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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-KSB


ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended September 30, 2005


Commission file
number: 2-42114





Local Telecom Systems, Inc.


(Name of Small Business Issuer in Its Charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|State of Nevada                                                    |  | 75-1310613                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)

1845 Woodall Rodgers, No. 1225


Dallas, Texas 75201


(Address of Principal Executive Offices)


Issuers Telephone Number including Area Code:


(214) 468-0000


Securities registered pursuant to Section 12(g) of the
Act:


Common stock, par value $0.0167


o


þ o


S-B 10-KSB 10-KSB. þ


12b-2 o þ




12b-2




DOCUMENTS INCORPORATED BY REFERENCE




o þ










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TABLE OF CONTENTS


|                                             |  |                                                                                          |    |  |    | 
|-------------------------------------------- |  | ---------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I                                      
|Item 1.                                      |  | Description of Business                                                                  |    |  | 3  | 
|                                             |  | (a) Business Development                                                                 |    |  | 3  | 
|                                             |  | (b) Business of the Issuer                                                               |    |  | 4  | 
|Item 2.                                      |  | Properties                                                                               |    |  | 9  | 
|Item 3.                                      |  | Legal Proceedings                                                                        |    |  | 9  | 
|Item 4.                                      |  | Submission of Matters to a Vote of Security
    Holders                                  |    |  | 9  | 
|                                            
|PART II                                     
|Item 5.                                      |  | Market for Common Equity and Related
    Stockholder Matters                             |    |  | 9  | 
|                                             |  | (a) Market Information                                                                   |    |  | 9  | 
|                                             |  | (b) Holders                                                                              |    |  | 9  | 
|                                             |  | (c) Dividends                                                                            |    |  | 9  | 
|                                             |  | (d) Securities Authorized for Issuance
    Under Equity Compensation Plans               |    |  | 9  | 
|Item 6.                                      |  | Plan of Operations                                                                       |    |  | 10 | 
|Item 7.                                      |  | Financial Statements                                                                     |    |  | 11 | 
|Item 8.                                      |  | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure |    |  | 12 | 
|Item 8A.                                     |  | Controls and Procedures                                                                  |    |  | 12 | 
|                                            
|PART III                                    
|Item 9.                                      |  | Directors, Executive Officers, Promoters
    and Control Persons                         |    |  | 12 | 
|Item 10.                                     |  | Executive Compensation                                                                   |    |  | 13 | 
|Item 11.                                     |  | Security Ownership of Certain Beneficial
    Owners and Management                       |    |  | 14 | 
|Item 12.                                     |  | Certain Relationships and Related
    Transactions                                       |    |  | 14 | 
|Item 13.                                     |  | Exhibits and Reports on Form 8-K                                                         |    |  | 15 | 
|Item 14.                                     |  | Principal Accountant Fees and Services                                                   |    |  | 15 | 
|INDEX TO EXHIBITS                            |  |                                                                                          | 30 | 
|302 Certification of Chief Executive Officer
|302 Certification of Chief Financial Officer
|906 Certification of Chief Executive Officer
|906 Certification of Chief Financial Officer



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FORWARD-LOOKING STATEMENTS


10-KSB 10-KSB




| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | changes in tax legislation;                                                          
|
| |  | federal and state regulations;                                                       
|
| |  | general economic conditions;                                                         
|
| |  | competitive factors and pricing pressures;                                           
|
| |  | our dependence on the services of key personnel;                                     
|
| |  | our dependence on persistency of existing business;                                  
|
| |  | risks associated with acquisitions;                                                  
|
| |  | significant intangible assets; and                                                   
|
| |  | our dependence on information processing systems and risk of
    errors or omissions.

10-KSB 10-KSB 10-KSB


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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS




(a) Business Development
















| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) 18,675,000 shares for officer/director fees,
    consulting fees, note payments, preferred stock dividends and
    preferred stock conversion fees.
|
| | b) 15,000,000 shares for consulting on acquisitions
    and financing.                                                                                
|
| | c) 30,000,000 shares to reconvert the outstanding
    preferred stock to common shares.                                                               









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(b) Business of the Issuer




Mortgage Brokerage








| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | There are approximately of 40,000 Small and Medium Enterprise
    (SME) mortgage brokers in the United States.
|
| |  | Licensing is state issued and controlled and licenses can take 6
    to 9 months to obtain.                   
|
| |  | Approximately 73% of all mortgage originations in the US are
    through a mortgage broker.                   

