UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
DC.  20549
 
 FORM
10-K
 (Mark
One)
 
 T ANNUAL REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For
the fiscal year ended October 31, 2009
 £ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
the transition period from _________ to _________
 
 COMMISSION
FILE NUMBER 0-22636
 RAPID
LINK, INCORPORATED
 (Name
of issuer in its charter)
 
 DELAWARE
              75-2461665(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 5408 N. 99thStreet; Omaha,
NE   68134
 (Address
of principal executive offices) (Zip Code)
 
 Issuer’s
telephone number: (402) 392-7561
 
 SECURITIES
REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: None
 SECURITIES
REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
 COMMON
STOCK, $0.001 PAR VALUE
 
 Check if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.  £
 
 Check if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.  £
 
 Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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.  T
 
 Check if there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.  T
 
 Check whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting
company pursuant to Rule 12b-2 of the Exchange Act:
 Large accelerated
      filer £
                Accelerated filer
      £
                Non-accelerated
      filer £
                Smaller reporting
      company T
 The
aggregate market value of the voting and non-voting common stock held by
non-affiliates of the registrant as of February 15, 2010 was
approximately $1,016,192 based on the average bid and ask price of a share
of common stock as quoted on the OTC Bulletin Board of $0.02.
 
 As
of February 15, 2010, there were 74,647,667 shares of registrant’s common stock
outstanding.
 
 
 DOCUMENTS
INCORPORATED BY REFERENCE: None


1


FORWARD-LOOKING
STATEMENTS





This
Annual Report on Form 10-K contains “forward-looking statements”, which are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by the use of such terms as
“expects,” “will,” “anticipates,” “estimates,” “believes,” “plans” and words of
similar meaning. These forward-looking statements relate to business plans,
programs, trends, results of future operations, satisfaction of future cash
requirements, funding of future growth, acquisition plans and other matters. In
light of the risks and uncertainties inherent in all such projected matters, the
inclusion of forward-looking statements in this report should not be regarded as
a representation by us or any other person that our objectives or plans will be
achieved or that our operating expectations will be realized. Revenues and
results of operations are difficult to forecast and could differ materially from
those projected in forward-looking statements contained herein, including
without limitation statements regarding our belief of the sufficiency of capital
resources and our ability to compete in the telecommunications
industry.  Actual results could differ from those projected in any
forward-looking statements for, among others, the following reasons: (a)
increased competition from existing and new competitors using fixed wireless
broadband technology to deliver internet and telecommunications services, (b)
the relatively low barriers to entry for start-up companies using fixed wireless
broadband technology to provide internet and telecommunications services, (c)
the price-sensitive nature of consumer demand, (d) the relative lack of customer
loyalty to any particular provider of voice and data services, (e) our
dependence upon favorable pricing from our suppliers to compete in the
diversified communication services industry, (f) increased consolidation in the
telecommunications industry, which may result in larger competitors being able
to compete more effectively, (g) failure to attract or retain key employees, (h)
continuing changes in governmental regulations affecting the telecommunications
industry and the Internet, (i) changing consumer demand, technological
developments and industry standards that characterize the industry, (j) failure
to close the acquisition of Mr. Prepaid and Yak America, and (k) risks related
to the Mr. Prepaid and Yak America businesses.  You are also urged to
carefully review and consider the various disclosures we have made which
describe certain factors that affect our business throughout this
Report.  For a discussion of these factors and others, please see
“Risk Factors” below in this section of this report.  Readers are
cautioned not to place undue reliance on the forward-looking statements made in
this report or in any document or statement referring to this
report.  All forward-looking statements attributable to the Company
are expressly qualified in their entirety by such language, and we are not
obligated, and do not intend, to update any forward-looking statements at any
time unless an update is required by applicable securities laws.  The
following discussion and analysis of financial condition and results of
operations covers the years ended October 31, 2009 and 2008 and should be read
in conjunction with our Financial Statements and the Notes thereto commencing at
page F-1 included hereof.


2


PART
I





Item
1.  Description of Business.





General





Throughout
this Annual Report on Form 10-K, the terms “we,” “Rapid Link,” and the “Company”
refer to Rapid Link, Incorporated, a Delaware corporation, and its
subsidiaries.  The Company was incorporated on July 10, 1986 under the
Company Act of the Province of British Columbia, Canada.  On August 7,
1992, we renounced our original province of incorporation and elected to
continue our domicile under the laws of the State of Wyoming, and on November
30, 1994, our name was changed to “Canmax Inc.”  On February 1, 1999,
we reincorporated under the laws of the State of Delaware under the name “ARDIS
Telecom & Technologies, Inc.”  On November 2, 1999, we acquired
substantially all of the business and assets of Dial Thru International
Corporation, a California corporation (the “DTI Acquisition”), and, on January
19, 2000, we changed our name from ARDIS Telecom & Technologies, Inc. to
Dial Thru International Corporation.  On November 1, 2005, we changed
our name to “Rapid Link, Incorporated” as we believe this name will receive
better market recognition and acceptance than its previous name, especially as
the Company continues to roll out wireless broadband internet related
services.





We are
currently in the process of disposing our two current operating subsidiaries
Telenational and One Ring and acquiring two new businesses known as Mr. Prepaid
and Yak America. Mr Prepaid is in the business of providing prepaid telecom and
transaction based POSA (point of sale activation) solutions through 1,000
independent retailers in the Eastern United States.  Products include
prepaid wireless PINs for use with various mobile phone
providers.  Yak America is a long distance reseller offering high
value dial around (10-10) and pre-subscribed long distance services (1+) across
the United States utilizing its network and telecommunication switch based in
Miami, Florida.  Pursuant to the 14F-1 filed on February 3, 2010 we
anticipate the initial closing of this set of transactions during February,
2010, thus changing the direction of the company
substantially.


Our
principal executive offices are located at 5408 N. 99th
Street, Omaha, Nebraska, 68134; our telephone number is 402-392-7561; our
website address is www.rapidlink.com;
and our common stock currently trades on the OTC Bulletin Board under the symbol
RPID.





Proposed
Acquisition of Mr. Prepaid and Yak America





On
October 13, 2009, the Registrant and its principal stockholders entered into a
Share Exchange Agreement (as amended, “Share Exchange Agreement”) with Blackbird
Corporation (“Blackbird”), and its principal stockholders, pursuant to which the
Registrant would grant newly-issued shares of its common stock to the Blackbird
stockholders in exchange for all outstanding shares of Blackbird (“Share
Exchange”).  Following the Share Exchange, it was contemplated that
Blackbird shareholders would hold approximately 80% of the Registrant’s
then-issued and outstanding shares of common stock.





Under the
Share Exchange Agreement, it was originally contemplated that the Registrant
would acquire all or substantially all of the outstanding shares of capital
stock of Blackbird which would result in Blackbird becoming an operating
subsidiary of the Registrant.  In consideration for the Blackbird
shares, the Registrant was required to issue an aggregate of 520,000,000 shares
of its common stock to the shareholders of Blackbird, which would constitute
approximately 80% of the Registrant’s then-issued and outstanding shares of
common stock.





As of
January 15, 2010, the Registrant entered into an Amendment to the Share Exchange
Agreement  (the “Amendment”) with  Blackbird, certain
Registrant shareholders, certain principal shareholders of Blackbird (the
“Blackbird Shareholders”), and a wholly-owned subsidiary of Blackbird, Mr.
Prepaid, Inc. (“Mr. Prepaid”). The Amendment modified the Share Exchange
Agreement.


3


Under the
Amendment, the transaction contemplated by the Share Exchange Agreement has been
modified to provide for an initial closing at which Rapid Link shall acquire all
of the issued and outstanding shares of capital stock of Mr. Prepaid in exchange
for 10,000,000 shares of the Registrant’s newly-formed class of preferred stock,
“Series A Preferred Stock”, and Mr. Prepaid will become a wholly-owned
subsidiary of the Registrant.  The Registrant’s preferred stock shall
have certain rights and preferences including that the shares of preferred stock
will be initially convertible into 520,000,000 shares of Registrant common
stock.  On an as-converted basis, these 520,000,000 shares of common
stock would constitute approximately 80% of the Registrant’s then-issued and
outstanding shares of common stock.  Prior to the initial closing, the
outstanding capital stock of Telenational Communications, Inc. (“Telenational”)
and One Ring Networks, Inc. (“One Ring”) will be transferred from Rapid Link to
a third party (“New Rapid Link”), controlled by one or more of the Rapid Link
Principal Stockholders or a designee without recourse or liability to Rapid
Link.  In addition, on the terms and subject to the conditions set
forth in the Amendment, at a subsequent closing, subject to the satisfaction of
certain additional conditions including obtaining consents to transfer certain
telecommunications licenses from the Federal Communication Commission and state
regulatory authorities, Blackbird will also deliver to Rapid Link all of the
issued and outstanding shares of capital stock of Yak America, Inc. and the
capital stock of any other Blackbird subsidiary.


Mr
Prepaid is in the business of providing prepaid telecom and transaction based
POSA (point of sale activation) solutions through 1,000 independent retailers in
the Eastern United States.  Products include prepaid wireless PINs for
use with various mobile phone providers.  Yak America is a long
distance reseller offering high value dial around (10-10) and pre-subscribed
long distance services (1+) across the United States utilizing its network and
telecommunication switch based in Miami, Florida.





In
addition, Blackbird and the Company have entered into a management agreement on
October 13, 2009 pursuant to which representatives designated by Blackbird shall
manage certain Telenational assets during the period between the execution of
the Share Exchange Agreement and the closing of such transaction. Such Blackbird
representatives shall receive a management fee of $40,000 per month for such
services after Telenational’s accounts payable have been satisfied.





The
description of the Share Exchange Agreement, the Amendment to the Share Exchange
Agreement, and Management Agreement are qualified in its entirety by reference
to such agreement attached hereto as Exhibit 2.11, 2.12 and 10.40,
respectively.





For more
information regarding the Share Exchange, please see the Registrant’s Form 8-Ks
filed with the Securities & Exchange Commission on October 19, 2009 and
January 27, 2010.





We
have included a description of the businesses of Mr. Prepaid and Yak America in
this report; however, the acquisitions of Mr. Prepaid and Yak America are
subject to the satisfaction of various conditions and are subject to certain
risks more fully described in this report.





Business
Strategy





Communication
Services





We have
served as facilities-based, communication companies providing various forms of
voice and data services to customers around the world.  Rapid Link
provides a multitude of communication services targeted to small and medium
sized businesses, as well as individual consumers.  These services
include the transmission of voice and data traffic over public and private
networks.  The Company also sells foreign and domestic termination of
voice traffic into the wholesale market.


4


The
Company’s product focus is to provide a variety of voice and data services over
its own facilities using alternative access methods. These services include
local and long distance calling, internet access, and wholesale services to
carriers.  With the addition of the advanced technology and management
expertise acquired in the acquisition of One Ring Networks during the second
quarter of fiscal 2008, the Company continues to build-out an extensive hybrid
fiber wireless broadband network allowing its customers to access services
without relying on the local exchange carrier (LEC).  The Company’s
strategy includes providing service via its own facilities to insure reliable
delivery of its current and future services.  Fixed wireless
technology allows for swift and cost efficient deployment of high speed
networks.  The Company will utilize WiMAX and other carrier-grade
equipment operating in microwave and millimeter-wave spectrum
bands.  Through organic growth and acquisitions in targeted areas, the
Company believes it will possess a strategic advantage over carriers that do not
provide their own network access.  The Company believes that its
strategy of “owning” the customer by providing the service directly, rather than
utilizing the networks of others, is important to its success.  This
strategy insures that the Company can provide its bundled products and
communication services without the threat of compromised service quality from
underlying carriers, and at significant cost savings when compared with other
technologies.





Development
of Wireless Broadband Internet





The
tremendous growth of internet utilization worldwide has led to dramatic changes
in how individuals and business consumers are able to access the
internet.  Regional incumbents are generally offering broadband
services over their legacy cable or telephone networks in most metropolitan
areas of the United States.  Often, wireless internet service
providers are able to provide services to customers in areas where the incumbent
providers cannot.





Recent
advances in wireless Ethernet equipment now make it possible to build
carrier-grade networks with significantly less capital investment than required
in the past.  As recently as three years ago, a service which provided
broadband speeds of 100Mbps or more to an end-user, would have been
prohibitively expensive.  Today, even faster speeds are available to
business customers.  With the increased bandwidth now available to our
customers, we are able to tailor our service offerings to suit the end users’
needs.  Synchronous connections (those with Matching upload and
download speeds) are more important now than ever, and new wireless technologies
make this possible.  Integrated voice services utilizing VoIP are a
perfect example of the flexibility and performance synchronous connections
allow.





Non-traditional
broadband service offerings





The
legacy services provided by telecommunicationsincumbents
have very specific limitations with regard to speeds, and are relatively
expensive.  Cableincumbents are
generally not offering synchronous broadband speeds at all, thus limiting the
scope of their products and services.  Wireless broadband technology
enables the Company to provide services outside the limits of traditional
telecommunications and cable based offerings.  Additionally, wireless
broadband services can be easily and cost effectively upgraded to match the
consumers changing needs.





Acquisition-related
Strategies.





We are in
the process of acquiring Mr. Prepaid and Yak America. Mr Prepaid is in the
business of providing prepaid telecom and transaction based POSA (point of sale
activation) solutions through 1,000 independent retailers in the Eastern United
States.  Products include prepaid wireless PINs for use with various
mobile phone providers.  Yak America is a long distance reseller
offering high value dial around (10-10) and pre-subscribed long distance
services (1+) across the United States utilizing its network and
telecommunication switch based in Miami, Florida.  Pursuant to the
14F-1 filed on February 3, 2010 we anticipate the intial closing of these
transactions beginning February, 2010, thus substantially changing the direction
of the company in its entirety.


5


Products
and Services





Rapid
Link Internet and Voice Service





Rapid
Link provides high speed internet and integrated voice services via its hybrid
fiber wireless broadband network.  Currently we offer this service in
following major metropolitan markets: Atlanta GA, Dallas TX, Los Angeles CA,
Omaha NE, and Washington DC.  We have plans to enter additional
markets during our fiscal year 2010.





Rapid
Link also offers fixed wireless broadband internet access via our network in
Amador County, California.  This service has been available since
October 31, 2008, and primarily serves residential and small
businesses.





Legacy
Products





These
services, while still contributing a portion of our revenues, will continue to
decrease as a percentage of our total revenues as we continue to develop and
market new services, including services in connection with the Mr. Prepaid and
Yak acquisitions.





Wholesale
Voice Termination





We offer
call completion on a wholesale basis to domestic and international
telecommunications companies.  This service enables our carrier
customers to benefit from our VoIP and TDM voice network expertise without
having to establish dozens of new relationships with smaller
providers.  Our extensive experience and exiting relationships with
voice service providers, allow us to offer reliable service to select
destinations around the world at very competitive prices.





International
Re-origination Services





Our
Re-origination service, allows a caller outside of the United States to place a
long distance telephone call that originates from our US-based switch, calls the
customer’s location, and then connects the call through our network to anywhere
in the world.  By completing the calls in this manner, we are able to
provide very competitive rates to the customer.  Generally, this
service is provided to customers that establish deposits or prepayments with
us.





International
Calling Cards





Our
“Global Roaming” service provides customers a single account number to initiate
phone-to-phone calls from locations throughout the world using specific
toll-free access numbers.  This service enables customers to receive
the cost benefits associated with our telecommunications network throughout the
world.





1+
Long Distance





We also
offer traditional 1+ long distance service to business and residential users
throughout the U.S.  We currently focus on SMEs through the agent
channel, as well as our niche markets, which generally have a large amount of
international calling.  By leveraging our long-standing international
carrier relationships, we can provide low rates and excellent service when
calling to countries that are not aggressively priced by the larger
carriers.


Mr.
Prepaid/Yak





Mr.
Prepaid delivers a comprehensive and ever-growing array of electronic products
and services through stand-alone point-of-service (POS) terminals, Web based or
can be integrated into major retailers’ electronic cash register system, also
known as EPoS.  Mr. Prepaid also provides prepaid solutions including
prepaid wireless airtime, prepaid calling cards (virtual), Bill Payment and
prepaid wireless handsets.  Mr. Prepaid serves upward of 1,000
merchant locations in the Eastern United States.


6


Yak





Yak
America is a switched based long distance reseller offering high value dial
around and pre-subscribed long distance services (1+ in contiguous United
States).





Segment
Information





Management
regularly reviews one set of financial information and all of our products share
similar economic characteristics.  Therefore, the Company has
determined that it has one operating segment.





Completed
Acquisitions





In
addition to the pending acquisition of Mr. Prepaid and Yak America, the Company
has made the following acquisitions:





On July
11, 2008, the Company purchased certain assets and assumed certain liabilities
of iBroadband Networks, Inc. and iBroadband of Texas, Inc.
(“iBroadband”).  Assets acquired in the iBroadband acquisition are
highly complementary to our existing business, particularly the operations of
our subsidiary One Ring Networks, Inc.  In addition, the iBroadband
acquisition provided that the seller of the assets agreed to purchase (2) 36
month, 10% notes from the Company for the purpose of restructuring existing debt
and providing needed operating capital.





On March
28, 2008, the Company acquired 100% of the outstanding stock of One Ring
Networks, Inc.  The purpose of the One Ring acquisition was to acquire
an existing carrier class network for the transport of voice and data, and an
experienced management team.  Through this effort, we further evolve
our goal of becoming a provider of communication services via fixed wireless and
fiber optic transport of voice and data.





On
October 31, 2007, the Company acquired 100% of the assets of Communications
Advantage, LLC (“Communications Advantage”), and Web-Breeze Networks, LLC (“Web
Breeze”).  The assets include a sizable wireless broadband network in
a rural geographic area of California that fits into the Company’s niche market
business model, a base of customers and revenues that are immediately accretive
to our revenues and earnings, and a staff of tenured professionals with vast
knowledge and experience in the wireless broadband sector.





On May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”).  Telenational historically
serviced a sizable base of both retail and commercial customers which very
closely mirror those customers Rapid Link has served.  This
acquisition allows us to expand our market share in the telecommunications
industry while taking advantage of several significant economies of scale, both
in respect to direct cost reductions, as well as operational
efficiencies.  We have subsequently moved substantially all of our
operational and administrative functions to the Telenational headquarters in
Omaha, Nebraska.





Competition





The
“Diversified Communication Services” industry is highly competitive, rapidly
evolving, and subject to constant technological change.  Other
providers currently offer one or more of each of the services offered by
us.  Communications service companies compete for consumers based on
price and quality, with the dominant providers conducting extensive advertising
campaigns to capture market share.  As a service provider in this
industry, we compete with dominant players such as Comcast Corp. (CMCSA),
AT&T (T), all of which are substantially larger than we are and have the
resources, history and customer bases to dominate virtually every segment of the
broadband internet and voice service market.


7


We also
compete with other small companies including Towerstream Corp. (TWER), and
Cbeyond Inc. (CBEY).  We also believe that existing competitors are
likely to continue to expand their service offerings to appeal to retailers and
consumers especially in the area of wireless broadband internet
service.





The
market for international voice completion services is also highly
competitive.  We compete both in the market for enhanced internet
communications services and in the market for carrier transmission
services.  We believe that the primary competitive factors in the
internet and voice communications business are quality of service, price,
convenience, and bandwidth options.  We believe that the ability to
offer enhanced service capabilities, including new services, will become an
increasingly important competitive factor in the near future.





Mr.
Prepaid/Yak





Mr.
Prepaid ranks among the top providers of POS terminals for the distribution of
prepaid wireless airtime, prepaid calling cards (virtual), Bill Payment and
prepaid wireless handsets in a highly competitive market. The terminals are
placed in small retail stores and the store owner receives a
discount.  Mr. Prepaid competes based on the discount offered and the
quality of its service.  Mr. Prepaid’s competitors include:Via One
Corporation, Payspot and Prepaid Experts.


Yak
competes with other businesses in its industry through maintaining competitive
prices per minute offered to the consumer.





Suppliers





Our
principal suppliers consist of domestic and international telecommunications
carriers, Internet Service Providers, and Broadband
suppliers.  Relationships currently exist with a number of reliable
carriers.  During the fiscal year ended October 31, 2009, one of the
Company’s suppliers accounted for approximately 31% of the Company’s total costs
of revenues.  Due to the highly competitive nature of the
telecommunications business, we believe that the loss of any carrier would not
have a long-term material impact on our business.





Mr.
Prepaid/Yak





Mr.
Prepaid’s principal supplier of POSA Terminals is TASQ Technologies and/or other
distributors.  Its wireless prepaid PIN’s and virtual calling cards
are supplied through Debisys and Direct Wholesale.  Wireless Prepaid
Phones are supplied through Spot Mobile and any other supplier depending on
specific requirements.  Mr. Prepaid has indicated that there are many
alternate suppliers available for the products and markets it
offers.





Yak’s
Genband G9 Converged Gateway switch has positioned it to efficiently accommodate
the expansion of its customer base.  The switch acts as a gateway to
both traditional PSTN (TDM) networks and IP networks.  Yak has
achieved national coverage by interconnecting with Level 3 Communications Inc.,
a major U.S. wholesale carrier (formerly Wiltel Communications LLC which was
acquired as of December 23, 2005). Its Carrier Identification Codes (“CIC”) are
programmed into the Level 3 switches and therefore Yak takes advantage of Level
3’s extensive network access arrangements with the Regional Bell Operating
Companies (“RBOC”s) and most major LECs.  U.S. originated calls are
hauled to its switch in Miami. The switch is co-located at the NAP of the
Americas which is operated by Terremark.  The NAP is one of the
premiere co-location facilities in North America and is the gateway for the
majority of traffic to Latin America and gives Yak access to 160 global
carriers.
  8


Sales
and Marketing





We sell
and market our services through our in house sales staff, independently
contracted sales agents, and third-party resellers.  Our Company also
receives a good deal of referrals from existing customers.  We focus
our sales efforts on small to medium sized businesses (“SME’s”), and vertical
market demographics.





We offer
businesses and individuals the opportunity to become resellers of our services
through our affiliate and reseller programs.  Resellers are able to
purchase bulk accounts and hardware at reseller specific pricing and they are
then able to resell these accounts to private individuals under the Rapid Link
brand.





Historically,
we have had substantial revenues in foreign markets.  For the fiscal
years ended October 31, 2009 and 2008, $5.4 million or 36% and $6.6 million or
39% of our total revenue from continuing operations for each year, respectively,
originated from foreign markets.





Mr.
Prepaid/Yak





Mr.
Prepaid sells and markets its products through its sales force and through the
Internet.  Yak also markets through the Internet and distribution of
flyers.





Customers





We focus
our current retail sales and marketing efforts on our Wireless Broadband
Internet products and services, targeting residential customers and
SMEs.  We rely heavily on the use of local advertising to generate
retail sales in markets where we offer our broadband
service.  Additionally, we utilize agent sales channels to generate
revenues.  By doing so, we believe that we establish a wide base of
customers with little vulnerability based on lack of customer
loyalty.  Our wholesale customers are primarily large
telecommunications customers in the United States, and medium to large foreign
Postal, Telephone and Telegraph companies, which are those entities responsible
for providing telecommunications services in foreign markets and are usually
government owned or controlled.





During
the fiscal year ended October 31, 2009, we did not provide wholesale services to
any customer that accounted for more than 10% of our revenue.





Employees





As of
December 31, 2009, we have twenty nine full-time employees and two part-time
employees.  Twelve of which perform technical duties, eleven of which
perform administrative and financial functions, four of which perform customer
support duties and four of which perform sales duties. Six employees are located
in Omaha, Nebraska; eleven employees are located in Texas; eight employees are
located in Georgia; two employees are located in California; and four employees
are located in South Africa.  None of our employees are represented by
a labor union, and we consider our employee relations to be
excellent.





Mr.
Prepaid has four full-time employees and one contractual salesperson paid on a
commission basis. Yak has 15 full time and three part-time
employees.  None of these employees are represented by a labor union,
and Mr. Prepaid and Yak each consider their employee relations to be
excellent.





Debt
Arrangements





Global
Telecom


9


On April
30, 2008, the Company entered into a four-year financing agreement with Global
Telecom Solutions (“GTS”) in the principal amount of $460,000.  The
agreement calls for monthly payments of $10,000 and interest accrues at 5% per
annum, and may be converted into the common stock of the Company in accordance
with the terms of the agreement.





Laurus/Valens





Effective
March 31, 2008, the Company modified its debt structure by entering into a
Security Agreement with certain lenders (“Lenders”) Upon the signing of the
Security Agreement, Valens II provided the Company with $1,800,000 of gross
financing, and the Company issued Valens II a 10% Secured Term A Note (“Valens
II Term A”) in the principal amount of $1,800,000.





On July
14, 2008 the Company completed the terms and conditions set forth in the
Security Agreement dated as of March 31, 2008, and further amended such terms on
July 11, 2008, to obtain additional financing by and among L.V. and certain
Lenders.  The completed financing agreement includes Valens U.S. SPV I
(“Valens”) purchasing a secured term note (“Term B Note”), the Lenders agreeing
to lend secured revolving loans under certain conditions including the Company
attaining specific financial covenants, and Laurus Master Fund and Valens
purchasing secured promissory notes related to the asset purchase of iBroadband
Networks, Inc., a Texas corporation, and iBroadband of Texas, Inc., a Delaware
corporation in the amounts of approximately $2.3 million and $293 thousand,
respectively.





Effective
July 14, 2008, Valens purchased from the Company a 10% secured term note (“Term
B Note”) in the principal amount of $1.5 million and a Warrant to purchase
4,437,870 shares of common stock at $0.01 per share for a purchase price of $1.5
million.  Interest accrues at 10% per annum and is payable monthly
commencing August 1, 2008.  Concurrent with the Valens Term B
financing arrangement, the Company purchased the assets of iBroadband and
assumed secured promissory notes in the aggregate amount of approximately $2.58
million (“Deferred Purchase Price Notes”), including approximately a $293,000
loan from Valens and a $2.3 million loan from Laurus Master
Fund.  Interest accrues at 10% per annum and is payable monthly
commencing the month after the Note has been assumed.





Global
Capital





On March
31, 2008, Global Capital Funding Group, LP (“Global”), which is the holder of
the GC Conote, modified its debt structure with the Company by entering into a
Subordination Agreement with L.V., acting as agent for itself and the
Lenders.  The agreement calls for the GC-Conote to become subordinate
to the Valens II Term A note.  In addition, GCA extended the maturity
date of the two debentures to June 30, 2011.  In consideration, the
Company made a principal payment of $600,000 on the GC-Conote and agreed to pay
Global the principal sum of $420,000 upon closing of the Valens II Term B note;
with the remainder of the outstanding principal amount of $180,000, which shall
not accrue interest after March 31, 2008, to be converted into the common stock
of the Company in accordance with the terms of the Securities Purchase Agreement
dated as of November 8, 2002.





As of
July 11, 2008, and upon closing of the Valens II Term B note, the Company paid
Global the principal sum of $420,000.  In consideration for the
principal payment of $420,000, Global forgave accrued interest in the amount of
$163,750, and is restricted from the selling of any shares of the Company’s
common stock for a period of two years from the effective date of this
amendment, and agreed that there are no additional cash monies owed to Global by
the Company other than the remaining principal balance of $180,000, which is to
be converted into the common stock of the Company.





As of
October 31, 2008, GCA Strategic Investment Fund Limited (“GCA”) held two Company
debentures having principal amounts of $630,333 and 570,944,
respectively.  On March 31, 2008, GCA modified its debt structure with
the Company by entering into a subordination agreement with L.V., which acted as
agent for itself and for the lenders.  The agreement called for the
GCA debentures to become subordinate to the Valens II Term A
note.  The Company may prepay the GTS debentures by paying 100% of the
outstanding principal and accrued interest.  In addition, GCA extended
the maturity date of the two debentures to June 30, 2011, and is restricted from
the selling of any shares of the Company’s common stock for a period of two
years from the effective date of this amendment.


10


Intellectual
Property





We do not
hold any patents or trademarks.  Our products and services are
available to other telecommunications companies.





Mr.
Prepaid/Yak.





Yak does
not hold any patents or trademarks.  Mr. Prepaid has trademarked the
name “Mr. Prepaid” with the Patent and Trademark Office (Reg. No.
3,693,212).





Government
Regulation





Telecommunications
services are subject to extensive government regulation at both the federal and
state levels in the United States.  Any violations of these
regulations may subject us to enforcement penalties.  The Federal
Communications Commission (“FCC”) has jurisdiction over all telecommunications
common carriers to the extent they provide interstate or international
communications services, including the use of local networks to originate or
terminate such services. Each state regulatory commission has jurisdiction over
the same carriers with respect to their provision of local and intrastate long
distance communications services. Significant changes to the applicable laws or
regulations imposed by any of these regulators could have a material adverse
effect on our business, operating results and financial condition.





The
following summary of regulatory developments and legislation is intended to
describe what we believe to be the most important, currently effective and
proposed international, federal, state, and local regulations and legislation
that are likely to materially affect us.  Some of these and other
existing federal and state regulations are the subject of judicial proceedings
and legislative and administrative proposals that could change, in varying
degrees, the manner in which this industry operates.  We cannot
predict the outcome of any of these proceedings or their impact on the
telecommunications industry or us at this time.  Some of these future
legislative, regulatory, or judicial changes could have a material adverse
impact on our business.


11


Regulation
by the Federal Communications Commission - Universal Service Funds





In 1997,
the FCC issued an order, referred to as the Universal Service Order, to
implement the provisions of the Telecommunications Act of 1996 relating to the
preservation and advancement of universal telephone service. The Universal
Service Order requires all telecommunications carriers providing interstate
telecommunications services to periodically contribute to universal service
support programs administered by the FCC (the “Universal Service Funds”). The
periodic contribution requirements to the Universal Service Funds under the
Universal Service Order are currently assessed based on a percentage of each
contributor’s interstate and international end user telecommunications revenues
reported to the FCC, which we measure and report in accordance with the
legislative rules adopted by the FCC.  The contribution rate factors
are determined quarterly and carriers, including us, are billed for their
contribution requirements each month based on projected interstate and
international end-user telecommunications revenues, subject to periodic
reconciliation.  We, and most of our competitors, pass through these
Universal Service Fund contributions in the price of our services, either as a
separate surcharge or as part of the base rate.  In addition to the
FCC universal service support mechanisms, state regulatory agencies also operate
parallel universal service support systems.  As a result, we are
subject to state, as well as federal, universal service support contribution
requirements, which vary from state to state.  As with any regulatory
obligation, if a federal or state regulatory body determines that we have
incorrectly calculated and/or remitted any universal service fund contribution,
we could be subject to the assessment and collection of past due remittances as
well as interest and penalties thereon.  Furthermore, if the FCC
determines that we have incorrectly calculated and overstated a separately
invoiced line item identified as a recovery of contributions to the Universal
Service Funds we could be required to repay any such over-collection and be
subject to penalty.





The FCC
is currently considering several proposals that would fundamentally alter the
basis upon which our Universal Service Fund contributions are determined and the
means by which such contributions may be recovered from our customers, changing
from a revenue percentage measurement to a connection (capacity), or telephone
number (access) measurement.  Because we pass through these
contributions to consumers, a change in the contribution methodology would not
directly affect our net revenues; however, a change in how contributions are
assessed might affect our customers differently than the customers of competing
services, and therefore could either increase or decrease the attractiveness of
our services.  The timing and effect of any FCC action on this
proposal is not yet known.





Access
Charges





As a long
distance provider, we remit access fees directly to local exchange carriers or
indirectly to our underlying long distance carriers for the origination and
termination of our long distance telecommunications
traffic.  Generally, intrastate access charges are
higher than interstate access charges.  Therefore, to the degree
access charges increase or a greater percentage of our long distance traffic is
intrastate, our costs of providing long distance services will
increase.





