value per option granted		N/A	$	0.235

A summary of the activity in the Company’s stock option plan for the nine month period ended September 30, 2008 is as follows:

	Number of shares			Weighted average exercise price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value ($)
Balance at January 1, 2008		1,960,603		$	0.47		4.49	$	33,600
Options granted		—			—		—		—
Options cancelled		(303,022	)		0.46		—		—
Options exercised		(90,749	)		0.23		—		—

Balance, September 30, 2008		1,566,832			0.48		4.28		13,871

Exercisable, September 30, 2008		923,685		$	0.46		2.84	$	13,871

As of September 30, 2008, there was $18,680 of unamortized compensation costs, net of estimated forfeitures, related to non vested stock options, which is expected to be recognized over a weighted average period of approximately 1.0 years. The following is a summary of all stock options outstanding as of September 30, 2008.

Exercise Price	Number of options outstanding		Average remaining life (years)		Weighted average exercise price		Weighted Number of options exercisable		Weighted average exercise price
$ 0.23		266,750		1.12	$	0.23		266,750	$	0.23
0.50		580,292		4.01		0.50		452,055		0.50
0.51		694,790		4.75		0.51		179,880		0.51
2.00		25,000		3.41		2.00		25,000		2.00
$0.23 - $2.00		1,566,832		4.28	$	0.48		923,685	$	0.46

Phantom Fiber Corporation

Notes to the Condensed Consolidated Financial Statements (unaudited)

Nine months ended September 30, 2008

Note 5.

Senior Convertible Notes

In connection with the January 2006 issuance of $3,500,000 of senior convertible notes, the Company has accounted for the conversion option in the notes as an embedded derivative under the provisions of FAS 133: Accounting for Derivative Instruments and Hedging Activities. Pursuant to the provisions of Statement of Financial Accounting Standards No. 133, and EITF 00-19: “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock” (“EITF 00-19”), the Company had recorded initially the value of the warrants and conversion option at $3,042,290 and $2,983,856, respectively. As the proceeds of the notes of $3,500,000 are less than the combined fair value of the warrants and the conversion option, the initial difference of $2,526,146 has been charged to interest expense on derivative instruments, a non-operating expense, in the consolidated statements of operations. The note is determined to have no value and has been recorded with a debt discount of $3,500,000, the value of the notes. The debt discount is being amortized using the effective interest rate method over the life of the underlying debt accordingly; the effective interest rate for the debt is 507%. The cash paid of $300,720, the value of the warrants of $211,519 and the shares issued of $43,200 to the private agents and lawyers have been accounted as deferred financing cost and the warrants have been accounted for as additional paid in capital. The deferred financing costs are being amortized on a straight line basis over the life of the underlying convertible note.

The company revalued both the conversion option and the warrants as of September 30, 2008 at $0. During the nine months ended September 30, 2008, the company has recorded income of $354,344 from the change in value of these derivative instruments.

On January 31, 2008, the Company concluded the negotiations for the extension of the Senior Secured Note and on February 11, 2008, the final agreements were delivered to the Holder. The amendments are to its outstanding Senior Unsecured Note (the “Amended Note”) in the principal amount of $2,642,000 originally entered into on January 6, 2006. The Holder of the Amended Note, Victory Park Master Fund, Ltd., (the “Holder”) agreed to an extension of the maturity date until May 31, 2008. In exchange for waiving interest due and any technical defaults of the original Registration Rights Agreement and in exchange for the extension of the maturity date and the cancellation of the Class A Warrants to purchase up to 2,642,000 $0.001 par value common stock of the Company for an exercise price of $1.50 per share, the Company agreed to issue 900,000 restricted common shares to the Holder. The agreements also provide for the early prepayment of the Amended Note at a discount under certain circumstances. The revised interest rate of the Amended Note is 12% annually and the amendment also provides for the Holder to be granted a security interest in all of the Registrant’s assets. The Company initially valued the conversion option as of January 31, 2008 at $939,550 which was fully recognized in income as of May 31, 2008. The conversion option exercise price is $0.25. Effective May 31, 2008, the Company paid the Holder $250,000 towards the principal, accrued interest and expenses resulting in a revised principal balance of $2,404,410, accrued interest owing of $95,649 and accrued expenses owing of $29,940. Victory Park Master Fund, Ltd., (the “Holder”) agreed to a second extension of the maturity date until May 31, 2010. The agreement provides for monthly payments of $55,000 beginning on August 29, 2008 and beginning on July 10, 2008 and the tenth day of each month following until maturity, the Company will pay an amount equal to 10% of the previous calendar month gross revenue provided that the resulting amount is greater than $60,000. Provisions of the amended note state that the note will be considered in default if the required $55,000 monthly payments are not made in a timely basis. In the event of default, the holder can demand immediate payment of all principal and interest plus under the amended note (see also note 9, subsequent event). The agreement also calls for weekly and monthly reporting to be reviewed by a third party consultant. The lender also agrees to return for cancellation, Class A warrants to purchase up to 2,642,000 $0.001 par value common stock of the Company for an exercise price of $0.56 per share. The Company initially valued the conversion option at $869,816 and revalued these at $533,942 for the period ended September 30, 2008. This resulted in an income of $335,874 from the change in value of these instruments.

On January 15, 2008, the Company issued (a) $973,583 principal amount of new senior convertible notes, and (b) warrants to purchase 2,165,674 shares of common stock, to 7 accredited investors. These convertible notes were utilized to pay other borrowings received amounting to $182,300, the settlement of short term loans payable of $780,000 and settlement of director dividends payable in the amount of $11,283 all of which was outstanding as of December 31, 2007. The senior convertible notes bear interest at 1% per annum payable semi-annually. The notes mature two years from the date of issuance and are convertible into shares of common stock at the investors’ option at $0.50 per share for one investor and $0.42 per share for the remaining investors, subject to adjustment. The warrants are exercisable until three years from the date of issuance at a purchase price of $0.50 per share. This transaction was exempt from registration requirement pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated there under. The Company initially valued the conversion option and warrants at $779,643 and $471,792, respectively. The Company revalued these at $38,586 and $105,504, respectively for the period ended September 30, 2008. This resulted in income of $1,107,345 from the change in value of these instruments.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Beginning Balance		354,444
Total gains or (losses) (realized/unrealized)
Included in earnings		335,228
Included in other comprehensive income		-
Purchases, issuances and settlements		-
Transfer in and/or out of Level 3		-
Ending Balance	$	689,672

Exhibit Number		Description
31.1		Certification by Chief Executive Officer and Principal Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

32.1		Certification by Chief Executive Officer and Principal Financial Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

DATE: November 20, 2008
	BY:	/s/ Jeffery Halloran
		Jeffery Halloran
		President/CEO/Director

	Nine months Ended September 30,				Three Months Ended September 30,
	2008		2007		2008		2007

United States and Canada	$	503,229	$	—	$	79,229	$	—
South and Central America, Caribbean and Australia		147,701		211,002		54,022		131,424
Europe		—		209,568		—		162,589
	$	650,930	$	420,570	$	133,251	$	294,013

			Fair Value Measurements at Reporting Date Using
Description	September 30, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Assets:	$	—	$	-	$	—	$	-

Total Assets	$	—	$	-	$	—	$	-

Liabilities
Derivative Instrument ( See Note 5 )	$	689,972	$	-	$	-	$	689,972

Total Liabilities	$	689,972	$	-	$	-	$	689,972