UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-K



|xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE    
|---------------------------------------------------------
|SECURITIES EXCHANGE ACT OF 1934                          
|OR                                                       
| ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|SECURITIES EXCHANGE ACT OF 1934                          



For the fiscal year ended: December 31,
2012



Commission file number: 000-53668



NET TALK.COM,
INC.

(Exact name of registrant as specified in
its charter)



|Florida                                  |  | 20 – 4830633       
|---------------------------------------- |  | -------------------
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|1080 NW 163rd Drive, Miami Gardens,FL    |  | 33169 – 5816       
|(Address of principal executive offices) |  | (Zip Code)         



Registrant’s telephone number, including
area code: (305) 621-1200



Securities registered pursuant to Section
12(b) of the Act:None



Securities registered pursuant to Section
12(g) of the Act: Common Stock, $0.001 par value



|Title of each class                                    |  | Name of each exchange on which registered
|------------------------------------------------------ |  | -----------------------------------------
|Common stock, $0.001 par value per share               |  | OTCBB                                    
|Redeemable preferred stock, $0.001 par value per share | 



Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.

Yes  ̈ No x



Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes  ̈ No x



Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.

Yes  ̈
No x



Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not 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. x



Check whether the registrant submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No  ̈



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



|Large accelerated filer ̈                                              | Accelerated filer ̈         
|--------------------------------------------------------------------- | ---------------------------
|Non-accelerated filer  ̈ (Do not check if a smaller reporting company) | Smaller reporting company x



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

Yes ̈ No x



The aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant as of September 4 , 2013 was $349,634.1 The Registrant had
60,251,355 shares of Common Stock, $0.001 par value, outstanding as of September 4, 2013.










1 The aggregate market value of common equity held-by
non-affiliates is computed based upon sale price of $0.07 occurring on September 4, 2013. The calculation does not account for
common shares issuable upon conversion of convertible preferred stock or exercise of common stock purchase warrants.











Net Talk.com, Inc.



Form 10-K



For year ended December 31, 2012



|Table of contents | Page                                                                                                         
|----------------- | -------------------------------------------------------------------------------------------------------------
|                  |                                                                                                              
|Part I            |                                                                                                              
|                  |                                                                                                              
|Item 1.           | Business                                                                                                     
|Item 1A.          | Risk factors                                                                                                 
|Item 2.           | Properties                                                                                                   
|Item 3.           | Legal proceedings                                                                                            
|Item 4.           | Mine safety disclosures                                                                                      
|                  |                                                                                                              
|Part II           |                                                                                                              
|                  |                                                                                                              
|Item 5.           | Market for registrant’s common equity, related stockholders matters and issuer purchases of equity securities
|                  |                                                                                                              
|Item 6.           | Selected financial data                                                                                      
|                  |                                                                                                              
|Item 7.           | Management discussion and analysis of financial condition and operation                                      
|Item 7A.          | Quantitative and qualitative disclosure about market risk                                                    
|Item 8.           | Financial statements and supplementary data                                                                  
|Item 9.           | Changes in and disagreements with accountants on accounting and financial disclosure                         
|Item 9A.          | Controls and procedures                                                                                      
|Item 9B.          | Other information                                                                                            
|                  |                                                                                                              
|Part III          |                                                                                                              
|                  |                                                                                                              
|Item 10.          | Directors, executive officers and corporate governance                                                       
|Item 11.          | Executive compensation                                                                                       
|Item 12.          | Security ownership of certain owners and management and related stockholder matter                           
|Item 13.          | Certain relationships and related transactions, and directors independence                                   
|Item 14.          | Principal accountant fees and services                                                                       
|                  |                                                                                                              
|Part IV           |                                                                                                              
|                  |                                                                                                              
|Item 15.          | Exhibits, financial statement schedules                                                                      
|                  | Signatures                                                                                                   
|                  | Financial statements                                                                                         



2







Forward Looking Statements



Certain statements contained in this
annual report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition
and Results of Operations) and other written material and oral statements made from time to time by
us do not relate to historical or current facts. As such, they are referred to as “forward-looking statements,” which
are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends
and factors that may impact our future plans and operating results. These forward-looking statements are derived, in part, from
various assumptions and analyses we have made in the context of our current business plan and information currently available to
us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and
other factors we believe to be appropriate in the circumstances. You can generally identify forward-looking statements through
words and phrases such as “ seek, ” “ anticipate, ” “ believe, ” “ estimate, ”
“ expect, ” “ intend, ” “ plan, ” “ budget, ” “ project, ” “
may be, ” “ may continue,” “may likely result, ” and similar expressions. When reading any forward
looking statement, you should remain mindful that actual results or developments may vary substantially from those expected as
expressed in or implied by that statement for a number of reasons or factors, such as those relating to:



| | ● | our ability to develop sales and marketing capabilities;
| | - | --------------------------------------------------------



| | ● | the accuracy of our estimates and projections;
| | - | ----------------------------------------------



| | ● | our ability to fund our short-term and long-term financing needs;
| | - | -----------------------------------------------------------------



| | ● | changes in our business plan and corporate strategies; and other risks and uncertainties discussed in greater detail in other
sections of this report.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



Each forward-looking statement should be read in context with,
and with an understanding of, the various other disclosures concerning our Company and our business made elsewhere in this prospectus,
as well as other public reports filed with the SEC. You should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this report
to reflect new events or circumstances unless and to the extent required by applicable law.



3







Part I



Item 1. Business



Company and Business



We are a telephone company, which manufactures, provides, sells
and supplies commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”)
technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology,
and other similar type technologies. Our main products are the “DUO”, DUO II” and the “DUO WIFI”.
All of these products are analog telephone adapters that provide connectivity for analog telephones and faxes to home, home office
or corporate local area networks (“LAN”). The DUO WIFI allows users to use these services without an Ethernet cable
plugged into the device.



Our DUO, DUO II and DUO WIFI and their related services are
cost effective solution for individuals, small businesses and telecommuters connecting to any analog telephone, fax or private
branch exchange (“PBX”). Our DUO, DUOII and DUO WIFI provide a USB port, one Ethernet port and one analog telephone
port. The DUO WIFI additionally provides a wireless chip so that users can connect to the device over WIFI hotspots. A full suite
of internet protocol features is available to maximize universal connectivity. In addition, analog telephones attached to our DUO,
DUOII and DUO WIFI are able to use advanced calling features such as call forwarding, caller ID, 3-way calling, call holding, call
retrieval, SMS, international call plans, local number portability and call transfer.



History and Overview



We are a Florida corporation, incorporated
on May 1, 2006 under the name Discover Screens, Inc. (“Discover Screens”).



On September 10, 2008, we changed
our name from Discover Screens, Inc. to NetTalk.com, Inc. and acquired certain tangible and intangible assets, formerly owned by
Interlink Global Corporation (“Interlink”), related to our VOIP products.



Our Strategy



We continue to improve and enhance the
following factors in building and expanding our customer base:



| | · | Deployment and distribution of our main products the DUO, DUO II and DUO WIFI, NetTalk TV devices,
IPhone and Androids applications for smartphones and tablets .
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | We offer our customers an attractive and innovative value proposition: a portable telephone replacement
with multiple and unique features that differentiates our services from the competition.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Innovative, high technology and low cost technology platform. We believe our innovative software
and network technology platform provides us with a competitive advantage over our competition and allows us to maintain a low cost
infrastructure relative to our competitors.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Plan of Operation



We provide, sell and supply commercial and residential telecommunication
services, including services utilizing voice over internet protocol (“VoIP”) technology, session initiation protocol
(“SIP”) technology, wireless fidelity technology, wireless maximum technology, marine satellite services technology
and other similar type technologies. We are developing our business infrastructure and new products and services.



4







Our Products



At this time, our main products are the DUO, DUOII and DUO WIFI.
Our DUO, DUOII and DUO WIFI are designed to provide specifications unique to each customer’s existing equipment. They allow
the customer full mobile flexibility by being able to take internet interface anywhere the customer has an internet connection.
Our DUO and DUO WIFI both have the following features:



| | · | A Universal Serial Bus (“USB”) connection allowing the interconnection of our DUO and DUO WIFI to any host computer.
| | - | --------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                     

| | · | In addition to the USB power source option, our DUO and DUO WIFI have an external power supply allowing the phone to independently
power itself when not connected to a host computer;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Unlike most VoIP telephone systems, our DUO and DUO WIFI both have standalone feature allowing them to be plugged directly
into a standard internet connection.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Our DUO and DUO WIFI are compact, space-efficient products.
| | - | -----------------------------------------------------------



Our DUO, DUOII and DUO WIFI have interface components so that
the customer can purchase multiple units that can communicate with each other allowing simultaneous ringing from multiple locations.



Our DUO products are portable and allow our customers to make
and receive phone calls with a telephone anywhere a broadband internet connection is available. We transmit the calls using
Voice over Internet Protocol “VOIP” technology, which converts voice signals into digital data transmissions over the
internet.



Our Services



Our business is to provide products and services that utilize
Voice Over Internet Protocol, which we refer to as “VoIP.” VoIP is a technology that allows the consumer to make telephone
calls over a broadband internet connection instead of using a regular (or analog) telephone line. VoIP works by converting the
user’s voice into a digital signal that travels over the internet until it reaches its destination. If the user is calling
a regular telephone line number, the signal is converted back into a voice signal once it reaches the end user. Our business model
is to develop and commercialize software technology solutions for cost effective, real-time communications over the internet and
related services.



Patents – Domestic and International



Our product is under US patent number 8,243,722
as well as International patent pending in over 123 countries.



Marketing



We have developed direct sales channels, as represented by web
sites and toll free numbers. Our direct sales channels are supported by highly integrated advertising campaigns across multiple
media such as infomercials, television and other media channels. Our website is www.nettalk.com, our telephone number is 305-621-1200
and our fax number is 305-621-1201.



Our primary source of revenue is the sale and distribution of
our netTalk DUO, DUO II and DUO WIFI. We also generate revenue from the sale of accessories to our product and international long
distance monthly charges that are billed to our customers.



Advertising



Our goal is to position ourselves as a premier supplier of choice
for VoIP services. Our current business strategy is to focus our advertising dollars on our home market in South Florida. Our advertising
will consist of mass marketing campaigns focusing on television infomercials for the South Florida market and other states including
cable television channels..



Customers



Our customers are made up of retail, residential and small businesses.
We anticipate that future services will appeal to our existing customers and hope that our additional phone products and services
will provide a complete phone package experience to our customers.



5







Our target audience is individual consumers and small businesses
looking to lower their current cost of telecommunications. We are also reaching a large audience with our websites. We hope that
consumers will find our websites by doing an internet search for VoIP service providers. We also use other means of advertising
such as direct to consumer sales, ecommerce and retail marketing co-ops with retail customers.



Geographic Markets



Our primary geographic market is North America. Our target audiences
are individual consumers and small businesses looking to lower their current cost of telecommunications. We also expect to
reach a large audience with our websites. We hope that consumers will find our websites by doing an internet search for VoIP service
providers. We will also use other means of advertising such as direct to consumer sales, ecommerce and coop marketing with
retail stores.