In April
2001, the FCC released a Notice of Proposed Rulemaking in which it proposed a
“fundamental re-examination of all currently regulated forms of intercarrier
compensation.”  Several different industry groups have submitted
access charge reform proposals to the FCC.  The FCC has not yet acted
on these proposals and it is not yet known when it will
act.  Therefore, at this time we cannot predict the effect that the
FCC’s ultimate determinations regarding access charge reform may have upon our
business.


12


Taxes
and Regulatory Fees





We are
subject to numerous local, state, and federal taxes and regulatory fees,
including, but not limited to, the Federal excise tax, FCC universal service
fund contributions and regulatory fees, and numerous public utility commission
regulatory fees.  We have procedures in place to ensure that we
properly collect taxes and fees from our customers and remit such taxes and fees
to the appropriate entity pursuant to applicable law and/or
regulation.  If our collection procedures prove to be insufficient or
if a taxing or regulatory authority determines that our remittances were
inadequate, we could be required to make additional payments, which could have a
material adverse effect on our business.





International
Telecommunications Services - Section 214.  In the United States, to
the extent that we offer services as a carrier, we are required to obtain
authority under Section 214 of the Communications Act of 1934 to provide
telecommunications service that originates within the United States and
terminates outside the United States.  We have obtained the required
Section 214 authorization from the FCC to provide U.S. international
service.  As a condition to our Section 214 authorization, we are
subject to various communications-oriented reporting and filing
requirements.  Failure to comply with the FCC’s rules could result in
fines, penalties, forfeitures, or revocation of our FCC authorization, each of
which could have a material adverse effect on our business, financial condition,
and results of operation.





International
Telecommunications Services - International Settlements





The FCC’s
International Settlements Policy (“Policy”) restricts the terms on which U.S.
based carriers and certain of their foreign correspondents settle the cost of
terminating each other’s traffic over their respective
networks.  Under the International Settlements Policy, absent approval
from the FCC, international telecommunications service agreements with dominant
foreign carriers must be non-discriminatory, provide for settlement rates
usually equal to one-half of the accounting rate, and require proportionate
share of return traffic.  This Policy, however, does not apply to
arrangements with any non-dominant foreign carrier or, since March 30, 2005,
with any dominant foreign carrier on routes where a demonstration has been made
that at least one U.S. carrier has a settlement arrangement with the dominant
foreign carrier that is compliant with the FCC’s applicable benchmark settlement
rates. This action has greatly lessened the number of instances in which the
Policy applies, effectively granting U.S. and foreign carriers greater freedom
to set rates and terms in their agreements.  As a result, 164
countries currently are exempt from the International Settlements Policy,
representing over 90% of all U.S.-originated international
traffic.  Notwithstanding the foregoing, the FCC could find that we do
not meet certain International Settlements Policy requirements with respect to
certain of our foreign carrier agreements.  Although the FCC generally
has not issued penalties in this area, it has issued a Notice of Apparent
Liability to a U.S. company for violations of the International Settlements
Policy and it could, among other things, issue a cease and desist order, impose
fines or allow the collection of damages if it finds that we are not in
compliance with the International Settlements Policy.  Any of these
events could have a material adverse effect on our business, financial
condition, or results of operation.





State
Regulations





Our
intrastate long distance operations are subject to various state laws and
regulations, including, in most jurisdictions, certification, and tariff filing
requirements.  As a certificated carrier, consumers may file
complaints against us at the public service commissions.  Certificates
of authority can generally be conditioned, modified, canceled, terminated, or
revoked by state regulatory authorities for failure to comply with state law
and/or the rules, regulations and policies of the state regulatory
authorities.  Fines and other penalties also may be imposed for such
violations.  Public service commissions also regulate access charges
and other pricing for telecommunications services within each
state.  The Regional Bell Operating Companies and other local exchange
carriers have been seeking reduction of state regulatory requirements, including
greater pricing flexibility, which, if granted, could subject us to increased
price competition.


13


Regulation
of Internet Telephony and Other IP-Enabled Services





The use
of the Internet to provide telephone service is a fairly recent market
development.  At present, we are not aware of any domestic, and are
aware of only a few foreign, laws or regulations that prohibit voice
communications over the Internet.





United
States





We
believe that, under U.S. law, the Internet-related services that we provide
constitute information services as opposed to regulated telecommunications
services and, as such, are not currently actively regulated by the FCC or any
state agencies charged with regulating telecommunications
carriers.  We cannot provide assurances that our Internet-related
services will not be actively regulated in the future.  Several
efforts have been made in the U.S. to enact federal legislation that would
either regulate or exempt from regulation services provided over the
Internet.  Increased regulation of the Internet may slow its growth,
particularly if other countries also impose regulations.  Such
regulation may negatively impact the cost of doing business over the Internet
and materially adversely affect our business, operating results, financial
condition and future prospects.





The
advent of VoIP services being provided by pure play VoIP providers, such as
Vonage, cable television and other companies, and the increased number of
traditional telephone companies entering the retail VoIP space has heightened
the need for U.S. regulators to determine whether VoIP is subject to the same
regulatory and financial constraints as wire line telephone service. On November
9, 2004, the FCC issued an order in response to a petition from Vonage declaring
that Vonage-style VoIP services were exempt from state telecommunications
regulations. The FCC order applies to all VoIP offerings provided over broadband
services. However, this order did not clarify whether, or under what terms, VoIP
traffic may be subject to intercarrier compensation requirements; whether VoIP
was subject to state tax or commercial business regulations; or whether VoIP
providers had to comply with obligations related to 911 emergency calls, and the
Universal Service Fund (“USF”) of the Communications Assistance for Law
Enforcement Act (“CALEA”).  The FCC is addressing many of these issues
through its “IP-Enabled Services Proceeding,” which opened in February
2004.





Due to
perceived urgency, however, the FCC did take some specific actions outside of
the broad IP-Enabled Services Proceeding to address emergency services and law
enforcement issues.  On June 3, 2005, the FCC issued an order
establishing rules requiring interconnected VoIP service providers to
incorporate 911 emergency call capabilities for their customers as a standard
feature of their services, rather than an optional enhancement.  And,
on August 5, 2005, the FCC announced the extension of CALEA to certain types of
VoIP providers.  Any additional regulation of IP-based services
concerns us and we must therefore remain diligent with respect to evaluating the
impact of FCC proposals and decisions.  However, based on the nature
of the IP-enabled services we currently provide, we do not believe either FCC
decision will materially adversely affect our business, operating results,
financial condition, or future prospects.





The FCC
has also considered whether to impose surcharges or other common carrier
regulations upon certain providers of VoIP or Internet
telephony.  While the FCC has presently refrained from such
regulation, the regulatory classification of Internet telephony remains
unresolved.  If the FCC were to determine that certain
Internet-related services including Internet telephony services are subject to
FCC regulations as telecommunications services, the FCC could subject providers
of such services to traditional common carrier regulation, including
requirements to make universal service contributions, and pay access charges to
local telephone companies.  A decision to impose such charges could
also have a retroactive effect, which could materially
adversely affect us.  It is also possible that the FCC will adopt a
regulatory framework other than traditional common carrier regulation that would
apply to Internet telephony providers.  Any such determinations could
materially adversely affect our business, financial condition, operating results
and future prospects to the extent that any such determinations negatively
affect the cost of doing business over the Internet or otherwise slow the growth
of the Internet.  Congressional dissatisfaction with FCC conclusions
could result in requirements that the FCC impose greater or lesser regulation,
which in turn could materially adversely affect our business, financial
condition, operating results and future prospects.


14


States





State
regulatory authorities may also retain jurisdiction to regulate certain aspects
of the provision of intrastate Internet telephony services.  Several
state regulatory authorities have initiated proceedings to examine the
regulation of such services.  Others could initiate proceedings to do
so.





International





The
regulatory treatment of Internet telephony outside of the U.S. varies widely
from country to country.  A number of countries that currently
prohibit competition in the provision of voice telephony also prohibit Internet
telephony.  Other countries permit but regulate Internet
telephony.  Some countries will evaluate proposed Internet telephony
service on a case-by-case basis and determine whether it should be regulated as
a voice service or as another telecommunications service.  Finally, in
many countries, Internet telephony has not yet been addressed by legislation or
regulation.  Increased regulation of the Internet and/or Internet
telephony providers or the prohibition of Internet telephony in one or more
countries could materially adversely affect our business, financial condition,
operating results and future prospects.





Other
General Regulations





Although
we do not know of any other specific new or proposed regulations that will
affect our business directly, the regulatory scheme for competitive
telecommunications market is still evolving, and there could be unanticipated
changes in the competitive environment for communications in
general.  For example, the FCC is currently considering rules that
govern how Internet providers share telephone lines with local telephone
companies and compensate local telephone companies.  These rules could
affect the role that the Internet ultimately plays in the telecommunications
market.





Mr.
Prepaid/Yak





Mr.
Prepaid is not required to obtain any licenses or approvals in order to operate
its principal products and services. Yak America is approved by the FCC as a
reseller of Long Distance Services.





Risk
Factors





Risks
Related to Current Operations





Without
the Mr. Prepaid Acquisition, our cash flow will likely not be sufficient to
satisfy our cost of operations.





For the
fiscal years ended October 31, 2009 and 2008, we recorded net losses from
continuing operations of approximately $11.8 and $2.6 million, respectively, on
revenues from continuing operations of approximately $14.9 and $17.2 million,
respectively.  For fiscal year 2009, our net loss from continuing
operations included approximately $9.5 million in non-cash expenses, primarily
depreciation expense and non-cash interest expense.  As a result of
historical losses, we currently have a working capital deficit.


15


Our
independent auditors have included a going concern paragraph in their audit
opinion on our consolidated financial statements for the fiscal year ended
October 31, 2009, which states “The Company has suffered recurring losses from
continuing operations during each of the last two fiscal
years.  Additionally, at October 31, 2009, the Company’s current
liabilities exceeded its current assets by $13.3 million and the Company has a
shareholders’ deficit totaling $15.2 million.  These conditions raise
substantial doubt about the Company’s ability to continue as a going
concern.”  The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.





Our
operating history makes it difficult to accurately assess our general prospects
in the broadband wireless internet sector of the Diversified Communications
Service industry and the effectiveness of our business strategy.  As
of the date of this report, a majority of our revenues are not derived from
broadband internet services.  Instead, we generated most of our
revenues from retail fixed-line and wholesale communication
services.  In addition, we have limited meaningful historical
financial data upon which to forecast our future sales and operating
expenses.  Our future performance will also be subject to prevailing
economic conditions and to financial, business and other
factors.  Accordingly, if the Mr. Prepaid Acquisition does not occur,
our actual future cash flows from operations will likely be insufficient to
satisfy our debt obligations and working capital needs and we may be forced to
liquidate our assets.





We
face competition from numerous, mostly well-capitalized sources.





The
market for our products and services is highly competitive.  We face
competition from multiple sources, many of which have greater financial
resources and a substantial presence in our markets and offer products or
services similar to our services.  Therefore, we may not be able to
successfully compete in our markets, which could result in a failure to
implement our business strategy, adversely affecting our ability to attract and
retain new customers.  In addition, competition within the industries
in which we operate is characterized by, among other factors, price, and the
ability to offer enhanced services.  Significant price competition
would reduce the margins realized by us in our telecommunications
operations.  Many of our competitors have greater financial resources
to devote to research, development, and marketing, and may be able to respond
more quickly to new or merging technologies and changes in customer
requirements.





We
have pledged our assets to existing creditors.





Our notes
are secured by a lien on substantially all of our assets.  A default
by us under the secured notes would enable the holders of the notes to take
control of substantially all of our assets.  The holders of the
secured notes have no operating experience in our industry and if we were to
default and the note holders were to take over control of our Company, they
could force us to substantially curtail or cease our operations.  If
this happens, you could lose your entire investment in our common
stock.





In
addition, the existence of our asset pledges to the holders of the secured notes
will make it more difficult for us to obtain additional financing required to
repay monies borrowed by us, continue our business operations, and pursue our
growth strategy.





The
regulatory environment in our industry is very uncertain.





The legal
and regulatory environment pertaining to the Internet and Diversified
Communication Services industry is uncertain and changing rapidly as the use of
the Internet increases.  For example, in the United States, the FCC
had been considering whether to impose surcharges or additional regulations upon
certain providers of Internet telephony, and indeed the FCC has confirmed that
providers must begin charging Universal Service access charges of roughly
6.5%.


16


New
regulations could increase the cost of doing business over the Internet or
restrict or prohibit the delivery of our products or services using the
Internet. In addition to new regulations being adopted, existing laws may be
applied to the Internet.  Newly enacted laws may cover issues that
include sales and other taxes, access charges, user privacy, pricing controls,
characteristics and quality of products and services, consumer protection,
contributions to the Universal Service Fund, an FCC-administered fund for the
support of local telephone service in rural and high-cost areas, cross-border
commerce, copyright, trademark and patent infringement, and other claims based
on the nature and content of Internet materials.





Changes
in the technology relating to Broadband Wireless Internet could threaten our
operations.





The
industries in which we compete are characterized, in part, by rapid growth,
evolving industry standards, significant technological changes, and frequent
product enhancements.  These characteristics could render existing
systems and strategies obsolete and require us to continue to develop and
implement new products and services, anticipate changing consumer demands and
respond to emerging industry standards and technological changes.  No
assurance can be given that we will be able to keep pace with the rapidly
changing consumer demands, technological trends, and evolving industry
standards.





Any
natural disaster or other occurrence that renders our operations center
inoperable could significantly hinder the delivery of our services to our
customers because we lack an off-site back-up communications
system.





Currently,
our disaster recovery systems focus on internal redundancy and diverse routing
within our operations center.  We currently do not have an off-site
communications system that would enable us to continue to provide communications
services to our customers in the event of a natural disaster, terrorist attack
or other occurrence that rendered our operations center
inoperable.  Accordingly, our business is subject to the risk that
such a disaster or other occurrence could hinder or prevent us from providing
services to some or all of our customers.  As a result of recent
acquisitions, we have mitigated the risk that a natural disaster or other
geographic-specific occurrence could hinder or prevent us from providing
services to some or all of our customers.  Nonetheless, a delay in the
delivery of our services could cause some of our customers to discontinue
business with us, which could have a material adverse effect on our financial
condition, and results of operations.





Risks
related to our securities





Potential
for substantial dilution to our existing stockholders exists.





The
issuance of convertible shares of preferred stock upon the closing of the Mr.
Prepaid Acquisition, the conversion of secured convertible notes or upon
exercise of outstanding warrants and/or stock options will cause immediate and
substantial dilution to our existing stockholders.  In particular, the
Mr. Prepaid Acquisition will mean that Blackbird (or in turn its stockholders)
will hold 80% of the outstanding common stock (on an as-converted basis)
following the Mr. Prepaid Acquisition.  In addition, any additional
financing may result in significant dilution to our existing
stockholders.


Our
OTC Bulletin Board listing negatively affects the liquidity of our common stock
as compared with other trading boards.





Our
common stock currently trades on the OTC Bulletin Board.  Therefore,
no assurances can be given that a liquid trading market will exist at the time
any stockholder desires to dispose of any shares of our common
stock.  In addition, our common stock is subject to the so-called
“penny stock” rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as an investor with a net
worth in excess of $1 million or annual income exceeding $200,000, or $300,000
together with a spouse).  For transactions covered by the penny stock
rules, a broker-dealer must make a suitability determination for the purchaser
and must have received the purchaser’s written consent to the transaction prior
to sale.  Consequently, both the ability of a broker-dealer to sell
our common stock and the ability of holders of our common stock to sell their
securities in the secondary market may be adversely affected.  The
Securities and Exchange Commission (the “SEC”) has adopted regulations that
define a “penny stock” to be an equity security that has a market price of less
than $5.00 per share, subject to certain exceptions.  For any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a disclosure schedule relating to the
penny stock market.  The broker-dealer must disclose the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is to sell the
securities as a market maker, the broker-dealer must disclose this fact and the
broker-dealer’s presumed control over the market.  Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny
stocks.


17


We
are subject to the ongoing requirements of section 404 of the Sarbanes-Oxley
Act. If we are unable to timely comply with section 404 or if the costs related
to compliance are significant, our profitability, stock price and results of
operations and financial condition could be materially adversely
affected.





We are
required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act
of 2002, which requires that we document and test our internal controls and
certify that we are responsible for maintaining an adequate system of internal
control procedures.  During fiscal 2009, we documented and tested
certain existing controls and evaluated these existing controls against the
standards adopted by the Committee of Sponsoring Organizations of the Treadway
Commission.  During the course of our ongoing evaluation and
integration of the internal controls of our business, we may identify areas
requiring improvement, and we may have to design enhanced processes and controls
to address issues identified through this review.





We
believe that the out-of-pocket costs, the diversion of management’s attention
from running the day-to-day operations and operational changes caused by the
need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act
could be significant.  If the time and costs associated with such
compliance exceed our current expectations, our results of operations could be
adversely affected.  We cannot be certain at this time that we will be
able to successfully complete the procedures, certification and attestation
requirements of Section 404 or that our auditors will not have to report a
material weakness in connection with the presentation of our financial
statements.  If we fail to comply with the requirements of Section 404
or if our auditors report such material weakness, the accuracy and timeliness of
the filing of our annual report may be materially adversely affected and could
cause investors to lose confidence in our reported financial information, which
could have a negative effect on the trading price of our common
stock.  In addition, a material weakness in the effectiveness of our
internal controls over financial reporting could result in an increased chance
of fraud and the loss of customers, reduce our ability to obtain financing and
require additional expenditures to comply with these requirements, each of which
could have a material adverse effect on our business, results of operations and
financial condition.





Risks
related to the proposed Mr. Prepaid Acquisition


18


We
may not successfully close the proposed acquisition.





The Share
Exchange Agreement includes various closing conditions which must be satisfied
before the acquisition of Mr. Prepaid and subsequently Yak America will
occur.  In the event that these conditions are not satisfied or waived
by the respective party, the acquisitions may not occur.





We
may have difficulties integrating our current business with the business of Mr.
Prepaid.





If the
proposed Mr. Prepaid Acquisition were to be consummated, the Company will be
integrating Mr. Prepaid and Yak’s products and services offerings. If the
Company cannot integrate the products effectively or if management spends too
much time on integration issues, it could harm the combined company’s business,
financial condition and results of operations. The difficulties, costs and
delays involved in integrating the companies, which could be substantial,
include the following:





-
            distraction
      of management and other key personnel from the business of the combined
      company;





-
            integrating
      technology, product lines, services and development
  plans;





-
            inability
      to demonstrate to customers and suppliers that the business combination
      will not result in adverse changes in product standards or business
      focus;





-
            inability
      to retain and integrate key
personnel;





-
            disruptions
      in the combined sales forces that may result in a loss of current
      customers or the inability to close sales with potential
      customers;





-
            expending
      time, money and attention on integration that would otherwise be spent on
      developing either company’s own products and
  services;





-
            additional
      financial resources that may be needed to fund the combined operations;
      and





-
            impairment
      of relationships with employees and customers as a result of changes in
      management.





The
proposed Mr. Prepaid Acquisition may result in additional Sarbanes-Oxley issues
and material weaknesses in the control structure of the Company.





Mr.
Prepaid and Yak are private corporations that have not been subject to the
requirements of the Sarbanes-Oxley Act of 2002. The operations of Mr. Prepaid
and Yak are expected to be material to the results of the post-acquisition
combined entity and management may not have sufficient time to document, assess,
test, and remedy the control structure of such companies, to identify any
material control weaknesses; and to disclose any such weaknesses in time to
comply with the reporting requirements of Sarbanes-Oxley.





Item
2.  Description of Property.





We lease
approximately 11,500 square feet in Omaha, Nebraska, located at 5408 N. 99th
Street.  Our current operations, information systems, and executive
headquarters are located in the Omaha facility.  We also have
operational offices in Atlanta, Georgia, Athens, Texas, Sutter Creek,
California, and a small sales and administrative office in Johannesburg, South
Africa.  We believe that our facilities are sufficient for the
operation of our current business for the foreseeable future.  The
expiration dates of the above-mentioned lease agreements are as
follows:


19





June
      30, 2011
            Omaha -
      Operational and Administrative HeadquartersNovember
      30, 2011
            South
      Africa - Sales and Administrative OfficeMarch
      31, 2016
            Atlanta -
      Operational OfficeMonth
      to month
            Athens -
      Operational OfficeMonth
      to month
            Sutter
      Creek - Operational Office





Item
3.  Legal Proceedings.





The
Company, from time to time, may be subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property of third parties by the
Company.  Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.





Coastline
Capital On May 5, 2008, the Company filed a lawsuit against
Coastline Capital  for Declaratory Relief related to the Valens and
Laurus debenture transactions.  The Company’s suit for
Declaratory  Relief seeks a Judgment from the Court that Coastline
Capital has not earned a broker’s fee in the Valens/Laurus transaction in that
Coastline Capital did not represent the Company in the transaction that closed
and, pursuant to the terms of the brokerage contract Coastline Capital was not
entitled to a broker’s fee.  On June 23, 2008, Coastline Capital filed
an answer and cross-complained against the Company contending that Coastline
Capital earned a broker’s fee when the Valens/Laurus debenture transaction
closed.  The Company has filed an answer to the Cross Complaint which
denied the allegations of the Cross Complaint and asserted affirmative
defenses.  The parties have agreed to binding arbitration to resolve
this dispute.  The Company will pursue this arbitration and vigorously
defend the Cross Complaint as the Company is confident that its claims are
supported by the facts and written documents relevant to this
litigation.





Ian
Caplan  On June 23, 2009, Ian Caplan and Click Connect LLC
filed a lawsuit in the Los Angeles Superior Court against the Company claiming
the Plaintiffs were not paid commissions for revenues generated by one of the
Companies subsidiaries.  On September 2, 2009, the Company filed an
answer to the complaint which denied the allegations of the Complaint and
asserted affirmative defenses.  The Plaintiffs have never executed a
contract with the Company who is the only defendant in the litigation and the
Company has not located any documents were it assumed any obligations to pay
commissions to the Plaintiff’s.  The litigation is in the discovery
phase.  It is expected that the Company will be successful in the
litigation based on the lack of privity of contract between the Plaintiff’s and
the Company and the lack of any course of dealing between the Company and the
Plaintiffs.





Qwest  Qwest
filed an arbitration proceeding, in Colorado, claiming unpaid fees for
telecommunication services provided to one of the Company’s
subsidiaries.  On December 21, 2009 the arbitrator awarded
$1,782,259.87 in favor of Qwest against one of the Company’s
subsidiaries.  The Company believes that its subsidiary was not
afforded due process in the arbitration proceedings and that the Arbitrator did
not take into consideration the excess billings of Qwest that were not due and
payable by its subsidiary. The Company will review with its counsel the option
of disputing the arbitration award after its subsidiary is served with a Civil
Action to Enforce the Arbitration Award.





Liotta
Litigation  On
November 24, 2009 Matthew Liotta filed his First Amended Complaint, in Fulton
County Georgia, against the Company and one of its subsidiaries alleging
wrongful termination and damages for unpaid compensation pursuant to a written
employment contract.  On January 12, 2010, the Company and its
subsidiary filed its answer to the First Amended Complaint which denied the
allegations of the Complaint and asserted affirmative defenses asserting that
neither the Company nor its subsidiary had ever executed an employment contract
with Matthew Liotta.  Upon Matthew Liotta’s termination “for cause” he
was paid all of his salary and benefits thus the Company believes that Mr.
Liotta has initiated this lawsuit, along with the litigation discussed below,
based upon his vendetta against the Company as a result of his dismissal for
cause as an employee of Telenational, a subsidiary of the
Company.


20


Former
One Ring Networks Shareholders litigation 5 of the 11 former shareholders
(which include Matthew Liotta, and his father, Dennis Liotta) of One Ring
Networks, Inc., a subsidiary of the Company, filed a lawsuit, in The District
Court of Nebraska, against the Company claiming that a portion of the payment
for their shares pursuant to the terms of a Stock Purchase Agreement between One
Ring Networks, Inc and the Company dated March 28, 2008 entitled the “True Up”
portion of the purchase price were incorrectly calculated and
unpaid.  On January 27, 2010, the Company filed an answer to the
Complaint which denied the allegations of the Complaint and asserted affirmative
defenses based upon the Company’s documents that support the fact that the “True
Up”  calculations were accurately prepared and were properly paid to
all of the former shareholders of One Ring Networks, Inc. On January 20, 2010,
the Court denied the Application for a Preliminary Injunction brought by the
Plaintiff’s requesting that the Company not transfer or spin off its subsidiary
One Ring Networks, Inc. pending the resolution of this litigation. The Order
denying the Preliminary Injunction was based upon the opposition filed by the
Company to the application for the Preliminary Injunction.  Based upon
the Court’s Order and the documents between the Company and One Ring Networks,
Inc the Company is very confident that this litigation will be resolved
favorably for the Company.





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





No
matters were submitted to a vote of security holders during fiscal
2009.


21


PART
II





Item
5.  Market for Common Equity and Related Stockholder
Matters.





Market
for the Company’s Common Stock





The
Company’s common stock, $0.001 par value, is quoted on the OTC Bulletin Board
under the trading symbol “RPID”.  Each share ranks equally as to
dividends, voting rights, participation in assets on winding-up and in all other
respects.  No shares have been or will be issued subject to call or
assessment.  There are no preemptive rights, provisions for redemption
or for either cancellation or surrender, or provisions for sinking or purchase
funds.





The
following table sets forth, for the fiscal periods indicated, the high and low
closing sales price per share of our common stock as reported on the OTC
Bulletin Board:





High
            
            
            LowFiscal Year Ended October 31,
      2009Fourth
      Quarter
            
            $
            0.04
            
            
            $
            0.02Third
      Quarter
            
            $
            0.07
            
            
            $
            0.02Second
      Quarter
            
            $
            0.07
            
            
            $
            0.03First
      Quarter
            
            $
            0.09
            
            
            $
            0.04Fiscal Year Ended October 31,
      2008Fourth
      Quarter
            
            $
            0.14
            
            
            $
            0.06Third
      Quarter
            
            $
            0.10
            
            
            $
            0.05Second
      Quarter
            
            $
            0.10
            
            
            $
            0.06First
      Quarter
            
            $
            0.12
            
            
            $
            0.06





The
market quotations presented reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not necessarily reflect actual
transactions.





The
closing price for our common stock on February 15, 2010, as reported on the OTC
Bulletin Board, was $0.015.





Dividends





We have
never declared or paid any cash dividends on our common stock and do not
presently intend to pay cash dividends on our common stock in the foreseeable
future.  We intend to retain future earnings for reinvestment in our
business.





Holders
of Record





There
were 484 stockholders of record as of February 15, 2010.


22


Equity
Compensation Plans





The
following table sets forth, as of October 31, 2009, certain information related
to the Company’s compensation plans under which shares of our common stock are
authorized for issuance.





Plan
      Category
              
              Number
      of securities to be Issued upon Exercise of Outstanding Options Warrants
      and Rights column (a)
              
              
              Weighted-Average
      Exercise Price of Outstanding Options, Warrants and
      Rights
              
              
              Number
      of Securities Remaining Available For Future Issuance Under Equity
      Compensation Plans(Excluding Securities Reflected in column in column
      (a))Equity
      compensation plans approved by security holders
              
              
              915,000
              (1)
              
              $
              0.11
              
              
              
              3,085,000
              (2)Equity
      compensation plans not approved by securityholders
              
              
              -
              
              
              
              n/a
              
              
              
              -Total
              
              
              915,000
              
              
              $
              0.11
              
              
              
              3,085,000





(1)
            Includes
      outstanding options granted pursuant to the Company’s 2002 Equity
      Incentive Plan.


(2)
            Includes
      shares remaining available for future issuance under the Company’s 2002
      Equity Incentive Plan.





The
Company’s 2002 Equity Incentive Plan (the “Equity Incentive Plan”), as amended,
authorizes the Board of Directors to grant options to purchase up to 4,000,000
shares of the Company’s common stock.  On October 31, 2002 at our
stockholder’s annual meeting, our stockholders approved the adoption of the
Equity Incentive Plan.  The maximum number of shares of common stock
that may be issuable under the Equity Incentive Plan to any individual plan
participant is 1,000,000 shares.  All options granted under the Equity
Incentive Plan have vesting periods up to a maximum of five
years.  The exercise price of an option granted under the Equity
Incentive Plan shall not be less than 85% of the fair value of the common stock
on the date such option is granted.





The
Company’s 1990 Stock Option Plan (the “Option Plan”), as amended, authorized the
Board of Directors to grant options to purchase up to 2,300,000 shares of the
Company’s common stock.  No options were to be granted to any
individual director or employee, which when exercised, would exceed 5% of the
issued and outstanding shares of the Company.  The term of any option
granted under the 1990 Stock Option Plan was fixed by the Board of Directors at
the time the options were granted, provided that the exercise period was not to
be longer than 10 years from the date of grant.  All options granted
under the 1990 Stock Option Plan have up to 10-year terms and have vesting
periods that range from 0 to three years from the grant date.  The
exercise price of any options granted under the 1990 Stock Option Plan is the
fair market value at the date of grant.  On October 31, 1990 at our
stockholder’s annual meeting, our stockholders approved the adoption of the
Option Plan.  Subsequent to the adoption of the Equity Incentive Plan,
no further options will be granted under the Option Plan.


23


Recent
Sales of Unregistered Securities





During
the fiscal year ended October 31, 2009, we did not issue any securities that
were not registered under the Securities Act of 1933, as amended, except as
disclosed in previous SEC filings.





Purchases
of Equity Securities by the Issuer and Affiliated Purchasers





There
were no repurchases of equity securities by the issuer or affiliated purchasers
during the fiscal year ended October 31, 2009.





Item
6.  Selected Financial Data.





Not
applicable.


24


Item
7.  Management’s Discussion and Analysis or Plan of
Operation.





Forward-Looking
Statements





This
Annual Report on Form 10-K contains “forward-looking statements”, which are
statements other than historical information or statements of current condition.
Some forward-looking statements may be identified by the use of such terms as
“expects,” “will,” “anticipates,” “estimates,” “believes,” “plans” and words of
similar meaning. These forward-looking statements relate to business plans,
programs, trends, results of future operations, satisfaction of future cash
requirements, funding of future growth, acquisition plans and other matters. In
light of the risks and uncertainties inherent in all such projected matters, the
inclusion of forward-looking statements in this report should not be regarded as
a representation by us or any other person that our objectives or plans will be
achieved or that our operating expectations will be realized. Revenues and
results of operations are difficult to forecast and could differ materially from
those projected in forward-looking statements contained herein, including
without limitation statements regarding our belief of the sufficiency of capital
resources and our ability to compete in the telecommunications industry. Actual
results could differ from those projected in any forward-looking statements for,
among others, the following reasons: (a) increased competition from existing and
new competitors using fixed wireless broadband technology to deliver internet
and telecommunications services, (b) the relatively low barriers to entry for
start-up companies using fixed wireless broadband technology to provide internet
and telecommunications services, (c) the price-sensitive nature of consumer
demand, (d) the relative lack of customer loyalty to any particular provider of
voice and data services, (e) our dependence upon favorable pricing from our
suppliers to compete in the diversified communication services industry, (f)
increased consolidation in the telecommunications industry, which may result in
larger competitors being able to compete more effectively, (g) failure to
attract or retain key employees, (h) continuing changes in governmental
regulations affecting the telecommunications industry and the Internet, (i)
changing consumer demand, technological developments and industry standards that
characterize the industry, (j) failure to close the acquisition of Mr. Prepaid
and Yak America, and (k) risks related to the Mr. Prepaid and Yak America
businesses.  You are also urged to carefully review and consider the
various disclosures we have made which describe certain factors that affect our
business throughout this Report.  For a discussion of these factors
and others, please see “Risk Factors” below in this section of this
report.  Readers are cautioned not to place undue reliance on the
forward-looking statements made in this report or in any document or statement
referring to this report.  All forward-looking statements attributable
to the Company are expressly qualified in their entirety by such language, and
we are not obligated, and do not intend, to update any forward-looking
statements at any time unless an update is required by applicable securities
laws.  The following discussion and analysis of financial condition
and results of operations covers the years ended October 31, 2009 and 2008 and
should be read in conjunction with our Financial Statements and the Notes
thereto commencing at page F-1 included hereof.