Mortgage Banking








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Acquisition Strategy








|                               |  |   |       |         
|------------------------------ |  | - | ----- | --------
|Purchase Market                |  | $ | 1,585 | Billion 
|Refinance Market               |  |   | 1,270 | Billion 
|Home Equity Market             |  |   | 370   | Billion 
|Total Consumer Lending Market: |  | $ | 3,225 | Trillion

Source: Mortgage Bankers Association of America, 2005.






| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Housing construction over the next 10 years is anticipated
    to exceed that of the previous 10 years. According to
    State of the Nations Housing, Harvard University, 2004,
    the total number of new homes expected to be built between 2005
    and 2015 is 18.5 million to 19.5 million residences.
|
| |  | Automation has accelerated loan and mortgage approvals, lowered
    costs, and expanded access to credit. Multiple mortgage products
    with different amortization lengths, loan terms, and repayment
    privileges have helped to keep many more consumers in the market.                                









| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Traditional Mortgage Broker
    Operations  There are approximately 44,000 small
    to medium sized mortgage brokers from whom the majority of
    consumers transact mortgage purchases in their local market.
    Typically, these establishments do the most efficient job of
    guiding consumers through the mortgage process. In addition to
    servicing their established customers, these operations may call
    on local real estate agents, builders, etc. who have first
    contact with ready consumers in their area.
|
| | 2. Internet Mortgage Originations 
    Internet mortgage originations are a growing trend in the US, as
    consumers become more comfortable with Internet driven mortgage
    transactions. Although margins usually range around 50% and have
    lower closing ratios and sales revenues, this model serves a
    unique, growing customer segment and drives strong brand
    awareness.                                                                                                                                              
|
| | 3. High-End Mortgage Capabilities  With
    this capability, the company can recruit the best talent in the
    industry with large value/high credit customers (A and Alt-A
    Paper) and established books of business. This ability allows
    the company to bring on seasoned loan officers with favorable
    commission splits who can significantly impact production.                                                                                                                                                            

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. Specialty Niches (Non-Warrantable
    Condos) LTSI has identified several
    opportunities to leverage this business model with several
    lenders/investors of high rise condominiums, who are seeking a
    joint venture partner to provide mortgage banking capabilities
    on warrantable and non-warrantable condos along the East Coast.                                                                                                                                                                                                                                                                                             
|
| | 5. Direct to the Consumer  It
    is believed home mortgage applicants with low income and/or
    less-than-perfect credit pay lower financing costs when they
    obtain their mortgages through brokers rather than lenders. This
    rapidly expanding sector does approximately 50% B, C & D
    paper, and 50% refinanced equity, primarily to Hispanics
    throughout South Texas. The Company specializes in proven
    non-traditional solicitations, including broadcast e-mails,
    newspaper advertising, direct mail, apartment-owner to homeowner
    programs, etc. that could be replicated in similar demographic
    markets.

Employees




Competition






Government Regulation






| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Mortgage brokers are licensed by their state of domicile                                   
|
| |  | Mortgage banking is regulated by federal and state banking laws                            
|
| |  | Mortgage lending is regulated by a number of federal and state
    consumer protection laws

RISK FACTORS


10-KSB




| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | WE ARE DEPENDENT UPON THE SUCCESS OF OUR PRIVATE PLACEMENT
    EFFORTS TO REPAY OUR SHORT-TERM OBLIGATIONS AND CONTINUE IN
    BUSINESS.



WE
MAY NOT HAVE ADEQUATE CASH TO FUND OUR OPERATIONS.




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OUR
LACK OF OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS
DIFFICULT.




CHANGES
IN INTEREST RATES MAY HARM OUR RESULTS OF OPERATIONS.




AN
ECONOMIC SLOWDOWN OR RECESSION COULD REDUCE THE DEMAND FOR OUR
MORTGAGE LOANS AND HARM OUR OPERATING RESULTS.




FAILURE
TO RENEW OR OBTAIN ADEQUATE FUNDING UNDER WAREHOUSE FACILITIES
AND REPURCHASE AGREEMENTS MAY HARM OUR LENDING
OPERATIONS.




AN
INTERRUPTION OR REDUCTION IN THE SECURITIZATION AND WHOLE LOAN
MARKETS WOULD HURT OUR FINANCIAL PERFORMANCE.




IF
WE ARE UNABLE TO SELL A SIGNIFICANT PORTION OF OUR MORTGAGE
LOANS ON AT LEAST A QUARTERLY BASIS, OUR EARNINGS WOULD
DECREASE.




WE
MAY BE REQUIRED TO REPURCHASE MORTGAGE LOANS OR INDEMNIFY
INVESTORS IF WE BREACH REPRESENTATIONS AND WARRANTIES OR IF THE
BORROWER DEFAULTS.




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IF
WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND
REGULATIONS, OUR ABILITY TO MAKE MORTGAGE LOANS MAY BE
RESTRICTED.




CHANGES
IN THE MORTGAGE INTEREST TAX DEDUCTION COULD DECREASE OUR LOAN
PRODUCTION.




OUR
INDUSTRY IS HIGHLY COMPETITIVE, WHICH MAY ADVERSELY AFFECT OUR
ABILITY TO GROW OUR CUSTOMER BASE AND GENERATE SALES.