We have been granted and or are applying for Competitive Local
Exchange Carrier (“CLEC”) Licenses in multiple states, as follows:



|Alabama     | Hawaii   | Massachusetts | New York       | Utah            
|----------- | -------- | ------------- | -------------- | ----------------
|Arizona     | Idaho    | Michigan      | North Carolina | Vermont         
|Arkansas    | Illinois | Minnesota     | North Dakota   | Washington, D.C.
|California  | Indiana  | Missouri      | Ohio           | Washington      
|Colorado    | Iowa     | Montana       | Oregon         | West Virginia   
|Connecticut | Kansas   | Nebraska      | Pennsylvania   | Wisconsin       
|Delaware    | Kentucky | Nevada        | South Carolina | Wyoming         
|Florida     | Maine    | New Jersey    | South Dakota   |                 
|Georgia     | Maryland | New Mexico    | Texas          |                 



It is our intent to focus our expansion on the geographic markets
in which we have been granted CLEC Licenses. We also intend to expand our market place to reach customers worldwide.



The Industry



In the past decade, the use of the internet for all purposes
has exploded. VoIP is a technology that enables communications over the internet through the compression of voice, video and/or
other media into data packets that can be efficiently transmitted over data networks and then converted back into the original
media at the other end of the transmission. Since the introduction of the first VoIP technology in the mid 1990s, the quality and
clarity of VoIP connections have continued to evolve and improve. Perhaps the biggest jump in VoIP quality came with the introduction
of SIP, or Session Initiation Protocol. SIP is a text-based protocol suitable for integrated voice-data applications. Today SIP
is the predominant industry standard for establishing multimedia communications over the Internet. As the clarity and quality of
VoIP services have increased, so has the acceptance of VoIP by consumers.



As a result of the potential cost savings and added feature
availability of VoIP, consumers, industry leaders and traditional telecommunication service providers see VoIP as the future of
telecommunications. Factors that have been contributing to the boom in VoIP use include: (a) increased consumer demand for
lower cost telephone services; (b) increased demand for long distance services as the market place becomes increasingly global;
(c) improved reliability and quality of VoIP due to technological advances; and (d) innovations that allow services for
VoIP users that are not available in traditional telephone services. These factor, and others, have resulted in various service
providers and consumers exploring VoIP alternatives to traditional analog phone services.



Our Competition



The communications industry is highly competitive and significantly
affected by regulatory changes, technology evolution, marketing strategies, and pricing decisions of the larger industry participants.
The market for our services is evolving rapidly and is subject to shifting customer demands and the introduction of new products
and services. Our current and potential competitors come from different market sectors and vary in size and scope with respect
to the products and services that they offer or intend to offer in the future.



One of our competitors in the domestic market is traditional
telephone service providers that are increasingly adding advanced service features to traditional telephone services. Domestic
telephone providers have the advantage of having strong name recognition, large research and development budgets and existing service
and market networks.



6







In addition, numerous vendors sell products and services using
VoIP technology. Our competitors use innovations such as Analogue Terminal Adapters, or ATAs, to connect an analogue telephone
to a VoIP network. Sometimes referred to as VoIP Gateways, these devices are widely advertised and sold. Sales are conducted by
many different methods, including internet and infomercial sales, and barriers to entry into the business are low.



We also face competition from alternative communication methods
such as internet, fax providers and voice mail service providers.



Many of our competitors may be better established, larger and
better financed than us, and are able to use their visibility and substantial marketing resources to attract customers. In particular,
many of our competitors are large, established network service providers that are able to market and distribute enhanced communication
services within their already large base of subscribers.



As a result, these competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to
the promotion and sale of their products. Moreover, we may not have sufficient resources to undertake the continuing research and
development necessary to remain competitive.



We differentiate our services from those offered by our competitors
by offering exceptional customer service and lower cost alternatives. We have worked hard to control the development costs associated
with the DUO, DUO II and DUOWIFI.                          We
have done this by choosing phone components and component vendors that are economical but do not compromise on quality.        We
have developed and marketed our own products and services, rather than simply reselling another manufacturer’s innovations.
Finally, our DUO, DUO II and DUO WIFI products are standalone phone products that do not require the user to first invest in a
computer. For these reasons, we believe that our DUO DUOII and DUO WIFI product is a lower cost alternative to similar telephone
products currently being marketed (because we are engaged in the same cost saving measures for the services we offer).                            We
are able to offer those services at a competitive price.



Our products and services are user friendly and convenient for
our customers; for example, our packaging includes detailed, user friendly instructions and diagrams to allow for easy installation
and activation. We have distinguished ourselves from our main competitors through the level of customer service offered to
our consumers following their purchase or our products or services. Many of our competitors only offer customer service through
an email query program. This does not allow the customer to receive rapid, real-time problem solving assistance in the event our
competitor’s product or service fails. We have established a customer service online forum where our users can post their
questions and read other users’ responses. The forum has key word or key phrase search option so that our customers can easily
find a solution to the problem they are experiencing. Our forum is moderated by one of our development engineers to ensure that
all questions are being properly addressed and issues resolved. We also offer a live customer support hotline. This allows
us to provide superior customer service, while still keeping our costs low.



Government Regulation



As a telecommunications supplier, we are subject to extensive
government regulation. The majority of our government regulation comes from the Federal Communications Commission (the “FCC”).



Telecommunications is an area of rapid regulatory change. Changes
in the laws and regulations and new interpretations of existing laws and regulations may affect permissible activities, the relative
costs associated with doing business and amounts paid to us for our services. We cannot predict the future of federal, state and
local regulations or legislation, including FCC regulations.



Federal Communications Commission (“FCC”)
regulation



The FCC is an independent United States government agency. The
FCC was established by the Communications Act of 1934 and is charged with regulating interstate and international communications
by radio, television, wire, satellite and cable. The FCC’s jurisdiction covers all fifty states, the District of Columbia
and U.S. possessions.



The FCC works to create an environment promoting competition
and innovation to benefit communications customers. Where necessary, the FCC has acted to ensure VoIP providers comply with important
public safety requirements and public policy goals.



Interconnected VoIP providers must comply with the Commission’s
Telecommunications Relay Services (TRS) requirements, including contributing to the TRS Fund used to support the provision of telecommunications
services to persons with speech or hearing disabilities, and offering 711 abbreviated dialing for access to relay services. Interconnected
VoIP providers and equipment manufacturers also must ensure that, consistent with Section 255 of the Communication Act, their
services are available to and usable by individuals with disabilities, if such access is readily achievable.



7







Finally, the FCC now requires interconnected VoIP providers
and telephone companies that obtain numbers from them to comply with Local Number Portability (LNP) rules. These rules allow telephone,
and now VoIP, subscribers that change providers to keep the subscribers telephone numbers provided that they stay in the same geographic
area. VoIP providers must also contribute to funds established to share LNP and numbering administrative costs among all telecommunications
providers benefiting from these services.



The FCC monitors and investigates complaints against VoIP providers
and, if necessary, can bring enforcement actions against VoIP providers that do not comply with applicable regulations.



Federal CALEA



On August 5, 2005, the Federal Communication Commission (the
FCC) released an Order extending the obligation of the Communication Assistance for Law Enforcement Act (“CALEA”) to
interconnect VOIP providers. Under CALEA , telecommunication carriers must assist law enforcement in executing electronic surveillance,
which includes the capability of providing call content and call identifying information to local enforcement agencies, or LEA,
pursuant to a court order or other lawful authorization.



The FCC required all interconnect VOIP providers to become CALEA
compliant by May 14, 2007. We are fully compliant with CALEA.



State Telecommunication Regulation



We are also registered with the Florida Public Utilities Commission
as a Competitive Local Exchange Carrier (“CLEC”) and Interexchange (“IXC”) Carrier.



In Florida, a “competitive local exchange carrier”
is defined as any company, other than an incumbent local exchange company, certificated by the Public Service Commission to provide
local exchange telecommunication services in the state of Florida on or after July 1, 1995. CLEC companies providing services
in Florida after July 1, 1995, must be certificated by the Florida Public Service Commission, and competitive local exchange
companies are required to file a price list specifying their rates and charges for basic local telecommunication services.



Florida, as well as other states, also regulates providers of
Interexchange Telecommunications (“IXC”). The Florida Public Service Commission includes the following as examples
of IXC providers: (1) operator service providers; (2) resellers; (3) switchless re-billers; (4) multi-location
discount aggregators; (5) prepaid debit card providers; and (5) facilities based interexchange carriers. Section 364.02(13)
of the Florida Statutes requires IXCs to provide current contact information and a tariff to the Florida Public Service Commission.



We have been granted and or are applying for Competitive Local
Exchange Carrier (“CLEC”) Licenses in multiple states, as follows:



|Alabama     | Hawaii   | Massachusetts | New York       | Utah            
|----------- | -------- | ------------- | -------------- | ----------------
|Arizona     | Idaho    | Michigan      | North Carolina | Vermont         
|Arkansas    | Illinois | Minnesota     | North Dakota   | Washington, D.C.
|California  | Indiana  | Missouri      | Ohio           | Washington      
|Colorado    | Iowa     | Montana       | Oregon         | West Virginia   
|Connecticut | Kansas   | Nebraska      | Pennsylvania   | Wisconsin       
|Delaware    | Kentucky | Nevada        | South Carolina | Wyoming         
|Florida     | Maine    | New Jersey    | South Dakota   |                 
|Georgia     | Maryland | New Mexico    | Texas          |                 



The law relating to regulation of VoIP technology is in a flux.
In recent court cases, other VoIP providers have challenged whether state regulations can be applied to VoIP technology or whether
such regulation has been preempted by the Telecommunications Act of 1996 and other Federal laws. At least one of our competitors
has successfully fought the application of state laws to VoIP technology. However, to be cautious, we will continue to obtain a
competitive local exchange carrier license from each state in which we conduct business. An added advantage of obtaining a
CLEC license from each state is that we can obtain an operational carrier number from the North American Numbering Plan Administration.
The operational carrier number will allow us to assign our customers telephone numbers in the area code in which they reside.



8







Employees



We employ 26 full time employees, none of our employees are
subject to collective bargaining agreement, and we consider our employee relations to be satisfactory.



Intellectual Property



We regard our domain names, patents, trademarks, copyrights,
trade dress, trade secrets, proprietary technologies and similar intellectual property as critical to our success, and we rely
on patent, trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees,
customers, partners, and others to protect our proprietary rights.



We have filed multiple patent applications with the United States
Patent and Trademark Office for the technology associated with our products. We also have software under development by our employees,
subcontractors and consultants.



The status of any patent involves complex legal and factual
questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed
by us will result in a patent being issued or that our issued patents, and any patents that may be issued in the future, will afford
adequate protection against competitors with similar technology. We similarly face the risk that any patents issued to us might
be infringed or designed around by others.



Patents – Domestic and International



Our DUO product is under US patent number 8,243,722 as well
as International patent pending in over 123 countries.



Research and Development



We expense research and development expenses as these costs
are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer
software product which are charged to expense when incurred as research and development until technological feasibility has been
established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence,
completion of a working model. At this time, our main product the DUO, DUO II and DUO WIFI is being sold in the market place. Therefore,
research and development cost reported in our financial statements relates to development of upcoming new products.



On July 14, 2010 werevealed
our product the netTALK DUO (“DUO”).