25


Overview





Proposed
Acquisition





On
October 13, 2009, the Registrant and its principal stockholders entered into a
Share Exchange Agreement (as amended, “Share Exchange Agreement”) with Blackbird
Corporation (“Blackbird”), and its principal stockholders, pursuant to which the
Registrant would grant newly-issued shares of its common stock to the Blackbird
stockholders in exchange for all outstanding shares of Blackbird (“Share
Exchange”).  Following the Share Exchange, it was contemplated that
Blackbird shareholders would hold approximately 80% of the Registrant’s
then-issued and outstanding shares of common stock.





Under the
Share Exchange Agreement, it was originally contemplated that the Registrant
would acquire all or substantially all of the outstanding shares of capital
stock of Blackbird which would result in Blackbird becoming an operating
subsidiary of the Registrant.  In consideration for the Blackbird
shares, the Registrant was required to issue an aggregate of 520,000,000 shares
of its common stock to the shareholders of Blackbird, which would constitute
approximately 80% of the Registrant’s then-issued and outstanding shares of
common stock.





As of
January 15, 2010, the Registrant entered into an Amendment to the Share Exchange
Agreement  (the “Amendment”) with  Blackbird, certain
Registrant shareholders, certain principal shareholders of Blackbird (the
“Blackbird Shareholders”), and a wholly-owned subsidiary of Blackbird, Mr.
Prepaid, Inc. (“Mr. Prepaid”). The Amendment modified the Share Exchange
Agreement.





Under the
Amendment, the transaction contemplated by the Share Exchange Agreement has been
modified to provide for an initial closing at which Rapid Link shall acquire all
of the issued and outstanding shares of capital stock of Mr. Prepaid in exchange
for 10,000,000 shares of the Registrant’s newly-formed class of preferred stock,
“Series A Preferred Stock”, and Mr. Prepaid will become a wholly-owned
subsidiary of the Registrant.  The Registrant’s preferred stock shall
have certain rights and preferences including that the shares of preferred stock
will be initially convertible into 520,000,000 shares of Registrant common
stock.  On an as-converted basis, these 520,000,000 shares of common
stock would constitute approximately 80% of the Registrant’s then-issued and
outstanding shares of common stock.  Prior to the initial closing, the
outstanding capital stock of Telenational Communications, Inc. (“Telenational”)
and One Ring Networks, Inc. (“One Ring”) will be transferred from Rapid Link to
a third party (“New Rapid Link”), controlled by one or more of the Rapid Link
Principal Stockholders or a designee without recourse or liability to Rapid
Link.  In addition, on the terms and subject to the conditions set
forth in the Amendment, at a subsequent closing, subject to the satisfaction of
certain additional conditions including obtaining consents to transfer certain
telecommunications licenses from the Federal Communication Commission and state
regulatory authorities, Blackbird will also deliver to Rapid Link all of the
issued and outstanding shares of capital stock of Yak America, Inc. and the
capital stock of any other Blackbird subsidiary.


Mr.
Prepaid is in the business of providing prepaid telecom and transaction based
POSA (point of sale activation) solutions through 1,000 independent retailers in
the Eastern United States.  Products include prepaid wireless PINs for
use with various mobile phone providers.  Yak America is a long
distance reseller offering high value dial around (10-10) and pre-subscribed
long distance services (1+) across the United States utilizing its network and
telecommunication switch based in Miami, Florida.  Following the
acquisitions, the primary operations of the Company are intended to be the
business of Mr. Prepaid and Yak America.





In
addition, Blackbird and the Company have entered into a management agreement on
October 13, 2009 pursuant to which representatives designated by Blackbird shall
manage certain Telenational assets during the period between the execution of
the Share Exchange Agreement and the closing of such transaction. Such Blackbird
representatives shall receive a management fee of $40,000 per month for such
services after Telenational’s accounts payable have been
satisfied.


26


The
description of the Share Exchange Agreement, the Amendment to the Share Exchange
Agreement, and Management Agreement are qualified in its entirety by reference
to such agreement attached hereto as Exhibit 2.11, 2.12 and 10.40,
respectively.





Current
Operations





We are a
facilities-based, diversified communication services company providing various
forms of voice, internet and data services to wholesale and retail customers
throughout the world.  We offer a wide array of communication services
targeted to individuals, enterprises and wholesale customers.





The
Diversified Communication Services industry continues to evolve towards an
increased emphasis on Ethernet based products and services.  We have
focused our business towards these types of products and services for the last
couple of years.  Furthermore, we believe the use of our networks,
either as a stand-alone solution or bundled with other IP products, provide our
customers with the best possible communications experience.





During
the third quarter of fiscal 2008, we acquired certain assets and assumed certain
liabilities of iBroadband Networks, Inc, and iBroadband of Texas
Inc.  Included in the asset base, among other assets, are several
significant fixed wireless broadband customers, strategic deployment sites and
equipment inventories in the Dallas, Texas area, as well as several thousand
retail customers in Athens, Texas who are provided local and long distance
telephony services.  The acquisition of these strategic assets allows
us to quickly and efficiently expand into this significant marketplace without
the typical upfront costs required to build infrastructure and develop a market
of this size.





During
the second quarter of fiscal 2008, we acquired One Ring Networks, Inc., which
operates one of the largest hybrid fiber wireless broadband networks in the
United States, and is one of the few carriers offering end-to-end communications
and networking services, without reliance on third party
providers.  This acquisition allows us to provide services to high
average revenue per user customers via fixed wireless and fiber optic
transport.  Typically, these customers are small to medium size
businesses, enterprises, and carriers.  We recognize that these
customers require a reliable and cost-effective voice solution.  In
addition, we offer an integrated product that includes local and long distance
calling with internet access in order to satisfy this demand.





On
October 31, 2007, we acquired 100% of the assets of Communications Advantage,
LLC (“Communications Advantage”), and Web-Breeze Networks, LLC (“Web
Breeze”).  The assets include a sizable wireless broadband network in
a rural geographic area of California that fits into the Company’s niche market
business model, a base of customers and revenues that are immediately accretive
to our revenues and earnings, and a staff of tenured professionals with vast
knowledge and experience in the wireless broadband sector.





Critical
Accounting Policies





This
disclosure is based upon the Company’s consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States.  The preparation of these financial statements
requires that we make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.  We base our estimates on
historical experience and other assumptions that we believe to be proper and
reasonable under the circumstances. We continually evaluate the appropriateness
of estimates and assumptions used in the preparation of its consolidated
financial statements.  Actual results could differ from those
estimates.  The following key accounting policies are impacted
significantly by judgments, assumptions and estimates used in the preparation of
the consolidated financial statements.


27


Revenue
Recognition





Long
distance revenue





Revenues
generated by international re-origination, domestic residential and enterprise
long distance service, and international wholesale termination, which represent
the primary sources of the Company’s revenues, are recognized as revenue based
on minutes of customer usage.  Revenue from these services is
recognized monthly as services are provided.  The Company records
payments received in advance as deferred revenue until such services are
provided.





Alternative
access revenues





The
acquisition of One Ring Networks further enhances the Company’s ability to
provide services via fixed wireless and fiber optic
transport.  Revenues generated through the sale of voice and data
services via fixed wireless and fiber optic transport, which are an increasingly
significant component of the Company’s revenues, are based on set capacity
limits, and generally carry recurring monthly charges for up to three year
contracted terms.  The Company records payments received in advance as
deferred revenue until such services are provided.





Allowance for Uncollectable
Accounts Receivable





Our
receivables are due from commercial enterprises and residential users in both
domestic and international markets.  Trade accounts receivable are
stated at the amount the Company expects to collect.  We regularly
monitor credit risk exposures in our accounts receivable and maintain a general
allowance for doubtful accounts based on historical experience.  The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments.  Management considers the following factors when determining
the collectability of specific customer accounts: customer creditworthiness,
past transaction history with the customer, current economic industry trends and
changes in customer payment terms.  Should any of these factors
change, the estimates made by management would also change, which in turn would
impact the level of the Company’s future provision for doubtful
accounts.  Specifically, if the financial condition of the Company’s
customers were to deteriorate, affecting their ability to make payments,
additional customer-specific provisions for doubtful accounts may be
required.  We review our credit policies on a regular basis and
analyze the risk of each prospective customer individually in order to minimize
our risk.  Based on management’s assessment, the Company provides for
estimated uncollectible amounts through a charge to earnings and a credit to a
valuation allowance.  Interest is typically not charged on overdue
accounts receivable.  Balances that remain outstanding after the
Company has used reasonable collection efforts are written off through a charge
to the valuation allowance and a credit to accounts receivable.





Purchase Price Allocation
and Impairment Testing





We
account for our acquisitions using the purchase method of
accounting.  This method requires that the acquisition cost be
allocated to the assets and liabilities we acquired based on their fair
values.  We make estimates and judgments in determining the fair value
of the acquired assets and liabilities.  We base our determination on
independent appraisal reports as well as our internal judgments based on the
existing facts and circumstances.  We record goodwill when the
consideration paid for an acquisition exceeds the fair value of net tangible and
identifiable intangible assets acquired.  If we were to use different
judgments or assumptions, the amounts assigned to the individual assets or
liabilities could be materially different.


28


Long-lived
assets, including the Company’s customer lists, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets might not be recoverable.  We assess our goodwill for
impairment annually or more frequently if impairment indicators
arise.  In order to properly complete these assessments, we rely on a
number of factors, including operating results, business plans, and anticipated
future cash flows.  Actual results that vary from these factors could
have an impact on the amount of impairment, if any, which actually
occurs.





Stock-Based
Compensation





We
adopted FASB Accounting Standards Codification 718 (“ASC 718”) (formerly SFAS
No. 123R, “Share-Based Payment”) as of November 1, 2006.  All of our
existing share-based compensation awards have been determined to be equity
awards.  Under the modified prospective transition method, we are
required to recognize noncash compensation costs for the portion of share-based
awards that are outstanding as of November 1, 2006 for which the requisite
service has not been rendered (i.e. nonvested awards) as the requisite service
is rendered on or after that date.  The compensation cost is based on
the grant date fair value of those awards, with grant date fair value currently
being estimated using the Black-Scholes option-pricing model, a pricing model
acceptable under ASC 718.  We are recognizing compensation cost
relating to the nonvested portion of those awards in the consolidated financial
statements beginning with the date on which ASC 718 is adopted, through the end
of the requisite service period.  ASC 718 requires that forfeitures be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.


29


Recent
Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (“FASB”) approved its Accounting
Standards Codification (“Codification”) as the single source of authoritative
United States accounting and reporting standards applicable for all
non-governmental entities, with the exception of the SEC and its staff. The
Codification, which changes the referencing of financial standards, is effective
for interim or annual financial periods ending after September 15, 2009.
Therefore, in the annual financial statements of fiscal year 2009, all
references made to US GAAP will use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter
existing US GAAP, it is not expected to have any impact on the Company’s
consolidated financial position or results of operations.





In
September 2006, the FASB issued guidance under ASC 820 (“ASC 820”) (formerly
SFAS No. 157, “Fair Value Measurements”).  ASC 820 defines fair value,
established a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  ASC 820 is generally effective for financial statements
issued for fiscal years beginning after November 15, 2007.  The
Company adopted this guidance at the beginning of fiscal year 2009. The adoption
of this guidance did not significantly affect the Company’s consolidated
financial condition or consolidated results of operations.


In
February 2007, the FASB issued guidance under ASC 825 (formerly SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities”), which
allows companies the option to measure financial assets or liabilities at fair
value and include unrealized gains and losses in net income rather than
equity.  The Company adopted this guidance at the beginning of fiscal
year 2009. The adoption of this guidance had no significant impact on the
financial position or results of operations of the Company.





In
December 2007, the FASB issued guidance under ASC 805 (formerly SFAS No.
141(revised 2007), “Business Combinations” (“SFAS 141R”)).  ASC 805
will significantly change the accounting for business combinations in a number
of areas including the treatment of contingent consideration, contingencies,
acquisition costs, IPR&D and restructuring costs.  In addition,
under ASC 805, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income tax expense.  ASC 805 is effective for fiscal years
beginning after December 15, 2008 and, as such, we will adopt this standard in
fiscal 2010.  The provisions of ASC 805 will impact the Company if it
is a party to a business combination after the pronouncement is
adopted.





In
December 2007, the FASB issued guidance under ASC 810 (formerly SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements, an Amendment of
ARB 51 (“SFAS 160”)) which becomes effective for fiscal periods beginning after
December 15, 2008 (November 1, 2009 for the Company). This statement amends ARB
51 to establish accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling
interest. It also requires disclosure on the face of the consolidated statement
of income, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. In addition, this statement establishes a
single method of accounting for changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation and requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. The
Company does not expect the adoption of this statement to have a material impact
on its financial statements.


30


In April
2008, the FASB issued guidance under ASC 350 (formerly FSP SFAS 142-3,
Determination of the Useful Life of Intangible Assets.) This guidance amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible. Previously, an
entity was precluded from using its own assumptions about renewal or extension
of an arrangement where there was likely to be substantial cost or material
modifications. This guidance removes the requirement for an entity to consider
whether an intangible asset can be renewed without substantial cost or material
modification to the existing terms and conditions and requires an entity to
consider its own experience in renewing similar arrangements. This guidance also
increases the disclosure requirements for a recognized intangible asset to
enable a user of financial statements to assess the extent to which the expected
future cash flows associated with the asset are affected by the entity’s intent
or ability to renew or extend the arrangement. This guidance is effective for
fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years. Early adoption is prohibited. The guidance for determining the
useful life of a recognized intangible asset is applied prospectively to
intangible assets acquired after the effective date. Accordingly, the Company
does not anticipate that the initial application of This guidance will have an
impact on the Company. The disclosure requirements must be applied prospectively
to all intangible assets recognized as of, and subsequent to, the effective
date.





In June
2008, the FASB issued guidance under ASC 815 (formerly EITF Issue No. 07-5,
Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.) This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 (November 1, 2009 for the
Company), and interim periods within those fiscal years. Early application is
not permitted. A contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified
in stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. This guidance provides a two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
scope exception. The Company is evaluating the impact of this guidance to its
consolidated financial statements.


31


Results
of Operations





The
following table set forth certain financial data and the percentage of total
revenues of the Company for the periods indicated:




Year
      Ended October 31, 2009
              
              
              %
      Change
              
              
              Year
      Ended October 31, 2008Amount
              
              
              %
      of Rev.
              
              
              2009
      Over / (Under) 2008
              
              
              Amount
              
              
              %
      of Rev.Revenues
              
              $
              14,946,295
              
              
              
              100.0
              %
              
              
              (13
              %)
              
              $
              17,238,948
              
              
              
              100.0
              %Costs
      and expenses:Costs
      of revenues
              
              
              10,113,325
              
              
              
              67.7
              %
              
              
              (14
              %)
              
              
              11,705,294
              
              
              
              67.9
              %Sales
      and marketing
              
              
              599,323
              
              
              
              4.0
              %
              
              
              (28
              %)
              
              
              826,856
              
              
              
              4.8
              %General
      and administrative
              
              
              12,492,438
              
              
              
              83.6
              %
              
              
              160
              %
              
              
              4,797,337
              
              
              
              27.9
              %Depreciation
      and amortization
              
              
              1,980,106
              
              
              
              13.2
              %
              
              
              43
              %
              
              
              1,384,526
              
              
              
              8.0
              %Gain
      on forgiveness of liabilities
              
              
              -
              
              
              
              -
              
              
              
              N/A
              
              
              
              (163,750
              )
              
              
              (0.9
              %)(Gain)
      loss on disposal of property and equipment
              
              
              (13,016
              )
              
              
              (0.1
              %)
              
              
              207
              %
              
              
              (4,240
              )
              
              
              (0.0
              %)Total
      costs and expenses
              
              
              25,172,176
              
              
              
              168.4
              %
              
              
              36
              %
              
              
              18,546,023
              
              
              
              107.6
              %Operating
      loss
              
              
              (10,225,881
              )
              
              
              (68.4
              %)
              
              
              682
              %
              
              
              (1,307,075
              )
              
              
              (7.6
              %)Other
      income (expense):Noncash
      financing expense
              
              
              (607,849
              )
              
              
              (4.1
              %)
              
              
              33
              %
              
              
              (457,388
              )
              
              
              (2.7
              %)Interest
      expense
              
              
              (956,412
              )
              
              
              (6.4
              %)
              
              
              76
              %
              
              
              (544,523
              )
              
              
              (3.1
              %)Related
      party interest expense
              
              
              (271,084
              )
              
              
              (1.8
              %)
              
              
              4
              %
              
              
              (259,669
              )
              
              
              (1.5
              %)Foreign
      currency exchange gain (loss)
              
              
              12,051
              
              
              
              0.1
              %
              
              
              (261
              %)
              
              
              (7,493
              )
              
              
              (0.0
              %)Gain
      on legal settlement
              
              
              231,658
              
              
              
              1.5
              %
              
              
              N/A
              
              
              
              -
              
              
              
              -Total
      other income(expense)
              
              
              (1,591,636
              )
              
              
              (10.6
              %)
              
              
              25
              %
              
              
              (1,269,073
              )
              
              
              (7.3
              %)Loss
      from continuing operations
              
              
              (11,817,517
              )
              
              
              (79.1
              %)
              
              
              359
              %
              
              
              (2,576,148
              )
              
              
              (14.9
              %)Discontinued
      operationsGain
      on disposal of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              N/A
              
              
              
              1,062,000
              
              
              
              6.1
              %Net
      loss
              
              
              (11,817,517
              )
              
              
              (79.1
              %)
              
              
              680
              %
              
              
              (1,514,148
              )
              
              
              (8.8
              %)


32


Operating
Revenues





Our
revenues decreased by $2.3 million, or 13%, as compared to fiscal
2008.  Our business model has shifted from providing low margin legacy
products to providing high-speed internet and integrated voice services, which
are high margin products.  Revenues generated via our hybrid fiber
wireless broadband network increased due to the acquisitions of One Ring and
iBroadband, however, this was offset by decreased revenues from our legacy
products that include traditional long distance services, international calling
cards, and wholesale voice termination.  In addition, revenues
decreased due to the variable nature of our retail revenue
component.





Costs
of Revenues





Our costs
of revenues for fiscal year 2009 decreased $1.6 million, or 14%, as compared to
fiscal year 2008.  Costs of revenues as a percentage of revenues were
67.7% for fiscal year 2009, compared to 67.9% for fiscal year 2008.





The
decrease in costs of revenues correlates to the decreased revenues, and is due
to newly negotiated contracts with carriers, and slightly lower cost of sales,
on a percentage basis, resulting from revenues generated from our hybrid fiber
wireless broadband network.  In addition, a majority of our costs of
revenues are variable, based on per minute transportation costs, costs of
revenues as a percentage of revenues will fluctuate, from quarter to quarter and
year to year, depending on the traffic mix between our wholesale and retail
products and total revenue for each year.





Sales
and Marketing Expenses





We sell
and market our services through our in house sales staff, independently
contracted sales agents, and third-party resellers.  Our sales and
marketing costs decreased from 5% of revenues for fiscal 2008 to 4% of revenues
for fiscal 2009.  In fiscal 2009, the revenue base used to calculate
agent commissions decreased due to our increased focus on high-speed internet
products, which yield lower agent commissions on a percentage
basis.  We will continue to focus our sales and marketing efforts on
web portal and magazine advertising, the establishment of distribution networks
to facilitate the introduction and growth of new products and services, and
agent related expenses to generate additional revenues.





General
and Administrative Expenses





Our
general and administrative expenses increased $7.7 million, or 160%, for fiscal
year 2009 as compared to fiscal 2008.  This increase includes a $5.3
million charge during fiscal 2009 relating to the impairment of goodwill and a
$1.1 million charge during 2009 relating to the write-off of the remaining book
value of customer lists.  In addition, the Company completed the
acquisition of One Ring during the second quarter of fiscal 2008, and the
acquisition of iBroadband in the third quarter of fiscal
2008.  General and administrative expenses with these entities were
not incurred for the full year during fiscal 2008.





We review
our general and administrative expenses regularly and continue to manage the
costs accordingly to support our current and anticipated future business,
particularly eliminating redundancies that have resulted from the above
mentioned acquisitions.  We have been proactive in managing our
general & administrative expenses and controlling costs; however, it may be
difficult to achieve significant reductions in future periods due to the
relatively fixed nature of our general and administrative expenses.





Gain
on Forgiveness of Liabilities





The Gain
on Forgiveness of Liabilities of $163,750 for fiscal 2008 was due to Global
Capital Funding Group (“Global”) forgiving any, and all, accrued interest on the
GC-Conote as partial consideration for the Company paying Global the principal
sum of $420,000 on the GC-Conote during 2008.


33


Gain
on Legal Settlement




During
the first quarter of fiscal 2009, the Company executed a settlement agreement
with 7-Eleven, Inc., f/k/a The Southland Corporation and received $231,658, net
of attorney fees totaling $168,342.  The agreement settled a dispute
over a Master Agreement for computer software license and maintenance between
the Company and 7-Eleven.  The net amount received was recorded in the
first quarter of fiscal 2009 as a “Gain on legal settlement”.





Gain
on Disposal of Discontinued Operations




The Gain
on Disposal of Discontinued Operations of $1,062,000 for fiscal 2008 relates to
the disposition of Canmax Retail Systems (“Canmx”) a former operating
subsidiary.




Noncash
Financing Expense, Related Party Non-Cash Financing Expense, Interest Expense
and Related Party Interest Expense





Non-cash
financing expense, including related party non-cash financing expense, increased
$150,000, or 33% during fiscal 2009 as compared to fiscal
2008.  Non-cash financing expense results from the amortization of
deferred financing fees and debt discounts on our debts to third party lenders
and related parties.





Interest
expense plus related party interest expense for fiscal 2009 increased $423,000,
compared to fiscal 2008.





Liquidity
and Sources of Capital





Our
operating activities used $893,000 of cash during fiscal 2009, which was
primarily due to the increased operating expenses related to our acquisitions of
iBroadband and One Ring.  Based on ongoing negative operating cash
flow during the current fiscal year, our current audit report includes an
explanatory paragraph indicating doubt about our ability to continue as a going
concern.





At
October 31, 2009, we had cash and cash equivalents of $128,000, a decrease of
$103,000 from the balance at October 31, 2008.  We had a working
capital deficit of $13.3 million at October 31, 2009, compared to a working
capital deficit of $2.1 million as of October 31, 2008.





Net cash
(used in) operating activities was ($893,842) and ($1,576,000) during fiscal
2009 and 2008, respectively.  Net cash used in operating activities
during fiscal 2009 was primarily due to the operating loss, adjusted for
non-cash financing expense, depreciation and amortization expense, loss on
impairment of goodwill and customer lists, bad debt expense, share-based
compensation expense, along with the effect of a positive net change in
operating assets and liabilities of $1,869,000.  Net cash used in
operating activities during fiscal 2008 was also primarily due to the net loss,
adjusted for non-cash interest expense, depreciation and amortization expense,
bad debt expense, and share-based compensation expense.  The net cash
(used in) operating activities during fiscal 2008 also included the net change
in operating assets and liabilities of $(789,000).





Net cash
(used in) investing activities was $(101,000) and $(97,000) during fiscal 2009
and 2008, respectively.  The net cash used in investing activities in
both years is primarily due to purchases of property and equipment, offset by
proceeds from the sale of property and equipment.  In fiscal 2008,
there was net cash received in connection with the One Ring acquisition and the
iBroadband acquisition.


34


Net cash
provided by financing activities was $690,000 during fiscal 2009 compared to
$1,408,000 during fiscal 2008.  Net cash provided by financing
activities in fiscal 2009 was primarily net proceeds from the revolving line of
credit, offset by repayment of notes payable and payments on capital
leases.  Net cash provided by financing activities in fiscal 2008 was
primarily from proceeds from the issuance of secured notes, offset by payment of
financing fees, repayment of convertible notes payable, and payments on capital
leases.





We have
an accumulated deficit of $65.1 million as of October 31, 2009, and a
significant working capital deficit.  Funding of our working capital
deficit, current and future operating losses, and expansion will require
continuing capital investment, which may not be available to
us.  Although to date we have been able to arrange the debt facilities
and equity financing described below, there can be no assurance that sufficient
debt or equity financing will continue to be available in the future or that it
will be available on terms acceptable to us. Our current capital
expenditure requirements are not significant, primarily due to the equipment
acquired from One Ring, iBroadband, and equipment acquired through capital lease
transactions, as well as the subsequent consolidation of operating facilities
into one operational facility.


35


Debt
Facilities and Equity Financing





The
Company has various debt obligations as of October 31, 2009 and 2008, including
amounts due to independent institutions and related
parties.  Descriptions of these debt obligations are included
below.  The following tables summarize outstanding debt as of October
31, 2009 and October 31, 2008:





Information
as of October 31, 2009





Brief
      Description of Debt
            
            Balance
            
            
            Int.
      Rate
            
            Due
      Date
            
            Discount
            
            
            NetNotes payable, currentVehicles
            
            $
            14,299
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            $
            14,299Valens
      Offshore (Valens II)
            
            
            1,800,000
            
            
            
            10
            %
            3/31/2011
            
            
            (118,562
            )
            
            
            1,681,438Valens
      U.S. SPV I
            
            
            1,500,000
            
            
            
            10
            %
            3/31/2011
            
            
            (111,185
            )
            
            
            1,388,815Laurus
      Master Fund (Deferred)
            
            
            2,290,451
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            2,290,451Valens
      U.S. SPV I (Deferred)
            
            
            292,709
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            292,709Convertible notes, currentGlobal
      Telecom Solutions
            
            
            120,000
            
            
            
            5
            %
            4/30/2012
            
            
            
            
            
            
            120,000Other
            
            
            42,500
            
            
            
            10
            %
            2/28/2008
            
            
            -
            
            
            
            42,500GCA-Debenture
            
            
            630,333
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            630,333GCA-Debenture
            
            
            570,944
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            570,944GC-Conote
            
            
            180,000
            
            
            
            -
            
            6/30/2011
            
            
            -
            
            
            
            180,000Trident-Debenture
            
            
            600,000
            
            
            
            10
            %
            6/30/2011
            
            
            -
            
            
            
            600,000Capital
      lease obligations, current
            
            
            759,034
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            759,034Notes payable, less current
      portionVehicles
            
            
            24,443
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            
            24,443Convertible notes, less current
      portionGlobal
      Telecom Solutions
            
            
            160,000
            
            
            
            5
            %
            4/30/2012
            
            
            -
            
            
            
            160,000Convertible
      notes payable to related parties, less current portion
            
            
            3,240,000
            
            
            
            8
            %
            6/30/2011
            
            
            -
            
            
            
            3,240,000Capital
      lease obligations,less
      current portion
            
            
            602,204
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            602,204Due
      to One Ring Shareholders
            
            
            595,790
            
            
            
            8
            %
            6/30/2011
            
            
            -
            
            
            
            595,790Revolving
      Line of Credit
            
            
            1,468,697
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            1,468,697Total
            
            $
            14,891,404
            
            
            
            
            
            
            
            $
            (229,747
            )
            
            $
            14,661,657


36


The
following is a summary, by year, of the future minimum payments required under
debt and capital lease obligations as of October 31, 2009:





Years
      ending October 31,2010
            
            $
            10,039,2202011
            
            
            4,205,9522012
            
            
            109,1682013
            
            
            45,3272014
            
            
            49,089Thereafter
            
            
            212,901Total
            
            $
            14,661,657





Information
as of October 31, 2008





Brief
      Description of Debt
            
            Balance
            
            
            Int.
      Rate
            
            Due
      Date
            
            Discount
            
            
            NetNotes payable, currentVehicles
            
            $
            13,917
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            $
            13,917Valens
      Offshore (Valens II)
            
            
            85,000
            
            
            
            10
            %
            3/31/2011
            
            
            (12,398
            )
            
            
            72,602Valens
      U.S. SPV I
            
            
            65,000
            
            
            
            10
            %
            3/31/2011
            
            
            (11,072
            )
            
            
            53,928Convertible notes, currentGlobal
      Telecom Solutions
            
            
            120,000
            
            
            
            5
            %
            4/30/2012
            
            
            
            
            
            
            120,000Other
            
            
            42,500
            
            
            
            10
            %
            2/28/2008
            
            
            -
            
            
            
            42,500Capital lease obligations,
      current
            
            
            585,002
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            585,002Notes payable, less current
      portionVehicles
            
            
            38,743
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            
            38,743Valens
      Offshore (Valens II)
            
            
            1,715,000
            
            
            
            10
            %
            3/31/2011
            
            
            (252,570
            )
            
            
            1,462,430Valens
      U.S. SPV I
            
            
            1,435,000
            
            
            
            10
            %
            3/31/2011
            
            
            (231,303
            )
            
            
            1,203,697Laurus
      Master Fund (Deferred)
            
            
            2,290,451
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            2,290,451Valens
      U.S. SPV I (Deferred)
            
            
            292,709
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            292,709Convertible notes, less current
      portionGCA-Debenture
            
            
            630,333
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            630,333GCA-Debenture
            
            
            570,944
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            570,944GC-Conote
            
            
            180,000
            
            
            
            -
            
            6/30/2011
            
            
            -
            
            
            
            180,000Trident-Debenture
            
            
            600,000
            
            
            
            10
            %
            6/30/2011
            
            
            -
            
            
            
            600,000Global
      Telecom Solutions
            
            
            280,000
            
            
            
            5
            %
            4/30/2012
            
            
            -
            
            
            
            280,000Convertible notes payable to related parties, less
      current portion
            
            
            3,240,000
            
            
            
            8
            %
            6/30/2011
            
            
            -
            
            
            
            3,240,000Capital lease obligations,less current portion
            
            
            742,784
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            742,784$
            12,927,383
            
            
            
            
            
            
            
            $
            507,343
            
            
            $
            12,420,040





Global Telecom Solutions -
Convertible Note





On April
30, 2008, the Company entered into a four-year financing agreement with Global
Telecom Solutions (“GTS”) in the principal amount of $460,000 as repayment of
carrier costs payable to GTS in the same amount.  The unsecured
convertible note called for monthly payments of $10,000 and interest accrues at
5% per annum, and may be converted at any time into common stock of the Company
at market price with a floor conversion price of $.10 per common
share.  The market price will be the closing bid price on Bloomberg
the day prior to the receipt by Company from GTS to convert all or a portion of
note at any time during the term of the note.  The Company may prepay
the note by paying 100% of the outstanding principal and accrued
interest.  The principal balance of this note at October 31, 2009 was
$280,000.


37


Valens II Term A
Note





Effective
March 31, 2008, the Company modified its debt structure by entering into a
Security Agreement with L.V. Administrative Services, Inc. (“L.V.”) and certain
lenders (“Lenders”) including Valens U.S. SPV I (“Valens”), and Valens Offshore
SPV II Corp. (“Valens II”).  L.V. acts as administrative and
collateral agent for the Lenders.  Upon the signing of the Security
Agreement, Valens II provided the Company with $1,800,000 of gross financing,
and the Company issued Valens II a 10% Secured Term A Note (“Valens II Term A”)
in the principal amount of $1,800,000.  As collateral agent for the
Lenders, L.V. maintains a continuing security interest in and lien upon all
assets of Company.  The Company has also executed a Stock Pledge
Agreement pledging all of the stock of Telenational and One Ring to L.V. on
behalf of the Lenders.