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ITEM 2.     PROPERTIES




|                                  |  |         |        |  |         |  |       |               |  |               
|--------------------------------- |  | ------- | ------ |  | ------- |  | ----- | ------------- |  | --------------
|                                  |  | Current |        |  |         |  |      
|                                  |  | Monthly |        |  | Square  |  |       |              
|Practice-Location                 |  | Rent    |        |  | Footage |  |       | Lease Expires
|                                  |  |         |        |  |         |  |       |              
|Executive offices, Dallas, Texas  |  | $       | 4,027  |  |         |  | 2,500 |               |  | May 2008      
|Mortgage banking, Austin, Texas   |  | $       | 11,800 |  |         |  | 8,000 |               |  | December 2007 
|Mortgage brokerage, Conroe, Texas |  | $       | 3,500  |  |         |  | 4,500 |               |  | September 2008
|Mortgage brokerage, Laredo, Texas |  | $       | 1,351  |  |         |  | 1,200 |               |  | December 2006 




ITEM 3.     LEGAL
PROCEEDINGS







ITEM 4.     SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS


10-KSB





PART II





ITEM 5.     MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS





(a) Market Information









(b) Holders









(c) Dividends







(d) Securities Authorized for Issuance Under Equity
Compensation Plans




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Issuance of Unregistered Shares


10-QSB







|        |                   
|------- | ------------------
|ITEM 6. | PLAN OF OPERATIONS

Disclosure Regarding Forward-Looking Statements


10-KSB 10-KSB 10-KSB,


General Discussion






Acquisitions






| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On March 25, 2005, and effective April 1, 2005, the
    Company acquired all of the outstanding Common Stock of MBT,
    Mortgage Services Ltd. for a total price of
    $2,777,499  $308,000 in notes and $2,469,499 of LTSI
    Common Stock
|
| |  | On September 30, the Company acquired all of the business,
    assets and goodwill of Lakeview Mortgage, Inc. for a total price
    of $285,000  $25,000 in notes and $260,000 of LTSI
    Common Stock                                       
|
| |  | On September 30, 2005, the Company acquired all of the
    business, assets and goodwill of Northland Funding, Inc.
    (Northland) for a total price of
    $840,000  $200,000 in notes and $640,000 of LTSI
    Common Stock              



Results of Operations




|                   |  |   |            |  
|------------------ |  | - | ---------- | -
| Revenue          |  | $ | 1,081,625  |  
| Operating loss   |  |   | 1,543,467  |  
| Net loss         |  | $ | (2,454,224 | )
| Per common share |  | $ | (.33       | )

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|                     |  |   |           |  
|-------------------- |  | - | --------- | -
|Revenues             |  | $ | 1,081,616 |  
|Loss from operations |  | $ | (13,564   | )

Income Taxes




Liquidity and Capital Sources






| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The acquisitions are totally dependent on internally generated
    cash flow to sustain their operations and meet their
    obligations. The Company cannot be expected to finance its
    operating subsidiaries.





| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is totally dependent on the success of the capital
    raising efforts to sustain its operations and complete its
    acquisition program.





| |   |                                                     
| | - | ----------------------------------------------------
| |  | $1,600,000 of short-term private placement financing
|
| |  | $10,000,000 of
    follow-on equity
    financing   







| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At September 30, 2005, the Company was obligated in the
    amount of $683,000 on short-term notes. Subsequent to
    September 30, 2005, several of these notes went into
    default, and the Company was successful in negotiating
    extensions of the notes in exchange for the issuance of
    additional Common Stock and Common Stock purchase warrants to
    the Noteholders








|        |                     
|------- | --------------------
|ITEM 7. | FINANCIAL STATEMENTS

10-KSB.


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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE










|         |                        
|-------- | -----------------------
|ITEM 8A. | CONTROLS AND PROCEDURES







10-KSB.





PART III







|        |                                                                 
|------- | ----------------------------------------------------------------
|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
    PERSONS



|                      |  |     |    |            |         |  |      |      |  |  |          |  |  |                         
|--------------------- |  | --- | -- | ---------- | ------- |  | ---- | ---- |  |  | -------- |  |  | ------------------------
|                      |  |     |    | Date First |         |  |      |      | 
|Name                  |  | Age |    |            | Elected |  |      | Term |  |  | Position
|                      |  |     |    |            |         |  |      |      |  |  |         
|Bruce A. Hall         |  |     | 48 |            |         |  | 2005 |      |  |  | 1 year   |  |  | Director                
|Richard M. Hewitt     |  |     | 68 |            |         |  | 2002 |      |  |  | 1 year   |  |  | Secretary, CFO, Director
|William R. Miertschin |  |     | 58 |            |         |  | 1997 |      |  |  | 1 year   |  |  | Chairman of the Board   
|Patrick A. McGeeney   |  |     | 56 |            |         |  | 2005 |      |  |  | 1 year   |  |  | President, CEO, Director