Our DUO offers our customers free nationwide calls to any landline
or mobile phone in the U.S. and Canada from anywhere in the world, as well as low-cost international rates. It’s also a versatile
digital phone service with no monthly fees, no contracts and no computer required.



Our DUO is flexible enough to connect directly to your Internet
connection through the router/modem, there is also a convenient option with our DUO to connect to your computer. The sleek design
is small enough to fit in the palm of your hand, making it a portable device.



Our DUO reduces the wear and tear on your home or office computer
and reduces energy costs, resulting in money savings. Our fax-friendly DUO, offers fax (incoming and outgoing), a unique feature
not offered, to our knowledge, by similar digital phone services.



The portability of this small device is also great for international
travelers who want to place free nationwide calls to the U.S. and Canada, or who are looking for a low-cost solution for international
rates. Calls to other netTALK customers are always free.



We are presently working on other new products and anticipate
future deployment the later part of this year and over the next year, including Nettalk “APP” for IPhone and Android
and Nettalk TV.



Item 1 A. Risk factors



This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference
is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and
objectives and other forward-looking statements included in this section, “Item 1 Business,” “Item 7 Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and in other places in this Annual Report. Such
statements may be identified by the use of forward-looking terminology such as “may”, “will”, “expect”,
“believe”, “estimate”, “anticipate”, “intend”, “continue”, or similar
terms, variations of such terms or the negative of such terms. Such statements are based on management’s current expectations
and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described
in the forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions
to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change
in events, conditions or circumstances on which any such statement is based. Factors that could cause such results to differ materially
from those described in the forward-looking statements include, but are not limited to, those set forth below.



9







Our business faces many risks. We believe the risks described
below are the material risks we face. However, the risks described below are not the only risks we face. Additional unknown risks
or risks that we currently consider immaterial may also impair our business operations. If any of the events or circumstances described
below actually occurs, our business, financial condition or results of operations could suffer, and the trading price of our shares
of common stock could decline significantly. Investors should consider the specific risk factors discussed below, together with
the “Special Note Regarding Forward-Looking Information” and the other information contained in this Annual Report
on Form 10-K and the other documents that we will file from time to time with the SEC.



RISKS RELATED TO OUR BUSINESS:



We have not sustained profits and our losses could continue.
Without sufficient additional capital to apply to repay our indebtedness, we may be required to significantly scale back our operations,
significantly reduce our headcount, seek protection under the provisions of the U.S. Bankruptcy Code, and/or discontinue many
of our activities which could negatively affect our business and prospects. Our current capital raising efforts may not be successful
in raising additional capital on favorable terms, or at all.



We have experienced significant losses in the past and never
sustained profits. For the years ended December 31, 2012 and 2011, we recorded net losses of $14.7 and $29.8 million, respectively.
For the three month ended December 31, 2011 and 2010, we recorded net losses of $3.4 and $1.2 million, respectively. For the fiscal
years ended September 30, 2011 and 2010 we recorded net losses of $27.7 and $6.4 million, respectively.



As of December 31, 2012, we had $15.6 million in current senior
debentures, demand notes and $1.4 million in long term mortgage debt.



While we believe that our current cash resources, together with
anticipated cash flows from operating activities, will be sufficient to fund our operations, including interest payments, in 2013,
they will not be sufficient to fund repayment of principal on our outstanding indebtedness in 2013. Further, we do not anticipate
having sufficient cash and cash equivalents to repay the debt should the senior debentures or mortgage debt lenders accelerate
the maturity date of outstanding debt, and we would be forced to seek alternative sources of financing. In light of these circumstances,
we will need to seek additional capital through public or private debt or equity financings.



However, there are no assurances that those efforts will be
successful or that additional capital will be available on terms that do not adversely affect our existing stockholders or restrict
our operations, if it is available at all. If we raise additional funds through the issuance of debt securities, these securities
could have rights that are senior to holders of our common stock and could include different financial covenants, restrictions
and financial ratios. The conversion of the convertible notes resulted in substantial dilution to our stockholders and any additional
equity financing would also likely be substantially dilutive to our stockholders, particularly in light of the prices at which
our common stock has been recently trading. In addition, if we raise additional funds through the sale of equity securities, new
investors could have rights senior to our existing stockholders. The terms of any future financings may restrict our ability to
raise additional capital, which could delay or prevent the further development or marketing of our products and services. Our need
to raise capital before the repayment of our debt becomes due may require us to accept terms that may harm our business or be disadvantageous
to our current stockholders, particularly in light of the current illiquidity and instability in the global financial markets.



Our business may be affected by factors outside our control
..



Our ability to increase sales and to profitably distribute and
sell our products and services is subject to a number of risks, including changes in our business relationships with our principal
distributors, competitive risks such as the entrance of additional competitors into our markets, pricing and technological competition,
risks associated with the development and marketing of new products and services in order to remain competitive and risks associated
with changing economic conditions and government regulation. Our inability to overcome these risks could materially and adversely
affect our operations.



10







Item 2. Properties



Description of properties



On August 8, 2011 we purchased an existing building
located in Miami Gardens, Florida, currently used as our corporate offices and operational center. The building, a 21,675 square
foot free standing structure, was purchased for $2,700,000 from Core Development Holdings Corporation, which entity has no
relationship to the Company.



Interconnection Leasing Agreements



The Company will be entering into lease arrangements to provide
interconnection services in multiple states. “Interconnection services” is defined in the Telecommunications Act of
1996 (the “Telecommunications Act”) as the linking of two telecommunication systems so that users of either system
may utilize the system components of the other. Pursuant to the FCC rules implementing the



Telecommunications Act, we negotiate interconnection agreements
with incumbent local exchange carriers to obtain access to facilities. Facilities leasing occurs where one network service provider
leases the facilities of another network service provider to provide services to end users. We currently have executed two interconnection
leasing agreements and are negotiating an interconnection leasing agreement with other major hosting/bandwidth companies. Our current
interconnection leasing agreements are with multiple carriers. The agreements relate to facilities located or to be located in
the following states:



|Alabama     | Hawaii   | Massachusetts | New York       | Utah            
|----------- | -------- | ------------- | -------------- | ----------------
|Arizona     | Idaho    | Michigan      | North Carolina | Vermont         
|Arkansas    | Illinois | Minnesota     | North Dakota   | Washington, D.C.
|California  | Indiana  | Missouri      | Ohio           | Washington      
|Colorado    | Iowa     | Montana       | Oregon         | West Virginia   
|Connecticut | Kansas   | Nebraska      | Pennsylvania   | Wisconsin       
|Delaware    | Kentucky | Nevada        | South Carolina | Wyoming         
|Florida     | Maine    | New Jersey    | South Dakota   |                 
|Georgia     | Maryland | New Mexico    | Texas          |                 



The agreements will grant us interconnection leasing rights
in all forty-three states in which we have obtained or are pursuing a CLEC license. If we enter new markets, we expect to
establish interconnection agreements with incumbent local exchange carriers on an individual state basis, as the need arises.



Item 3. Legal Proceedings



On April 4, 2012, MagicJack Vocaltec Ltd. filed a complaint
in United States District Court For the Southern District of Florida, Civil Action No.: 9:12-cv-80360-DMM,against the Company,
alleging patent infringement, seeking injunctive relief and damages as a result of the alleged patent infringement. The Company
answered the complaint, denying all of its material allegations, asserting a number of affirmative defenses, and seeking counterclaims
for declaratory relief. The Company’s patent counsel has provided an opinion that the NetTalk DUO does not infringe their
patent. MagicJack Vocaltec Ltd. and NetTalk filed a Joint Stipulation and motion for the dismissal.Effective November 2012, the federal court has dismissed the entire case with prejudice, including
all claims, counterclaims, defenses and causes of action.



On September 21, 2012, NetTalk.com, Inc. filed a complaint in
United States District Court For the Southern District of Florida, Civil Action No.: 9:12-cv-81022-CIV-MIDDLEBROOK/BRANNON,against MAGICJACK VOCALTECLTD, MAGIJACK HOLDINGS CORPORATION f/k/a YMAX HOLDINGS CORPORATION and DANIEL BORISLOW, In the complaint,
we allege patent infringement by the defendants, seeking injunctive relief and damages as a result of the alleged patent infringement
by defendants.



11







On September 14, 2012, a supplier filed a complaint in the United
States District Court for the Southern District of Florida, Case No.: 1:12-cv-23366-FAM, alleging breach of contract by
the Company and seeking damages of not less than $473,319 due to such alleged breach. The supplier alleges in the complaint that
Net Talk failed to pay for component parts manufactured for the Company’s products. The Company filed an answer to the complaint
denying the supplier’s allegations and asserting affirmative defenses.



NetTalk reached a settlement with the supplier
and as of December 31, 2012 we are in full compliance with said settlement.



On November 26, 2012, a supplier to the
Client, Broadvox, LLC (“Broadvox”), filed a complaint in the Court of Common Pleas, Cuyahoga County, Ohio, Case
No.: CV-12-796095, alleging breach of contract by the Company and seeking damages of not less than $111,701 due to such alleged
breach. The Company and Broadvox entered into a settlement agreement providing for the payment of all past due amounts.



A Statement of Claim was served by DACS Marketing & Sponsorship
Inc. on NetTalk.com Inc. on June 20, 2012. The claim is for $125,834.21 for amounts DACS claims is owing to it pursuant to its
agreement as well as $126,000 for general damages for breach of contract.



A Statement of Defence was delivered on your behalf on August
31, 2012, denying all claims.



The following offers to settle have been made by the parties
but to date, the parties have not accepted any proposed offers:



| | 1. | November 7, 2012, NetTalk offered to settle the action by payment to DACS of $5,000.
| | -- | ------------------------------------------------------------------------------------

| | 2. | December 18, 2012, DACS offered to settle the action by NetTalk paying to DACS the sum of $85,000.
| | -- | --------------------------------------------------------------------------------------------------

| | 3. | December 27, 2012, NetTalk offered to settle the action by payment to DACS of $10,000.
| | -- | --------------------------------------------------------------------------------------



To date, we have heard nothing further from the lawyer for DACS.



ITEM 4. Mine safety disclosuresNone



Part II



Item 5. Market for registrant’s common equity, related
stockholder matters and issuer purchases of equity



Our common stock has been quoted on the OTC Bulletin Board under
the symbol “NTLK” since September 15, 2009.



Market Information



The figures set forth below reflect the quarterly high and low
bid information for shares of our common stock during the last two fiscal years, as reported by the OTC Bulletin Board. These quotations
reflect inter-dealer prices without retail markup, markdown, or commission, and may not represent actual transactions.



|                   |  | High |      |  | Low |  
|------------------ |  | ---- | ---- |  | --- | -
|2011 Quarter Ended |  |      |      |  |     |  
|March 31, 2011     |  | $    | 2.50 |  |     | $
|June 30, 2011      |  | $    | 1.19 |  |     | $
|September 30, 2011 |  | $    | 0.70 |  |     | $
|December 31, 2011  |  | $    | 0.58 |  |     | $
|2012 Quarter Ended |  |      |      |  |     |  
|March 31, 2012     |  | $    | 1.67 |  |     | $
|June 30, 2012      |  | $    | 0.48 |  |     | $
|September 30, 2012 |  | $    | 0.20 |  |     | $
|December 31, 2012  |  | $    | 0.19 |  |     | $



RULES GOVERNING LOW-PRICE STOCKS THAT MAY AFFECT ABILITY TO
RESELL SHARES. Our common stock is subject to certain rules adopted by the SEC that regulate broker-dealer practices in connection
with transactions in "penny stocks". Penny stocks generally are securities with a price of less than $ 5.00 other than
securities registered on certain national exchanges or quoted on the NASDAQ system, provided that the exchange or system provides
current price and volume information with respect to transaction in such securities. The additional sales practice and disclosure
requirements imposed upon broker-dealers may discourage broker-dealers from effecting transactions in our shares which could limit
the market liquidity of the shares and impede the sale of our shares in the secondary market.