In
connection with the sale of the Term A Note, The Company issued Valens II a
common stock purchase warrant to purchase 5,625,000 common shares at $0.01 per
share.  These warrants were valued at $441,903 using the Black-Scholes
model with the following assumptions:  applicable risk-free interest
rate based on the current treasury-bill interest rate of 4.14%; volatility
factor of the expected market price of the Company’s common stock of 165%; and a
life of the warrants of five years.  The relative fair value of the
warrants of $354,799 was recorded as a debt discount.  This debt
discount is being amortized over the term of the Valens Term A note using the
interest method.  The Company recognized $146,406 and $89,831 of
non-cash financing expense associated with these warrants using the interest
method during the fiscal year ended October 31, 2009 and 2008,
respectively.  The unamortized debt discount at October 31, 2009 and
2008 was $118,562 and $264,968, respectively.  In addition, the
Company incurred legal, professional, and administrative costs associated with
the Valens II Security Agreement, which resulted in $375,778 of deferred
financing fees, of which $131,190 and $95,143 was expensed using the interest
method as noncash financing fees during the fiscal year ended October 31, 2009
and 2008, respectively.




Interest
accrues under the Term A Note at 10% per annum and is payable monthly commencing
April 1, 2008.  Amortizing payments of principal shall commence on
October 1, 2009 of $85,000 per month, plus accrued interest and any other fees
then due.  The Term A Note matures on March 31, 2011.  The
Company may prepay the Term A Note by paying 100% of the outstanding principal
and repaying all amounts owed under the Security Agreement and all ancillary
documents.





On
October 31, 2008, the Company issued warrants to purchase 8,750,000 Company
shares of its common stock upon exercise at $0.01 per share to Valens in
consideration for amendments to the Security Agreement dated March 31,
2008.  These warrants were valued at $288,066 using the Black-Scholes
model with the following assumptions:  applicable risk-free interest
rate based on the current treasury-bill interest rate of 3.75%; volatility
factor of the expected market price of the Company’s common stock of 1.25; and a
life of the warrants of five years.  The relative fair value of the
warrants of $288,066 was recorded as an asset and is amortized monthly as
non-cash financing fees using the straight-line method beginning fiscal year
2009 and ending March 31, 2011, which is the maturity date of the Term A Note.
The Company recognized $119,201 of non-cash financing expense associated with
these warrants using the interest method during the fiscal year ended October
31, 2009.





Valens Term B
Note





On July
14, 2008 the Company completed the terms and conditions set forth in the
Security Agreement dated as of March 31, 2008, and further amended on July 11,
2008, to obtain additional financing by and among L.V. and certain other lenders
(“Lenders”).  The completed financing agreement includes Valens U.S.
SPV I (“Valens”) purchasing a secured term note (“Term B Note”), the Lenders
agreeing to lend secured revolving loans under certain conditions including the
Company attaining specific financial covenants, and Laurus Master Fund and
Valens purchasing secured promissory notes related to the asset purchase of
iBroadband Networks, Inc., a Texas corporation, and iBroadband of Texas, Inc., a
Delaware corporation in the amounts of approximately $2.3 million and $293
thousand, respectively.  As collateral agent for the Lenders, L.V.
maintains a continuing security interest in and lien upon all assets of
Company.


38


Effective
July 14, 2008, Valens purchased from the Company a 10% secured term note (“Term
B Note”) in the principal amount of $1.5 million and a warrant to purchase
4,437,870 shares of common stock at $0.01 per share.  Interest accrues
at 10% per annum and is payable monthly commencing August 1,
2008.  Amortizing principal payments of $65,000 per month, plus
accrued interest and any other fees then due commenced on October 31,
2009.  The Term B Note matures on March 31, 2011.  The
Company may prepay the Term B Note by paying 100% of the outstanding principal
and repaying all amounts owed under the Security Agreement and all ancillary
documents.





The sale
of the Term B Note and Warrant was dated as of July 11, 2008.  The
Company received gross proceeds of $1,500,000.  Of the gross proceeds,
approximately $26,500 was directed to pay legal fees for investors’ counsel,
$94,500 was directed to Valens for administrative fees, and $420,000 was used as
principal payment on the GC-Conote to Global.  The remaining $959,000
was retained by the Company.





In
connection with the sale of the Term B Note, the Company issued Valens a common
stock purchase warrant to purchase 4,437,870 common shares at $0.01 per
share.  These warrants were valued at $349,478 using the Black-Scholes
model with the following assumptions:  applicable risk-free interest
rate based on the current treasury-bill interest rate of 4.14%; volatility
factor of the expected market price of the Company’s common stock of 171%; and a
life of the warrants of five years.  $283,440 represented cash
received relative to the warrants and the remaining amount of $1,216,560 was
allocated to the Term B Note resulting in a debt discount of
$283,440.  The relative fair value of the warrants of $283,440 was
recorded as a debt discount.  This debt discount is being amortized
over the term of the Valens Term B note using the interest
method.  The Company recognized $131,189 and $41,066 of expense
associated with these warrants for the fiscal year ended October 31,
2008.  The unamortized debt discount at October 31, 2009 was
$111,185.  In addition, the Company incurred legal, professional, and
administrative costs associated with the Valens Security Agreement, which
resulted in $120,967 of deferred financing fees, of which $55,989 and $17,526
was expensed as noncash financing fees using the interest method for the fiscal
year ended October 31, 2009 and 2008, respectively.




Deferred Purchase Price
Notes





Concurrent
with the Valens Term B financing arrangement, the Company purchased the assets
of iBroadband and assumed secured promissory notes in the aggregate amount of
approximately $2.58 million (“Deferred Purchase Price Notes”), including
approximately a $293,000 loan from Valens and a $2.3 million loan from Laurus
Master Fund.  As collateral agent for the Lenders, L.V. maintains a
continuing security interest in and lien upon all assets of
Company.  Interest accrues at 10% per annum and is payable monthly
commencing the month after the Notes were assumed.  The outstanding
principal of both notes is due on their maturity date, March 31,
2011.  The Company may prepay these Deferred Purchase Price Notes by
paying 100% of the outstanding principal and repaying all amounts owed under the
Security Agreement and all ancillary documents.





GC-Conote





On March
31, 2008, Global Capital Funding Group, LP (“Global”), which is the holder of
the GC-Conote, modified its debt structure with the Company by entering into a
subordination agreement with L.V., acting as agent for itself and the
Lenders.  The agreement calls for the GC-Conote to become subordinate
to the Valens II Term A note.  In connection with the subordination
agreement, Global subordinated all claims and security interests it may have
against any of the assets of the Company, to the security interests granted by
the Company to L.V., acting as collateral agent for the Lenders.  In
addition, Global extended the maturity date of two debentures to June 30, 2011
(see below “GCA Debentures”).  In consideration, the Company made a
principal payment of $600,000 on the GC-Conote and agreed to pay Global the
principal sum of $420,000 upon closing of the Term B Note; with the remainder of
the outstanding principal amount of $180,000, which shall not accrue interest
after March 31, 2008.  The GC-Conote is convertible at any time into
common shares of the Company at the conversion price equal to 80% of the average
of the three lowest volume weighted average sales prices as reported by
Bloomberg L.P. during the twenty Trading Days immediately preceding the related
Notice of Conversion.  However, the conversion price of the Company’s
stock is not to be lower than $0.10 and not to exceed $0.25.


39


As of
July 11, 2008, and upon closing of the Valens II Term B note, the Company paid
Global the principal sum of $420,000 on the GC-Conote.  In
consideration for the principal payment of $420,000, Global forgave accrued
interest in the amount of $163,750, and is restricted from the selling of any
shares of the Company’s common stock for a period of two years from the
effective date of the amendment to the GC-Conote.  The Company
recorded $163,750 as “Gain on Forgiveness of Liabilities” in its Consolidated
Statement of Operations for fiscal year 2008.  In addition, Global
agreed that there are no additional cash monies owed to Global by the Company
other than the remaining principal balance of $180,000 of the
GC-Conote.  The principal balance of the GC-Conote is $180,000 at
October 31, 2009.





GCA
Debentures





As of
October 31, 2008, GCA Strategic Investment Fund Limited (“GCA”) held two Company
convertible debentures having principal amounts of $630,333 and 570,944,
respectively.  The conversion terms of the debentures allow the
Company to elect to pay in GCA cash in lieu of
conversion.  Additionally, GCA is limited to only converting up to
4.99% ownership at a time and there is a floor of $.10 per share on the
conversion which limits the number of common shares for which the notes are
convertible into.





On March
31, 2008, GCA modified its debt structure with the Company by entering into a
subordination agreement with L.V., which acted as agent for itself and for the
Lenders.  The agreement called for the GCA debentures to become
subordinate to the Valens II Term A note.  In connection with the
subordination agreement, GCA subordinated all claims and security interests it
may have against any of the assets of the Company, including VoIP technology and
certain equipment, to the security interests granted by the Company to L.V.,
acting as collateral agent for the Lenders.  The Company may prepay
the GCA debentures by paying 100% of the outstanding principal and accrued
interest.  In addition, GCA extended the maturity date of the two
debentures to June 30, 2011, and is restricted from the selling of any shares of
the Company’s common stock for a period of two years from the effective date of
this amendment.





Trident
Debenture





As of
October 31, 2008, “Trident Growth Fund, L.P. (“Trident”) held a Company
convertible debenture having a principal balance of $600,000.  The
debenture is convertible into common stock of the Company at $.14 per common
share.





During
the second quarter of fiscal 2007, Trident extended the $600,000 debenture with
an original due date of March 8, 2007 to March 8, 2008.  In connection
with the extension, the Company issued Trident 1,200,000 additional warrants,
resulting in deferred financing fees of $83,708, of which $29,401 was expensed
as noncash interest expense during fiscal year 2008.  These warrants
were fully expensed as of October 31, 2008. The fair value of the warrants was
determined on the date of grant using the Black-Scholes pricing model with the
following assumptions: applicable risk-free interest rate based on the current
treasury-bill interest rate of 4.5%; volatility factor of the expected market
price of the Company’s common stock of 287%; and an expected life of the
warrants of four years.  Also in connection with extension, the
Company issued Trident additional warrants to purchase 150,000 shares of the
Company’s stock at $.10 per share during fiscal 2008.  The fair value of
the warrants of $8,966 was determined on the date of grant using the
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate of 4.5%; dividend
yield of 0%; volatility factor of the expected market price of the Company’s
common stock of 295%, and a life of the warrants of four years.  The
Company recognized $8,966 of expense associated with the warrants during fiscal
year 2008.


40


On March
31, 2008, Trident modified its debt structure with the Company by entering into
a subordination agreement with L.V., which acted as agent for itself and for the
Lenders.  The agreement called for the Trident debenture to become
subordinate to the Valens II Term A note.  In connection with the
subordination agreement, Trident subordinated all claims and security interests
it may have against any of the assets of the Company, to the security interests
granted by the Company to L.V., acting as collateral agent for the
Lenders.  In addition, Trident agreed to extend the maturity date of
the principal amount of the $600,000 debenture to June 30, 2011.  In
consideration for the subordination and maturity date extension, the Company
issued Trident a common stock purchase warrant to purchase 60,000 common shares
of the Company’s stock at $0.07 per share.  The fair value of the
warrants totaled $4,503 and was determined on the date of grant using the
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate of 4.14%;
volatility factor of the expected market price of the Company’s common stock of
165%; and a life of the warrants of five years.  The Company
recognized $4,503 of expense associated with the warrants during the fiscal year
ended October 31, 2008.  The Company may prepay the Trident debenture
by paying 100% of the outstanding principal and accrued interest.





Related Party
Notes





On May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”) for $4,809,750, including acquisition
costs of $50,000.  The purchase consideration included a contingent
cash payment in the amount of $500,000 and 19,175,000 shares of the Company’s
common stock valued at $3,259,750.  On October 31, 2007, the
contingent purchase price consideration was converted to a convertible demand
note payable to Apex Acquisitions, Inc. (“Apex”) in the amount of
$500,000.





On March
31, 2008, Apex entered into a subordination agreement with L.V., which acted as
agent for itself and for the Lenders.  The agreement called for the
Apex demand note to become subordinate to the Valens II Term A
note.  In addition, Apex agreed to amend the note by stipulating a
maturity date of June 30, 2011.  The outstanding balance of the Apex
note was $500,000 at October 31, 2009 and 2008.





On
October 31, 2007, the Company entered into an agreement, which modified its debt
structure with Apex.  The agreement called for the outstanding note
originally due in November of 2007 payable to Apex to be extended to November 1,
2009.  The note was also modified to allow for the balance to be
convertible to common stock at market pricing.





On March
31, 2008, Apex entered into a subordination agreement with L.V., which acted as
agent for itself and for the Lenders.  The agreement called for the
Apex demand note to become subordinate to the Valens II Term A
note.  In addition, Apex agreed to amend the note by stipulating a
maturity date of June 30, 2011.  The outstanding balance of the Apex
note was $1,120,000 at October 31, 2009 and 2008.


41


On
October 31, 2007, $50,000 of debentures including $65,889 of accrued interest
was transferred by the debenture holders to John Jenkins, the Company’s
Chairman. These amounts, along with a $300,000 related party demand note
including accrued interest of $84,111, were rolled into a $500,000 convertible
demand note payable to Mr. Jenkins.





On March
31, 2008, Mr. Jenkins entered into a subordination agreement with L.V., which
acted as agent for itself and for the Lenders.  The agreement called
for Mr. Jenkins’ demand note to become subordinate to the Valens II Term A
note.  In addition, Mr. Jenkins agreed to amend the note by
stipulating a maturity date of June 30, 2011.  The outstanding balance
of this note was $500,000 at October 31, 2009 and 2008.





On
October 31, 2007, the Company entered into an agreement, which modified its debt
structure with the Company’s Chairman, John Jenkins.  The agreement
called for the outstanding note due in February of 2008 payable to John Jenkins
to be extended to November 1, 2009.




On March
31, 2008, Mr. Jenkins entered into a subordination agreement with L.V., which
acted as agent for itself and for the Lenders.  The agreement called
for Mr. Jenkins’ note to become subordinate to the Valens II Term A
note.  In addition, Mr. Jenkins agreed to amend the note by
stipulating a maturity date of June 30, 2011.  The outstanding balance
of this note was $1,120,000 at October 31, 2009 and 2008.





Mr.
Jenkins and APEX may at any time elect to convert their related party
convertible notes into common stock of the Company using a conversion price
equal to the bid price at the day of conversion as shown on
Bloomberg.  In connection with the subordination agreements, Mr.
Jenkins and APEX subordinated all claims and security interests it may have
against any of the assets of the Company, to the security interests granted by
the Company to L.V., acting as collateral agent for the Lenders.  The
Company may prepay the related party notes to Mr. Jenkins and to APEX by paying
100% of the outstanding principal and accrued interest.


42


Capital Lease
Obligations





We have
entered into various capital lease arrangements and indefeasible right of use
agreements. The effective interest rate on these agreements is
8%.  The following table summarizes the Company’s outstanding capital
lease obligations as of October 31, 2009:





Information
      as of October 31, 2009Brief
      Description of Capital Lease
            
            Equipment
      Value
            
            Lease
      Term Ends
            
            Monthly
      Payment
            
            
            Capital
      Lease ObligationsShort-term
            
            Long-termGraybar-1
            
            $
            52,868
            
            11/01/2012
            
            $
            1,058
            
            
            $
            10,438
            
            $
            23,548Graybar-2
            
            
            53,514
            
            04/23/2012
            
            
            1,289
            
            
            
            13,416
            
            
            19,647Farnam-5
            
            
            107,044
            
            12/01/2009
            
            
            4,809
            
            
            
            9,587
            
            
            -Farnam-6
            
            
            107,439
            
            04/30/2010
            
            
            4,827
            
            
            
            33,125
            
            
            -Farnam-7
            
            
            129,992
            
            05/31/2010
            
            
            5,840
            
            
            
            45,653
            
            
            -Farnam-8
            
            
            169,528
            
            05/31/2010
            
            
            7,089
            
            
            
            55,415
            
            
            -Farnam-9
            
            
            269,700
            
            10/01/2010
            
            
            11,404
            
            
            
            131,972
            
            
            -Farnam-10
            
            
            235,177
            
            04/01/2011
            
            
            10,566
            
            
            
            118,278
            
            
            52,135Farnam-11
            
            
            266,892
            
            01/01/2011
            
            
            17,525
            
            
            
            200,335
            
            
            32,232Huntington
            
            
            22,888
            
            05/07/2011
            
            
            708
            
            
            
            7,924
            
            
            3,493Leaf
            
            
            71,082
            
            07/16/2011
            
            
            2,198
            
            
            
            24,310
            
            
            14,739AGL
            
            
            300,838
            
            07/27/2017
            
            
            3,650
            
            
            
            23,049
            
            
            250,395AGL-1
            
            
            60,854
            
            08/01/2017
            
            
            750
            
            
            
            4,679
            
            
            52,202AGL-2
            
            
            38,906
            
            07/01/2017
            
            
            500
            
            
            
            3,162
            
            
            34,245AGL-3
            
            
            57,254
            
            05/01/2017
            
            
            750
            
            
            
            4,773
            
            
            50,972AEL-1
            
            
            32,805
            
            09/01/2011
            
            
            1,017
            
            
            
            11,007
            
            
            9,868AEL-2
            
            
            58,958
            
            09/01/2011
            
            
            1,831
            
            
            
            19,844
            
            
            17,501GE
            
            
            71,715
            
            09/17/2011
            
            
            2,247
            
            
            
            24,211
            
            
            23,426GE-2
            
            
            41,977
            
            11/01/2011
            
            
            1,304
            
            
            
            13,862
            
            
            16,041Dell
            
            
            7,941
            
            04/01/2011
            
            
            357
            
            
            
            3,994
            
            
            1,760$
            759,034
            
            $
            602,204





Total
      payments due under capital leases
            
            $
            1,576,177Less
      amount representing interest
            
            
            (214,939
            )Present
      value of minimum payments
            
            
            1,361,238Less
      current portion of capital lease obligations
            
            
            (759,034
            )Capital
      lease obligations, less current portion
            
            $
            602,204




Contractual
Obligations





Operating
Leases, including Related Party Lease





The
Company leases its corporate office and branch office facilities under various
noncancelable operating leases with terms expiring at various dates through
2016.  The operational and administrative headquarters facility is
leased through June 2011 from Apex Communications, Inc., an entity owned
partially by an executive officer of the Company.  In addition, office
space is leased to support operating divisions located in California, Georgia,
Texas, and in South Africa.  The California, Texas and South Africa
leases are month-to-month.  Rent expense for office operating leases
was $240,553 and $229,766 during fiscal year 2009 and 2008, respectively. Rent
expense to Apex was $137,591 and $134,860 for fiscal year 2009 and 2008,
respectively.


43


Future
minimum lease payments under noncancelable operating leases as of October 31,
2009 are as follows:





Year
      Ending October 31,2010
            
            
            822,3582011
            
            
            727,8802012
            
            
            521,7142013
            
            
            328,5192014
            
            
            367,3382015
            
            
            84,6652016
            
            
            50,446Total
      minimum lease payments
            
            $
            2,902,920





Future
minimum lease payments for office rent relate to the Apex and Georgia operating
leases.





Facilities
Leases





The
Company has obligations under various Facilities License Agreements (“Facilities
Leases”) to commercial property owners related to communications and information
technology equipment which is used in the Company’s wireless network services
and owned by the Company housed within or atop the commercial
property.  The Facilities Leases generally have terms of one to three
years, require monthly payments between $150 and $5,000 and are renewed
regularly.  A portion of the Company’s Facilities Leases contain
escalation clause which provide for cost of living adjustments each
year.  Total expense under these Facilities Leases was approximately
$763,000 and $195,000 during fiscal year 2009 and 2008, respectively, and is
included within cost of services in the accompanying statements of
operations.





Item
8.  Financial Statements.





The
information required by Item 8 of this Report is presented following Item 14,
beginning on page F-1.





Item
9.  Changes in and Disagreements with Accountants


on
Accounting and Financial Disclosure.





None.





Item
9A. (T) Controls and Procedures.





(a)           Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this report, management, with the participation of
John Jenkins, our chief executive officer and our chief financial officer,
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934).  In designing and evaluating its
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated can provide
only reasonable, but not absolute, assurance that the objectives of the
disclosure controls and procedures are met.  Additionally, in
designing disclosure controls and procedures, management was necessarily
required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures.  The design of any
disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.  Based upon that evaluation, management concluded
that these disclosure controls and procedures were ineffective as of the end of
the period covered in this report.


44


(b)           Management’s
Report on Internal Control Over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company.  In order
to evaluate the effectiveness of internal control over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act, management has conducted an
assessment, including testing using criteria described in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). Because of the inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.  Based on its assessment,
management has concluded that the Company’s internal control over financial
reporting was ineffective as of October 31, 2009.





The
matters involving internal controls and procedures that our management
considered to be material weaknesses under the standards of the Public Company
Accounting Oversight Board were:





(1) We
have an audit committee; however it provided ineffective oversight in the
establishing and monitoring of required controls and procedures;





(2) We
had one individual performing the roles of the chief executive officer and
principal financial officer. Although we have outsourced certain accounting
functions, we did not maintain adequate segregation of duties within our
critical financial reporting applications, the related modules and financial
reporting process. The lack of review by an additional sufficiently
knowledgeable person produces the potential for misstatement in the financial
statements to occur and not be detected in a timely manner. This deficiency
could cause the financial statements and the underlying financial records to be
misstated. In addition, it creates, the opportunity for possible irregularities,
to exist and continue without detection in a timely basis.





(3) We
had ineffective controls over period end financial disclosure and reporting
processes. We had a number of audit adjustments. Audit adjustments are the
result of a failure of the internal controls to prevent or detect misstatements
of accounting information.





Even
though management is not aware of any instance in which the Company failed to
identify or resolved a disclosure matter or failed to perform a timely and
effective review, the control deficiencies described above could result in a
misstatement of balance sheet and income statement accounts and statements of
cash flow in our interim or annual consolidated financial statements that would
not be prevented or detected. Accordingly, management has determined that these
control deficiencies constitute a material weakness.





Management’s
report was not subject to attestation by the Company’s independent registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.





Item
9B.  Other Information.





None.


45


PART
III





Item
10.  Directors, Executive Officers, Promoters, Control Persons and
Corporate


Governance;
Compliance With Section 16(a) of the Exchange Act.




The
following table sets forth the names, ages, years elected and principal offices
and positions of our current directors and executive officers as of January 12,
2009.


Name
            
            Age
            
            Position
      with the Company
            
            Year
      First Elected as Officer or DirectorJohn
      A. Jenkins
            
            48
            
            Chairman,
      CEO, Secretary and Director
            
            2001Michael
      P. Prachar
            
            41
            
            Chief
      Operating Officer
            
            2006David
      R. Hess
            
            48
            
            Director
            
            2005Lawrence
      J. Vierra
            
            64
            
            Director
            
            2001





JOHN A.
JENKINS has served as our Chairman of the Board since October 2001, our Chief
Executive Officer from October 2001 until October 2008, served as our President
from December 1999 until July 2005, and has served as a director since December
1999.  In May 1997, Mr. Jenkins founded Dial Thru International
Corporation (subsequently dissolved in November 2000), and served as its
President and Chief Executive Officer until joining us in November
1999.  Prior to 1997, Mr. Jenkins served as the President and Chief
Financial Officer for Golden Line Technology, a French telecommunications
company.  Prior to entering the telecommunications industry, Mr.
Jenkins owned and operated several software, technology and real estate
companies. Mr. Jenkins holds a degree in physics from UCLA.





MICHAEL
P. PRACHAR has served as Chief Operating Officer since May 2006.  Mr.
Prachar served as Vice President and Chief Operating Officer of Telenational
Communications, Inc. from April 1998 until its acquisition by Rapid Link in May
2006.  Mr. Prachar has been involved in the telecommunications
industry since 1992 and has practical experience in most related aspects,
including equipment service, sales, marketing, management, and information
technology.





DAVID R.
HESS was elected to our Board of Directors in May 2002 and served as our
President from July 2005 until October 2006.  Mr. Hess was
instrumental in orchestrating the Integrated and Telenational
acquisitions.  Prior to joining us, Mr. Hess was the Managing Partner
of RKP Steering Group, a company he co-founded in August 2003.  From
November 2001 until December 2002, Mr. Hess served as the Chief Executive
Officer and President, North America of Telia International Carrier, Inc. Prior
to joining Telia, Mr. Hess was part of a turnaround team hired by the board of
directors of Rapid Link, Incorporated.  He served as the Chief
Executive Officer and as a director of Rapid Link, Incorporated from August 2000
until September 2001. Mr. Hess received a BA in Communications with a Minor in
Marketing from Bowling Green State University.





LAWRENCE
J. VIERRA has served as one of our directors since January 2000, and from that
time through October 2004, served as our Executive Vice President. Currently,
Mr. Vierra is a professor at the University of Las Vegas. From 1995 through
1999, Mr. Vierra served as the Executive Vice President of RSL Com USA, Inc., an
international telecommunications company, where he was primarily responsible for
international sales. Mr. Vierra has also served on the board of directors and
executive committees of various telecommunications companies and he has
extensive knowledge and experience in the international sales and marketing of
telecommunications products and services. Mr. Vierra holds degrees in marketing
and business administration.


46


Family
Relationships





There are
no family relationships among our directors or executive officers.





Involvement
in Certain Legal Proceedings





None of
our executive officers or directors, other than David Hess, a director, has had
any bankruptcy petition filed by or against any business of which such officer
or director was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time.  None of our
executive officers or directors have been convicted in a criminal proceeding or
are subject to a pending criminal proceeding, excluding traffic violations or
similar misdemeanors, nor have they been a party to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree or final order prohibiting activities subject to federal or
state securities laws, or a finding of any violation of federal or state
securities laws.





Meetings
of the Board of Directors





Our Board
of Directors held six meetings during the fiscal year ended October 31,
2009.  The Board of Directors has two standing committees: an Audit
Committee and a Compensation Committee.  There is no standing
nominating committee.  Each of the directors attended the meeting of
the Board of Directors and all meetings of any committee on which such director
served.





Audit
Committee





The Audit
Committee is comprised of two non-employee directors, Lawrence J. Vierra and
David Hess.  The Audit Committee makes recommendations to our Board of
Directors or management concerning the engagement of our independent public
accountants and matters relating to our financial statements, our accounting
principles and our system of internal accounting controls.  The Audit
Committee also reports its recommendations to the Board of Directors as to
approval of financial statements.  The Audit Committee held four
meetings during the fiscal year ended October 31, 2009.





Compliance
with Section 16(a) of the Securities Exchange Act of 1934





Section
16(a) of the Exchange Act requires our directors, executive officers, and
persons who own more than 10% of our common stock to file with the SEC initial
reports of ownership and reports of changes in ownership of our common stock and
other equity securities of our Company.  Officers, directors and
greater than 10% stockholders are required by regulations promulgated by the SEC
to furnish us with copies of all Section 16(a) reports they
file.  Based solely on the review of such reports furnished to us and
written representations that no other reports were required, we believe that
during the fiscal year ended October 31, 2009, our executive officers, directors
and all persons who own more than 10% of our common stock complied with all
Section 16(a) requirements.





Code
of Business Conduct and Ethics





We have
adopted a code of business conduct and ethics for employees, executive officers
and directors that is designed to ensure that all of our directors, executive
officers and employees meet the highest standards of ethical
conduct.  The code requires that our directors, executive officers,
and employees avoid conflicts of interest, comply with all laws and other legal
requirements, and conduct business in an honest and ethical manner and otherwise
act with integrity and in our best interest.  Under the terms of the
code, directors, executive officers, and employees are required to report any
conduct that they believe in good faith to be an actual or apparent violation of
the code.


47


As a
mechanism to encourage compliance with the code, we have established procedures
to receive, retain and treat complaints received regarding accounting, internal
accounting controls or auditing matters.  These procedures ensure that
individuals may submit concerns regarding questionable accounting or auditing
matters in a confidential and anonymous manner.  The code also
prohibits us from retaliating against any director, executive officer, or
employee who reports actual or apparent violations of the code.





Item
11.  Executive Compensation.




Summary
Compensation





The
following table summarizes compensation we paid for services rendered to our
Company during the fiscal years ended October 31, 2009 and 2008 to our chairman,
chief executive officer, any executive officer with a total salary and bonus
exceeding $100,000 during fiscal 2009, and all other executive officers as of
October 31, 2009 (the “Named Executive Officers”).








Summary
      Compensation TableName
      and principal position
            Year
            
            Salary
            
            
            Bonus
            
            
            Stock
      Awards
            
            
            Option
      Awards
            
            
            Non-Equity
      Incentive Plan
            
            
            Non-qualified
      Deferred Compen-sation Earnings
            
            
            All
      other compen-sation
            
            
            Total($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)(a)
            (b)
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)
            
            
            (i)
            
            
            (j)John
      A. Jenkins Chairman (1)
            2009
            
            
            150,000
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            150,0002008
            
            
            150,000
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            150,000Michael
      P. Prachar Chief Operating Officer
            2009
            
            
            150,000
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            150,0002008
            
            
            150,000
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            -0-
            
            
            
            150,000





(1)
            Mr.
      Jenkins was the Company’s Chairman of the Board in fiscal
      2009.  In November 2009, Mr. Jenkins was named Chief Executive
      Officer and Chief Financial
Officer.


(2)
            Mr.
      Prachar was the Company’s Chief Operating Officer of the company for
      fiscal 2009.




Outstanding Equity Awards at
Fiscal Year End





The
following table sets forth certain information regarding stock options at
October 31, 2009 by the named executive officers.





OUTSTANDING
EQUITY AWARDS TABLE (1)





Option AwardsEquity
      Incentive Plan Awards:Name
      and Principal Position
            
            Number
      of Securities
              Underlying
      Unexercised Options
            
            
            Number
      of securities underlying unexercised unearned options
            
            
            Exercise
      Price
            
            
            Expiration
      DateExercisable
            
            
            UnexercisableJohn
      A. Jenkins
              Chairman
            
            
            100,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Michael
      P. Prachar
              Chief
      Operating Officer
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -


(1) No named executive has any
stock awards outstanding at October 31, 2009.


48





Employment
Agreements





The
Company has not entered into any employment agreements or arrangements, whether
written or oral, with any of its named executive officers.





Compensation
of Directors





The
members of our Board of Directors did not receive any type of compensation from
us during the year ended October 31, 2009.  Directors are not
compensated for attending Board and committee meetings, though our directors are
allowed to participate in our Equity Incentive Plan for services rendered to the
Company as a director.





Item
12.  Security Ownership of Certain Beneficial Owners


and
Management and Related Stockholder Matters.





The
following table sets forth information regarding the beneficial ownership of our
Common Stock as of February 3, 2010, for each of the following persons: (i) each
of the directors and executive officers; (ii) all of the directors and executive
officers as a group; and (iii) each person who is known by us to own
beneficially five percent or more of our Common Stock.





Beneficial
      Owner
            
            Number
      of Shares
            
            
            PercentApex
      Acquisitions, Inc. (1)
            
            
            37,269,944
            
            
            
            34.86
            %P.O.
      Box 8658Breckenridge,
      CO  80424John
      A. Jenkins (2)
            
            
            39,283,524
            
            
            
            36.74
            %Michael
      Prachar
            
            
            0
            
            
            
            0David
      R. Hess (3)
            
            
            1,000,000
            
            
            
            .94
            %Lawrence
      J. Vierra (4)
            
            
            1,825,000
            
            
            
            1.71
            %All
      Executive Officers and Directors as a group (3 persons)
(5)
            
            
            79,378,468
            
            
            
            74.25
            %








(1)
Includes (i) 17,966,420 shares held directly, and (ii) 19,303,524 shares of
common stock which may be acquired through the conversion of convertible notes
(shares from conversion calculated using the closing bid share price at February
3, 2010 of $0.02), all of which are exercisable or convertible within 60 days of
February 3, 2010.  Apex is 70% owned by Mr. Canfield and 30% owned by
Mr. Prachar, for all shares of common stock.


(2)
Includes (i) 19,200,000 shares held directly, (ii) 100,000 shares of common
stock which may be acquired through the exercise of options, (iii) 580,000
shares of common stock which may be acquired through the exercise of warrants,
(iv) 100,000 shares of common stock held by dependent child, and (v)
19,303,524  shares of common stock which may be acquired through the
conversion of a convertible note (shares from conversion calculated using the
closing bid share price at February 2, 2010, 2010 of $0.02); all of which are
exercisable or convertible within 60 days of February 3, 2010.