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Section 16(a) Beneficial Ownership Reporting
Compliance









|         |                       
|-------- | ----------------------
|ITEM 10. | EXECUTIVE COMPENSATION





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|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT



|                               |  |                                                                       |  |              |            |    |          |  |       | 
|------------------------------ |  | --------------------------------------------------------------------- |  | ------------ | ---------- | -- | -------- |  | ----- | 
|                               |  | Name and Address                                                      |  | Number of    |            |    | Percent  | 
|Title of Class                 |  | of Beneficial Owner                                                   |  | Shares Owned |            |    | of Class | 
|                               |  |                                                                       |  |              |            |    |          | 
|Common Stock $0.0167 Par Value |  | Corriente Rope Co., Inc.
    P.O. Box 607
    Albany, Texas 76430     |  |              | 15,000,000 |    |          |  | 18.5% | 
|Common Stock $0.0167 Par Value |  | Amber G. Smith
    6867 Anglebluff Circle
    Dallas, Texas 75248     |  |              | 26,302,800 | *  |          |  | 32.8% | 
|Common Stock $0.0167 Par Value |  | Stephen Grosberg
    601 E. 20th St. #8C
    New York, New York 10010 |  |              | 6,672,000  | ** |          |  | 8.3%  | 
|Common Stock $0.0617 Par Value |  |                                                                       |  |              |            |    |          |  |       | 




| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| | * | Amber G. Smiths holdings include 26,000,000 shares of
    common stock owned by Concord Creek Corp. of which she is CEO
    and a Director.



|   |                                                                                                                                                                                                                                                                                       
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Stephen Grosbergs holdings include 160,000 shares of
    common stock owned by Stephen and Charles and Nettie Grosberg
    Foundation and 1,032,000 shares of common stock owned by
    Stephen Grosberg, custodian for Catherine Grosberg.
    Mr. Grosberg controls these entities.

Executive Officers and Directors


|                                                  |  |                                                                           |  |  |           |    |  |  |      | 
|------------------------------------------------- |  | ------------------------------------------------------------------------- |  |  | --------- | -- |  |  | ---- | 
|Common Stock
    $0.0167 Par Value                |  | William R. Miertschin
    7738 Forest Lane #102
    Dallas, Texas 75230   |  |  | 7,308,963 | *  |  |  | 9.1  | 
|                                                 
|Common Stock
    $0.0167 Par Value                |  | Richard M. Hewitt
    202 Fresh Meadow Drive
    Trophy Club, Texas 76262 |  |  | 2,017,242 | ** |  |  | 2.5  | 
|                                                 
|All Directors and Officers as a group (2 persons) |  |                                                                           |  |  | 9,326,205 |    |  |  | 11.6 | 




| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | William R. Miertschins holdings include
    2,000,000 shares of common stock owned by Cumberland
    Continental Corp. of which Miertschin is CEO and a Director.



|   |                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------
|** | Richard M. Hewitts holdings include 64,657 shares of
    common stock owned by Richard M. Hewitt, P.C. of which
    Hewitt is the principle.










|         |                                               
|-------- | ----------------------------------------------
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



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|         |                                     
|-------- | ------------------------------------
|ITEM 13. | EXHIBITS AND REPORTS ON
    FORM 8-K

8-K









|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



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SIGNATURES






| |                            
| | ---------------------------
| | LOCAL TELECOM SYSTEMS, INC.

|                        |  |                                                                    
|----------------------- |  | -------------------------------------------------------------------
|Date: February 15, 2006 |  | /s/ William R. MiertschinBy: William R. Miertschin,
    Chairman   
|                       
|Date: February 15, 2006 |  | /s/ Patrick A. McGeeneyBy: Patrick A. McGeeney,
    President & CEO



|                                               |  |                 |  |                   |  | 
|---------------------------------------------- |  | --------------- |  | ----------------- |  | 
|Signature                                      |  | Title           |  | Date             
|                                               |  |                 |  |                  
|                                              
|/s/ William R. MiertschinWilliam R. Miertschin |  | Chairman        |  | February 15, 2006
|                                              
|/s/ Patrick A. McGeeneyPatrick A. McGeeney     |  | President & CEO |  | February 15, 2006

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LOCAL TELECOM SYSTEMS INC.


CONSOLIDATED FINANCIAL STATEMENTS


AND


REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM


SEPTEMBER 30, 2005


Killman, Murrell & Company, P.C.


Certified Public Accountants


17



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##### 










LOCAL TELECOM SYSTEMS INC.


INDEX TO FINANCIAL STATEMENTS


|                                                                                                                             |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                             |  | Page |   
|                                                                                                                             |  |      |   
|Report of Independent Registered Public
    Accounting Firm                                                                  |  |      | 19 | 
|Consolidated Balance Sheet as of
    September 30, 2005                                                                      |  |      | 20 | 
|Consolidated Statement of Operations for
    the period from March 25, 2005 (Inception) to
    September 30, 2005            |  |      | 21 | 
|Consolidated Statement of
    Stockholders Deficit for the period from March 25,
    2005 (Inception) to September 30, 2005 |  |      | 22 | 
|Consolidated Statement of Cash Flows for
    the period from March 25, 2005 (Inception) to
    September 30, 2005            |  |      | 23 | 
|Notes to Consolidated Financial
    Statements                                                                               |  |      | 24 | 



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                               
| | ------------------------------
| | /s/                           
| |                               
| | Killman Murrell & Company P.C.





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LOCAL TELECOM SYSTEMS INC.