12







The penny stock rules require broker-dealers, prior to a transaction
in a penny stock not otherwise exempt from the rules, to make a special suitability determination for the purchaser to receive
the purchaser's written consent to the transaction prior to sale, to deliver standardized risk disclosure documents prepared by
the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. In addition,
the penny stock regulations require the broker-dealer to deliver prior to any transaction involving the penny stock, a disclosure
schedule prepared by the SEC relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt.
A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current
quotations for the securities. Finally, a broker-dealer is required to send monthly statements disclosing recent price information
with the respect to the penny stock held in a customer's account and information with respect to the limited market in penny stocks.



Holders



As of December 31, 2012, there were 170 registered holders or
persons otherwise entitled to hold our common stock. The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers,
and registered clearing agencies. The transfer agent of our common stock is Fidelity Transfer.



Dividends



We have not declared or paid any cash dividends on our common
stock since our inception, and our Board of Directors currently intends to retain all earnings for use in the business for the
foreseeable future. Any future payment of dividends to holder of common stock will depend upon our results of operations, financial
condition, cash requirements, and other factors deemed relevant by our Board of Directors.



Securities Authorized for Issuance Under Equity Compensation
Plans



The following table sets forth certain information about the
common stock that may be issued upon the exercise of options under the equity compensation plans as of December 31, 2012.



|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |     |  | 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 (a) | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- | --- |  | --------------------------------------------------------------------------- |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------ | 
|                                                           |  | (a)                                                                                         |     |  | (b)                                                                         |  |     | (c)                                                                                                                                        | 
|Equity compensation plans approved by security holders     |  |                                                                                             | -0- |  |                                                                             |  | -0- |                                                                                                                                            | 
|                                                           |  |                                                                                             |     |  |                                                                             |  |     |                                                                                                                                            | 
|Equity compensation plans not approved by security holders |  |                                                                                             | -0- |  |                                                                             |  | -0- |                                                                                                                                            | 
|                                                           |  |                                                                                             |     |  |                                                                             |  |     |                                                                                                                                            | 
|Total                                                      |  |                                                                                             | -0- |  |                                                                             |  | -0- |                                                                                                                                            | 



Share-Based Payment Arrangements



In June 2008, the FASB issued authoritative guidance on the
treatment of participating securities in the calculation of earnings per shares (“EPS”). This guidance addresses whether
instruments granted in share – based payment transactions are participating securities prior to vesting and, therefore, need
to be included in the earnings allocation in computing EPS under the two - class method. This guidance was effective for fiscal
years beginning on or after December 15, 2008. Adoption of this guidance did not have a material impact on our results of operations
and financial position, or on basic or diluted EPS.



We apply the grant date fair value method
to our share – based payment arrangements with employees and consultants. Share – based compensation cost to employees
is measured at the grant date fair value based on the value of the award and is recognized over the service period. Share –
based payments to non – employees are recorded at fair value on the measurement date and reflected in expense over the service
period.



13







2010 Stock Option Plan



On November 15, 2009, NetTalk adopted the 2010 Stock Option
Plan (the "Plan") which is intended to advance the interests of the Company’s shareholders
by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions
to the Company by providing such persons with equity ownership opportunities and performance-based incentives, thereby better aligning
the interests of such persons with those of the Company’s shareholders. All of the Company’s
employees, officers, and directors, and those Company’s consultants and advisors (i) that are natural persons and (ii) who
provide bona fide services to the Company not connected to a capital raising transaction or the promotion or creation of a market
for the Company’s securities, are eligible to be granted options or restricted stock awards under the Plan. The
maximum aggregate number of shares of the Company’s common stock issuable under the Plan was 10,000,000 shares of the Company’s
common stock.



On July 26, 2010, we issued 3,709,500 shares
of common stock to our employees as part of our 2010 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On May 23 2011, we issued 3,890,000 shares
of common stock to our employees as part of our 2010 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On July 26 2011, we issued 2,400,500 shares
of common stock to our employees as part of our 2010 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



Summary of 2010 Stock Option Plan (issuances):



|July 26, 2010 |  |  | 3,709,500  |  |  | Common shares
|------------- |  |  | ---------- |  |  | -------------
|May 23, 2011  |  |  | 3,890,000  |  |  | Common shares
|July 26, 2011 |  |  | 2,400,500  |  |  | Common shares
|Total         |  |  | 10,000,000 |  |  | Common shares



2011 Stock Option Plan



On June 15, 2011, NetTalk adopted the 2011
Stock Option Plan (the "Plan") which is intended to advance the interests of the Company’s
shareholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives,
thereby better aligning the interests of such persons with those of the Company’s shareholders. All
of the Company’s employees, officers, and directors, and those Company’s consultants and advisors (i) that are natural
persons and (ii) who provide bona fide services to the Company not connected to a capital raising transaction or the promotion
or creation of a market for the Company’s securities, are eligible to be granted options or restricted stock awards
under the Plan. The maximum aggregate number of shares of the Company’s common stock issuable under the Plan was 20,000,000
shares of the Company’s common stock.



On January 6, 2012, we issued 3,483,500 shares
of common stock to our employees as part of our 2011 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On May 28, 2012, we issued 15,488,000 shares
of common stock to our employees as part of our 2011 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On July 25, 2012, we issued 1,028,500 shares
of common stock to our employees and vendors as part of our 2011 Stock Option Plan. The shares are compensatory in nature and are
fully vested. We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



Summary of 2011 Stock Option Plan (issuances):



|January 6, 2012 |  |  | 3,483,500  |  |  | Common shares
|--------------- |  |  | ---------- |  |  | -------------
|May 28, 2012    |  |  | 15,488,000 |  |  | Common shares
|July 25, 2012   |  |  | 1,028,500  |  |  | Common shares
|Total           |  |  | 20,000,000 |  |  | Common shares



14







2012 Stock Option Plan



On July 25, 2012, Nettalk adopted the 2012
Stock Option Plan (the "Plan") which is intended to advance the interests of the Company’s
shareholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives,
thereby better aligning the interests of such persons with those of the Company’s shareholders. All
of the Company’s employees, officers, and directors, and those Company’s consultants and advisors (i) that are natural
persons and (ii) who provide bona fide services to the Company not connected to a capital raising transaction or the promotion
or creation of a market for the Company’s securities, are eligible to be granted options or restricted stock awards
under the Plan. The maximum aggregate number of shares of the Company’s common stock that may be issued under the
Plan is 20,000,000 shares of the Company’s common stock.



On July 25, 2012, we issued 471,500 shares
of common stock to our employees and vendors as part of our 2012 Stock Option Plan. The shares are compensatory in nature and are
fully vested. We have valued the shares consistent with fair value at the time of issuance including and adjusted for ownership
restrictions.



Recent Sales of Unregistered Securities



Unless otherwise noted below, we have previously included information
concerning sales of unregistered securities in our Quarterly Reports on Form 10-Q or in a Current Report on Form 8-K.



Item 6. Selected financial data.



As a smaller reporting company, we are
not required to include disclosure, pursuant to this item.



Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations



This discussion and analysis of our financial condition and
results of operations contains forward-looking statements that involve risks and uncertainties. We have based these forward-looking
statements on our current expectations and projections of future events. However, our actual results could differ materially from
those discussed herein as a result of the risks that we face, including but not limited to those risks stated
in ”Risk Factors," or faulty assumptions on our part. In addition, the following discussion should be read in conjunction
with the audited financial statements and the related notes thereto included elsewhere in this Annual Report.



Liquidity and Capital Resources



During the
years ended December 31, 2012 and 2011, we generated net losses of $14,715,006 and $28,389,302, respectively. We used cash
in our operations in the amount of $5,248,675 during the year ended December 31, 2012.



As of December 31, 2012, we had cash and
cash equivalents on hand of $96,347.



|Statement of cash flow data:                     |  | 12/31/2012 |            |   | 12/31/2011 |  
|------------------------------------------------ |  | ---------- | ---------- | - | ---------- | -
|Net cash provided (used) in operating activities |  | $          | (5,248,675 | ) |            | $
|Net cash provided (used) in investing activities |  | $          | (317,395   | ) |            | $
|Net cash provided (used) in financing activities |  | $          | 4,123,154  |   |            | $



Our largest operating expenditures currently consist of compensation
and benefits.



Borrowing Arrangements



Long-term and short term debt



Securities Option Agreement:



On June 30, 2012, we executed Securities Option Agreement with
Vicis Capital Master Fund (“Vicis”) whereby Vicis grants us an option to purchase and redeem all securities and debentures
held by Vicis. The option becomes exercisable on the date that all principal and accrued interest on all debentures have been paid
in full, and may be exercised at any time after initial exercise date through and including December 31, 2013 (expiration date).
Upon exercise of the “option” the redemption price for the securities shall be an amount equal to $16,000,000 minus
the sum of principal and accrued interest paid on all debentures held by Vicis. Upon exercise of the option, any and all unpaid
dividends on the securities shall be surrendered and cancelled without payment of additional consideration.



15







Extension of Maturity Dates of Outstanding
Non-Convertible Debentures:



On June 30, 2012, we entered into an agreement to modify
our outstanding debentures solely to extend their maturity dates that originally ranged from June 30, 2012 to July 1, 2013 to
December 31, 2013. There were no other material modifications to the debentures and the holders received no additional
consideration to effect the modification. As a result of these modifications, we evaluated each debenture to determine
whether the maturity extension constituted a substantial modification. Under current accounting standards, from a
debtor’s perspective, a modification of a debt instrument is deemed equivalent to the exchange of debt instruments if
the present value of the cash flows under the terms of the modified arrangement are at least 10 percent different from the
present value of the remaining cash flows under the terms of the original debt instrument. In cases where the difference in
cash flows exceeds this level, extinguishment accounting is prescribed. As a result of our calculations, we concluded that
the present values, using the effective interest rates on the issuance dates, of our face value $5,266,130, $2,000,000, and
$3,500,000 debentures exceeded the substantive threshold. Accordingly, the debentures were adjusted to their respective fair
values of $6,150,160, $2,313,888, and $3,852,748 and a corresponding charge to income in the amount of $3,135,235
representing the extinguishment loss.



The fair values of the debentures were determined based upon
their future cash flows, discounted at a credit-risk adjusted market interest rate of 7.4%.



2012 Issuance of Non-Convertible Debentures



On March 29, 2012, we issued a face value $500,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013



On April 20, 2012, we issued a face value $500,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013.



On June 26, 2012, we issued a face value $450,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013.