(3)
Includes 1,000,000 shares of common stock.


(4)
Includes (i) 1,795,000 shares held directly, (ii) 30,000 shares of common stock
which may be acquired through the exercise of warrants, which are exercisable
within 60 days of February 3, 2010.


(5)
Calculations based on 107,242,626 shares outstanding, assuming exercise and
conversion of all options, warrants and other convertible securities
exerciseable or convertible within 60 days of February 3, 2010 and beneficially
owned by officers and directors as a group.


49


Changes
in Control





The
Company is in the process of a transaction with Blackbird as described in the
Form 8-K filed on October 19, 2009 and January 27, 2010 which if closed will
result in a change of control of the Company.





Item
13.  Certain Relationships and Related Transactions,


and
Director Independence.





In
October 2001, we issued 10% convertible notes (the “Notes”) to two of our
executive officers and one director (the “Related Parties”), each of whom was
also a director, who provided financing to our Company in the aggregate
principal amount of $1,945,958.  The Notes were issued as follows: (i)
a note in the principal amount of $1,745,958 to John Jenkins, our Chairman and
Chief Executive Officer; (ii) a note in the principal amount of $100,000 to our
former Executive Vice President and Chief Financial Officer; and (iii) a note in
the principal amount of $100,000 to Lawrence Vierra, a director.  With
an original maturity date of October 24, 2003, these Notes were amended to
mature on February 24, 2004.  Each Note was originally convertible at
six-month intervals only, but was subsequently amended in November 2002 to
provide for conversion into shares of our common stock at the option of the
holder at any time.  The conversion price is equal to the closing bid
price of our common stock on the last trading day immediately preceding the
conversion.  We also issued to the holders of the Notes warrants to
acquire an aggregate of 1,945,958 shares of common stock at an exercise price of
$0.75 per share, which warrants expired on October 24, 2007.





In
January and July 2002, the Notes issued to Mr. Jenkins were amended to include
additional advances in the aggregate principal amount of $402,443.  We
also issued to Mr. Jenkins two warrants to acquire an additional 102,443 and
300,000 shares of common stock, respectively, at an exercise price of $0.75,
which warrants expired on January 28, 2007 and July 8, 2007,
respectively.





On July
21, 2005, our Company and the Related Parties agreed to extend the maturity date
of the Notes to February 29, 2008.  In connection with the extension,
we issued to the Related Parties warrants to acquire 640,000 shares of common
stock at an exercise price of $0.16.  The warrants expire in July
2010.  In September 2005 and 2004, respectively, the holders of the
Notes converted a total aggregate of $467,500 and $877,500, respectively, of the
outstanding principal into an aggregate of 3,740,000 and 6,750,000,
respectively, of shares of common stock.





On May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”) for $4,809,750, including acquisition
costs of $50,000.  The purchase consideration included a contingent
cash payment in the amount of $500,000 and 19,175,000 shares of the Company’s
common stock valued at $3,259,750.  On October 31, 2007, the
contingent purchase price consideration was converted to a convertible demand
note payable to Apex Acquisitions, Inc. (“Apex”) Apex in the amount of
$500,000





On
October 31, 2007, the Company entered into an agreement, which modified its debt
structure with Apex.  The agreement calls for the outstanding note due
in November of 2007 payable to Apex to be extended to November 1,
2009.  The note was also modified to allow for the balance to be
convertible to common stock at market pricing.





On
October 31, 2007, the Company entered into an agreement, which materially
modified its debt structure with the Company’s Chairman, John
Jenkins.  The agreement calls for the outstanding note due in February
of 2008 payable to John Jenkins to be extended to November 1,
2009.  The note was also modified to allow for the balance to be
convertible to common stock at market pricing.





On March
31, 2008, Apex entered into a subordination agreement with L.V., which acted as
agent for itself and for the lenders.  The agreement called for the
Apex demand note to become subordinate to the Valens II Term A
note.  In addition, Apex agreed to amend the note by stipulating a
maturity date of June 30, 2011.  The outstanding balance of the Apex
Note was $500,000 at October 31, 2009.


50


On March
31, 2008, Apex entered into a subordination agreement with L.V., which acted as
agent for itself and for the lenders.  The agreement called for the
Apex demand note to become subordinate to the Valens II Term A
note.  In addition, Apex agreed to amend the note by stipulating a
maturity date of June 30, 2011.  The outstanding balance of the Apex
Notes was $1,120,000 at October 31, 2009.





On March
31, 2008, Mr. Jenkins entered into a subordination agreement with L.V., which
acted as agent for itself and for the lenders.  The agreement called
for Mr. Jenkins’ demand note to become subordinate to the Valens II Term A
note.  In addition, Mr. Jenkins agreed to amend the note by
stipulating a maturity date of June 30, 2011.  The outstanding balance
of Mr. Jenkins debenture was $500,000 at October 31, 2009.





On March
31, 2008, Mr. Jenkins entered into a subordination agreement with L.V., which
acted as agent for itself and for the Lenders.  The agreement called
for Mr. Jenkins’ note to become subordinate to the Valens II Term A
note.  In addition, Mr. Jenkins agreed to amend the note by
stipulating a maturity date of June 30, 2011.  The outstanding balance
of Mr. Jenkins’ Notes was $1,120,000 at October 31, 2009.





Item
14.  Principal Accountant Fees and Services.





Audit
Fees





During
fiscal 2009, the Company engaged a new audit firm, GHP Horwath in Denver,
Colorado.  The aggregate fees that were billed by our audit firms for
professional services rendered for the audit of the Company’s annual financial
statements and for the reviews of the interim financial statements included in
the Company’s Forms 10-QSBs, including services related thereto, were $84,000
and $110,289 for fiscal 2009 and 2008, respectively.





All
Other Fees





There
were no other fees billed by audit firms during fiscal 2009 and
2008.





Policy Related to Board of Directors
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Registered Public Accounting Firm.


The Board
of Directors will engage the Auditor for the audit of the Company’s consolidated
financial statements, and other audit-related work as deemed
necessary.  The Auditor may only be engaged for non-audit related work
if those services enhance and support the attest function of the audit, or are
an extension to the audit or audit related services.  Annually the
Chief Financial Officer (“CFO”) will review with the Board of Directors the
services the Auditor expects to provide in the coming year and the related
fees.  The Auditor shall determine the scope of work necessary to
render an opinion on the consolidated financial statements of the
Company.  This determination should include the locations to visit,
the scope of work to be performed at each location, and the timing of that
work.  The scope of work will be presented to the Board of Directors
for approval.
 
 The
Auditor shall be considered the preferred service provider of Audit Related
Services if services are consistent with the attest role of the Auditor and
either:


1.
              services
      can only be provided by the Auditor,
or
 2.
              services
      are an extension of the work performed as part of the Audit, or rely on
      work performed as part of the Audit such that the quality and timeliness
      of the services can most effectively be provided by the Auditor,
      or
 3.
              services
      enhance the effectiveness of the Auditor’s examination of the Company’s
      consolidated financial
statements.


51


The Board
of Directors is responsible for approving all Audit, Audit Related, and Other
Non-Audit Services.  Each year as part of the Annual Audit Plan, the
CFO will provide the Board of Directors with a report of anticipated Audit,
Audit Related, Other Non-Audit Services, together with an estimate of
fees.  The size of the fee and the scope of these services will be
carefully considered so as to avoid any real or perceived question as to the
Auditor’s independence.
 
 The
Company shall not hire an audit engagement team member in a financial reporting
oversight role where that person has prepared financial statements or exercised
influence over the financial statements during the two year period prior to the
date of employment.  The CFO is responsible for the implementation of
this policy.


Item
15.  Exhibits.





Exhibits





The
following is a list of all exhibits filed with this Report, including those
incorporated by reference.





2.1
Agreement and Plan of Merger dated as of January 30, 1998, among Canmax Inc.,
CNMX MergerSub, Inc. and US Communications Services, Inc. (filed as Exhibit 2.1
to the Company’s Current Report on Form 8-K filed February 9, 1998 , and
incorporated herein by reference)





2.2
Rescission Agreement dated June 15, 1998 among Canmax Inc., USC and former
principals of USC (filed as Exhibit 10.1 to the Company’s Current Report on Form
8-K dated January 30, 1998, and incorporated herein by reference)





2.3 Asset
Purchase Agreement by and among Affiliated Computed Services, Inc., Canmax and
Canmax Retail Systems, Inc. dated September 3, 1998 (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed December 22, 1998 and
incorporated herein by reference)





2.4 Asset
Purchase Agreement dated November 2, 1999 among ARDIS Telecom &
Technologies, Inc., Dial Thru International Corporation, a Delaware corporation,
Dial Thru International Corporation, a California corporation, and John Jenkins
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed November
17, 1999 and incorporated herein by reference)





2.5 Stock
and Asset Purchase Agreement, dated as of September 18, 2001, by and among Rapid
Link USA, Inc., Rapid Link Inc., and Dial Thru International Corporation (filed
as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed October 29,
2001 and incorporated herein by reference)





2.6 First
Amendment to Stock and Asset Purchase Agreement, dated as of September 21, 2001,
by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru International
Corporation (filed as Exhibit 2.2 to the Company’s Current Form 8-K filed
October 29, 2001 and incorporated herein by reference)





2.7
Second Amendment to Stock and Asset Purchase Agreement, dated as of October 12,
2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation (filed as Exhibit 2.3 to the Company’s Current Report
on Form 8-K filed October 29, 2001 and incorporated herein by
reference)





2.8 Third
Amendment to Stock and Asset Purchase Agreement, dated as of October 30, 2001,
by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru International
Corporation (filed as Exhibit 2.4 to the Company’s Current Report on Form 8-K
filed December 28, 2001 and incorporated herein by reference)


52


2.9
Fourth Amendment to Stock and Asset Purchase Agreement, dated as of November 30,
2001, by and among Rapid Link USA, Inc., Rapid Link Inc., and Dial Thru
International Corporation (filed as Exhibit 2.5 to the Company’s Current Report
on Form 8-K filed December 28, 2001 and incorporated herein by
reference)





2.10
Asset Purchase Agreement, dated as of October 25, 2005, by and between
Integrated Communications, Inc. and Dial Thru International Corporation (filed
as Exhibit 2.5 to the Company’s Current Report on Form 8-K filed October 31,
2005 and incorporated herein by reference)





2.11
Share Exchange Agreement by and among, the Registrant, Blackbird Corporation,
and the principal shareholders of Blackbird Corporation and the principal
shareholders of Rapid Link dated as of October 13, 2009 (filed as Exhibit 10.1
to the Company’s Form 8-K filed on October 19, 2009 and incorporated herein by
reference)





2.12
Amendment to Share Exchange Agreement dated as of January 21, 2010, by and among
the Registrant, Blackbird Corporation, a Florida corporation, Mr. Prepaid, Inc.,
a Florida corporation, the principal Blackbird stockholders, and the principal
Rapid Link stockholders. (filed as Exhibit 10.1 to the Company’s Form 8-K filed
on January 27, 2010 and incorporated herein by reference)





3.1
Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Company’s
Annual Report on Form 10-K for the fiscal year ended October 31,
1999  and incorporated herein by reference)





3.2
Amended and Restated Bylaws of Dial Thru International Corporation (filed as
Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year
ended October 31, 1999 and incorporated herein by reference)





3.3
Amendment to Certificate of Incorporation dated January 11, 2005 and filed with
the State of Delaware on January 13, 2005 (filed as Exhibit 3.3 to the Company’s
Annual Report on Form 10-K for the fiscal year ended October 31, 2004 and
incorporated herein by reference)





3.4
Amendment to Certificate of Incorporation dated October 28, 2005 and filed with
the State of Delaware on November 1, 2005 (filed as Exhibit 3.4 to the Company’s
Annual Report on Form 10-K for the fiscal year ended October 31, 2005 and
incorporated herein by reference)





4.1
Securities Purchase Agreement issued January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed as
Exhibit 4.1 to the Company’s Registration Statement on Form S-3, File 333-82622,
filed on February 12, 2002 and incorporated herein by reference)





4.2
Registration Rights Agreement dated January 28, 2002 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed as
Exhibit 4.2 to the Company’s Registration Statement on Form S-3, File 333-82622,
filed on February 12, 2002 and incorporated herein by reference)





4.3 6%
Convertible Debenture of Dial Thru International Corporation and GCA Strategic
Investment Fund Limited (filed as Exhibit 4.3 to the Company’s Registration
Statement on Form S-3, File 333-82622, filed on February 12, 2002 and
incorporated herein by reference)





4.4
Common Stock Purchase Warrant dated January 28, 2002 between GCA Strategic
Investment Fund Limited and Dial Thru International Corporation (filed as
Exhibit 4.4 to the Company’s Registration Statement on Form S-3, File 333-82622,
filed on February 12, 2002 and incorporated herein by reference)





4.5
Securities Purchase Agreement issued November 8, 2002 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed as
Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on September 23,
2003, and incorporated herein by reference)


53


4.6
Secured Promissory Note issued November 8, 2002 between Dial Thru International
Corporation and Global Capital Funding Group, L.P. (filed as Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed on September 23, 2003, and
incorporated herein by reference)





4.7
Common Stock Purchase Warrant issued November 8, 2002 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed as
Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on September 23,
2003, and incorporated herein by reference)





4.8
Registration Rights Agreement issued November 8, 2002 between Dial Thru
International Corporation and Global Capital Funding Group, L.P. (filed as
Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on September 23,
2003, and incorporated herein by reference)





4.9
Securities Purchase Agreement issued July 24, 2003 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed as
Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on September 23,
2003, and incorporated herein by reference)





4.10
Promissory Note issued July 24, 2003 between Dial Thru International Corporation
and GCA Strategic Investment Fund Limited (filed as Exhibit 4.6 to the Company’s
Current Report on Form 8-K filed on September 23, 2003, and incorporated herein
by reference)





4.11
Common Stock Purchase Warrant issued July 24, 2003 between Dial Thru
International Corporation and GCA Strategic Investment Fund Limited (filed as
Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on September 23,
2003, and incorporated herein by reference)





4.12
Secured Promissory Note dated June 1, 2005 between Global Capital Funding Group,
L.P. and Dial Thru International Corporation (filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on June 7, 2005, and incorporated
herein by reference)





4.13
Common Stock Purchase Warrant dated June 1, 2005 between Global Capital Funding
Group, L.P. and Dial Thru International Corporation (filed as Exhibit 4.2 to the
Company’s Current Report on Form 8-K filed on June 7, 2005, and incorporated
herein by reference)





4.14
Common Stock Purchase Warrant dated June 1, 2005 between Global Capital Funding
Group, L.P. and Dial Thru International Corporation (filed as Exhibit 4.3 to the
Company’s Form 8-K filed on June 7, 2005, and incorporated herein by
reference)





4.15
Common Stock Purchase Warrant dated June 1, 2005 between GCA Strategic
Investment Fund Limited and Dial Thru International Corporation (filed as
Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on June 7, 2005,
and incorporated herein by reference)





4.16
Common Stock Purchase Warrant dated June 1, 2005 between GCA Strategic
Investment Fund Limited and Dial Thru International Corporation (filed as
Exhibit 4.6 to the Company’s Form 8-K filed on June 7, 2005, and incorporated
herein by reference)





4.17
Common Stock Purchase Warrant dated June 1, 2005 between GCA Strategic
Investment Fund Limited and Dial Thru International Corporation (filed as
Exhibit 4.7 to the Company’s Form 8-K filed on June 7, 2005, and incorporated
herein by reference)





4.18
Securities Purchase Agreement dated March 8, 2007 between Rapid Link,
Incorporated and Trident Growth Fund, L.P. (filed as Exhibit 4.1 to the
Company’s Current Report on Form 8-K filed on March 14, 2007, and incorporated
herein by reference)


54


4.19 10%
Secured Convertible Debenture dated March 8, 2007 between Rapid Link,
Incorporated and Trident Growth Fund, L.P. (filed as Exhibit 4.2 to the
Company’s Form 8-K filed on March 14, 2007, and incorporated herein by
reference)





4.20
Common Stock Purchase Warrant dated March 8, 2007 between Rapid Link,
Incorporated and Trident Growth Fund, L.P. (filed as Exhibit 4.3 to the
Company’s Current Report on Form 8-K filed on March 14, 2007, and incorporated
herein by reference)





4.21
Security Agreement dated March 8, 2007 between Rapid Link, Incorporated and
Trident Growth Fund, L.P. (filed as Exhibit 4.4 to the Company’s Current Report
on Form 8-K filed on March 14, 2007, and incorporated herein by
reference)





4.22
Subordination Agreement dated March 8, 2007 between Rapid Link, Incorporated
Charger Investments, LLC and Trident Growth Fund, L.P. (filed as Exhibit 4.5 to
the Company’s Form 8-K filed on March 14, 2007, and incorporated herein by
reference)





4.23
Securities Purchase Agreement dated March 8, 2007 between Rapid Link,
Incorporated and Charger Investments, LLC (filed as Exhibit 4.6 to the Company’s
Current Report on Form 8-K filed on March 14, 2007, and incorporated herein by
reference)





4.24 10%
Secured Convertible Debenture dated March 8, 2007 between Rapid Link,
Incorporated and Charger Investments, LLC (filed as Exhibit 4.7 to the Company’s
Current Report on Form 8-K filed on March 14, 2007, and incorporated herein by
reference)





4.25
Common Stock Purchase Warrant dated March 8, 2007 between Rapid Link,
Incorporated and Charger Investments, LLC (filed as Exhibit 4.8 to the Company’s
Current Report on Form 8-K filed on March 14, 2007, and incorporated herein by
reference)





4.26
Security Agreement dated March 8, 2007 between Rapid Link Incorporated and
Charger Investments, LLC (filed as Exhibit 4.9 to the Company’s Current Report
on Form 8-K filed on March 14, 2007, and incorporated herein by
reference)





4.27
Secured Term A Note dated as of March 31, 2008 by Rapid Link, Incorporated and
its subsidiaries and issued to Valens Offshore SPV II, Corp (filed as Exhibit
4.2 to the Company’s Current Report on Form 8-K filed on April 10, 2008, and
incorporated herein by reference)





4.28
Common Stock Purchase Warrant dated as of March 31, 2008 between VALENS OFFSHORE
SPV II, CORP., and Rapid Link, Incorporated (filed as Exhibit 4.3 to the
Company’s Form 8-K filed on April 10, 2008, and incorporated herein by
reference)





4.29
Secured Promissory Note dated July 11, 2008 between Rapid Link, Inc. and Valens
U.S. SPV I, LLC (filed as Exhibit 4.2 to the Company’s Form 8-K filed on July
18, 2008, and incorporated herein by reference)





4.30
Secured Revolving Note dated July 11, 2008 between Rapid Link, Inc. and Valens
U.S. SPV I, LLC (filed as Exhibit 4.3 to the Company’s Form 8-K filed on July
18, 2008, and incorporated herein by reference





4.31
Amended and Restated Deferred Purchase Price Note dated July 11, 2008 between
Rapid Link, Incorporated and Laurus Master Fund, Ltd. (filed as Exhibit 4.4 to
the Company’s Form 8-K filed on July 18, 2008, and incorporated herein by
reference)





4.32
Common Stock Purchase Warrant dated July 11, 2008 between VALENS U.S. SPV I,
LLC, and Rapid Link, Incorporated (filed as Exhibit 4.5 to the Company’s Form
8-K filed on July 18, 2008, and incorporated herein by reference)





4.33
Amended and Restated Deferred Purchase Price Note dated July 11, 2008 between
Rapid Link, Incorporated and Valens U.S. SPV I, LLC (filed as Exhibit 4.6 to the
Company’s Form 8-K filed on July 18, 2008, and incorporated herein by
reference)





4.34
Common Stock Purchase Warrant dated October 31, 2008 between Rapid Link,
Incorporated and VALENS U.S. SPV I, LLC (filed as Exhibit 4.2 to the Company’s
Form 8-K filed on November 6, 2008, and incorporated herein by
reference)


55


10.1
Employment Agreement, dated June 30, 1997 between Canmax Retail Systems, Inc.
and Roger Bryant (filed as Exhibit 10.3 to the Company’s Registration Statement
on Form S-3, File No. 333-33523, and incorporated herein by
reference)





10.2
Commercial Lease Agreement between Jackson--Shaw/Jetstar Drive Tri-star Limited
Partnership and the Company (filed as Exhibit 10.20 to the Company’s Annual
Report on Form 10-K for the fiscal year ended October 31, 1998, and incorporated
herein by reference)





10.3
Employment Agreement, dated November 2, 1999 between ARDIS Telecom &
Technologies, Inc. and John Jenkins (filed as Exhibit 4.3 to the Company’s
Annual Report on Form 10-K for the fiscal year ended October 31, 2000and
incorporated herein by reference)





10.4
Amendment Number 1 to Securities Purchase Agreement dated June 1, 2005 between
Global Capital Funding Group, L.P. and Dial Thru International Corporation
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June
7, 2005, and incorporated herein by reference)





10.5
Amendment Number 1 to Securities Purchase Agreement dated June 1, 2005 between
GCA Strategic Investment Fund Limited and Dial Thru International Corporation
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June
7, 2005, and incorporated herein by reference)





10.6
Amendment Number 1 to Securities Purchase Agreement dated June 1, 2005 between
GCA Strategic Investment Fund Limited and Dial Thru International Corporation
(filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June
7, 2005, and incorporated herein by reference)





10.7
Amendment Number 2 to Securities Purchase Agreement between Rapid Link,
Incorporated and GCA Strategic Investment Fund Limited dated November 2, 2005
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
March 14, 2007, and incorporated herein by reference)





10.8
Stock Purchase Agreement by and between Rapid Link, Incorporated and Apex
Acquisitions, Inc. dated as of May 3, 2007 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on May 9, 2007, and incorporated
herein by reference)





10.9
Amendment No. 1 to Stock Purchase Agreement by and between Rapid Link,
Incorporated and Apex Acquisitions, Inc. dated as of May 5, 2007 (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 9, 2007,
and incorporated herein by reference)





10.10
Stock Pledge Agreement by and between Rapid Link, Incorporated and Apex
Acquisitions, Inc. dated as of May 5, 2007 (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed on May 9, 2007, and incorporated
herein by reference)





10.11
Secured Recourse Promissory Note dated as of May 5, 2007 made by Rapid Link,
Incorporated in favor of Apex Acquisitions, Inc. (filed as Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on May 9, 2007, and incorporated
herein by reference)





10.12
Fifth Allonge to 10% Convertible Note of Dial Thru International Corporation in
favor of John Jenkins, dated September 14, 2007 (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on June 7, 2005, and incorporated
herein by reference)





10.13
Amendment Number 2 to Securities Purchase Agreement between Rapid Link, Inc.,
formerly known as Dial Thru International Corporation, and GCA Strategic
Investment Fund Limited dated September 14, 2007 (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on September 20, 2007, and
incorporated herein by reference)


56


10.14
Amendment Number 2 to Securities Purchase Agreement between Rapid Link, Inc.,
formerly known as Dial Thru International Corporation, and Global Capital
Funding Group, L.P. dated September 14, 2007 (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed on September 20, 2007, and
incorporated herein by reference)





10.15
Amendment Number 2 to Securities Purchase Agreement between Rapid Link, Inc.,
formerly known as Dial Thru International Corporation, and GCA Strategic
Investment Fund Limited dated August 15, 2007 (filed as Exhibit 10.4 to the
Company’s Current Report on Form 8-K filed on September 20, 2007, and
incorporated herein by reference)





10.16
Amendment Number 3 to 6% Convertible Debenture between GCA Strategic Investment
Fund Limited and Rapid Link, Incorporated, formerly known as Dial Thru
International Corporation dated September 14, 2007 (filed as Exhibit 10.5 to the
Company’s Form Current Report on 8-K filed on September 20, 2007, and
incorporated herein by reference)





10.17
Amendment Number 4 to 6% Convertible Debenture between GCA Strategic Investment
Fund Limited and Rapid Link, Incorporated, formerly known as Dial Thru
International Corporation dated September 14, 2007 (filed as Exhibit 10.6 to the
Company’s Current Report on Form 8-K filed on September 20, 2007, and
incorporated herein by reference)





10.18
Amendment Number 1 to Secured Promissory Note due February 28, 2008 between
Global Capital Funding Group, L.P. and Rapid Link, Inc., formerly known as Dial
Thru International Corporation dated September 14, 2007 (filed as Exhibit 10.7
to the Company’s Current Report on Form 8-K filed on September 20, 2007, and
incorporated herein by reference)





10.19
Amendment Number 1 to Secured Promissory Note due March 30, 2007 between Global
Capital Funding Group, L.P. and Rapid Link, Inc., formerly known as Dial Thru
International Corporation dated September 14, 2007 (filed as Exhibit 10.8 to the
Company’s Current Report on Form 8-K filed on September 20, 2007, and
incorporated herein by reference)





10.20
Security Agreement dated March 31, 2008 by and among LV Administrative Services,
Inc. and Rapid Link, Incorporated, One Ring Networks, Inc., Telenational
Communications, Inc. and the lenders set forth therein (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed on April 10, 2008, and
incorporated herein by reference)





10.21
Registration Rights Agreement issued March 31, 2008 between Rapid Link,
Incorporated and Valens Offshore SPV II, Corp. (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed on April 10, 2008, and incorporated
herein by reference)





10.22
Stock Pledge Agreement dated as of March 31, 2008, between LV ADMINISTRATIVE
SERVICES INC., and Rapid Link, Incorporated, (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed on April 10, 2008, and incorporated
herein by reference)





10.23
Management Services dated as of March 31, 2008 by and among Rapid Link,
Incorporated and iBroadband, Inc., and iBroadband Networks,
Inc.  (filed as Exhibit 10.4 to the Company’s Current Report on Form
8-K filed on April 10, 2008, and incorporated herein by reference)





10.24
Extension Agreement dated as of March 8, 2008 by and between Trident Growth
Fund, L.P., and Rapid Link Incorporated, (filed as Exhibit 10.5 to the Company’s
Current Report on Form 8-K filed on April 10, 2008, and incorporated herein by
reference)


57


10.25
Subordination Agreement dated March 31, 2008 by and among LV Administrative
Services, Inc. and Rapid Link, Incorporated, and the lenders set forth therein
and Trident Growth Fund, L.P. (filed as Exhibit 10.6 to the Company’s Form 8-K
filed on April 10, 2008, and incorporated herein by reference)





10.26
Subordination Agreement dated March 31, 2008 by and among LV Administrative
Services, Inc. and Rapid Link, Incorporated, and the lenders set forth therein
and Global Capital Funding Group, L.P. (filed as Exhibit 10.7 to the Company’s
Form 8-K filed on April 10, 2008, and incorporated herein by
reference)





10.27
Subordination Agreement dated March 31, 2008 by and among LV Administrative
Services, Inc. and Rapid Link, Incorporated, and the lenders set forth therein
and GCA Strategic Investment Fund Limited (filed as Exhibit 10.8 to the
Company’s Form 8-K filed on April 10, 2008, and incorporated herein by
reference)





10.28
Subordination Agreement dated March 31, 2008 by and among LV Administrative
Services, Inc. and Rapid Link, Incorporated, and the lenders set forth therein
and John Jenkins (filed as Exhibit 10.9 to the Company’s Form 8-K filed on April
10, 2008, and incorporated herein by reference)





10.29
Subordination Agreement dated March 31, 2008 by and among LV Administrative
Services, Inc. and Rapid Link, Incorporated, and the lenders set forth therein
and Apex Acquisitions, Inc. (filed as Exhibit 10.10 to the Company’s Form 8-K
filed on April 10, 2008, and incorporated herein by reference)





10.30
Amendment No.1 to the Security Agreement, Secured Term A Note, Secured Term B
Note and Deferred Purchase Price Notes dated as of July 11, 2008 by and among
Rapid Link, Incorporated and LV Administrative Services, Inc. (filed as Exhibit
10.1 to the Company’s Form 8-K filed on July 18, 2008, and incorporated herein
by reference)





10.31
Registration Rights Agreement dated as of July 31, 2008 between Rapid Link,
Incorporated and Valens.  (filed as Exhibit 10.2 to the Company’s Form
8-K filed on July 18, 2008, and incorporated herein by reference)





10.32
Funds Escrow Agreement dated as of July 11, 2008 between Rapid Link, Inc.,
Telenational Communications, Inc., Laurus Master Fund, Ltd., Valens U.S. SPV I,
LLC, Valens Offshore SPV II Corp. and together with Valens US and Laurus, and
Loeb & Loeb LLP.  (filed as Exhibit 10.3 to the Company’s Form 8-K
filed on July 18, 2008, and incorporated herein by reference)





10.33
Intellectual Property Security Agreement dated as of July 11, 2008 by
Telenational Communications, Inc. and LV Administrative Services Corp., as
administrative agent for the lender set forth therein.  (filed as
Exhibit 10.4 to the Company’s Form 8-K filed on July 18, 2008, and incorporated
herein by reference)





10.34
Secured Party General Conveyance and Bill of Sale dated July 11, 2008 between
Laurus Master Fund, Ltd., iBroadband, Inc., and Rapid Link, Incorporated
including its subsidiaries.  (filed as Exhibit 10.5 to the Company’s
Form 8-K filed on July 18, 2008, and incorporated herein by
reference)





10.35
Collateral Assignment dated July 11, 2008 by Rapid Link, Incorporated to LV
Administrative Services, Inc., as administrative and collateral agent to the
Lenders.  (filed as Exhibit 10.6 to the Company’s Form 8-K filed on
July 18, 2008, and incorporated herein by reference)





10.36
Amendment Number 5 to Securities Purchase Agreement dated July 11, 2008 between
Rapid Link, Inc. and Global Capital Funding Group.  (filed as Exhibit
10.7 to the Company’s Form 8-K filed on July 18, 2008, and incorporated herein
by reference)





10.37
Amendment Number 6 dated as of July 11, 2008 to 6% Convertible Debenture between
Rapid Link, Inc. and GCA Strategic Investment Fund Limited.  (filed as
Exhibit 10.8 to the Company’s Form 8-K filed on July 18, 2008, and incorporated
herein by reference)


58


10.38
Amendment Number 7 dated July 11, 2008 to Securities Purchase Agreement between
Rapid Link, Inc. and GCA Strategic Investment Fund Limited.  (filed as
Exhibit 10.9 to the Company’s Form 8-K filed on July 18, 2008, and incorporated
herein by reference)





10.39
Amendment No.2 to the Security Agreement and Amendment No.1 to the Secured
Revolving Note dated as of October 31, 2008 by and among Rapid Link,
Incorporated, and LV Administrative Services, Inc. and (b) Amendment No.1 to the
Secured Revolving Note dated July 11, 2008 issued by Rapid Link, Incorporated in
favor of Valens U.S. SPV I, LLC. (filed as Exhibit 10.1 to the Company’s Form
8-K filed on November 6, 2008, and incorporated herein by
reference)





10.40
Management Agreement by and among the Registrant and Blackbird Corporation dated
as of October 13, 2009 (filed as Exhibit 10.2 to the Company’s Form 8-K filed on
October 19, 2009, and incorporated herein by reference)





14.1 Code
of Business Conduct and Ethics for Employees, Executive Officers and Directors
(filed as Exhibit 14.1 to the Company’s report on Form 10-K for the fiscal year
ended October 31, 2003 and incorporated herein by reference)





21.1
Subsidiaries of the Registrant (filed herewith)





31.1
Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)





31.2
Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act of 1934 (filed herewith)





32.1
Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
(furnished herewith)





32.2
Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
(furnished herewith)


59


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





RAPID
      LINK, INCORPORATED(Registrant)/s/
      John A. JenkinsJohn
      A. JenkinsChief Executive Officer, Chief
      Financial Officer, Treasurer and
      DirectorDate:
      February 15, 2010








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.