CONSOLIDATED BALANCE SHEET


As of September 30, 2005


|                                                                              |                                                                                                             |                                            |           |            |            |  
|----------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ---------- | ---------- | -
|ASSETS                                                                       
|Current Assets                                                                |                                                                                                             |                                            |           |           
|                                                                              | Cash                                                                                                        |                                            | $         | 68,918     |           
|                                                                              | Accounts receivable                                                                                         |                                            |           | 70,433     |           
|                                                                              | Prepaid expenses                                                                                            |                                            |           | 8,183      |           
|                                                                              | Deferred debt issue cost                                                                                    |                                            |           | 334,246    |           
|                                                                              |                                                                                                             |                                            |          
|                                                                              |                                                                                                             | Total Current Assets                       |           |            | 481,780    |  
|                                                                              |                                                                                                             |                                            |          
|Office and Computer Equipment, Net of Accumulated
    Depreciation of $13,903 |                                                                                                             |                                            | 265,874   |           
|                                                                              |                                                                                                             |                                            |          
|Other Assets                                                                  |                                                                                                             |                                            |           |           
|                                                                              | Goodwill                                                                                                    |                                            |           | 2,023,161  |           
|                                                                              | Other                                                                                                       |                                            |           | 5,976      |           
|                                                                              |                                                                                                             |                                            |          
|                                                                              |                                                                                                             | Total Assets                               |           | $          | 2,776,791  |  
|                                                                              |                                                                                                             |                                            |          
|LIABILITIES AND STOCKHOLDERS EQUITY                                         
|Current Liabilities                                                           |                                                                                                             |                                            |           |           
|                                                                              | Notes payable                                                                                               |                                            | $         | 683,379    |           
|                                                                              | Accounts payable                                                                                            |                                            |           | 91,751     |           
|                                                                              | Accrued liabilities                                                                                         |                                            |           | 129,315    |           
|                                                                              | Accounts payable-related parties                                                                            |                                            |           | 159,540    |           
|                                                                              |                                                                                                             |                                            |          
|                                                                              |                                                                                                             | Total Current Liabilities                  |           |            | 1,018,985  |  
|                                                                              |                                                                                                             |                                            |          
|Unissued Common Stock                                                         |                                                                                                             |                                            | 2,649,168 |           
|Unissued Preferred Stock                                                      |                                                                                                             |                                            | 1,150,000 |           
|Stockholders Equity                                                          |                                                                                                             |                                            |           |           
|                                                                              | Preferred stock, par value $.10 per share
    1,000,000 shares authorized, none issued                      |                                            |           |           |           
|                                                                              | Common stock, $.0167 par value, 100,000,000 shares
    authorized, 79,959,423 shares issued and outstanding |                                            |           | 1,335,323  |           
|                                                                              | Additional paid-in-capital                                                                                  |                                            |           | (922,461   | )         
|                                                                              | Accumulated deficit                                                                                         |                                            |           | (2,454,224 | )         
|                                                                              |                                                                                                             |                                            |          
|                                                                              |                                                                                                             | Total Stockholders Equity                 |           |            | (2,041,362 | )
|                                                                              |                                                                                                             |                                            |          
|                                                                              |                                                                                                             | Total Liabilities and Stockholders Equity |           | $          | 2,776,791  |  
|                                                                              |                                                                                                             |                                            |          



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LOCAL TELECOM SYSTEMS INC.





CONSOLIDATED STATEMENT OF OPERATIONS


For the Period Ended September 30, 2005


|                                                                           |                                          |   |            |           |  
|-------------------------------------------------------------------------- | ---------------------------------------- | - | ---------- | --------- | -
|Revenues                                                                   |                                          | $ | 1,081,625  |          
|Cost of Revenues                                                           |                                          |   | 104,537    |          
|                                                                           |                                          |   |           
|Gross Profit                                                               |                                          |   | 977,088    |          
|                                                                           |                                          |   |           
|Operating Expenses                                                         |                                          |   |            |          
|                                                                           | Compensation                             |   |            | 814,174   |  
|                                                                           | General and administrative               |   |            | 542,478   |  
|                                                                           | Depreciation                             |   |            | 13,902    |  
|                                                                           |                                          |   |           
|                                                                           | Improvement loss on second mortgage lien |   |            | 1,150,000 |  
|Total Operating Expenses                                                   |                                          |   | 2,520,555  |          
|                                                                           |                                          |   |           
|Loss from Operation                                                        |                                          |   | (1,543,467 | )        
|Interest                                                                   |                                          |   |            |          
|                                                                           | Income                                   |   |            | 381       |  
|                                                                           | Expense                                  |   |            | (911,138  | )
|                                                                           |                                          |   |           
|Loss before taxes                                                          |                                          |   | (2,454,224 | )        
|Income taxes                                                               |                                          |   |           |          
|                                                                           |                                          |   |           
|Net Loss                                                                   |                                          | $ | (2,454,224 | )        
|                                                                           |                                          |   |           
|Pro Forma Loss Per Share                                                   |                                          |   |            |          
|                                                                           | Basic                                    |   |            | (0.33     | )
|                                                                           |                                          |   |           
|                                                                           | Diluted                                  |   |            | (0.33     | )
|                                                                           |                                          |   |           
|Pro Forma Weighted Average Number of Common Shares (Basic and
    Diluted) |                                          |   | 7,346,186  |          



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LOCAL TELECOM SYSTEMS INC.





CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT


|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            |             |   |   |            |            |   |   |            |            |  
|-------------------------- | ------------------------------------------------------------------------------------- | ------------ | ---------- | ---------- | --------------- | - | --------- | ---------- |  |  | ----------- | -------- | - | --------------- | ------ | ------- | ------- | - | ---------- | ----------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                           |                                                                                       | Common Stock |            |            | Preferred Stock |   |           |            |  |  |             | Total    |  
|                           |                                                                                       |              |            |            |                 |   |           | Additional |  |  | Accumulated |          |   | Stockholders   |       
|                           |                                                                                       | Shares       |            |            | Amount          |   |           | Shares     |  |  | Amount      |          |   | Paid-In Capital |        |         | Deficit |   |            | Equity      |  
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            |             |  
|Balance September 30, 2004 |                                                                                       |              | 16,284,423 |            |                 | $ | 271,950   |            |  |  | 600,000     |          |   | $               | 60,000 |         |         | $ | 9,456,612  |             |   | $ | (9,911,284 | )          |   | $ | (122,722   | )         
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            |             |  
|                           | Conversion of common to preferred stock                                               |              |            | 30,000,000 |                 |   |           | 501,000    |  |  |             | (600,000 | ) |                 |        | (60,000 | )       |   |            | (441,000    | ) |   |            |            |   |   |            |            |  
|                           | Issuance of common stock for consulting, director fees,
    dividends, financing fees |              |            | 15,000,000 |                 |   |           | 250,500    |  |  |             |          |   |                 |        |         |         |   |            |             |   |   |            | (250,500   | ) |   |            |            |  
|                           | Issuance of common stock for consulting, director fees,
    dividends, financing fees |              |            | 18,675,000 |                 |   |           | 311,873    |  |  |             |          |   |                 |        |         |         |   |            |             |   |   |            | (311,873   | ) |   |            |            |  
|                           | Net Loss                                                                              |              |            |           |                 |   |           |           |  |  |             |          |   |                 |        |         |         |   |            |             |   |   |            | 6,683      |   |   |            | 6,683      |  
|                           | Reclass LTSI retained deficit to paid in capital                                      |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            | (10,466,973 |   |   |            | 10,466,973 |   |   |            |            |  
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            |             |  
|Balance March 25, 2005     |                                                                                       |              | 79,959,423 |            |                 | $ | 1,335,323 |            |  |  |             |          |   |                 |        |         |         |   | (1,451,361 | )           |   |   |            |            |   |   | (116,039   | )         
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            |             |  
|                           | 1,710,000 warrants issued in acquiring MBI                                            |              |            |           |                 |   |           |           |  |  |             |         |   |                 |        |        |         |   |            | 528,900     |   |   |            |           |   |   |            | 528,900    |  
|                           | Net Loss                                                                              |              |            |           |                 |   |           |           |  |  |             |         |   |                 |        |        |         |   |            |            |   |   |            | (2,454,224 | ) |   |            | (2,454,224 | )
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            |             |  
|Balance September 30, 2005 |                                                                                       |              | 79,959,423 |            |                 | $ | 1,335,323 |            |  |  |             |          |   | $               |        |         |         | $ | (922,461   | )           |   | $ | (2,454,224 | )          |   | $ | (2,041,363 | )         
|                           |                                                                                       |              |            |            |                 |   |           |            |  |  |             |          |   |                 |        |         |         |   |            |             |  



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LOCAL TELECOM SYSTEMS, INC.





CONSOLIDATED STATEMENT OF CASH FLOWS


For the Period March 25, 2005 (Inception) to
September 30, 2005


|                                      |                                                                                                       |                                                       |          |            |           | 
|------------------------------------- | ----------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | -------- | ---------- | --------- | 
|Operating Activities                  |                                                                                                       |                                                       |          |           
|                                      | Net loss                                                                                              |                                                       | $        | (4,916,037 | )        
|                                      | Adjustments to reconcile net loss to cash provided by operating
    activities:                       |                                                       |          |            |          
|                                      |                                                                                                       | Depreciation                                          |          |            | 13,902    | 
|                                      |                                                                                                       | Reserve for note receivable                           |          |            | 800,000   | 
|                                      |                                                                                                       | Common stock issued in payment for operating expenses |          |            | 3,692,524 | 
|                                      | Cash provided (used) by operating assets and liabilities
    (excluding the effects of acquisitions): |                                                       |          |            |          
|                                      | Accounts receivable                                                                                   |                                                       |          | (60,888    | )        
|                                      | Prepaid expenses                                                                                      |                                                       |          | (8,183     | )        
|                                      | Other assets                                                                                          |                                                       |          | (5,976     | )        
|                                      | Accounts payable                                                                                      |                                                       |          | 82,252     |          
|                                      | Accounts payable  related party                                                                      |                                                       |          | 12,995     |          
|                                      | Accrued liabilities                                                                                   |                                                       |          | 116,304    |          
|                                      |                                                                                                       |                                                       |         
|Cash used by operating activities     |                                                                                                       |                                                       | (273,100 | )         
|                                      |                                                                                                       |                                                       |         
|Investing Activities                  |                                                                                                       |                                                       |          |           
|                                      | Purchase of equipment                                                                                 |                                                       |          | (10,656    | )        
|                                      |                                                                                                       |                                                       |         
|Cash Used in Investing Activities     |                                                                                                       |                                                       | (10,656  | )         
|                                      |                                                                                                       |                                                       |         
|Financing Activities                  |                                                                                                       |                                                       |          |           
|                                      | Proceeds from note payable                                                                            |                                                       |          | 350,000    |          
|                                      |                                                                                                       |                                                       |         
|Cash provided by financing activities |                                                                                                       |                                                       | 350,000  |           
|                                      |                                                                                                       |                                                       |         
|Net Increase in Cash                  |                                                                                                       |                                                       | 66,237   |           
|Cash Balance, Beginning of Period     |                                                                                                       |                                                       | 2,681    |           
|                                      |                                                                                                       |                                                       |         
|Cash Balance, End of Period           |                                                                                                       | $                                                     | 68,918   |           
|                                      |                                                                                                       |                                                       |         
|Supplemental Cash Flow Information    |                                                                                                       |                                                       |          |           
|                                      | Interest paid                                                                                         |                                                       | $        |           |          
|                                      |                                                                                                       |                                                       |         
|                                      | Income taxes                                                                                          |                                                       | $        |           |          
|                                      |                                                                                                       |                                                       |         