During the year ended December 31, 2012, we received advances
in the total amount of $1,150,000, as part of a series of 10% senior secured debentures, due December 31, 2013, issued to our largest
investor.



During the year ended December 31, 2012, we received advances
in the total amount of $275,000, represented by Demand Notes, issued to our largest investor.



The carrying values our long-term and short term debt consisted
of the following as of December 31, 2012 and December 31, 2011:



|                                                            |  | December 31, |            |  | December 31, |  
|----------------------------------------------------------- |  | ------------ | ---------- |  | ------------ | -
|                                                            |  | 2012         |            |  | 2011         |  
|$2,000,000 face value 12% debenture, due December 31, 2013  |  | $            | 2,398,153  |  |              | $
|$3,500,000 face value 12% debenture, due December 31, 2013  |  |              | 3,993,053  |  |              |  
|$5,266,130 face value 12% debenture, due December 31, 2013  |  |              | 6,374,130  |  |              |  
|$ 500,000 face value 10% debenture, due December 31, 2013   |  |              | 500,000    |  |              |  
|$ 500,000 face value 10% debenture, due December 31, 2013   |  |              | 500,000    |  |              |  
|$ 450,000 face value 10% debenture, due December 31, 2013   |  |              | 450,000    |  |              |  
|$1,150,000 advances on 10% debenture, due December 31, 2013 |  |              | 1,150,000  |  |              |  
|$ 275,000 demand notes, due on demand                       |  |              | 275,000    |  |              |  
|Total                                                       |  | $            | 15,640,336 |  |              | $



16







Long-term debt:



On January 11, 2013, we received an additional advance of
$400,000 pursuant to its existing lending facility with 1080 NW 163rd Drive, LLC. The additional advance of $400,000 was
endorsed by a mortgage promissory note, which was consolidated with the initial advance of $1,000,000 from the mortgage on
1080 NW 163rd Drive, LLC. The consolidated promissory mortgage note has an aggregate principal balance of $1,400,000, accrues
interest at 12% per year, is payable in full on November 29, 2014 and is secured by our corporate office building, located at 1080 NW 163rd Drive, Miami Gardens, FL 33169.



On February 15, 2013 and April 10, 2013 we received additional
advances of $100,000 and $75,000 from 1080 NW 163rd Drive, LLC. These advances are not evidenced by a formal promissory note. The
additional advances of $100,000 and $75,000 accrue interest at 8% per year, and were payable in full on June 9, 2013. These notes
are now in default.



On February 19, 2013, August 9, 2013, August 14, 2013 and September
3, 2013the Company’s CEO advanced the Company $25,000, $5,000, $20,000 and $25,000, respectively. These advances are not
evidenced by a formal promissory note. These advances were for working capital and bear no interest and are due on demand.



On April 22, 2013 and May 3, 2013 we received advances from
Vicis in the amount of $50,000 and $25,000, respectively, both due on demand. These advances are not evidenced by a formal promissory
note.



On May 31, 2013, we issued a $300,000 face value, 5% Secured
Convertible Promissory Note, due December 1, 2013. This note is convertible into shares of the Company’s common stock at
a rate of $0.08 per share, for a total of 3,750,000 common shares. This note has a second priority security interest, junior in
priority only to the holder of the first priority interest, to all real property of the Company and any and all cash proceeds and/or
noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting obligations and
the security therefore or for any right to payment.



On July 15, 2013, we issued a $200,000
face value, 5% Secured Convertible Promissory Note, due January 15, 2014. This note is convertible into shares of the Company’s
common stock at a rate of $0.08 per share, for a total of 2,500,000 common shares. This note has a second priority security interest,
junior in priority only to the holder of the first priority interest, to all real property of the Company and any and all cash
proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment.



On July 7, 2013, August 9, 2013, August
9, 2013, August 15, 2013 and August 22, 2013 we received $111,000, $111,000, $55,000, $75,000 and $125,000 respectively, for working
capital from an outside party. These notes are due on demand and carry a 0% interest rate. Interest will be imputed on these notes
at current market rates.



17







Results of Operations



Year ended December 31, 2012 and 2011



Revenues: Our operating revenue amounted to $5,790,983
for the year ended December 31, 2012, compared to $3,548,714 at December 31, 2011. The increase in revenues relates to increases
in sales to large retail customers and increases sales volume during the period ended December 31, 2012. We have historically benefitted
from a high degree of revenue retention from both subscription based renewals and on demand customers. This high degree of customer
retention means that our customers provide a stable and reliable cash flow retention model. Our customers typically pay us upfront
and then use their downloads in a predictable pattern over time, which results in favorable cash flow and is adding predictability
and stability to our financial performances.



Cost of sales: Our cost of sales amounted to $6,184,787
for the year ended December 31, 2012, compared to $3,631,360 at December 31, 2011. The increase in cost of sales relates to increased
sales to large retail customers and increasing sales volume during the year ended December 31, 2012.



Advertising:Our advertising expenses amounted to $1,019,882
the year ended December 31, 2012, compared to $2,391,898 at December 31, 2011. The breakdown of our advertising expense is as follows:



|                 |  | 12/31/2012 |           |  | 12/31/2011 |  
|---------------- |  | ---------- | --------- |  | ---------- | -
|Media and others |  | $          | 914,427   |  |            | $
|Smartphone       |  |            | 105,455   |  |            |  
|Total            |  | $          | 1,019,882 |  |            | $



Compensation and Benefits: Our compensation and
benefits expense amounted to $1,692,237 for the year ended December 31, 2012, compared to $1,036,201 at December 31,
2011. This amount represents normal salaries and wages paid to management members and employees. The increase is due to the
addition of employees in our development, engineering and operations departments.



Professional Fees: Our professional fees amounted to
$884,580 for the year ended December 31, 2012, compared to $379,929 at December 31, 2011. This amount includes normal payments
and accruals for legal, accounting and other professional services related to general business and being a public company. The
increase also relates to legal fees incurred in defending and securing our intellectual property rights and patents.



Depreciation and Amortization: Depreciation and amortization
amounted to $262,842 for the year ended December 31, 2012, compared to $327,421 at December 31, 2011. These amounts represent amortization
of our long-lived tangible and intangible assets using the straight-line method and lives commensurate with the assets’ remaining
utility. Our long-lived assets, both tangible and intangible, are subject to annual impairment review, or more frequently if circumstances
so warrant. During the years ended December 31, 2012 and 2011, we did not calculate or record impairment charges, however, negative
trends in our business and our inability to meet our projected future results could give rise to impairment charges in future periods.



Research and Development and Software Costs



We expense research and development expenses, as these costs
are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer
software product which are charged to expense when incurred as research and development until technological feasibility has
been established for the product. Technological feasibility is established upon completion of a detail program design or, in its
absence, completion of a working model. At this time our main products, the DUO, DUO II and DUO-WIFI are being sold in the market
place.



|Components of Research and development: |  | 12/31/2012 |           |  | 12/31/2011 |  
|--------------------------------------- |  | ---------- | --------- |  | ---------- | -
|Product development and engineering     |  | $          | 88,917    |  |            | $
|Payroll and benefits                    |  |            | 1,122,794 |  |            |  
|Total                                   |  | $          | 1,211,711 |  |            | $



18







General, Selling and Administrative Expenses: General,
selling and administrative expenses amounted to $2,614,408 for the year ended December 31, 2012, compared to $2,337,965 at December
31, 2011. General corporate expenses, are as follows:



|Items              |  | 12/31/2012 |           |  | 12/31/2011 |  
|------------------ |  | ---------- | --------- |  | ---------- | -
|                   |  |            |           |  |            |  
|Shipping outbound  |  | $          | 437,126   |  |            | $
|Insurance          |  |            | 272,240   |  |            |  
|Rent and occupancy |  |            | 134,393   |  |            |  
|Taxes and licenses |  |            | 148,619   |  |            |  
|Travel             |  |            | 168,599   |  |            |  
|Commissions        |  |            | 667,176   |  |            |  
|Other              |  |            | 786,255   |  |            |  
|Total              |  | $          | 2,614,408 |  |            | $



Loss from operations:Loss from operations amounted to
$8,079,464 for the year ended December 31, 2012, compared to $7,676,545 at December 31, 2011. The increase in net loss resulted
primarily from increase in payroll and legal fees.



Interest Expense: Interest expense amounted to $3,500,512
for the year ended December 31, 2012, compared to $2,035,257 at December 31, 2011. This amount represents interest on our mortgage
debt and also includes, (i) stipulated interest under our convertible debentures that were converted to common stock during the
year and our secured debentures issued on August 8, 2011, (ii) the related amortization of premiums and discounts (iii) the
amortization of deferred finance costs. Aggregate premiums continue to be credited to interest expense over the term of the debentures
using the effective interest method.



Derivative expenses:Derivative expense amounted to $0
for the year ended December 31, 2012, compared to $17,174,242 at December 31, 2011. Derivative expenses are extraordinary and non-recurring.



Debt extinguished: Debt extinguished amounted to $3,135,235
for the year ended December 31, 2012, compared to $1,293,539 at December 31, 2011.



Net Loss: Net loss amounted to $14,715,006 for the year
ended December 31, 2012, compared to $28,389,302 at December 31, 2011.



Results of Operations



Three months ended December 31, 2011 and 2010



Revenues: Our operating revenue amounted to $1,298,623
for the three months ended December 31, 2011, compared to $470,378 at December 31, 2010. The increase in revenues relates to increase
in sales to large retail customers and increase sales volume during the three month period. We have historically benefitted from
a high degree of revenue retention from both subscription based renewals and on demand customers. This high degree of customer
retention means that our customers provide a stable and reliable cash flow retention model. Our customers typically pay us upfront
and then use their downloads in a predictable pattern over time, which results in favorable cash flow and is adding predictability
and stability to our financial performances.



Cost of sales: Our cost of sales amounted to $1,787,815
for the three months ended December 31, 2011, compare to $724,988 at December 31, 2010. The increase in cost of sales relates to
increased sales to large retail customers and increasing sales volume during the period.



Advertising:Our advertising expenses amounted to $606,209
for the three months ended December 31, 2011, compared to $109,996 at December 31, 2010. The breakdown of our advertising expense
is as follows:



|                 |  | 12/31/2011 |         |  | 12/31/2010 |  
|---------------- |  | ---------- | ------- |  | ---------- | -
|Media and others |  | $          | 531,633 |  |            | $
|Smartphone       |  |            | 74,576  |  |            |  
|Total            |  | $          | 606,209 |  |            | $



Compensation and Benefits: Our compensation and benefits
expense amounted to $289,652 for the three months ended December 31, 2011, compared to $104,750 at December 31, 2010. This
amount represents normal salaries and wages paid to management members and employees. The increase is due to the addition of employees
in our development, engineering and operations departments.



19







Professional Fees: Our professional fees amounted to
$136,118 for the three months ended December 31, 2011, compared to $68,094 at December 31, 2010. This amount includes normal payments
and accruals for legal, accounting and other professional services related to general business and being a public company.