NAME
            
            TITLE
            
            DATE/s/
      JOHN A. JENKINS
            
            Chairman
      of the Board, CEO,
            
            February 15,
      2010John
      A. Jenkins
            
            and
      Secretary/s/
      LAWRENCE J. VIERRA
            
            Director
            
            February 15,
      2010Lawrence
      J. Vierra/s/
      DAVID R. HESS
            
            Director
            
            February 15,
      2010David
      R. Hess


60


RAPID LINK, INCORPORATED AND SUBSIDIARIES


INDEX
TO FINANCIAL STATEMENTS








Consolidated Financial
      Statements:
            PageReports of Independent Registered Public Accounting
      Firms
            F-2Consolidated Balance Sheets at October 31, 2009 and
      2008
            F-4Consolidated Statements of Operations for
      the fiscal years ended October 31, 2009 and 2008
            F-5Consolidated Statements of Shareholders’ Deficit for the
      fiscal years ended October 31, 2009 and 2008
            F-6Consolidated Statements of Cash Flows for the fiscal
      years ended October 31, 2009 and 2008
            F-7Notes to Consolidated Financial
    Statements
            F-8


F-1
 Index


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Shareholders of


Rapid
Link, Incorporated








We have
audited the accompanying consolidated balance sheet of Rapid Link,
Incorporated and subsidiaries (the “Company”) as of October 31, 2009 and the
related consolidated statements of operations, shareholders’ deficit, and cash
flows for the year then ended.  These consolidated financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audit provides
a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Rapid Link, Incorporated and
subsidiaries as of October 31, 2009, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 1
to the consolidated financial statements, the Company has suffered recurring
losses from continuing operations during each of the last two fiscal
years.  Additionally, at October 31, 2009, the Company’s current
liabilities exceeded its current assets by $13.3 million and the Company has a
shareholders’ deficit totaling $15.2 million.  These conditions raise
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans as they relate to these issues are also
explained in Note 1.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.








/s/ GHP
Horwath, P.C.


Denver,
Colorado


February
15, 2010


F-2
 Index


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and Shareholders of


Rapid
Link, Incorporated








We have
audited the accompanying consolidated balance sheet of Rapid Link, Incorporated
and subsidiaries (the “Company”) as of October 31, 2008, and the related
consolidated statement of operations, shareholders’ deficit, and cash flows for
the year then ended.  These consolidated financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Rapid Link, Incorporated and
subsidiaries as of October 31, 2008, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 1
to the consolidated financial statements, the Company has suffered recurring
losses from continuing operations during the last two fiscal
years.  Additionally, at October 31, 2008, the Company’s current
liabilities exceeded its current assets by $2.1 million and the Company has a
shareholders’ deficit totaling $2.9 million.  These conditions raise
substantial doubt about the Company’s ability to continue as a going
concern.  Management’s plans as they relate to these issues are also
explained in Note 1.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.








/s/ KBA
GROUP LLP


Dallas,
Texas


January
27, 2009


F-3
 Index


RAPID LINK, INCORPORATED AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS








October 31,2009
              
              
              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              127,939
              
              
              $
              230,841Accounts
      receivable, net of allowance of $436,652 and $178,618,
      respectively
              
              
              578,946
              
              
              
              950,089Prepaid
      expenses
              
              
              19,797
              
              
              
              44,790Other
      current assets
              
              
              -
              
              
              
              327,665Total
      current assets
              
              
              726,682
              
              
              
              1,553,385Property
      and equipment, net
              
              
              2,109,860
              
              
              
              2,394,188Customer
      lists, net
              
              
              -
              
              
              
              1,954,414Goodwill
              
              
              -
              
              
              
              5,174,012Deposits
      and other assets
              
              
              291,313
              
              
              
              484,675Deferred
      financing fees, net
              
              
              341,892
              
              
              
              672,144Total
      assets
              
              $
              3,469,747
              
              
              $
              12,232,818LIABILITIES
      AND SHAREHOLDERS’ DEFICITCurrent
      liabilities:Revolving
      line of credit
              
              $
              1,468,697
              
              
              $
              -Accounts
      payable
              
              
              2,547,368
              
              
              
              1,595,714Accrued
      interest (including $280,800 and $21,600, respectively, to related
      parties)
              
              
              900,924
              
              
              
              231,329Other
      accrued liabilities
              
              
              330,703
              
              
              
              507,501Deferred
      revenue
              
              
              212,022
              
              
              
              313,979Deposits
      and other payables
              
              
              9,898
              
              
              
              75,486Capital
      lease obligations, current portion
              
              
              759,034
              
              
              
              585,002Convertible
      notes, current portion
              
              
              2,143,777
              
              
              
              162,500Notes
      payable, current portion, net of debt discount of $229,747 and $23,470,
      respectively
              
              
              5,667,712
              
              
              
              140,447Total
      current liabilities
              
              
              14,040,135
              
              
              
              3,611,958Capital
      lease obligations, less current portion
              
              
              602,204
              
              
              
              742,784Due
      to One Ring sellers
              
              
              595,790
              
              
              
              -Convertible
      notes, less current portion
              
              
              160,000
              
              
              
              2,261,277Convertible
      notes payable to related parties, less current portion
              
              
              3,240,000
              
              
              
              3,240,000Notes
      payable, less current portion, net of debt discount of $0 and $483,873,
      respectively
              
              
              24,443
              
              
              
              5,288,030Total
      liabilities
              
              
              18,662,572
              
              
              
              15,144,049Commitments
      and contingenciesShareholders’
      deficit:Preferred
      stock, $.001 par value; 10,000,000 shares authorized; none issued and
      outstanding
              
              
              -
              
              
              
              -Common
      stock, $.001 par value; 175,000,000 shares authorized; 74,647,667 and
      69,847,444 shares issued and 74,635,645 and 69,835,422 shares outstanding
      at October 31, 2009 and October 31, 2008, respectively
              
              
              74,648
              
              
              
              69,848Additional
      paid-in capital
              
              
              49,917,337
              
              
              
              50,386,214Accumulated
      deficit
              
              
              (65,129,940
              )
              
              
              (53,312,423
              )Treasury
      stock, at cost; 12,022 shares
              
              
              (54,870
              )
              
              
              (54,870
              )Total
      shareholders’ deficit
              
              
              (15,192,825
              )
              
              
              (2,911,231
              )Total
      liabilities and shareholders’ deficit
              
              $
              3,469,747
              
              
              $
              12,232,818








The
accompanying notes are an integral part of these consolidated financial
statements.


F-4
 Index


RAPID LINK, INCORPORATED AND
SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS







Year
      Ended October 31,2009
            
            
            2008Revenues
            
            $
            14,946,295
            
            
            $
            17,238,948Costs
      and expenses:Costs
      of revenues
            
            
            10,113,325
            
            
            
            11,705,294Sales
      and marketing
            
            
            599,323
            
            
            
            826,856General
      and administrative (including impairment loss of $6,371,886 and $0,
      respectively, of goodwill and customer lists)
            
            
            12,492,438
            
            
            
            4,797,336Depreciation
      and amortization
            
            
            1,980,106
            
            
            
            1,384,526Gain
      on forgiveness of liabilities
            
            
            -
            
            
            
            (163,750
            )Gain
      on disposal of property and equipment
            
            
            (13,016
            )
            
            
            (4,240
            )25,172,176
            
            
            
            18,546,023Operating
      loss
            
            
            (10,225,881
            )
            
            
            (1,307,075
            )Other
      income (expense):Noncash
      financing expense
            
            
            (607,849
            )
            
            
            (457,388
            )Interest
      expense
            
            
            (956,412
            )
            
            
            (544,523
            )Related
      party interest expense
            
            
            (271,084
            )
            
            
            (259,669
            )Foreign
      currency exchange gain (loss)
            
            
            12,051
            
            
            
            (7,493
            )Gain
      on legal settlement
            
            
            231,658
            
            
            
            -(1,591,636
            )
            
            
            (1,269,073
            )Loss
      from continuing operations
            
            
            (11,817,517
            )
            
            
            (2,576,148
            )Discontinued
      operationsGain
      on disposal of discontinued operations
            
            
            -
            
            
            
            1,062,000Net
      loss
            
            $
            (11,817,517
            )
            
            $
            (1,514,148
            )Loss
      per share:Basic
      and diluted weighted average shares outstanding
            
            
            73,238,135
            
            
            
            67,944,322Basic
      and diluted loss per share from continuing operations
            
            $
            (.16
            )
            
            $
            (.04
            )Basic
      and diluted income per share from discontinued operations
            
            
            .00
            
            
            
            .02Basic
      and diluted loss per share
            
            $
            (.16
            )
            
            $
            (.02
            )








The
accompanying notes are an integral part of these consolidated financial
statements.


F-5
 Index


RAPID LINK, INCORPORATED AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ DEFICIT








Common
      Stock
            
            
            Treasury
      Stock
            
            
            Additional
      Paid-in Capital
            
            
            Accumulated
      Deficit
            
            
            TotalShares
            
            
            AmountBalance,
      October 31, 2007
            
            
            65,161,544
            
            
            
            65,162
            
            
            
            (54,870
            )
            
            
            48,976,402
            
            
            
            (51,798,275
            )
            
            
            (2,811,581
            )Issuance
      of common stock for cash
            
            
            800,000
            
            
            
            800
            
            
            
            -
            
            
            
            119,200
            
            
            
            -
            
            
            
            120,000Issuance
      of common stock for acquisition
              of
      One Ring Networks
            
            
            3,885,900
            
            
            
            3,886
            
            
            
            -
            
            
            
            315,507
            
            
            
            -
            
            
            
            319,393Share-based
      compensation expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            35,330
            
            
            
            -
            
            
            
            35,330Issuance
      of warrants in connection with amendments, issuance or extension of
      debentures
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            939,775
            
            
            
            -
            
            
            
            939,775Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,514,148
            )
            
            
            (1,514,148
            )Balance,
      October 31, 2008
            
            
            69,847,444
            
            
            $
            69,848
            
            
            $
            (54,870
            )
            
            $
            50,386,214
            
            
            $
            (53,312,423
            )
            
            $
            (2,911,231
            )Issuance
      of common stock for cash
            
            
            537,933
            
            
            
            538
            
            
            
            -
            
            
            
            29,587
            
            
            
            -
            
            
            
            30,125Issuance
      of common stock for
              acquisition
      of One Ring Networks
            
            
            4,262,290
            
            
            
            4,262
            
            
            
            -
            
            
            
            (516,866
            )
            
            
            -
            
            
            
            (512,604
            )Share-based
      compensation expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,402
            
            
            
            
            
            
            
            18,402Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (11,817,517
            )
            
            
            (11,817,517
            )Balance,
      October 31, 2009
            
            
            74,647,667
            
            
            $
            74,648
            
            
            $
            (54,870
            )
            
            $
            49,917,337
            
            
            $
            (65,129,940
            )
            
            $
            (15,192,825
            )








The
accompanying notes are an integral part of these consolidated financial
statements.


F-6
 Index


RAPID LINK, INCORPORATED AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year
      Ended October 31,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (11,817,517
            )
            
            $
            (1,514,148
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Noncash
      financing expense
            
            
            607,849
            
            
            
            457,388Depreciation
      and amortization
            
            
            1,980,106
            
            
            
            1,384,526Loss
      on impairment of goodwill and customer lists
            
            
            6,371,886
            
            
            
            -Bad
      debt expense
            
            
            320,845
            
            
            
            79,043(Gain)
      on disposal of property and equipment
            
            
            (13,016
            )
            
            
            (4,240
            )(Gain)
      on legal settlement
            
            
            (231,658
            )
            
            
            -Share-based
      compensation expense
            
            
            18,402
            
            
            
            35,330Non-cash
      gain on forgiveness of liabilities
            
            
            -
            
            
            
            (163,750
            )Non-cash
      gain on disposal of discontinued operations
            
            
            -
            
            
            
            (1,062,000
            )Changes
      in operating assets and liabilities (net of effect of
      acquisitions):Accounts
      receivable
            
            
            50,298
            
            
            
            198,354Prepaid
      expenses and other current assets
            
            
            252,040
            
            
            
            (235,300
            )Deposits
      and other assets
            
            
            290,017
            
            
            
            (67,434
            )Accounts
      payable
            
            
            951,658
            
            
            
            (1,256,915
            )Accrued
      liabilities
            
            
            492,793
            
            
            
            364,076Deferred
      revenue
            
            
            (101,957
            )
            
            
            213,282Deposits
      and other payables
            
            
            (65,588
            )
            
            
            (4,650
            )Net
      cash used in operating activities
            
            
            (893,842
            )
            
            
            (1,576,438
            )Cash
      flows from investing activities:Purchases
      of property and equipment
            
            
            (143,729
            )
            
            
            (122,145
            )Proceeds
      from sale of property and equipment
            
            
            13,016
            
            
            
            4,240Cash
      acquired in One Ring acquisition
            
            
            -
            
            
            
            25,396Advances
      to One Ring
            
            
            -
            
            
            
            (30,000
            )Cash
      acquired in iBroadband acquisition
            
            
            -
            
            
            
            25,560Proceeds
      from gain on legal settlement
            
            
            231,658
            
            
            
            -Net
      cash provided by (used in) investing activities
            
            
            100,945
            
            
            
            (96,949
            )Cash
      flows from financing activities:Net
      proceeds from revolving line of credit
            
            
            1,468,697
            
            
            
            -Proceeds
      from sale of common stock
            
            
            30,125
            
            
            
            120,000Proceeds
      from notes payable
            
            
            -
            
            
            
            3,324,538Payment
      on convertible debentures
            
            
            (133,918
            )
            
            
            (1,085,910
            )Payment
      of financing fees
            
            
            -
            
            
            
            (496,745
            )Payments
      on capital leases
            
            
            (674,909
            )
            
            
            (403,961
            )Payments
      on related party notes and shareholder advances
            
            
            -
            
            
            
            (50,000
            )Net
      cash provided by financing activities
            
            
            689,995
            
            
            
            1,407,922Net
      increase (decrease) in cash and cash equivalents
            
            
            (102,902
            )
            
            
            (265,465
            )Cash
      and cash equivalents, beginning of year
            
            
            230,841
            
            
            
            496,306Cash
      and cash equivalents, end of year
            
            $
            127,939
            
            
            $
            230,841Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            527,501
            
            
            $
            531,151Supplemental
      schedule of non cash investing and financing activities:Fair
      value of common stock issued in connection with One Ring
      acquisition
            
            
            83,186
            
            
            $
            319,393Issuance
      of note payable for One Ring acquisition “true-up” adjustment (Note
      3)
            
            
            (595,790
            )
            
            
            -Capital
      leases assumed in connection with One Ring Networks
      acquisition
            
            
            -
            
            
            
            379,766Debt
      assumed in connection with iBroadband acquisition
            
            
            -
            
            
            
            2,583,160Fair
      value of warrants issued in connection with amendments, issuance or
      extension of debt
            
            
            -
            
            
            
            939,775Property
      and equipment acquired with capital leases
            
            
            708,361
            
            
            
            1,343,332Vehicle
      purchased with note payable
            
            
            -
            
            
            
            24,598








The
accompanying notes are an integral part of these consolidated financial
statements.


F-7
 Index


RAPID LINK, INCORPORATED AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 - ORGANIZATION AND NATURE OF BUSINESS





Nature
of Business





Rapid
Link, Incorporated, a Delaware corporation, and its subsidiaries (collectively
referred to as “Rapid Link” or the “Company”), have served as facilities-based,
communication companies providing various forms of voice and data services to
customers around the world.  Rapid Link provides a multitude of
communication services targeted to small and medium sized businesses, as well as
individual consumers.  These services include the transmission of
voice and data traffic over public and private networks.  The Company
also sells foreign and domestic termination of voice traffic into the wholesale
market.





The
Company’s product focus is to provide a variety of voice and data services over
its own facilities using alternative access methods.  These services
include local and long distance calling, internet access, and wholesale services
to carriers.  With the addition of the advanced technology and
management expertise acquired in the acquisition of One Ring Networks during the
second quarter of fiscal 2008, the Company continues to build-out an extensive
hybrid fiber wireless network allowing its customers to access services without
relying on the local exchange carrier (LEC).  The Company’s strategy
includes providing service via its own facilities to insure reliable delivery of
its current and future services.  Fixed wireless technology allows for
swift and cost efficient deployment of high-speed networks.  The
Company will utilize WiMAX and other carrier-grade equipment operating in
microwave and millimeter-wave spectrum bands.  Through organic growth
and acquisitions in targeted areas, the Company believes it will possess a
strategic advantage over carriers that do not provide their own network
access.  The Company believes that its strategy of “owning” the
customer by providing the service directly, rather than utilizing the networks
of others, is important to its success.  This strategy insures that
the Company can provide its bundled products and communication services without
the threat of compromised service quality from underlying carriers, and at
significant cost savings when compared with other
technologies.  However, as described below under “Management’s Plans”
we have entered into agreements which, if successfully closed, would change the
direction of the company in its entirety.





Financial
Condition





The
Company is subject to various risks in connection with the operation of its
business including, among other things, (i) changes in external competitive
market factors, (ii) inability to satisfy anticipated working capital or other
cash requirements, (iii) changes in the availability of transmission facilities,
(iv) changes in the Company’s business strategy or an inability to execute its
strategy due to unanticipated changes in the market, (v) various competitive
factors that may prevent the Company from competing successfully in the
marketplace, and (vi) the Company’s lack of liquidity and its ability to raise
additional capital.  The Company has an accumulated deficit of $65.1
million as of October 31, 2009, as well as a working capital deficit of $13.3
million.  For the fiscal year ended October 31, 2009, the Company’s
working capital deficit increased $11.3 million from October 31,
2008.  For the fiscal year ended October 31, 2009, the Company’s net
loss was $11.8 million, on revenues of $14.9 million.





Funding
of the Company’s working capital deficit, its current and future anticipated
operating losses, and expansion of the Company will require continuing capital
investment.  The Company’s strategy is to fund these cash requirements
through debt facilities and additional equity financing.


F-8
 Index


Although
the Company has been able to arrange debt facilities and equity financing to
date, there can be no assurance that sufficient debt or equity financing will
continue to be available in the future or that it will be available on terms
acceptable to the Company.  Failure to obtain sufficient capital could
materially affect the Company’s operations in the short term and hinder
expansion strategies.  The Company continues to explore external
financing opportunities.  Historically, some of the Company’s funding
has been provided by a major shareholder. At
October 31, 2009, approximately 22% of the Company’s debt is due to the senior
management and a Director of the Company, as well as an entity owned by senior
management.





The
Company’s operating history makes it difficult to accurately assess its general
prospects in the hybrid fiber wireless broadband internet sector of the
Diversified Communication Services industry and the effectiveness of its
business strategy.  Through October 31, 2009, the majority of the
Company’s revenues have not been derived from broadband internet
services.  Instead, the Company generated most of its revenues from
retail fixed-line and wholesale communication services.  In addition,
the Company has limited meaningful historical financial data upon which to
forecast its future sales and operating expenses.  The Company’s
future performance will also be subject to prevailing economic conditions and to
financial, business and other factors.  Accordingly, the Company
cannot assure that it will successfully implement its business strategy or that
its actual future cash flows from operations will be sufficient to satisfy debt
obligations and working capital needs.





Our
independent auditors have included a going concern paragraph in their audit
opinion on our consolidated financial statements for the fiscal year ended
October 31, 2009.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





Management’s
Plans:





The
Company has had significant negotiations with its major debtholders and has
entered into a letter of intent whereby significant operations of the company
will be sold or spun off to other parties, other operations will be acquired and
the direction of the company will change.  These matters are
summarized in the following paragraphs:


In
January, 2010, the Company entered into an Amendment to the Share Exchange
Agreement  (the “Amendment”) with  Blackbird Corporation
(“Blackbird”), certain Company shareholders, certain principal shareholders of
Blackbird (the “Blackbird Shareholders”), and a wholly-owned subsidiary of
Blackbird, Mr. Prepaid, Inc. (“Mr. Prepaid”). The Amendment amended the Share
Exchange Agreement by and among Blackbird and the Company and their respective
principal shareholders dated as of October 13, 2009 (“Share Exchange
Agreement”).





Under the
Share Exchange Agreement, it was contemplated that the Company would acquire all
or substantially all of the outstanding shares of capital stock of Blackbird
(the “Transaction”) which would result in Blackbird becoming an operating
subsidiary of the Company.  In consideration for the Blackbird shares,
the Company was required to issue an aggregate of 520,000,000 shares of its
common stock to the shareholders of Blackbird, which would constitute
approximately 80% of the Company’s then-issued and outstanding shares of common
stock.





Under the
Amendment, the transaction contemplated by the Share Exchange Agreement has been
modified to provide for an initial closing at which Rapid Link shall acquire all
of the issued and outstanding shares of capital stock of Mr. Prepaid in exchange
for 10,000,000 shares of the Company’s newly-formed preferred stock, and Mr.
Prepaid will become a wholly-owned subsidiary of the Company (the “Share
Exchange”).  The Company’s preferred stock shall have certain rights
and preferences including that the shares of preferred stock will be initially
convertible into 520,000,000 shares of Company common stock.  On an
as-converted basis, these 520,000,000 shares of common stock would constitute
approximately 80% of the Company’s then-issued and outstanding shares of common
stock.  Prior to the initial closing, the outstanding capital stock of
Telenational Communications, Inc. (“Telenational”) and One Ring Networks, Inc.
(“One Ring”) will be transferred from Rapid Link to a third party (“New Rapid
Link”), without recourse or liability to Rapid Link.


F-9
 Index


In
addition, on the terms and subject to the conditions set forth in the Amendment,
at a subsequent closing, subject to the satisfaction of certain additional
conditions including obtaining consents to transfer certain telecommunications
licenses from the Federal Communication Commission and state regulatory
authorities, Blackbird will also deliver to Rapid Link all of the issued and
outstanding shares of capital stock of Yak America, Inc. and the capital stock
of any other Blackbird subsidiary.  At such subsequent closing,
certain assets necessary to conduct the core business of Telenational will be
transferred to a wholly-owned subsidiary of Rapid Link in exchange for the
assumption by such transferee of $1.85 million of indebtedness owed to certain
creditors.  Such indebtedness will be secured by the Telenational
assets.





Mr
Prepaid is in the business of providing prepaid telecom and transaction based
POSA (point of sale activation) solutions through 1,000 independent retailers in
the Eastern United States.  Products include prepaid wireless PINs for
use with various mobile phone providers.  Yak America is a long
distance reseller offering high value dial around (10-10) and pre-subscribed
long distance services (1+) across the United States utilizing its network and
telecommunication switch based in Miami, Florida.





In
addition, Blackbird and the Company have entered into a management agreement on
October 13, 2009 pursuant to which representatives designated by Blackbird shall
manage certain Telenational assets during the period between the execution of
the Share Exchange Agreement and the closing of such transaction. Such Blackbird
representatives shall receive a management fee of $40,000 per month for such
services after Telenational’s accounts payable have been satisfied.





At
October 31, 2009, the Company was not in compliance with certain covenants
associated with their security agreement with L.V. Administrative Services
(“L.V.”) and certain lenders (“Lenders”) including Valens U.S. SPV I (“Valens”),
and Valens Offshore SPV II Corp. (“Valens II”) (Note 6).   As of
October 31, 2009 and through the date of this report the lenders have not
notified the company of an event of default.  However, the
non-compliance represents an event that gives the lenders the right to notify
the company of default.  Therefore, at October 31, 2009, the entire
amount owed to the lenders, of approximately $5,653,413, was callable and has
been classified as a current liability. The covenant violations with these
lenders triggered cross defaults in certain convertible notes. As of October 31,
2009 and through the date of this report the convertible note holders have not
notified the Company of an event of default.  However, the
non-compliance represents an event that gives the convertible note holders the
right to notify the company of default.  Therefore, at October 31,
2009, the entire amount owed to these convertible note holders, of approximately
$1,981,277, was callable and has been classified as a current liability. The
Company is currently negotiating these matters with all of the
lenders.





Management
cannot assure that the Blackbird Share Exchange Agreement will be successfully
closed or that the negotiations with the lenders will be
successful.   Even if these matters were to occur the Company may
not be able to implement a new business plan or generate future cash flows
sufficient to satisfy its operating and financing needs.Because of the
uncertainty related to the successful closing of the Blackbird transaction and
debt negotiations, the planned disposition of the Company’s operating
subsidiaries do not meet the accounting criteria for presentation as assets held
for sale or as discontinued operations.
  F-10
 Index


NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of
Consolidation





The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries.  All significant
intercompany balances and transactions have been eliminated.





Use of
Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.





Revenue
Recognition





Long
distance revenue





Revenues
generated by international re-origination, domestic residential and enterprise
long distance service, and international wholesale termination, which represent
the primary sources of the Company’s revenues, are recognized as revenue based
on minutes of customer usage.  Revenue from these services is
recognized monthly as services are provided.  The Company records
payments received in advance as deferred revenue until such services are
provided.





Alternative
access revenues





Revenues
generated through the sale of voice and data services via fixed wireless and
fiber optic transport are based on set capacity limits, and generally carry
recurring monthly charges for up to three year contracted terms.  The
Company records payments received in advance as deferred revenue until such
services are provided.





Cash and Cash
Equivalents





The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.  Cash and
cash equivalent are at risk to the extent that they exceed Federal Deposit
Insurance Corporation insured amounts.  To minimize this risk, the
Company places its cash and cash equivalents with high credit quality financial
institutions.





Accounts
Receivable





Trade
accounts receivable are due from commercial enterprises and residential users in
both domestic and international markets.  Trade accounts receivable
are stated at the amount the Company expects to collect.  The Company
regularly monitors credit risk exposures in accounts receivable and maintains a
general allowance for doubtful accounts based on historical experience for
estimated losses resulting from the inability of its customers to make required
payments.  Management considers the following factors when determining
the collectability of specific customer accounts: customer creditworthiness,
past transaction history with the customer, current economic industry trends and
changes in customer payment terms.  Should any of these factors
change, the estimates made by management would also change, which in turn would
impact the level of the Company’s future provision for doubtful
accounts.  Specifically, if the financial condition of the Company’s
customers were to deteriorate, affecting their ability to make payments,
additional customer-specific provisions for doubtful accounts may be
required.  The Company reviews its credit policies on a regular basis
and analyzes the risk of each prospective customer individually in order to
minimize risk.  Based on management’s assessment, the Company provides
for estimated uncollectible amounts through a charge to earnings and a credit to
a valuation allowance.  Interest is typically not charged on overdue
accounts receivable.  Balances that remain outstanding after the
Company has used reasonable collection efforts are written off through a charge
to the valuation allowance and a credit to accounts receivable.


F-11
 Index


Property and
Equipment





Property
and equipment are stated at cost less accumulated depreciation and
amortization.  Depreciation of property and equipment is calculated
using the straight-line method over the estimated useful lives of the assets
ranging from three to seven years.  Equipment held under capital
leases and leasehold improvements are amortized on a straight-line basis over
the shorter of the remaining lease term or the estimated useful life of the
related asset ranging from two to five years.  Expenditures for
repairs and maintenance are charged to expense as incurred.  Major
renewals and betterments are capitalized.





Goodwill





The
Company reviews goodwill arising from business combinations (Note 3) for
impairment annually or more frequently if impairment indicators
arise.  Impairment indicators include (i) a significant decrease in
the market value of an asset, (ii) a significant change in the extent or manner
in which an asset is used or a significant physical change in an asset, (iii) a
significant adverse change in legal factors or in the business climate that
could affect the value of an asset or an adverse action by a regulator, and (iv)
a current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that demonstrates
continuing losses associated with an asset used for the purpose of producing
revenue.





The
Company has one operating and reporting segment and one reporting
unit.  For the purpose of identifying the reporting units, (i) an
operating segment is a reporting unit if discrete financial information is
available (ii) management regularly reviews individual operating results, and
(iii) similar economic characteristics of components within an operating segment
result in a single reporting unit.  The Company’s management regularly
reviews one set of financial information, and all of the Company’s products
share similar economic characteristics.  Therefore, the Company has
determined that it has one single reporting unit.





Long-Lived
Assets





Long-lived
assets, including the Company’s customer lists arising from business
combinations (Note 3), are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable.  The Company does not perform a periodic assessment of
assets for impairment in the absence of such information or
indicators.  Conditions that would necessitate an impairment include a
significant decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a significant
adverse change that would indicate that the carrying amount of an asset or group
of assets is not recoverable.  For long-lived assets to be held and
used, the Company recognizes an impairment loss only if an impairment is
indicated by its carrying value not being recoverable through undiscounted cash
flows.  The impairment loss is the difference between the carrying
amount and the fair value of the asset estimated using discounted cash
flows.  Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell.





Subsequent
to the end of the third quarter the Company began a goodwill and customer list
impairment analysis. The initial analysis (first step) was performed by the
Company’s management team after the conclusion of the quarter. Based on a
combination of factors, including the current economic environment and the
Company’s operating results, management concluded that there were a number of
indicators which required the Company to perform a goodwill impairment analysis
in between annual tests. As of the filing of the Quarterly Report on Form 10-Q
for the third quarter ended July 31, 2009, management had not completed the
entire two-step analysis.  However, based on the work performed to
date, management concluded that an impairment loss was probable. This relates
primarily to the Company’s CLEC business, One Ring Networks, Inc. business and
its fixed wireless broadband Internet access business in Northern California.
Accordingly, the Company recorded a $1 million non-cash goodwill impairment
charge, representing management’s best estimate of the impairment loss. The
Company finalized its goodwill and customer list impairment analysis during the
fourth quarter of fiscal 2009, and determined that, primarily due to significant
and continuing operating and cash flow losses, all of the goodwill and customer
lists were impaired. This resulted in an impairment charge of $5.4 million in
the fourth quarter, and a total impairment charge of $6.4 million for the year
(classified as a component of general and administrative
expense.)


F-12
 Index


Fair Market Value of
Financial Instruments





The
carrying amount for current assets and liabilities, and long-term debt is not
materially different from fair market value because of the short maturity of the
instruments and/or their respective interest rate amounts and other terms have
been negotiated recently.





Convertible Debt
Obligations





When
applicable, the Company calculates the value of the beneficial conversion
feature embedded in its debt borrowings in accordance with ASC 470 (formerly
known as EITF 98-5, “Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios,” and EITF
00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments,”) and
records the calculated amount as debt discount.  Debt discount is
amortized over the term of the corresponding debt obligation using the interest
method.





Net Loss Per
Share





Basic net
loss per share is computed using the weighted average number of shares of common
stock outstanding during the year.  Diluted net loss per share is
computed using the weighted average number of shares of common stock outstanding
during the year and common equivalent shares consisting of stock options,
warrants, and convertible debentures (using the treasury stock method) to the
extent they are dilutive.





Shares
issuable upon the exercise of stock options, warrants, and convertible
debentures are excluded from the calculation of net loss per share for the years
ended October 31, 2009 and 2008, as their effect would be
antidilutive.  Potentially issuable shares from outstanding stock
options, warrants and convertible debentures amounted to 120,710,906 and
121,365,906 shares, respectively, as of October 31, 2009 and 2008,
respectively.





Income
Taxes





The
Company utilizes the asset and liability approach to financial accounting and
reporting for income taxes.  Deferred income taxes and liabilities are
computed for differences between the financial statement carrying amounts and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income.  Valuation allowances are recorded when necessary to reduce
deferred tax assets to the amount expected to be realized.  Income tax
expense or benefit is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and
liabilities.


F-13
 Index


Stock-Based
Compensation





The
Company adopted FASB Accounting Standards Codification 718 (“ASC 718”) (formerly
known as SFAS No. 123R “Share-Based Payment”) as of November 1,
2006.  All of the Company’s existing share-based compensation awards
have been determined to be equity awards.  Under the modified
prospective transition method, the Company is required to recognize noncash
compensation costs for the portion of share-based awards that are outstanding as
of November 1, 2006 for which the requisite service has not been rendered (i.e.
nonvested awards) as the requisite service is rendered on or after that
date.  The compensation cost is based on the grant date fair value of
those awards, with grant date fair value currently being estimated using the
Black-Scholes option-pricing model, a pricing model acceptable under ASC
718.  The Company is recognizing compensation cost relating to the
nonvested portion of those awards in the consolidated financial statements
beginning with the date on which ASC 718 is adopted, through the end of the
requisite service period.  ASC 718 requires that forfeitures be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.