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Year Ended September 30, 2005




|   |                                                                        
|-- | -----------------------------------------------------------------------
|1. | NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES

Organization






Revenue Recognition




Use of Estimates




Cash and Cash
Equivalents




Advertising




Office and Computer
Equipment




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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Goodwill




Income Taxes




2.     RECENT ACCOUNTING
PRONOUNCEMENTS


Accounting Changes Reporting Accounting Changes in Interim Financial
Statements




|   |             
|-- | ------------
|3. | ACQUISITIONS







| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 3,714,998 shares of the Companys common stock at a
    valuation of $.63 per share or $2,351,099                                                                                        
|
| |  | 1,210,000 shares issued to note guarantors, the excess of
    $353,400 over the face value of the notes has been expensed as
    interest                                                
|
| |  | warrants to purchase an additional 1,710,000 shares of the
    Companys common stock over the next three years at
    purchase prices of $.20 to $.35 per share 
    valued at $530,985
|
| |  | cash of $300,000 borrowed on short term notes from unrelated
    parties                                                                                                                 
|
| |  | notes payable to the Sellers of $108,000                                                                                                                                                 

over-the


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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                  |                        |   |           |           | 
|----------------------------------------------------------------- | ---------------------- | - | --------- | --------- | 
| Tangible assets, principally computers and office
    equipment |                        | $ | 188,265   |          
| Goodwill                                                        |                        |   | 2,589,234 |          
|                                                                  |                        |   |          
|                                                                  |  Total Purchase Price |   | $         | 2,777,499 | 







|                                  |  |   |            |  
|--------------------------------- |  | - | ---------- | -
|Revenue                           |  | $ | 1,902,654  |  
|Net income (loss)                 |  |   | (4,901,051 | )
|Diluted earnings (loss) per share |  | $ | (.08       | )





| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lakeview Mortgage, located in Laredo, Texas, is an independent
    mortgage broker engaged in the securing of mortgage loans for
    home buyers in the Laredo, Texas, market.      
|
| |  | Northland Funding Group, located in Austin, Texas, is an
    independent mortgage broker engaged in the securing of mortgage
    loans for home buyers in the Austin, Texas, market.





| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 900,000 shares of common stock at a fair value of
    $.54 per share or $486,780                                                                                    
|
| |  | warrants to purchase 1,475,000 shares of the Companys
    common stock of which 1,225,000 are immediately exercisable at
    $.20 per share for a value of $417,994
|
| |  | short-term notes payable to the sellers of $225,000                                                                                                                 





|                                                                  |                        |   |           |           | 
|----------------------------------------------------------------- | ---------------------- | - | --------- | --------- | 
| Tangible assets, principally computers and office
    equipment |                        | $ | 91,512    |          
| Goodwill                                                        |                        |   | 1,038,262 |          
|                                                                  |                        |   |          
|                                                                  | ° Total Purchase Price |   | $         | 1,129,774 | 
|                                                                  |                        |   |          



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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                  
|-- | -----------------
|4. | LEASE OBLIGATIONS





|   |                      
|-- | ---------------------
|5. | FINANCIAL INSTRUMENTS





6.     INCOME TAXES




|                       |                            |   |          |          |  
|---------------------- | -------------------------- | - | -------- | -------- | -
|Current Tax (Benefit)  |                            | $ | (271,083 | )       
|Deferred Tax (Benefit) |                            |   |         |         
|                       |                            |   |         
|                       | Total Income Tax (Benefit) |   | $        | (271,083 | )
|                       |                            |   |         



|                                    |                               |   |          |       | 
|----------------------------------- | ----------------------------- | - | -------- | ----- | 
|Tax Benefit at Statutory Rate (35%) |                               | $ | (278,083 | )    
|                                    | Other Non-Deductible Expenses |   |          | 7,000 | 
|                                    |                               |   |         
|                                    |                               | $ | (271,083 | )    
|                                    |                               |   |         



|                    |                     |   |          |         | 
|------------------- | ------------------- | - | -------- | ------- | 
|Deferred Tax Assets |                     | $ | (271,083 | )      
|                    | Valuation Allowance |   |          | 271,083 | 
|                    |                     |   |         
|                    | Net Deferred Assets |   | $        |        | 
|                    |                     |   |         