Depreciation and Amortization: Depreciation and amortization
amounted to $60,765 for the three months ended December 31, 2011, compared to $90,033 at December 31, 2010. These amounts represent
amortization of our long-lived tangible and intangible assets using the straight-line method and lives commensurate with the assets’
remaining utility. Our long-lived assets, both tangible and intangible, are subject to annual impairment review, or more frequently
if circumstances so warrant. During the three months ended December 31, 2011 and 2010, we did not calculate or record impairment
charges, however, negative trends in our business and our inability to meet our projected future results could give rise to impairment
charges in future periods.



Research and Development and Software Costs



We expense research and development expenses, as these costs
are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer
software product and are charged to expense when incurred as research and development until technological feasibility has
been established for the product. Technological feasibility is established upon completion of a detail program design or, in its
absence, completion of a working model. At this time our main products, the DUO are being sold in the market place. Therefore,
research and development cost reported in our financial statements relates to pre – marketing cost and are expensed accordingly.



|Components of Research and development: |  | 12/31/2011 |         |  | 12/31/2010 |  
|--------------------------------------- |  | ---------- | ------- |  | ---------- | -
|Product development and engineering     |  | $          | 8,650   |  |            | $
|Payroll and benefits                    |  |            | 262,132 |  |            |  
|Total                                   |  | $          | 270,782 |  |            | $



General, Selling and Administrative Expenses: General,
selling and administrative expenses amounted to $497,986 for the three months ended December 31, 2011, compared to $184,282 at
December 31, 2011 and consisted of general corporate expenses, as follows:



|Items              |  | 12/31/2011 |         |  | 12/31/2010 |  
|------------------ |  | ---------- | ------- |  | ---------- | -
|Bad debt           |  | $          | -       |  |            | $
|Insurance          |  |            | 41,126  |  |            |  
|Software           |  |            | 1,600   |  |            |  
|Rent and occupancy |  |            | 78,438  |  |            |  
|Taxes and licenses |  |            | 34,254  |  |            |  
|Travel             |  |            | 51,434  |  |            |  
|Commissions        |  |            | 149,203 |  |            |  
|Other              |  |            | 141,931 |  |            |  
|Total              |  | $          | 497,986 |  |            | $



Loss from operations:Loss from operations amounted to
$2,350,704 for the three months ended December 31, 2011, compared to $997,323 at December 31, 2010. The increase in net loss resulted
primarily from an increase in payroll and advertising expense to sustain our growth in the retail segment and support awareness
of the Company’s products. .



Interest Expense: Interest expense amounted to $1,090,735
for the three months ended December 31, 2011, compared to $126,000 at December 31, 2010. Such amount represented (i) stipulated
interest under our aggregate $4,998,773 face value convertible debentures that were converted to common stock during the year and
our secured debentures issued on August 8, 2011, (ii) the related amortization of premiums and discounts and (iii) the amortization
of deferred finance costs. Aggregate premiums continue to be credited to interest expense over the term of the debentures using
the effective interest method.



Derivative expense:Derivative expense amounted to $0
for the three months ended December 31, 2011, compared to $105,778 at December 31, 2010.



Net Loss: Net loss amounted to $3,440,286 for the three
months ended December 31, 2011, compared to $1,227,545 at December 31, 2010.



20







Results of Operations



Comparison - fiscal years ended September 30, 2011 and
2010



Revenues: Our operating income amounted to $2,720,465
and $737,498 for the fiscal years ended September 30, 2011 and 2010, respectively. The increase in revenues relates to establishing
several brick and mortar retail customers and increasing sales volume during the fiscal year ended September 30, 2011.



Cost of sales: Our cost of sales amounted to $3,098,366
and $1,453,332 for the fiscal years ended September 30, 2011 and 2010, respectively. The increase in cost of sales relates to increased
sales primarily driven by sales to our newly acquired retail customers and increasing sales volume during the fiscal year ended
September 30, 2011.



Advertising:Our advertising expenses amounted to $1,701,490
and $357,413 for fiscal years ended September 30, 2011 and 2010. The breakdown of our advertising expense is as follows:



|                            |  | September 30, |          
|--------------------------- |  | ------------- | ---------
|                            |  | 2011          |          
|                            |  |               |          
|Infomercial/production time |  | $             | -        
|Media and others            |  |               | 1,514,992
|Smartphone                  |  |               | 186,498  
|Total                       |  | $             | 1,701,490



Compensation and Benefits: Our compensation and benefits
expense amounted to $1,262,994 and $477,576 for fiscal years ended September 30, 2011 and 2010. This amount represents normal
salaries and wages paid to management members and employees. The increase is due to the addition of employees in our development,
engineering and operations departments.



Professional Fees: Our professional fees amounted to
$235,756 and $255,471 for fiscal years ended September 30, 2011 and 2010, respectively. This amount includes normal payments and
accruals for legal, accounting and other professional services related to general business and being a public company.



Depreciation and Amortization: Depreciation and amortization
amounted to $356,688 and $363,335 for fiscal years ended September 30, 2011 and 2010. These amounts represent amortization of our
long-lived tangible and intangible assets using the straight-line method and lives commensurate with the assets’ remaining
utility. Our long-lived assets, both tangible and intangible, are subject to annual impairment review, or more frequently if circumstances
so warrant. During fiscal years ended September 30, 2011 and 2010, we did not calculate or record impairment charges, however,
negative trends in our business and our inability to meet our projected future results could give rise to impairment charges in
future periods.



Research and Development and Software Costs



We expense research and development expenses, as these costs
are incurred. We account for our offering-related software development costs as costs incurred internally in creating a computer
software product and are charged to expense when incurred as research and development until technological feasibility has been
established for the product. Technological feasibility is established upon completion of a detail program design or, in its absence,
completion of a working model. At this time our main products, the DUO are being sold in the market place. Therefore, research
and development cost reported in our financial statements relates to pre – marketing cost and are expensed accordingly.



|Components of Research and development: |  | September 30, 2011 |         |  | September 30, 2010 |  
|--------------------------------------- |  | ------------------ | ------- |  | ------------------ | -
|                                        |  |                    |         |  |                    |  
|Product development and engineering     |  | $                  | 405,645 |  |                    | $
|Payroll and benefits                    |  |                    | 497,724 |  |                    |  
|Total                                   |  | $                  | 903,369 |  |                    | $



21







General, Selling and Administrative Expenses: General,
selling and administrative expenses amounted to $1,484,971 for the fiscal year ended September 30, 2011 as compared to $547,075
for the fiscal year ended September 30, 2010 and consisted of general corporate expenses.



Our general and administrative expenses
are made up of the following items:



|Items                                    |  | September 30, 2011 |           |  | September 30, 2010 |  
|---------------------------------------- |  | ------------------ | --------- |  | ------------------ | -
|                                         |  |                    |           |  |                    |  
|Bad debt                                 |  | $                  | -         |  |                    | $
|Insurance                                |  |                    | 116,023   |  |                    |  
|Software support                         |  |                    | 42,883    |  |                    |  
|Rent and occupancy                       |  |                    | 277,228   |  |                    |  
|Taxes and licenses                       |  |                    | 77,661    |  |                    |  
|Travel                                   |  |                    | 176,031   |  |                    |  
|Distribution, processing and commissions |  |                    | 434,885   |  |                    |  
|Other                                    |  |                    | 360,260   |  |                    |  
|Total                                    |  | $                  | 1,484,971 |  |                    | $



Loss from operations:Loss from operations amounted to
$6,323,169 and $3,091,901 for the fiscal year ended September 30, 2011 and 2010. The increase in net loss resulted primarily from
an increase in payroll and advertising expense to sustain our growth in the retail segment and support awareness of the Company’s
products. Research and development expenses increased as a result of the DUO WIFI and other products expected to roll out during
2012.



Interest Expense: Interest expense amounted to $1,070,522
for the fiscal year ended September 30, 2011 as compared to $1,058,363 for the fiscal year ended September 30, 2010. Such amount
represented (i) stipulated interest under our aggregate $4,998,773 face value convertible debentures that were converted to common
stock during the year and our secured debenture issued on August 8, 2011, (ii) the related amortization of premiums and discounts (iii)
the amortization of deferred finance costs. Aggregate premiums continue to be credited to interest expense over the term of the
debentures using the effective interest method.



Derivative Income (Expense): Derivative income (expense)
amounted to $(17,280,018) for the fiscal year ended September 30, 2011 as compared to derivative income of $1,445,632 for the year
ended September 30, 2010. Such amount represents the change in fair value of liability-classified warrants. Derivative financial
instruments are carried as liabilities, at fair value, in our financial statements with changes reflected in income. In addition
to the liability-classified warrants, we also had certain compound derivative financial instruments related to our $4,998,773 face
value convertible debentures that had de minimus values. We are required to adjust our warrant and compound derivatives to fair
value at each reporting period. The fair value of our warrant derivative is largely based upon fluctuations in the fair value of
our common stock. The fair value of our compound derivative is largely based upon estimates of cash flow arising from the derivative
and credit-risk adjusted interest rates. Accordingly, the volatility in these underlying valuation assumptions will have future
effects on our earnings.



Debt extinguished:Debt extinguished amounted to $1,293,538
for the fiscal year ended September 30, 2011 as compared to $3,617,983 for the fiscal year ended September 30, 2010. The amount
represents loss recognized related to the June 30, 2011 transaction whereupon the investor converted debt into shares of our common
stock and was granted inducement warrants to convert such debt; expense was also incurred to settle accrued interest as part of
the transaction. The expense incurred during the fiscal year ended September 30, 2011 related to the issuance of new debentures
on February 24, 2010.



Net Loss: Net loss amounted to $26,176,565 for the fiscal
year ended September 30, 2011, as compared to a net loss of $6,306,963 for the fiscal year ended September 30, 2010.



Net Loss Per Common Share: Basic loss per common share
represents our net loss divided by the weighted average number of common shares outstanding during the period. Diluted loss per
common share gives effect to all potentially dilutive securities. We compute the effects on diluted loss per common share arising
from warrants and options using the treasury stock method. We computed the effects on diluted loss per common share arising from
convertible securities using the if-converted method. The effects, are anti-dilutive and are excluded.



22







Contractual obligations – Not Applicable



Off-Balance Sheet Arrangements - NONE



Critical Accounting Policies and estimates



Our accounting policies are discussed and summarized in Note
1 to our financial statements. The following describes our critical accounting policies and estimates.