Effective
November 1, 2006, the Company accounts for equity instruments issued to
non-employees in accordance with the provisions of ASC 718 and ASC 505 (formerly
known as Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”).  All transactions in
which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.  The measurement date of the
fair value of the equity instrument issued is the earlier of the date on which
the counterparty’s performance is complete or the date on which it is probable
that performance will occur.





Noncash
share-based compensation costs recorded in general and administrative expenses
for the fiscal year ended October 31, 2009 and 2008 were $18,402 and $35,330,
respectively. The Company issues new shares of common stock upon exercise of
stock options.  As of October 31, 2009, the total unrecognized
compensation cost related to non-vested options was $11,856, and the weighted
average period over which it will be recognized is .87 years.





Recent Accounting
Pronouncements




In June
2009, the Financial Accounting Standards Board (“FASB”) approved its Accounting
Standards Codification (“Codification”) as the single source of authoritative
United States accounting and reporting standards applicable for all
non-governmental entities, with the exception of the SEC and its staff. The
Codification, which changes the referencing of financial standards, is effective
for interim or annual financial periods ending after September 15, 2009.
Therefore, in the annual financial statements of fiscal year 2009, all
references made to US GAAP will use the new Codification numbering system
prescribed by the FASB. As the Codification is not intended to change or alter
existing US GAAP, it is not expected to have any impact on the Company’s
consolidated financial position or results of operations.





In
September 2006, the FASB issued guidance under ASC 820 (“ASC 820”) (formerly
SFAS No. 157, “Fair Value Measurements”).  ASC 820 defines fair value,
established a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements.  ASC 820 is generally effective for financial statements
issued for fiscal years beginning after November 15, 2007.  The
Company adopted this guidance at the beginning of fiscal year 2009. The adoption
of this guidance did not significantly affect the Company’s consolidated
financial condition or consolidated results of operations.


F-14
 Index


In
February 2007, the FASB issued guidance under ASC 825 (formerly SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities”), which
allows companies the option to measure financial assets or liabilities at fair
value and include unrealized gains and losses in net income rather than
equity.  The Company adopted this guidance at the beginning of fiscal
year 2009. The adoption of this guidance had no significant impact on the
financial position or results of operations of the Company.





In
December 2007, the FASB issued guidance under ASC 805 (formerly SFAS No.
141(revised 2007), “Business Combinations” (“SFAS 141R”)).  ASC 805
will significantly change the accounting for business combinations in a number
of areas including the treatment of contingent consideration, contingencies,
acquisition costs, IPR&D and restructuring costs.  In addition,
under ASC 805, changes in deferred tax asset valuation allowances and acquired
income tax uncertainties in a business combination after the measurement period
will impact income tax expense.  ASC 805 is effective for fiscal years
beginning after December 15, 2008 and, as such, we will adopt this standard in
fiscal 2010.  The provisions of ASC 805 will impact the Company if it
is a party to a business combination after the pronouncement is
adopted.





In
December 2007, the FASB issued guidance under ASC 810 (formerly SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements, an Amendment of
ARB 51 (“SFAS 160”)) which becomes effective for fiscal periods beginning after
December 15, 2008 (November 1, 2009 for the Company). This statement amends ARB
51 to establish accounting and reporting standards for the non-controlling
interest in a subsidiary and for the deconsolidation of a subsidiary. The
statement requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling
interest. It also requires disclosure on the face of the consolidated statement
of income, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. In addition, this statement establishes a
single method of accounting for changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation and requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. The
Company does not expect the adoption of this statement to have a material impact
on its financial statements.





In April
2008, the FASB issued guidance under ASC 350 (formerly FSP SFAS 142-3,
Determination of the Useful Life of Intangible Assets.) This guidance amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible. Previously, an
entity was precluded from using its own assumptions about renewal or extension
of an arrangement where there was likely to be substantial cost or material
modifications. This guidance removes the requirement for an entity to consider
whether an intangible asset can be renewed without substantial cost or material
modification to the existing terms and conditions and requires an entity to
consider its own experience in renewing similar arrangements. This guidance also
increases the disclosure requirements for a recognized intangible asset to
enable a user of financial statements to assess the extent to which the expected
future cash flows associated with the asset are affected by the entity’s intent
or ability to renew or extend the arrangement. This guidance is effective for
fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years. Early adoption is prohibited. The guidance for determining the
useful life of a recognized intangible asset is applied prospectively to
intangible assets acquired after the effective date. Accordingly, the Company
does not anticipate that the initial application of this guidance will have an
impact on the Company. The disclosure requirements must be applied prospectively
to all intangible assets recognized as of, and subsequent to, the effective
date.


F-15
 Index


In June
2008, the FASB issued guidance under ASC 815 (formerly EITF Issue No. 07-5,
Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.) This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008 (November 1, 2009 for the
Company), and interim periods within those fiscal years. Early application is
not permitted. A contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified
in stockholders’ equity in the statement of financial position would not be
considered a derivative financial instrument. This guidance provides a two-step
model to be applied in determining whether a financial instrument or an embedded
feature is indexed to an issuer’s own stock and thus able to qualify for the
scope exception. The Company is evaluating the impact of this guidance to its
consolidated financial statements.





Fair
value of financial instruments:




The
carrying amounts of cash, accounts receivable, and accounts payable are
approximated fair value as of October 31, 2009 and 2008, due to the relatively
short maturities of these instruments.  The carrying amounts of notes
payable, excluding related party notes payable, approximated fair value as of
October 31, 2009 and 2008, based upon terms and conditions available to the
Company at those dates in comparison to the terms and conditions of its
outstanding debt.  The fair value of related party notes payable is
impracticable to estimate due to the related party nature of the underlying
transactions.




Effective
November 1, 2008, the Company adopted ASC 820, Fair Value Measurements and
Disclosures.   This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements.  As permitted,
the Company elected to defer the adoption of the nonrecurring fair value
measurement disclosure of nonfinancial assets and liabilities.  The
adoption of this guidance did not have a material impact on the Company’s
financial position, results of operations or cash flows.





To
increase consistency and comparability in fair value measurements, this guidance
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels as follows:





Level
1 - quoted prices (unadjusted) in active markets for identical asset or
liabilities;





Level
2 - observable inputs other than Level I, quoted prices for similar assets
or liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, and model-derived prices whose
inputs are observable or whose significant value drivers are observable;
and





Level
3 - assets and liabilities whose significant value drivers are
unobservable.





Observable
inputs are based on market data obtained from independent sources, while
unobservable inputs are based on the Company’s market
assumptions.  Unobservable inputs require significant management
judgment or estimation.  In some cases, the inputs used to measure an
asset or liability may fall into different levels of the fair value
hierarchy.  In those instances, the fair value measurement is required
to be classified using the lowest level of input that is significant to the fair
value measurement.  Such determination requires significant management
judgment.





There
were no financial assets or liabilities measured at fair value as of October 31,
2009 with the exception of cash which is measured using level 1
inputs.  There were no changes in the Company’s valuation techniques
used to measure fair value on a recurring basis as a result of partially
adopting this guidance.


F-16
 Index


NOTE
3 - ACQUISITIONS





iBroadband Networks, Inc.
and iBroadband of Texas, Inc.





On July
11, 2008, the Company purchased certain assets and assumed certain liabilities
of iBroadband Networks, Inc. and iBroadband of Texas, Inc.
(“iBroadband”).  Consideration given in the asset purchase totaled
approximately $2.82 million, which consisted of the Company assuming certain
liabilities and secured promissory notes of approximately $240 thousand and
$2.58 million, respectively.  Interest accrues at 10% per annum on the
assumed secured promissory notes and is payable monthly commencing the month
after the notes were assumed.  The outstanding principal matures and
shall be due on March 31, 2011.





The
Company acquired the following net assets from iBroadband:





Tangible
      assets acquired:Property
      and equipment
            
            $
            658,567Accounts
      receivable and other
            
            
            259,688Cash
            
            
            25,560943,815Customer
      list
            
            
            177,449Goodwill
            
            
            1,700,384Total
      assets acquired
            
            
            2,821,648Liabilities
      assumed:Accounts
      payable
            
            
            (238,488
            )Notes
      payable
            
            
            (2,583,160
            )Total
      liabilities assumed
            
            
            (2,821,648
            )Net
      assets acquired
            
            $
            -





The
purpose of the iBroadband acquisition was two-fold.  Significantly,
the assets of iBroadband Networks, Inc., and iBroadband of Texas, Inc. are
highly complementary to our existing business, particularly the operations of
our subsidiary One Ring Networks, Inc.  Secondly, the seller of the
assets agreed to purchase (2) 36 month, 10% notes from the Company for the
purpose of restructuring existing debt and providing needed operating
capital.  The acquisition was accounted for using the purchase method
of accounting.  The customer list will be amortized over its useful
life of two years.  The purchase price allocated to customer list was
determined by management’s estimate of the value associated with each acquired
customer.  Goodwill represents the excess of consideration given over
the fair value of assets acquired and liabilities assumed.  The
goodwill acquired is expected to be deductible for federal income tax
purposes.  The results of operations of iBroadband are included in the
Company’s results of operations from July 11, 2008, the effective date of the
acquisition.





One Ring Networks,
Inc.





On March
28, 2008, the Company acquired 100% of the outstanding stock of One Ring
Networks, Inc. (“One Ring”) for consideration of 3,885,900 common shares and
114,100 warrants valued at $319,393.  Additional contingent
consideration can be attained with certain performance objectives being achieved
as well as the price of the Company’s common stock.  The value of the
issued stock was determined to be $310,872 and was calculated using the average
quoted price of $0.08 per share, which approximates the average trading value as
quoted on the OTC Bulletin Board for the three days before and three days after
the date the terms of the acquisition were agreed to and
announced.  In addition, the Company issued 114,100 warrants to
purchase common stock at $.12 per share valued at $8,521.  The fair
value of the warrants was determined on the date of grant using the
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate of 4.14%;
volatility factor of the expected market price of the Company’s common stock of
1.65; and a life of the warrants of five years.


F-17
 Index


At
December 31, 2008, The Company calculated the contingent consideration
consisting of True Up Shares and True Up Cash to be 1,489,475 and $595,790,
respectively, including 445,639 common shares and $178,255, respectively, issued
to Matthew Liotta, the Company’s former Chief Technology Officer.  The
True Up Shares were valued at the fair market value of the Company’s common
stock at the end of the True Up period as defined.  The fair value of
the True Up Cash and the fair value of the True Up Shares were recorded as a
reduction in the value of the previously issued common stock in connection with
the acquisition.  The Company issued promissory notes and shares of
its common stock during the second fiscal quarter of 2009 as payment of the True
Up Cash and True Up Shares.  At March 31, 2009, the Company calculated
additional contingent consideration consisting of Secondary Shares to be
2,772,815, including 829,602 shares issued to Matthew Liotta.  The
fair value of the Secondary Shares was determined to be $83,184 based on the
quoted price of $.03 per share at the end of the contingency
period.  The fair value of the Secondary Shares was recorded as an
additional cost of the acquisition resulting in an increase to goodwill of
$83,184.


The
Company acquired the following net assets from One Ring:





Tangible
      assets acquired:Property
      and equipment
            
            $
            213,868Capital
      lease equipment
            
            
            379,765Accounts
      receivable and other
            
            
            202,372Cash
            
            
            25,396821,401Customer
      list
            
            
            15,601Goodwill
            
            
            366,566Total
      assets acquired
            
            
            1,203,568Liabilities
      assumed:Accounts
      payable
            
            
            (195,041
            )Accrued
      liabilities and other
            
            
            (275,341
            )Notes
      payable
            
            
            (34,028
            )Capital
      lease obligations
            
            
            (379,765
            )Total
      liabilities assumed
            
            
            (884,175
            )Net
      assets acquired
            
            $
            319,393





The
purpose of the One Ring acquisition was to acquire an existing carrier class
network for the transport of voice and data, and an experienced management
team.  Through this effort, we further evolve our goal of becoming a
provider of communication services via fixed wireless and fiber optic transport
of voice and data.  The acquisition was accounted for using the
purchase method of accounting.  The customer list will be amortized
over its useful life of two years.  The purchase price allocated to
customer list was determined by management’s estimates of the value associated
with each acquired customer.  The goodwill acquired is not expected to
be deductible for federal income tax purposes.  The results of
operations of One Ring are included in the Company’s results of operations from
March 31, 2008, the effective date of the acquisition.  Goodwill
represents the excess of consideration given over the fair value of assets
acquired and liabilities assumed.





Unaudited Pro Forma Summary
Information





The
following unaudited pro forma summary approximates the consolidated results of
operations as if the One Ring and iBroadband acquisitions had occurred as of
November 1, 2007, after giving effect to certain adjustments, including
amortization of specifically identifiable intangibles and interest
expense.  The pro forma financial information does not purport to be
indicative of the results of operations that would have occurred had the
transactions taken place at the beginning of the period presented or of future
results of operations.


F-18
 Index





Year
      Ended October 31, 2008Unaudited
      pro forma information:Revenues
            
            $
            19,868,928Net
      loss
            
            $
            (2,518,506
            )Basic
      and diluted net loss per share
            
            $
            (0.03
            )Weighted
      average shares outstanding
            
            
            69,835,422





NOTE
4 - PROPERTY AND EQUIPMENT





Property
and equipment consists of the following at October 31, 2009 and
2008:





2009
            
            
            2008
            
            Est.
      LifeTelephone
      switch equipment
            
            $
            1,437,948
            
            
            $
            1,416,556
            
            3-5
      yrs.Computer
      software
            
            
            318,888
            
            
            
            1,097,672
            
            3-5
      yrs.Computer
      equipment
            
            
            65,515
            
            
            
            222,085
            
            3-5
      yrs.Furniture
      and fixtures
            
            
            158,279
            
            
            
            158,279
            
            5-7
      yrs.Leasehold
      improvements
            
            
            41,982
            
            
            
            41,982
            
            5-7
      yrs.Installation
      equipment
            
            
            219,120
            
            
            
            139,888
            
            3
      yrs.Vehicles
            
            
            56,803
            
            
            
            56,803
            
            3
      yrs.Equipment
      held under capital leases
            
            
            2,320,346
            
            
            
            1,613,349
            
            2-5
      yrs.4,618,881
            
            
            
            4,746,614Less:
      accumulated depreciation and amortization
            
            
            (2,509,021
            )
            
            
            (2,352,426
            )Property
      and equipment, net
            
            $
            2,109,860
            
            
            $
            2,394,188





Amortization
of assets held under capital leases is included with depreciation expense and
totaled $784,336 and $395,978 for fiscal 2009 and 2008,
respectively.  Property and equipment depreciation and amortization
expense totaled $1,136,418 and $609,490 in fiscal 2009 and 2008,
respectively.





NOTE
5 – CUSTOMER LISTS





Customer
lists acquired and corresponding accumulated amortization at October 31, 2009
and 2008 were as follows:





2009
            
            
            2008
            
            
            Est.
      LifeCustomer
      lists
            
            $
            3,923,735
            
            
            $
            3,923,735
            
            
            2-5
      yrs.Less:
      accumulated amortization
            
            
            (3,923,735
            )
            
            
            (1,969,321
            )
            
            -Customer
      lists, net
            
            $
            -
            
            
            $
            1,954,414





Amortization
expense, including the fiscal 2009 impairment charge totaled $1,954,414 in
fiscal 2009 and $775,036 in fiscal 2008.


F-19
 Index


NOTE
6 – CAPITAL LEASES, CONVERTIBLE DEBENTURES AND NOTES PAYABLE, INCLUDING RELATED
PARTY NOTES





The
Company has various debt and capital lease obligations as of October 31, 2009
including amounts due to independent institutions and related
parties.  Descriptions of these obligations are included
below.  The following tables summarize outstanding debt and capital
leases as of October 31, 2009 and 2008:





Information
as of October 31, 2009





Brief
      Description of Debt
            
            Balance
            
            
            Int.
      Rate
            
            Due
      Date
            
            Discount
            
            
            NetNotes payable, currentVehicles
            
            $
            14,299
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            $
            14,299Valens
      Offshore (Valens II)
            
            
            1,800,000
            
            
            
            10
            %
            3/31/2011
            
            
            (118,562
            )
            
            
            1,681,438Valens
      U.S. SPV I
            
            
            1,500,000
            
            
            
            10
            %
            3/31/2011
            
            
            (111,185
            )
            
            
            1,388,815Laurus
      Master Fund (Deferred)
            
            
            2,290,451
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            2,290,451Valens
      U.S. SPV I (Deferred)
            
            
            292,709
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            292,709Convertible notes, currentGlobal
      Telecom Solutions
            
            
            120,000
            
            
            
            5
            %
            4/30/2012
            
            
            
            
            
            
            120,000Other
            
            
            42,500
            
            
            
            10
            %
            2/28/2008
            
            
            -
            
            
            
            42,500GCA-Debenture
            
            
            630,333
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            630,333GCA-Debenture
            
            
            570,944
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            570,944GC-Conote
            
            
            180,000
            
            
            
            -
            
            6/30/2011
            
            
            -
            
            
            
            180,000Trident-Debenture
            
            
            600,000
            
            
            
            10
            %
            6/30/2011
            
            
            -
            
            
            
            600,000Capital
      lease obligations, current
            
            
            759,034
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            759,034Notes payable, less current
      portionVehicles
            
            
            24,443
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            
            24,443Convertible notes, less current
      portionGlobal
      Telecom Solutions
            
            
            160,000
            
            
            
            5
            %
            4/30/2012
            
            
            -
            
            
            
            160,000Convertible
      notes payable to related parties, less current portion
            
            
            3,240,000
            
            
            
            8
            %
            6/30/2011
            
            
            -
            
            
            
            3,240,000Capital
      lease obligations,
              less
      current portion
            
            
            602,204
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            602,204Due
      to One Ring Shareholders
            
            
            595,790
            
            
            
            8
            %
            6/30/2011
            
            
            -
            
            
            
            595,790Revolving
      Line of Credit
            
            
            1,468,697
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            1,468,697Total
            
            $
            14,891,404
            
            
            
            
            
            
            
            $
            (229,747
            )
            
            $
            14,661,657


F-20
 Index


The
following is a summary, by year, of the future minimum payments required under
debt and capital lease obligations as of October 31, 2009:





Years
      ending October 31,2010
            
            $
            10,039,2202011
            
            
            4,205,9522012
            
            
            109,1682013
            
            
            45,3272014
            
            
            49,089Thereafter
            
            
            212,901Total
            
            $
            14,661,657





Information
as of October 31, 2008





Brief
      Description of Debt
            
            Balance
            
            
            Int.
      Rate
            
            Due
      Date
            
            Discount
            
            
            NetNotes payable, currentVehicles
            
            $
            13,917
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            $
            13,917Valens
      Offshore (Valens II)
            
            
            85,000
            
            
            
            10
            %
            3/31/2011
            
            
            (12,398
            )
            
            
            72,602Valens
      U.S. SPV I
            
            
            65,000
            
            
            
            10
            %
            3/31/2011
            
            
            (11,072
            )
            
            
            53,928Convertible notes, currentGlobal
      Telecom Solutions
            
            
            120,000
            
            
            
            5
            %
            4/30/2012
            
            
            
            
            
            
            120,000Other
            
            
            42,500
            
            
            
            10
            %
            2/28/2008
            
            
            -
            
            
            
            42,500Capital lease obligations,
      current
            
            
            585,002
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            585,002Notes payable, less current
      portionVehicles
            
            
            38,743
            
            
            
            7
            %
            Varies
            
            
            -
            
            
            
            38,743Valens
      Offshore (Valens II)
            
            
            1,715,000
            
            
            
            10
            %
            3/31/2011
            
            
            (252,570
            )
            
            
            1,462,430Valens
      U.S. SPV I
            
            
            1,435,000
            
            
            
            10
            %
            3/31/2011
            
            
            (231,303
            )
            
            
            1,203,697Laurus
      Master Fund (Deferred)
            
            
            2,290,451
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            2,290,451Valens
      U.S. SPV I (Deferred)
            
            
            292,709
            
            
            
            10
            %
            3/31/2011
            
            
            -
            
            
            
            292,709Convertible notes, less current
      portionGCA-Debenture
            
            
            630,333
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            630,333GCA-Debenture
            
            
            570,944
            
            
            
            6
            %
            6/30/2011
            
            
            -
            
            
            
            570,944GC-Conote
            
            
            180,000
            
            
            
            -
            
            6/30/2011
            
            
            -
            
            
            
            180,000Trident-Debenture
            
            
            600,000
            
            
            
            10
            %
            6/30/2011
            
            
            -
            
            
            
            600,000Global
      Telecom Solutions
            
            
            280,000
            
            
            
            5
            %
            4/30/2012
            
            
            -
            
            
            
            280,000Convertible notes payable to related parties, less
      current portion
            
            
            3,240,000
            
            
            
            8
            %
            6/30/2011
            
            
            -
            
            
            
            3,240,000Capital lease obligations,less current portion
            
            
            742,784
            
            
            
            8
            %
            Varies
            
            
            -
            
            
            
            742,784$
            12,927,383
            
            
            
            
            
            
            
            $
            (507,343
            )
            
            $
            12,420,040


F-21
 Index


Global Telecom Solutions -
Convertible Note





On April
30, 2008, the Company entered into a four-year financing agreement with Global
Telecom Solutions (“GTS”) in the principal amount of $460,000 as repayment of
carrier costs payable to GTS in the same amount.  The unsecured
convertible note called for monthly payments of $10,000 and interest accrues at
5% per annum, and may be converted at any time into common stock of the Company
at market price with a floor conversion price of $.10 per common
share.  The market price will be the closing bid price on Bloomberg
the day prior to the receipt by Company from GTS to convert all or a portion of
note at any time during the term of the note.  The Company may prepay
the note by paying 100% of the outstanding principal and accrued
interest.  The principal balance of this note at October 31, 2009 was
$280,000.





Valens II Term A
Note





Effective
March 31, 2008, the Company modified its debt structure by entering into a
Security Agreement with L.V. Administrative Services, Inc. (“L.V.”) and certain
lenders (“Lenders”) including Valens U.S. SPV I (“Valens”), and Valens Offshore
SPV II Corp. (“Valens II”).  L.V. acts as administrative and
collateral agent for the Lenders.  Upon the signing of the Security
Agreement, Valens II provided the Company with $1,800,000 of gross financing,
and the Company issued Valens II a 10% Secured Term A Note (“Valens II Term A”)
in the principal amount of $1,800,000.  As collateral agent for the
Lenders, L.V. maintains a continuing security interest in and lien upon all
assets of Company.  The Company has also executed a Stock Pledge
Agreement pledging all of the stock of Telenational and One Ring to L.V. on
behalf of the Lenders.





In
connection with the sale of the Term A Note, The Company issued Valens II a
common stock purchase warrant to purchase 5,625,000 common shares at $0.01 per
share.  These warrants were valued at $441,903 using the Black-Scholes
model with the following assumptions:  applicable risk-free interest
rate based on the current treasury-bill interest rate of 4.14%; volatility
factor of the expected market price of the Company’s common stock of 165%; and a
life of the warrants of five years.  The relative fair value of the
warrants of $354,799 was recorded as a debt discount.  This debt
discount is being amortized over the term of the Valens Term A note using the
interest method.  The Company recognized $146,406 and $89,831 of
non-cash financing expense associated with these warrants using the interest
method during the fiscal year ended October 31, 2009 and 2008,
respectively.  The unamortized debt discount at October 31, 2009 and
2008 was $118,562 and $264,968, respectively.  In addition, the
Company incurred legal, professional, and administrative costs associated with
the Valens II Security Agreement, which resulted in $375,778 of deferred
financing fees, of which $131,190 and $95,143 was expensed using the interest
method as noncash financing fees during the fiscal year ended October 31, 2009
and 2008, respectively.




Interest
accrues under the Term A Note at 10% per annum and is payable monthly commencing
April 1, 2008.  Amortizing payments of principal shall commence on
October 1, 2009 of $85,000 per month, plus accrued interest and any other fees
then due.  The Term A Note matures on March 31, 2011.  The
Company may prepay the Term A Note by paying 100% of the outstanding principal
and repaying all amounts owed under the Security Agreement and all ancillary
documents.





On
October 31, 2008, the Company issued warrants to purchase 8,750,000 Company
shares of its common stock upon exercise at $0.01 per share to Valens in
consideration for amendments to the Security Agreement dated March 31,
2008.  These warrants were valued at $288,066 using the Black-Scholes
model with the following assumptions:  applicable risk-free interest
rate based on the current treasury-bill interest rate of 3.75%; volatility
factor of the expected market price of the Company’s common stock of 1.25; and a
life of the warrants of five years.  The relative fair value of the
warrants of $288,066 was recorded as an asset and is amortized monthly as
non-cash financing fees using the straight-line method beginning fiscal year
2009 and ending March 31, 2011, which is the maturity date of the Term A Note.
The Company recognized $119,201 of non-cash financing expense associated with
these warrants using the interest method during the fiscal year ended October
31, 2009.


F-22
 Index


Valens Term B
Note





On July
14, 2008 the Company completed the terms and conditions set forth in the
Security Agreement dated as of March 31, 2008, and further amended on July 11,
2008, to obtain additional financing by and among L.V. and certain other lenders
(“Lenders”).  The completed financing agreement includes Valens U.S.
SPV I (“Valens”) purchasing a secured term note (“Term B Note”), the Lenders
agreeing to lend secured revolving loans under certain conditions including the
Company attaining specific financial covenants, and Laurus Master Fund and
Valens purchasing secured promissory notes related to the asset purchase of
iBroadband Networks, Inc., a Texas corporation, and iBroadband of Texas, Inc., a
Delaware corporation in the amounts of approximately $2.3 million and $293
thousand, respectively.  As collateral agent for the Lenders, L.V.
maintains a continuing security interest in and lien upon all assets of
Company.





Effective
July 14, 2008, Valens purchased from the Company a 10% secured term note (“Term
B Note”) in the principal amount of $1.5 million and a warrant to purchase
4,437,870 shares of common stock at $0.01 per share.  Interest accrues
at 10% per annum and is payable monthly commencing August 1,
2008.  Amortizing principal payments of $65,000 per month, plus
accrued interest and any other fees then due commenced on October 31,
2009.  The Term B Note matures on March 31, 2011.  The
Company may prepay the Term B Note by paying 100% of the outstanding principal
and repaying all amounts owed under the Security Agreement and all ancillary
documents.





The sale
of the Term B Note and Warrant was dated as of July 11, 2008.  The
Company received gross proceeds of $1,500,000.  Of the gross proceeds,
approximately $26,500 was directed to pay legal fees for investors’ counsel,
$94,500 was directed to Valens for administrative fees, and $420,000 was used as
principal payment on the GC-Conote to Global.  The remaining $959,000
was retained by the Company.





In
connection with the sale of the Term B Note, the Company issued Valens a common
stock purchase warrant to purchase 4,437,870 common shares at $0.01 per
share.  These warrants were valued at $349,478 using the Black-Scholes
model with the following assumptions:  applicable risk-free interest
rate based on the current treasury-bill interest rate of 4.14%; volatility
factor of the expected market price of the Company’s common stock of 171%; and a
life of the warrants of five years.  $283,440 represented cash
received relative to the warrants and the remaining amount of $1,216,560 was
allocated to the Term B Note resulting in a debt discount of
$283,440.  The relative fair value of the warrants of $283,440 was
recorded as a debt discount.  This debt discount is being amortized
over the term of the Valens Term B note using the interest
method.  The Company recognized $131,189 and $41,066 of expense
associated with these warrants for the fiscal year ended October 31, 2009 and
2008, respectively.  The unamortized debt discount at October 31, 2009
was $111,185.  In addition, the Company incurred legal, professional,
and administrative costs associated with the Valens Security Agreement, which
resulted in $120,967 of deferred financing fees, of which $55,989 and $17,526
was expensed as noncash financing fees using the interest method for the fiscal
year ended October 31, 2009 and 2008, respectively.





Deferred Purchase Price
Notes





Concurrent
with the Valens Term B financing arrangement, the Company purchased the assets
of iBroadband and assumed secured promissory notes in the aggregate amount of
approximately $2.58 million (“Deferred Purchase Price Notes”), including
approximately a $293,000 loan from Valens and a $2.3 million loan from Laurus
Master Fund.  As collateral agent for the Lenders, L.V. maintains a
continuing security interest in and lien upon all assets of
Company.  Interest accrues at 10% per annum and is payable monthly
commencing the month after the Notes were assumed.  The outstanding
principal of both notes is due on their maturity date, March 31,
2011.  The Company may prepay these Deferred Purchase Price Notes by
paying 100% of the outstanding principal and repaying all amounts owed under the
Security Agreement and all ancillary documents.


F-23
 Index


GC-Conote





On March
31, 2008, Global Capital Funding Group, LP (“Global”), which is the holder of
the GC-Conote, modified its debt structure with the Company by entering into a
subordination agreement with L.V., acting as agent for itself and the
Lenders.  The agreement calls for the GC-Conote to become subordinate
to the Valens II Term A note.  In connection with the subordination
agreement, Global subordinated all claims and security interests it may have
against any of the assets of the Company, to the security interests granted by
the Company to L.V., acting as collateral agent for the Lenders.  In
addition, Global extended the maturity date of two debentures to June 30, 2011
(see below “GCA Debentures”).  In consideration, the Company made a
principal payment of $600,000 on the GC-Conote and agreed to pay Global the
principal sum of $420,000 upon closing of the Term B Note; with the remainder of
the outstanding principal amount of $180,000, which shall not accrue interest
after March 31, 2008.  The GC-Conote is convertible at any time into
common shares of the Company at the conversion price equal to 80% of the average
of the three lowest volume weighted average sales prices as reported by
Bloomberg L.P. during the twenty Trading Days immediately preceding the related
Notice of Conversion.  However, the conversion price of the Company’s
stock is not to be lower than $0.10 and not to exceed $0.25.





As of
July 11, 2008, and upon closing of the Valens II Term B note, the Company paid
Global the principal sum of $420,000 on the GC-Conote.  In
consideration for the principal payment of $420,000, Global forgave accrued
interest in the amount of $163,750, and is restricted from the selling of any
shares of the Company’s common stock for a period of two years from the
effective date of the amendment to the GC-Conote.  The Company
recorded $163,750 as “Gain on Forgiveness of Liabilities” in its Consolidated
Statement of Operations for fiscal year 2008.  In addition, Global
agreed that there are no additional cash monies owed to Global by the Company
other than the remaining principal balance of $180,000 of the
GC-Conote.  The principal balance of the GC-Conote is $180,000 at
October 31, 2009.





GCA
Debentures





As of
October 31, 2008, GCA Strategic Investment Fund Limited (“GCA”) held two Company
convertible debentures having principal amounts of $630,333 and 570,944,
respectively.  The conversion terms of the debentures allow the
Company to elect to pay in GCA cash in lieu of
conversion.  Additionally, GCA is limited to only converting up to
4.99% ownership at a time and there is a floor of $.10 per share on the
conversion which limits the number of common shares for which the notes are
convertible into.





On March
31, 2008, GCA modified its debt structure with the Company by entering into a
subordination agreement with L.V., which acted as agent for itself and for the
Lenders.  The agreement called for the GCA debentures to become
subordinate to the Valens II Term A note.  In connection with the
subordination agreement, GCA subordinated all claims and security interests it
may have against any of the assets of the Company, including VoIP technology and
certain equipment, to the security interests granted by the Company to L.V.,
acting as collateral agent for the Lenders.  The Company may prepay
the GCA debentures by paying 100% of the outstanding principal and accrued
interest.  In addition, GCA extended the maturity date of the two
debentures to June 30, 2011, and is restricted from the selling of any shares of
the Company’s common stock for a period of two years from the effective date of
this amendment.