7.     STOCKHOLDERS EQUITY




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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) 18,675,000 shares for officer/director fees,
    consulting fees, note payments, preferred stock dividends and
    preferred stock conversion fees,
|
| | b) 15,000,000 shares for consulting on acquisitions
    and financing, and,                                                                           
|
| | c) 30,000,000 shares to reconvert the outstanding
    preferred stock to common shares.                                                               









| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | 1. Issued 4,924,998 shares of Common Stock to various
    parties in connection with the acquisition of MBI Financial
    Services, Ltd.
|
| | 2. Issued 260,000 shares of Common Stock to the former
    owner in connection with the acquisition of Lakeview Mortgage,
    Inc.      
|
| | 3. Issued 640,000 shares of Common Stock to the former
    owners of Northland Funding Group, Inc.                                      
|
| | 4. Issued 87,000 shares of Common Stock to various
    officers, directors and vendors in return for services.                          







| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Warrants granted to existing shareholders on
    May 25, 2005 to purchase 1,599,188 shares for $1.00
    per share for one year and 1,599,188 shares for $2.00 for
    two years.                                                
|
| | 2. Warrants issued to various parties in connection with
    the acquisition of MBI Mortgage Services Ltd. for
    1,710,000 shares at a price of $.20 to $.35 per share for
    three years.                                       
|
| | 3. Warrants issued in connection with the acquisition of
    Northland Funding, Inc. for 1,475,000 shares of which
    250,000 are performance based and 1,225,000 are exercisable at a
    price of $.20 per share for three years.
|
| | 4. Warrants issued to a noteholder in connection with an
    extension of the note to purchase 150,000 shares at a price
    of $.20 for three years.                                                                               

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##### Table of Contents



LOCAL TELECOM SYSTEMS INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


8.                EARNINGS
PER SHARE




|                                          |  |               |            |  
|----------------------------------------- |  | ------------- | ---------- | -
|                                          |  | Year Ended    |           
|                                          |  | September 30, |           
|                                          |  | 2005          |           
|                                          |  |               |           
|Numerator                                 |  |               |            |  
|Net loss                                  |  | $             | (4,916,037 | )
|Preferred stock dividends                 |  |               | 66,000     |  
|                                          |  |               |           
|Numerator for basic loss per common share |  | $             | (4,982,037 | )
|                                         
|Denominator                               |  |               |            |  
|Basic loss per common share               |  |               |            |  
|Weighted average shares outstanding       |  |               | 49,430,506 |  
|Per Common Share                          |  |               |            |  
|Basic loss per common share               |  | $             | (.10       | )
|                                          |  |               |           





|   |                  
|-- | -----------------
|9. | SUBSEQUENT EVENTS







| |                           
| | --------------------------
| | Related Party Transactions





| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Principal owners have provided collateral in the form of their
    Common Stock of the Company for borrowings incurred for
    acquisitions and working capital. For this they have been
    granted warrants to purchase 835,000 shares of Common Stock
    at exercise prices of $.20 - $.35 for a period of
    3 years.
|
| |  | The Company has borrowed $50,000 directly from a principal owner
    for which the principal owner has received warrants to purchase
    150,000 shares of the Companys Common Stock at a
    price of $.20 per share for 3 years in consideration for
    extending the note.                                            
|
| |  | The Chief Executive Officer has personally guaranteed a third
    party loan for which he has received warrants to purchase 25,000
    shares of the Companys Common Stock.                                                                                                                                               
|
| |  | The former spouse of the Chief Executive Officer is indebted to
    the Company for $1,150,000. Such indebtedness is secured by a
    second lien on real property occupied by the debtor having a
    fair value of $800,000.                                                                                             
|
| |  | The Chairman of the Board is a member of Bajjer, LLC, from whom
    the Company purchased MBI and has an on-going consulting
    relationship.                                                                                                                                                                             

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##### Table of Contents






INDEX TO EXHIBITS


|            |    |          |  |             |    |  |  |                                             
|----------- | -- | -------- |  | ----------- | -- |  |  | --------------------------------------------
|Exhibit No. |    | Page No. |  | Description
|            |    |          |  |            
|            | 31 | (i)      |  |             | 17 |  |  | 302 Certification of Chief Executive Officer
|            | 31 | (ii)     |  |             | 18 |  |  | 302 Certification of Chief Financial Officer
|            | 32 | (i)      |  |             | 19 |  |  | 906 Certification of Chief Executive Officer
|            | 32 | (ii)     |  |             | 20 |  |  | 906 Certification of Chief Executive Officer

Exhibits Incorporated by Reference


8-K


8-K





30