Critical Accounting Policies



The financial information contained in our comparative results
of operations and liquidity disclosures has been derived from our financial statements. The preparation of those financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and notes. The following significant estimates were made in the preparation of our
financial statements and should be considered when reading our Management’s Discussion and Analysis:



| | ● | Impairment of Long-lived Assets: Our telecommunications equipment, other property and intangible assets are material to our
financial statements. Further, they are subject to the potential negative effects arising from technological obsolescence. We evaluate
our tangible and definite-lived intangible assets for impairment annually or more frequently in the presence of circumstances or
trends that may be indicators of impairment. Our evaluation is a two-step process. The first step is to compare our undiscounted
cash flows, as projected over the remaining useful lives of the assets, to their respective carrying values. In the event
that the carrying values are not recovered by future undiscounted cash flows, as a second step, we compare the carrying values
to the related fair values and, if lower, record an impairment adjustment. For purposes of fair value, we generally use replacement
costs for tangible fixed assets and discounted cash flows, using risk-adjusted discount rates, for intangible assets. These estimates
are made by competent employees, using the best available information, under the direct supervision of our management.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Intangible assets: Our intangible assets require us to make subjective estimates about our future operations and cash flows
so that we can evaluate the recoverability of such assets. These estimates consider available information and market indicators
including our operational history, our expected contract performance, and changes in the industries that we serve.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Share-based payment arrangements: We currently intend to issue share-indexed payments in future periods to employees and non-employees.
There are many valuation techniques, such as Black-Scholes-Merton valuation model that we may use to value share-indexed contracts,
such as warrants and options. All such techniques will require certain assumptions that require us to develop forward-looking
information as well as historical trends. For purposes of historical trends, we may need to look to peer groups of companies and
the selection of such groups of companies is highly subjective.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Common stock valuation: Estimating the fair value of our common stock is necessary in the preparation of computations related
to acquisition, share-based payment and financing transactions. We believe that the most appropriate and reliable basis for common
stock value is trading market prices in an active market.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Derivative Financial Instruments: We generally do not use derivative financial instruments to hedge exposures to cash-flow,
market or foreign-currency risks. However, we have entered into certain other financial instruments and contracts, such as our
secured convertible debenture and warrant financing arrangements that are either (i) not afforded equity classification, (ii) embody
risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. We are required
to carried as derivative liabilities, at fair value, in our financial statements. The fair value of share-indexed derivatives will
be significantly influenced by the fair value of our common stock (see Common Stock Valuation, above). Certain other elements of
forward-type derivatives are significantly influenced by credit-adjusted interest rates used in cash-flow analysis. Since we are
required to carry derivative financial instruments at fair value and make adjustments through earnings, our future profitability
will reflect the influences arising from changes in our stock price, changes in interest rates, and changes in our credit standing.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23







Revenue recognition



We derive revenue from (i) product sales and (ii) telecom services.
All revenues are recognized in accordance with ASC 605, Revenue Recognition and SAB 104 as follows: when evidence of an arrangement
exists, in the case of products, when the product is shipped to a customer, or in the case of telecom services, when the service
is used by the consumer, when the fee is fixed or determinable and finally when we have concluded that amounts are collectible
from the customers. Shipping costs billed to customers are included as a component of product sales. The associated cost of shipping
is included as a component of cost of product sales.



Operating revenue consist of customer equipment sales of our
main product the NetTalk DUO (“DUO”), telecommunication service revenues, shipping and handling revenues.



Our DUO provides for revenue recognition from the sale of the
device and from the sale of telephone service. The initial year of telephone service is included on the sale price at time of sale
and billed subsequently thereafter. Therefore, revenue recognition on our DUO is fully recognized at the time of our customer equipment
sale, the one year telephone service is amortized over 12 month cycle. Subsequent renewals of the annual telephone service are
amortized over the corresponding 12 months cycle.



International calls are billed as earned from our customers.
International calls are prepaid and customers account is debited as minutes are used and earned.



Inventory



Inventory consists of the cost of customer equipment and is
stated at the lower of cost or market.



At the present time we do not provide
for inventory allowance. As we continue to sell our product we will evaluate the need for such an allowance.



|                                 |  | December 31, |           |  | December 31, |  
|-------------------------------- |  | ------------ | --------- |  | ------------ | -
|Inventory                        |  | 2012         |           |  | 2011         |  
|Productive material and supplies |  | $            | 869,740   |  |              | $
|Finished goods                   |  |              | 598,034   |  |              |  
|Total                            |  | $            | 1,467,774 |  |              | $



During the year ended December 31, 2012 and 2011, in accordance
with our lower of cost or market analyses we did not record any lower of cost or market adjustments to our finished goods inventories.



Of our $598,034 of finished goods inventory at December 31,
2012, $140,200 is held on consignment at one of our distributors.



Of our $1,018,339 of finished goods inventory at December 31,
2011, $170,402 was held on consignment at one of our distributors.



Income taxes



We recognize deferred taxes for the expected tax consequences
of temporary differences between the tax bases of assets and liabilities and their reported amounts using tax rates in effect for
the year. We have recorded a valuation allowance on the assumption that realization of the benefits is not more likely than
not.



Net operating loss carry-forwards



As of December 31, 2012, we had net operating loss carry-forwards
in the amount of $35,490,620 for US federal and state tax purposes expiring at various times thru 2031.



24







Recent accounting pronouncements



In May 2011, the FASB issued an update that amends the guidance
provided in ASC Topic 820, Fair Value Measurement, by clarifying some existing concepts, eliminating
wording differences between GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases,
changing some principles to achieve convergence between GAAP and IFRS. The update results in a consistent definition of fair value,
establishes common requirements for the measurement of and disclosure about fair value between GAAP and IFRS, and expands the disclosures
for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This update became effective in
the second quarter of fiscal 2012. The adoption of this update did not have a material impact on our financial statements.



Item 7A. Quantitative and Qualitative
Disclosures About Market Risk



We are a smaller reporting company as defined by Rule 12b-2
of the Securities Exchange Act of 1934 and, as such, are not required to provide the information under this item.



Item 8. Financial Statement and Supplementary Data



The financial statements are part of this filings and are contained
herein.



Item 9. Changes In and Disagreements With Accountants
On Accounting and Financial Disclosure



None.



Item 9A. Controls and Procedures



Disclosure controls



We maintain “disclosure controls and procedures,”
as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”),
that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules
and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures
are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply 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.



As of December 31, 2012, we carried out an evaluation, under
the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not effective in ensuring that information required
to be disclosed by us in our periodic reports is recorded, processed, summarized and reported, within the time periods specified
for each report and that such information is accumulated and communicated to our management, including our principal executive
and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure.



In connection with the assessment described above, management
identified the following control deficiencies that represent material weaknesses at December 31, 2012:



| | · | Due to the Company’s limited resources, the Company has insufficient personnel resources and technical accounting and
reporting expertise to properly address all of the accounting matters inherent in the Company’s financial transactions. The
Company does not have a formal audit committee, and the Board does not have a financial expert, thus the Company lacks the board
oversight role within the financial reporting process.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company’s small size and “one-person”
office prohibits the segregation of duties and the timely review of accounts payable, expense reporting and inventory management
and banking information.



25







Our Chief Executive Officer and Chief Financial Officer are
in the process of determining how best to change our current system and implement a more effective system to insure that information
required to be disclosed in this annual report on Form 10-K has been recorded, processed, summarized and reported accurately. Our
management acknowledges the existence of this problem, and intends to developed procedures to address them to the extent possible
given limitations in financial and manpower resources. While management is working on a plan, no assurance can be made at this
point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate
once implemented.



Management report on internal control
over financial reporting



Our management is responsible for establishing and maintaining
adequate internal control over financing reporting for our company. Internal control over financial reporting is defined in Rule
13a – 15(f) and 15d – 15(f) of the Securities and Exchange Act of 1934 as a process designed by or under the supervision
of our principal executive and principal financial officer and effected by board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:



| | ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition
of assets of the company;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of company’s
assets that could have a material effect on the financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of the inherent limitations, internal control over financial
reporting may not detect or prevent misstatements. 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.



Our management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2012. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in internal control – integrated framework. Based
on our assessment, management concluded that as of December 31, 2012, our internal control over financial reporting is not effective
based on those criteria.



In connection with the assessment described above, management
identified the following control deficiencies that represent material weaknesses at December 31, 2012:



| | · | Due to the Company’s limited resources, the Company has insufficient personnel resources and technical accounting and
reporting expertise to properly address all of the accounting matters inherent in the Company’s financial transactions. The
Company does not have a formal audit committee, and the Board does not have a financial expert, thus the Company lacks the board
oversight role within the financial reporting process.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The Company’s small size and “one-person” office prohibits the segregation of duties and the timely review
of accounts payable, expense reporting and inventory management and banking information.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Chief Executive Officer and Chief Financial Officer are
in the process of determining how best to change our current system and implement a more effective system to insure that information
required to be disclosed in this annual report on Form 10-K has been recorded, processed, summarized and reported accurately. Our
management acknowledges the existence of this problem, and intends to developed procedures to address them to the extent possible
given limitations in financial and manpower resources. While management is working on a plan, no assurance can be made at this
point that the implementation of such controls and procedures will be completed in a timely manner or that they will be adequate
once implemented. Failure to develop adequate internal control and hiring of qualified accounting personnel may result in a “material
weakness” in the Company’s internal control relating to the above activities.



26







This annual report does not include an attestation report of
the company’s registered public accounting firm regarding internal control over financial reporting. As a smaller reporting
company, the management’s report is not subject to attestation by the company’s registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission.



Changes in Internal Controls.



During the year ended December 31, 2012, there were no changes
in our internal control over financial reporting identified in connection with the evaluation required by paragraph (f) of Rule
13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



Item 9B. Other Information



On November 29, 2012, we borrowed
$1,000,000 from a lender and in exchange, we issued a 12% promissory note and a mortgage and
security agreement. The 12% promissory note, among other matters, accrues interest at 12% per annum, is payable in full on November
29, 2014, and is secured by our corporate office building, located at 1080 NW 163rd Drive, Miami Gardens, FL 33169.
Proceeds from the 12% promissory note were used for operating expenses and working capital.



On January 11, 2013, we received an additional advance of $400,000
pursuant to its existing lending facility with 1080 NW 163rd Drive, LLC. The additional advance of $400,000 was memorialized by
a future advance promissory note issued by us, which was consolidated with an initial advance of $1,000,000 from 1080 NW 163rd
Drive, LLC. The consolidated promissory note has an aggregate principal balance of $1,400,000. The consolidated promissory note,
among other matters, accrues interest at 12% per annum, is payable in full on November 29, 2014, and is secured by the Company’s
corporate office building, located at 1080 NW 163rd Drive, Miami Gardens, FL 33169. Proceeds from the additional advance of $400,000
were used for operating expenses and working capital



Part III



Item 10. Directors, executive officers and corporate governanceThe following table sets forth certain information with respect to each of our directors, executive officers and key employees
as of December 31, 2012. Their ages, positions, dates of initial election or appointment, and the expiration of their terms are
as follows:



|Name                          | Age | Position                                        | Period served            
|----------------------------- | --- | ----------------------------------------------- | -------------------------
|Anastasios Kyriakides         | 64  | Director, Chief Executive Officer and Secretary | May 2008 to present      
|Kenneth A. Hosfeld            | 61  | Director, Vice President                        | May 2008 to present      
|Guillermo Rodriguez (Retired) | 64  | Director, Chief Financial Officer               | May 2008 to April 30,2013
|Shad Stastney (Resigned)      | 45  | Director                                        | May 2012 to June 6, 2013 
|Dr. George Gabb               | 44  | Director                                        | May 2011 to present      



Unless expressly indicated in the above table, each director
and officer will serve in these capacities until their successors are duly elected, qualified and seated in accordance with the
Company’s Articles of Incorporation and Bylaws.