F-24
 Index


Trident
Debenture





As of
October 31, 2008, “Trident Growth Fund, L.P. (“Trident”) held a Company
convertible debenture having a principal balance of $600,000.  The
debenture is convertible into common stock of the Company at $.14 per common
share.





During
the second quarter of fiscal 2007, Trident extended the $600,000 debenture with
an original due date of March 8, 2007 to March 8, 2008.  In connection
with the extension, the Company issued Trident 1,200,000 additional warrants,
resulting in deferred financing fees of $83,708, of which $29,401 was expensed
as noncash interest expense during fiscal year 2008.  These warrants
were fully expensed as of October 31, 2008. The fair value of the warrants was
determined on the date of grant using the Black-Scholes pricing model with the
following assumptions: applicable risk-free interest rate based on the current
treasury-bill interest rate of 4.5%; volatility factor of the expected market
price of the Company’s common stock of 287%; and an expected life of the
warrants of four years.  Also in connection with extension, the
Company issued Trident additional warrants to purchase 150,000 shares of the
Company’s stock at $.10 per share during fiscal 2008.  The fair value of
the warrants of $8,966 was determined on the date of grant using the
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate of 4.5%; dividend
yield of 0%; volatility factor of the expected market price of the Company’s
common stock of 295%, and a life of the warrants of four years.  The
Company recognized $8,966 of expense associated with the warrants during fiscal
year 2008.





On March
31, 2008, Trident modified its debt structure with the Company by entering into
a subordination agreement with L.V., which acted as agent for itself and for the
Lenders.  The agreement called for the Trident debenture to become
subordinate to the Valens II Term A note.  In connection with the
subordination agreement, Trident subordinated all claims and security interests
it may have against any of the assets of the Company, to the security interests
granted by the Company to L.V., acting as collateral agent for the
Lenders.  In addition, Trident agreed to extend the maturity date of
the principal amount of the $600,000 debenture to June 30, 2011.  In
consideration for the subordination and maturity date extension, the Company
issued Trident a common stock purchase warrant to purchase 60,000 common shares
of the Company’s stock at $0.07 per share.  The fair value of the
warrants totaled $4,503 and was determined on the date of grant using the
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate of 4.14%;
volatility factor of the expected market price of the Company’s common stock of
165%; and a life of the warrants of five years.  The Company
recognized $4,503 of expense associated with the warrants during the fiscal year
ended October 31, 2008.  The Company may prepay the Trident debenture
by paying 100% of the outstanding principal and accrued interest.





Related Party
Notes





On May 5,
2006, the Company acquired 100% of the outstanding stock of Telenational
Communications, Inc. (“Telenational”) for $4,809,750, including acquisition
costs of $50,000.  The purchase consideration included a contingent
cash payment in the amount of $500,000 and 19,175,000 shares of the Company’s
common stock valued at $3,259,750.  On October 31, 2007, the
contingent purchase price consideration was converted to a convertible demand
note payable to Apex Acquisitions, Inc. (“Apex”) in the amount of
$500,000.





On March
31, 2008, Apex entered into a subordination agreement with L.V., which acted as
agent for itself and for the Lenders.  The agreement called for the
Apex demand note to become subordinate to the Valens II Term A
note.  In addition, Apex agreed to amend the note by stipulating a
maturity date of June 30, 2011.  The outstanding balance of the Apex
note was $500,000 at October 31, 2009 and 2008.


F-25
 Index


On
October 31, 2007, the Company entered into an agreement, which modified its debt
structure with Apex.  The agreement called for the outstanding note
originally due in November of 2007 payable to Apex to be extended to November 1,
2009.  The note was also modified to allow for the balance to be
convertible to common stock at market pricing.





On March
31, 2008, Apex entered into a subordination agreement with L.V., which acted as
agent for itself and for the Lenders.  The agreement called for the
Apex demand note to become subordinate to the Valens II Term A
note.  In addition, Apex agreed to amend the note by stipulating a
maturity date of June 30, 2011.  The outstanding balance of the Apex
note was $1,120,000 at October 31, 2009 and 2008.





On
October 31, 2007, $50,000 of debentures including $65,889 of accrued interest
was transferred by the debenture holders to John Jenkins, the Company’s
Chairman. These amounts, along with a $300,000 related party demand note
including accrued interest of $84,111, were rolled into a $500,000 convertible
demand note payable to Mr. Jenkins.





On March
31, 2008, Mr. Jenkins entered into a subordination agreement with L.V., which
acted as agent for itself and for the Lenders.  The agreement called
for Mr. Jenkins’ demand note to become subordinate to the Valens II Term A
note.  In addition, Mr. Jenkins agreed to amend the note by
stipulating a maturity date of June 30, 2011.  The outstanding balance
of this note was $500,000 at October 31, 2009 and 2008.





On
October 31, 2007, the Company entered into an agreement, which modified its debt
structure with the Company’s Chairman, John Jenkins.  The agreement
called for the outstanding note due in February of 2008 payable to John Jenkins
to be extended to November 1, 2009.





On March
31, 2008, Mr. Jenkins entered into a subordination agreement with L.V., which
acted as agent for itself and for the Lenders.  The agreement called
for Mr. Jenkins’ note to become subordinate to the Valens II Term A
note.  In addition, Mr. Jenkins agreed to amend the note by
stipulating a maturity date of June 30, 2011.  The outstanding balance
of this note was $1,120,000 at October 31, 2009 and 2008.





Mr.
Jenkins and APEX may at any time elect to convert their related party
convertible notes into common stock of the Company using a conversion price
equal to the bid price at the day of conversion as shown on
Bloomberg.  In connection with the subordination agreements, Mr.
Jenkins and APEX subordinated all claims and security interests it may have
against any of the assets of the Company, to the security interests granted by
the Company to L.V., acting as collateral agent for the Lenders.  The
Company may prepay the related party notes to Mr. Jenkins and to APEX by paying
100% of the outstanding principal and accrued interest.





Revolving
Line of Credit





In
connection with the Security Agreement dated as of March 31, 2008, and further
amended on July 11, 2008, and on October 31, 2008, to obtain additional
financing by and among L.V. and certain other lenders (“Lenders”), the Lenders
agreed to lend a 10% secured revolving line of credit that expires on March 31,
2011 to the Company under certain conditions as specified in the Security
Agreement and subsequent amendments.  As collateral agent for the
Lenders, L.V. maintains a continuing security interest in and lien upon all
assets of the Company.





The
Company may draw up to a maximum amount of $600,000 on the secured revolving
line of credit provided the eligible borrowing base is greater than or equal to
the balance due on the revolving line of credit.  The revolving line
of credit carries an over-advance provision, whereby the lender, in its sole
discretion, may advance cash amounts in excess of the $600,000 contracted.
Interest accrues daily on the outstanding principal balance of the revolving
line of credit and is payable monthly. The balance of the secured revolving loan
at October 31, 2009 was $1,468,697.


F-26
 Index


Capital Lease
Obligations





We have
entered into various capital lease agreements and indefeasible right of use
agreements. The effective interest rate on these agreements is
8%.  The following table summarizes the Company’s outstanding capital
lease obligations as of October 31, 2009:





Information
      as of October 31, 2009Brief
      Description of Capital Lease
            
            Equipment
      Value
            
            Lease
      Term Ends
            
            Monthly
      Payment
            
            Capital
      Lease ObligationsShort-term
            
            Long-termGraybar-1
            
            $
            52,868
            
            11/01/2012
            
            $
            1,058
            
            $
            10,438
            
            $
            23,548Graybar-2
            
            
            53,514
            
            04/23/2012
            
            
            1,289
            
            
            13,416
            
            
            19,647Farnam-5
            
            
            107,044
            
            12/01/2009
            
            
            4,809
            
            
            9,587
            
            
            -Farnam-6
            
            
            107,439
            
            04/30/2010
            
            
            4,827
            
            
            33,125
            
            
            -Farnam-7
            
            
            129,992
            
            05/31/2010
            
            
            5,840
            
            
            45,653
            
            
            -Farnam-8
            
            
            169,528
            
            05/31/2010
            
            
            7,089
            
            
            55,415
            
            
            -Farnam-9
            
            
            269,700
            
            10/01/2010
            
            
            11,404
            
            
            131,972
            
            
            -Farnam-10
            
            
            235,177
            
            04/01/2011
            
            
            10,566
            
            
            118,278
            
            
            52,135Farnam-11
            
            
            266,892
            
            01/01/2011
            
            
            17,525
            
            
            200,335
            
            
            32,232Huntington
            
            
            22,888
            
            05/07/2011
            
            
            708
            
            
            7,924
            
            
            3,493Leaf
            
            
            71,082
            
            07/16/2011
            
            
            2,198
            
            
            24,310
            
            
            14,739AGL
            
            
            300,838
            
            07/27/2017
            
            
            3,650
            
            
            23,049
            
            
            250,395AGL-1
            
            
            60,854
            
            08/01/2017
            
            
            750
            
            
            4,679
            
            
            52,202AGL-2
            
            
            38,906
            
            07/01/2017
            
            
            500
            
            
            3,162
            
            
            34,245AGL-3
            
            
            57,254
            
            05/01/2017
            
            
            750
            
            
            4,773
            
            
            50,972AEL-1
            
            
            32,805
            
            09/01/2011
            
            
            1,017
            
            
            11,007
            
            
            9,868AEL-2
            
            
            58,958
            
            09/01/2011
            
            
            1,831
            
            
            19,844
            
            
            17,501GE
            
            
            71,715
            
            09/17/2011
            
            
            2,247
            
            
            24,211
            
            
            23,426GE-2
            
            
            41,977
            
            11/01/2011
            
            
            1,304
            
            
            13,862
            
            
            16,041Dell
            
            
            7,941
            
            04/01/2011
            
            
            357
            
            
            3,994
            
            
            1,760$
            759,034
            
            $
            602,204





Total
      payments due under capital leases
            
            $
            1,576,177Less
      amount representing interest
            
            
            (214,939
            )Present
      value of minimum payments
            
            
            1,361,238Less
      current portion of capital lease obligations
            
            
            (759,034
            )Capital
      lease obligations, less current portion
            
            $
            602,204





NOTE
7 - CAPITAL STOCK





During
fiscal 2008, the Company issued 3,885,900 shares of its common stock in
connection with the acquisition of 100% of the outstanding stock of One Ring
Networks, Inc., valued at $310,872 at the date of issuance.





During
fiscal 2008, the Company sold 300,000 shares of its common stock for $45,000 to
Matthew Liotta, the Company’s Chief Technology Officer.





During
fiscal 2008, the Company sold 500,000 shares of its common stock for $75,000 to
an unrelated party.





During
fiscal 2009, the Company issued 1,489,475 shares of its common stock in
connection with the contingent payment of True Up Shares related to the
acquisition of One Ring Networks, Inc.


F-27
 Index


During
the first quarter of fiscal 2009, the Company sold 125,000 shares of its common
stock for $7,000 to an unrelated party.





During
the first quarter of fiscal 2009, the Company sold 412,933 shares of its common
stock for $23,124 to Matthew Liotta, the Company’s Chief Technology
Officer.





During
fiscal 2009, the Company issued 2,772,815 shares of its common stock in
connection with the contingent payment of Secondary Shares related to the
acquisition of One Ring Networks, Inc.





The
following table describes stock reserved for future issuances at October 31,
2009:


Number
      of SharesOptions
      (1)
            
            
            4,000,000Warrants
            
            
            26,911,970Convertible
      debt (2)
            
            
            94,523,484125,435,454





(1) The
Company’s 2002 Equity Incentive Plan, as amended, authorizes the Board of
Directors to grant options to purchase up to 4,000,000 shares of the Company’s
common stock.


(2)
Assumes conversion on October 31, 2009 under the terms of the related
agreements.  In addition, specific Company convertible notes allow the
Company to elect to pay in cash in lieu of conversion.  Additionally,
the debt holders are limited to only converting up to 4.99% ownership at a time
and there is a floor of $.10 per share on the conversion which does therefore
limit the number of common shares for which the debt is convertible
into.


NOTE
8 - BUSINESS AND CREDIT CONCENTRATIONS





In the
normal course of business, the Company extends unsecured credit to virtually all
of its customers.  Management has provided an allowance for doubtful
accounts, which reflects its estimate of amounts, which may become
uncollectible.  In the event of complete non-performance by the
Company’s customers, the maximum exposure to the Company is the outstanding
accounts receivable balance at the date of non-performance.





During
fiscal 2009, the Company did not provide wholesale services to any single
customer who accounted for more than 10% of revenues. During the same period,
one of the Company’s suppliers accounted for approximately 34% of the Company’s
total costs of revenues. At October 31, 2009, no customer accounted for more
than 10% of the Company’s trade accounts receivable.





During
fiscal 2008, the Company did not provide wholesale services to any single
customer who accounted for more than 10% of revenues. During the same period,
two of the Company’s suppliers accounted for approximately 22% and 19% of the
Company’s total costs of revenues, respectively. At October 31, 2008, one
customer accounted for 23% of the Company’s trade accounts
receivable.





Due to
the highly competitive nature of the telecommunications business, the Company
believes that the loss of any carrier would not have a long-term material impact
on its business.


F-28
 Index


Information
regarding the Company’s domestic and foreign revenues is as
follows:





South
      Africa
            
            
            All
      other foreign revenues
            
            
            Domestic
            
            
            TotalFiscal
      2009
            
            $
            775,565
            
            
            $
            4,637,676
            
            
            $
            9,533,054
            
            
            $
            14,946,295Fiscal
      2008
            
            $
            1,159,119
            
            
            $
            5,478,000
            
            
            $
            10,601,829
            
            
            $
            17,238,948





During
fiscal 2009, 5% of the Company’s revenue was generated from customers in South
Africa.  During fiscal 2008, 7% of the Company’s revenue was generated
from customers in South Africa.   No individual foreign country
held more than 10 percent of the Company’s long-lived assets as of October 31,
2009 and 2008.





NOTE
9 – EMPLOYEE BENEFIT PLAN





The
Company’s 401(k) Plan (the “Plan”) is a defined contribution plan covering all
domestic employees of the Company.  The Plan provides for voluntary
contributions by employees into the Plan subject to the limitations imposed by
the Internal Revenue Code Section 401(k).For fiscal 2008, the Company matched
participant contributions 50% on every dollar deferred to a maximum of 6% of
compensation.  The Company’s matching funds are subject to a six-year
vesting schedule from the date of original employment.  Company
contributions charged to expense during fiscal 2009 and 2008 was $6,255 and
$35,330, respectively.  The Company did not match participant contributions
into the Plan after December 31, 2008.


NOTE
10 - GAIN ON LEGAL SETTLEMENTS





During
the first quarter of fiscal 2009, the Company executed a settlement agreement
over a past business dispute and received $231,658, net of attorney
fees.  The net amount received was recorded in the first quarter of
fiscal 2009 as a “Gain on legal settlements”.




NOTE
11 - GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS





During
fiscal 2004, the Company determined, based on final written communications with
the State of Texas, that it had a liability for sales taxes (including penalties
and interest) totaling $1.1 million.  On August 5, 2005, the State of
Texas filed a lawsuit in the 53rd Judicial District Court of Travis County,
Austin, Texas against the Company.  The lawsuit requested payment of
approximately $1.162 million, including penalties and for state and local sales
tax.  The sales tax amount due was attributable to audit findings of
the State of Texas for the years 1995 to 1999 associated with Canmax Retail
Systems (“Canmax”), a former operating subsidiary, which provided retail
automation software and related services to the retail petroleum and convenience
store industries.





Effective
April 30, 2008, the Company entered into a settlement agreement and release with
the State of Texas (“State”) whereby the State released the Company, with the
exception of Canmax, from any and all claims related to the sales tax liability
with the State.  In consideration for the release, the Company paid
the State $100,000 during the second quarter of fiscal 2008.





Effective
April 30, 2008, the Company entered into a purchase agreement to sell Canmax to
a third party for a nominal fee.  The sale of Canmax resulted in a
gain of $1,062,000, which was classified as a gain on disposal of discontinued
operations in the accompanying statement of operations.


F-29
 Index


NOTE
12 - STOCK OPTIONS AND WARRANTS





Stock
Options





2002
Equity Incentive Plan





The
Company’s 2002 Equity Incentive Plan (the “Equity Incentive Plan”), as amended,
authorizes the Board of Directors to grant options to purchase up to 4,000,000
shares of the Company’s common stock.  The maximum number of shares of
common stock that may be issuable under the Equity Incentive Plan to any
individual plan participant is 1,000,000 shares.  All options granted
under the Equity Incentive Plan have vesting periods up to a maximum of five
years.  The exercise price of an option granted under the Equity
Incentive Plan shall not be less than 85% of the fair value of the common stock
on the date such option is granted.





1990
Stock Option Plan





The
Company’s 1990 Stock Option Plan (the “Option Plan”), as amended, authorized the
Board of Directors to grant options to purchase up to 2,300,000 shares of the
Company’s common stock.  No options were to be granted to any
individual director or employee, which when exercised, would exceed 5% of the
issued and outstanding shares of the Company.  The Board of Directors
fixed the term of any option granted under the 1990 Stock Option Plan at the
time the options were granted, provided that the exercise period was not to be
longer than 10 years from the date of grant.  All options granted
under the 1990 Stock Option Plan have up to 10-year terms and have vesting
periods that range from 0 to three years from the grant date.  The
exercise price of any options granted under the 1990 Stock Option Plan is the
fair market value at the date of grant.  Subsequent to the adoption of
the Equity Incentive Plan, no further options will be granted under the Option
Plan.





The
Company’s stock option activity for the two years ended October 31, 2009 was as
follows:




Number
      of Shares
            
            
            Option
      Price Per Share
            
            
            Weighted
      Average Exercise PriceOptions
      outstanding at October 31, 2007
            
            
            1,210,000
            
            
            $
            0.05-0.14
            
            
            $
            0.10Options
      granted
            
            
            400,000
            
            
            
            0.08
            
            
            
            0.08Options
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -Options
      cancelled
            
            
            (40,000
            )
            
            
            0.13
            
            
            
            0.13Options
      outstanding at October 31, 2008
            
            
            1,570,000
            
            
            
            0.05–0.14
            
            
            
            0.10Options
      granted
            
            
            -
            
            
            
            -
            
            
            
            -Options
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -Options
      cancelled
            
            
            (655,000
            )
            
            
            0.5-0.13
            
            
            
            0.08Options
      outstanding at October 31, 2009
            
            
            915,000
            
            
            $
            0.08-0.14
            
            
            $
            0.11





The
weighted average grant date fair value of options granted during fiscal 2008 was
$0.07 per share.  All options granted during fiscal 2008 were to
employees.  The weighted average remaining contractual term of
exercisable options outstanding at October 31, 2009 was 2.39 years, and the
weighted average remaining contractual term of exercisable and non-exercisable
options outstanding at October 31, 2009 was 1.72 years.  The total
unrecognized cost related to non-vested options at October 31, 2009 was $11,856,
and the weighted average period over which it will be recognized is .87
years.


F-30
 Index


The
following table summarizes information about employee compensatory stock options
outstanding at October 31, 2009:





Options
      Outstanding
            
            
            Options
      ExercisableRange
      of Average Exercise Prices
            
            
            Number
      Outstanding
            
            
            Weighted
      Average Remaining Life (in Years)
            
            
            Weighted
      Average Exercise Price
            
            
            Number
      Exercisable
            
            
            Weighted
      Average Exercise Price$0.08
            
            
            
            
            400,000
            
            
            
            0.86
            
            
            
            0.08
            
            
            
            0
            
            
            
            0.08$0.12-$0.14
            
            
            
            
            515,000
            
            
            
            2.39
            
            
            
            0.13
            
            
            
            515,000
            
            
            
            0.13915,000
            
            
            
            1.72
            
            
            $
            0.11
            
            
            
            515,000
            
            
            $
            0.10





Warrants





Employee
warrant activity for the two years ended October 31, 2009 was as
follows:





Number
      of Shares
            
            
            Warrants
      Price Per Share
            
            
            Weighted
      Average Exercise PriceWarrants
      outstanding at   October 31, 2007
            
            
            1,640,000
            
            
            $
            .13
      -.16
            
            
            $
            .14Warrants
      granted
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      cancelled
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      outstanding at October 31, 2008
            
            
            1,640,000
            
            
            $
            .13
      -.16
            
            
            $
            .14Warrants
      granted
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      cancelled
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      outstanding at October 31, 2009
            
            
            1,640,000
            
            
            $
            .13
      -.16
            
            
            $
            .14





Warrant
Issuances to Non-Employees





Non-employee
warrant activity for the two years ended October 31, 2009 was as
follows:




Number
      of Shares
            
            
            Warrants
      Price Per Share
            
            
            Weighted
      Average Exercise PriceWarrants
      outstanding at   October 31, 2007
            
            
            11,835,000
            
            
            $
            0.10
      -0.78
            
            
            $
            0.20Warrants
      granted
            
            
            19,136,970
            
            
            
            0.01
      -0.12
            
            
            
            0.01Warrants
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      cancelled
            
            
            (5,700,000
            )
            
            
            0.10
      –0.78
            
            
            
            0.10Warrants
      outstanding at October 31, 2008
            
            
            25,271,970
            
            
            
            0.01
      -0.38
            
            
            
            0.05Warrants
      granted
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      cancelled
            
            
            -
            
            
            
            -
            
            
            
            -Warrants
      outstanding at October 31, 2009
            
            
            25,271,970
            
            
            $
            0.01
      -0.38
            
            
            $
            0.05








See
discussion of warrants in (“NOTE 6 – CAPITAL LEASES, CONVERTIBLE DEBENTURES AND
NOTES PAYABLE, INCLUDING RELATED PARTY NOTES”).


F-31
 Index


NOTE
13 - INCOME TAXES





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts reported for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities at October 31, 2009 and 2008 are
as follows:





2009
            
            
            2008Deferred
      tax assetsNet
      operating loss carryovers
            
            $
            14,644,638
            
            
            $
            15,242,872Accounts
      receivable
            
            
            148,462
            
            
            
            47,130Goodwill
      and customer lists
            
            
            2,306,938
            
            
            
            73,453Warrants
            
            
            54,296
            
            
            
            54,296Accrued
      liabilities
            
            
            19,015
            
            
            
            31,181Total
      gross deferred tax assets
            
            
            17,173,349
            
            
            
            15,448,932Deferred
      tax liabilitiesProperty
      and equipment
            
            
            (12,722
            )
            
            
            (16,464
            )Total
      gross deferred tax liabilities
            
            
            (12,722
            )
            
            
            (16,464
            )Net
      deferred tax assets
            
            
            17,160,627
            
            
            
            15,432,468Valuation
      allowance
            
            
            (17,160,627
            )
            
            
            (15,432,468
            )Net
      deferred assets
            
            $
            -
            
            
            $
            -





The
following is a reconciliation of the Company’s income tax expense (benefit) at
the statutory rate to the income tax expense (benefit) at the effective tax
rate:





2009
            
            
            2008Income
      tax benefit at statutory rate
            
            $
            (4,017,956
            )
            
            $
            (501,210
            )Permanent
      differences
            
            
            208,950
            
            
            
            160,733Net
      Operating Loss Expiration
            
            
            2,120,449
            
            
            
            1,439,818Change
      in valuation allowance
            
            
            1,728,159
            
            
            
            (973,964
            )Other
            
            
            (39,602
            )
            
            
            (125,377
            )$
            -
            
            
            $
            -





At
October 31, 2009, the Company has U.S. net operating loss carryforwards for
federal income tax purposes of approximately $43 million, which expire in 2010
through 2029.  Utilization of U.S. net operating losses is subject to
annual limitations provided for by the Internal Revenue Code. The annual
limitation may also result in the expiration of net operating losses before
utilization.





Realization
of tax benefits depends on having sufficient taxable income within the carryback
and carryforward periods. The Company continually reviews the adequacy of the
valuation allowance and recognizes these benefits as reassessment indicates that
it is more likely than not that the benefits will be realized. Based on pretax
losses incurred in prior years, management has established a valuation allowance
against the entire net deferred asset balance.


F-32
 Index


NOTE
14 - COMMITMENTS AND CONTINGENCIES





Operating
Leases, including Related Party Lease





The
Company leases its corporate office and branch office facilities under various
noncancelable operating leases with terms expiring at various dates through
2016.  The operational and administrative headquarters facility is
leased through June 2011 from Apex Communications, Inc., an entity owned
partially by an executive officer of the Company.  In addition, office
space is leased to support operating divisions located in California, Georgia,
Texas, and in South Africa.  The California lease is
month-to-month.  Rent expense for office operating leases was $240,553
and $229,766 during fiscal year 2009 and 2008, respectively. Rent expense to
Apex was $137,591 and $134,860 for fiscal year 2009 and 2008,
respectively.





Facilities
Leases





The
Company has obligations under various Facilities License Agreements (“Facilities
Leases”) to commercial property owners related to communications and information
technology equipment which is used in the Company’s wireless network services
and owned by the Company housed within or atop the commercial
property.  The Facilities Leases generally have terms of one to three
years, require monthly payments between $150 and $5,000 and are renewed
regularly.  A portion of the Company’s Facilities Leases contain
escalation clauses which provide for cost of living adjustments each
year.  Total expense under these Facilities Leases was approximately
$763,000 and $195,000 during fiscal year 2009 and 2008, respectively, and is
included within cost of services in the accompanying statements of
operations.





Future
minimum lease payments under noncancelable operating and facilities leases as of
October 31, 2009 are as follows:





Year
      Ending October 31,
            
            Related
      Party
            
            
            Other
            
            
            Total2010
            
            
            135,400
            
            
            
            686,958
            
            
            
            822,3582011
            
            
            89,907
            
            
            
            637,973
            
            
            
            727,8802012
            
            
            -
            
            
            
            521,714
            
            
            
            521,7142013
            
            
            -
            
            
            
            328,519
            
            
            
            328,5192014
            
            
            -
            
            
            
            367,338
            
            
            
            367,3382015
            
            
            -
            
            
            
            84,665
            
            
            
            84,6652016
            
            
            -
            
            
            
            50,446
            
            
            
            50,446Total
      minimum lease payments
            
            $
            225,307
            
            
            
            2,677,613
            
            
            
            2,902,920





Legal
Proceedings





The
Company, from time to time, may be subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property of third parties by the
Company.  Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.





Coastline
Capital On May 5, 2008, the Company filed a lawsuit against
Coastline Capital  for Declaratory Relief related to the Valens and
Laurus debenture transactions.  The Company’s suit for
Declaratory  Relief seeks a Judgment from the Court that Coastline
Capital has not earned a broker’s fee in the Valens/Laurus transaction in that
Coastline Capital did not represent the Company in the transaction that closed
and, pursuant to the terms of the brokerage contract Coastline Capital was not
entitled to a broker’s fee.  On June 23, 2008, Coastline Capital filed
an answer and cross-complained against the Company contending that Coastline
Capital earned a broker’s fee when the Valens/Laurus debenture transaction
closed.  The Company has filed an answer to the Cross Complaint which
denied the allegations of the Cross Complaint and asserted affirmative
defenses.  The parties have agreed to binding arbitration to resolve
this dispute.  The Company will pursue this arbitration and vigorously
defend the Cross Complaint as the Company is confident that its claims are
supported by the facts and written documents relevant to this
litigation.


F-33
 Index


Ian
Caplan  On June
23, 2009, Ian Caplan and Click Connect LLC filed a lawsuit in the Los Angeles
Superior Court against the Company claiming the Plaintiffs were not paid
commissions for revenues generated by one of the Companies
subsidiaries.  On September 2, 2009, the Company filed an answer to
the complaint which denied the allegations of the Complaint and asserted
affirmative defenses.  The Plaintiffs have never executed a contract
with the Company who is the only defendant in the litigation and the Company has
not located any documents where it assumed any obligations to pay commissions to
the Plaintiff’s.  The litigation is in the discovery
phase.  It is expected that the Company will be successful in the
litigation based on the lack of privity of contract between the Plaintiffs and
the Company and the lack of any course of dealing between the Company and the
Plaintiff’s.





Qwest  During
the quarter ended July 31, 2009, Qwest a former vendor, alleged that a
subsidiary of the Company was notified of a significant price increase in
relation to a telecommunication contract between the vendor and a subsidiary of
the Company.  The Company responded that it was not properly notified
of any changes, which was required under the contract.  Additionally,
the Company requested proof of notification from the vendor, which has not yet
been provided.  The vendor requested arbitration pursuant to the
contract, and claims that the Company owes approximately $1.78 million for
services provided.  The Company’s position is that under the
contracted pricing structure the Company owes $0.8 million.  This
amount is accrued in the financial statements.  On December 21, 2009
the arbitrator awarded approximately $1,780,000 in favor of the vendor and
against a subsidiary of the Company.  Management has evaluated this
matter and believes that the current potential range of loss of could be
reasonably estimated as $800,000 to $1,780,000.  Management believes
that upon final resolution the amount will likely be less than $1,780,000, based
upon, among other factors, that the subsidiary was not afforded due process in
the arbitration proceedings and that the arbitrator did not take into
consideration the excess billings of Qwest that were not due and payable by the
subsidiary.  At this time, the precise and final outcome of this
matter cannot be predicted and management’s evaluation indicates that amounts at
the high end of the range are not likely.  Therefore, $800,000 has
been accrued for this matter.





Liotta
Litigation  On
November 24, 2009 Matthew Liotta filed his First Amended Complaint, in Fulton
County Georgia, against the Company and one of its subsidiaries alleging
wrongful termination and damages for unpaid compensation pursuant to a written
employment contract.  On January 12, 2010, the Company and its
subsidiary filed its answer to the First Amended Complaint which denied the
allegations of the Complaint and asserted affirmative defenses asserting that
neither the Company nor its subsidiary has ever executed an employment contract
with Matthew Liotta.  Upon Matthew Liotta’s termination “for cause” he
was paid all of his salary and benefits thus the Company believes that Mr.
Liotta has instituted this litigation, along with the litigation discussed
below, based upon his vendetta against the Company as a result of his dismissal
for cause as an employee of Telenational, a subsidiary of the
Company.




Former
One Ring Networks Shareholders litigation 5 of the 11 former shareholders
of One Ring Networks, Inc, a subsidiary of the Company, filed a lawsuit, in The
District Court of Nebraska, against the Company claiming that a portion of the
payment for their shares pursuant to the terms of a Stock Purchase Agreement
between One Ring Networks, Inc and the Company dated March 28, 2008 entitled the
“True Up” portion of the purchase price were incorrectly calculated and
unpaid.  On January 27, 2010, the Company filed an answer to the
Complaint which denied the allegations of the Complaint and asserted affirmative
defenses based upon the Company’s documents that support the fact that the “True
Up” calculations were accurately prepared and were properly paid to all of the
former shareholders of One Ring Networks, Inc. On January 20, 2010, the Court
denied the Application for a Preliminary Injunction brought by the Plaintiff’s
requesting that the Company not transfer or spin off its subsidiary One Ring
Networks, Inc. pending the resolution of this litigation. The Order denying the
Preliminary Injunction was based upon the opposition filed by the Company to the
application for the Preliminary Injunction.  Based upon the Court’s
Order and the documents between the Company and One Ring Networks, Inc the
Company is very confident that this litigation will be resolved favorably for
the Company.


F-34
 Index


NOTE
15 – SUBSEQUENT EVENTS




In May 2009, the FASB
issued a new accounting standard which established general accounting standards
and disclosure for subsequent events. In accordance with this standard, the
Company evaluated subsequent events through February 15, 2010, the date we filed
this Annual Report on Form 10-K with the Securities and Exchange Commission
(SEC).





EXHIBIT
INDEX





NO.
            
            DESCRIPTION OF EXHIBIT21.1
            
            Subsidiaries
      of the Registrant (filed herewith)31.1
            
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act of 1934 (filed
      herewith)31.2
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
      15d-14(a) of the Securities Exchange Act of 1934 (filed
      herewith)32.1
            
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished
      herewith)32.2
            
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished
      herewith)






F-35