Background of Executive Officers and
Directors



Anastasios Kyriakides, Director, Chief Executive Officer,
Secretary. Mr. Kyriakides has served as a member of the Company’s board of directors and as the Company’s
Chief Executive Officer and Secretary since September 2008. Mr. Kyriakides received a Bachelor of Science in business from
Florida International University in 1975. In 1977, he received a degree in investment banking from the American Institute of Banking.
From 1979 until present, Mr. Kyriakides has consulted for numerous companies in the areas of shipping, travel, banking and
electronics. Mr. Kyriakides began his career in the electronics development field when, in 1979, he founded and served as
Chairman of Lexicon Corporation, producer of the LK300, the first hand held electronic language translator which translated words
and phrases into 12 different languages. Lexicon was publicly traded on the NASDAQ, under the symbol LEXI, until it was ultimately
acquired by Nixdorf Computers of Germany. Mr. Kyriakides was also the founder of Delcor Industries, established in 1980 in
Hollywood, Florida. Delcor was an electronics manufacturing facility employing over 150 employees to assemble OEM products for
various electronics companies including IBM mainframe and Gable Division. In 1983, Mr. Kyriakides founded the Mylex Corporation to
develop and produce the world’s first hand-held optical scanner and VGA card for personal computers. As the President and
Chairman, Mr. Kyriakides guided Mylex from its beginning as a private company to its becoming a public company traded on the
NASDAQ under the stock symbol MYLX until it was acquired as a wholly owned subsidiary of IBM (NYSE: IBM). In 1983, Mr. Kyriakides
was the founder and Chairman of Tower Bank NA, a full service commercial bank, with three offices, headquartered in Dade County,
Florida. Mr. Kyriakides also has extensive experience in the cruise line and travel industries. His cruise ship career started
with Carnival Cruise line out of the Port of Miami, and continued to a successful startup with Tropicana Cruises; one of the first
gaming ships out of the Port of Miami. Mr. Kyriakides founded Regency Cruise Line in 1984, as the world’s first publicly
traded company in passenger shipping, and served as its Chairman and Secretary until 1987. Mr. Kyriakides also organized the
successful start-up of Seawind Cruise Line. In his three years with Seawind Cruise Line, Mr. Kyriakides served as its founder,
chairman, chief executive officer and secretary.



27







From 1994 to 1996, Mr. Kyriakides served as the Chairman
of Montgomery Ward Travel, a company created to provide full travel services to eight million Montgomery Ward customers and credit
card holders. Immediately prior to joining the Company, Mr. Kyriakides served as Chief Executive Officer of Interlink Global
Corporation from 1994 until September, 2008. Interlink Global Corporation provided telecommunications applications utilizing hardware
and software that enables its domestic and worldwide users to access the internet as a transmission medium for placing telephone
calls.



Kenneth Hosfeld, Director, Vice President. Mr. Hosfeld
was appointed to serve on the Company’s board of directors in September 2008. Mr. Hosfeld has over twenty-two years
of international sales, marketing, and business management experience in the telecommunications industry. Most recently, Mr. Hosfeld
served as a member of the board of directors and the executive vice president for Interlink Global Corporation (OTC: ILKG), a provider
of private and public telecommunication network and internet services. Prior to joining Interlink, Mr. Hosfeld co-founded
NetExpress. He has also served as the Regional Director of Brazil, the Andinos, and the Caribbean for Tellabs, Inc., a global supplier
to the dynamic telecommunications industry that designs, manufactures, markets and services voice, data a video transportation
tools and networks. While with Tellabs, Mr. Hosfeld secured that company’s first “turn-key” contract which
involved a complete, fully managed network deployment including all products and services and project financing. He also opened
Tellabs’ offices in Brazil and regularly exceeded revenue targets. Prior to that, Kenneth was Vice President of Nera Latin
America, a subsidiary of Nera Telecommunications (formerly ABB), a telecommunications and IT solutions provider for microwave,
satellite, wireless broadband access, networking and broadcasting. Mr. Hosfeld had full production and logistic responsibility
for the Latin American region, including responsibilities for opening offices throughout Latin America including such countries
as Brazil, Colombia, Mexico, and Venezuela, While with the company, Mr. Hosfeld was also able to penetrate the Mexican and
Chilean markets. Prior to his work with Nera Latin America, Mr. Hosfeld was responsible for similar product sales in Africa
and in China. Mr. Hosfeld speaks over six languages including fluent Spanish and Portuguese. Immediately prior to joining
the Company, Mr. Hosfeld served as Executive Vice President of Interlink Global Corporation from 1994 until September, 2008.
Interlink Global Corporation provided telecommunications applications utilizing hardware and software that enables its domestic
and worldwide users to access the internet as a transmission medium for placing telephone calls.



Guillermo Rodriguez, Director,
Chief Financial Officer (Retired April 30,2013). Mr. Rodriguez was appointed to the Company’s board of directors
in September 2008. Mr. Rodriguez was a certified public accountant. He earned his Bachelor’s Degree with a major in
accounting and business administration from the University of Miami in Coral Gables, Florida. Mr. Rodriguez earned his Masters
of Business Administration from Nova Southeastern University in Davie, Florida. He has extensive accounting and financial reporting
experience in banking, real estate brokering, property management and the telecommunications industry. Prior to joining the Company
in September 2008, Mr. Rodriguez worked for Interlink Global Corporation from 2005 until September 2008 and as controller
and financial officer for Land Cellular Corporation from 2003 until 2005. Prior to that, Mr. Rodriguez served as controller
and financial officer for Bremer Real Estate, CSW Associates and Consolidated Bank, N.A. Mr. Rodriguez also worked as an auditor
and investigator for the Federal Deposit Insurance Corporation (FDIC). Mr. Rodriguez is fluent in Spanish.Effective
April 30, 2013, Mr. Rodriguez retired as CFO of the Company. The Company is currently looking for a new CFO. The Company’s
CEO, Anastasios Kyriakides has fulfilled that role for the time being.



Dr. George Gabb, Director.



Mr. Gabb has over 18 years of experience
within the education field. Currently he oversees the Computer Information Systems department at Miami Dade College North Campus
(“MDC”), covering a wide variety of programming languages. Mr. Gabb has been with MDC since 1998 and has a total of
18 years of experience within the education field. Prior to his stay at MDC, he held a variety of Director-level academic IT-related
positions. In addition to his academic background, Mr. Gabb is a member of the Florida Bar. He holds a B.S. in Psychology, M.S.
in Computer Information Systems, and a J.D. from Nova Southeastern University.



Shad Stastney, Director(Resigned June 6, 2013)



Mr. Shadron Lee Stastney is a founding partner of Vicis Capital
LLC. He graduated from the University of North Dakota in 1990 with a B.A. in Political Theory and History, and from Yale Law School
in 1994 with a J.D. focusing on corporate and tax law. From 1994 to 1997, he worked as an associate at Cravath, Swaine and Moore
in New York, where he worked in the tax group and in the corporate group, focusing on derivatives. In 1997, he joined CSFB’s
then-combined convertible/equity derivative origination desk. From 1998 through 2001, he worked in CSFB’s corporate equity
derivatives origination group, eventually becoming a Director and Head of the Hedging and Monetization Group, a joint venture between
derivatives and equity capital markets. In 2001, he jointly founded Victus Capital Management, LP, and in 2004, he jointly founded
Vicis. Mr. Stastney also jointly founded Vicis Capital Management LLC in 2001. Mr. Stastney has been a director of QHP Financial
Group, Inc. since February 2010, China Hydro since January 2010, Master Silicone Carbide since September 2008, Amacore Holdings,
Inc. since August 2008, Care Media since April 2007, China New Energy since August 2008, Zurvita Holdings, Inc. since March 2010,
Age of Learning since March 2010 and OptimizeRX Corporation since July 2010. Mr. Stastney was a director of Medical Solutions Management
from October 2007 to January 2009 and MDWerks from May 2008 to August 2009. Mr. Stastney resigned as a Member of the Board of Directors
effective June 6, 2013.



28







Significant employees



Other than the executive officers named above, the Company does
not have any “significant employees.”



Family relationship – NONE.



Involvement in legal proceedings



No officer, director, promoter or significant employee has been
involved in the last five years in any of the following:



| | ● | Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and
other minor offenses);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoying, barring, suspending or otherwise limiting his involvement in any type of business,
securities or banking activities; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ● | Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission
to have violated or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Committees



Our business, property and affairs are managed by or under the
direction of the board of directors. Members of the board are kept informed of our business through discussion with the chief executive
and financial officers and other officers, by reviewing materials provided to them and by participating at meetings of the board
and its committees. We presently do not have any committees of our board of directors, however, our board of directors intends
to establish various committees at some point in the future.



Employment Agreements



On May 16, 2011, we executed an Amended
Employment Agreement with Mr. Kyriakides our Chief Executive Officer and President as follows:



Salary set at $250,000 per year starting on January 1, 2012.
Three year term with automatic renewal of two years.



Change of control cash payment set at $1,500,000



Currently, with the exception of Mr. Kyriakides Employment Agreement,
all other employment with the Company is at will and may be terminated by either the employee or the Company at any time. We require
each of our three executive officers to execute a Confidentiality and Non-Competition Agreement.



Compliance with Section 16(a) of the Exchange Act



Section 16(a) of the Securities Exchange Act of 1934 requires
our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity
securities to file with the SEC initial reports of ownership and reports of change in ownership of common stock and other equity
securities of our company. Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish
us with copies of all Section 16(a) forms they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to us under Rule 16a-3(e) during the year ended December 31, 2012, and Forms 5 and amendments thereto furnished to us with respect
to the year ended December 31, 2012, we believe that during the year ended December 31, 2012, our executive officers, directors
and all persons who own more than ten percent of a registered class of our equity securities have complied with all Section 16(a)
filing requirements.



29







Code of Ethics



We have adopted and previously filed a Code of Ethics for our
officers, directors and employees.



Material Changes to Nominations by Security Holders of Director
Candidates



In the past fiscal year, there has been no material change to
the procedures by which security holders may recommend nominees to the small business issuer’s board of directors.



Audit Committee



We do not currently have a standing audit committee. The Company’s
Chief Executive Officer is actively researching candidates for membership on the Board of Directors who would be “independent”
and who, accordingly, could serve on an audit committee. The entire Board of Directors is currently performing the equivalent functions
of an audit committee, none of whom have been determined to be an “audit committee financial expert.”



Audit Committee Financial Expert



We do not currently have an “audit committee financial
expert” as defined under Item 407(e) of Regulation S-K. As discussed above, our Board of Directors plans to form an Audit
Committee. In addition, the Board is actively seeking to appoint an individual to the Board of Directors and the Audit Committee
who would be deemed an audit committee financial expert.



Item 11. Executive compensation



Compensation of our executive officers



The following table contains compensation information for our
executive officers for the period ended December 31, 2012 and December 31, 2011. No other officer received compensation greater
than $100,000 for either fiscal year. All of the information included in this table reflects compensation earned by the individuals
for services rendered to our Company and all references in the following tables to stock awards relate to awards of common stock
granted by us.



|Name and Position                |  | Year  ended Dec
31, |      |  | Salary |   |         | Common Stock Awards |  |   | Total |    
|-------------------------------- |  | ------------------- | ---- |  | ------ | - | ------- | ------------------- |  | - | ----- | ---
|Anastasios Kyriakides, Director, |  |                     | 2012 |  |        | $ | 258,600 | (2)                 |  | $ | 0     | (3)
|Chief Executive Officer (1)      |  |                     | 2011 |  |        | $ | 190,000 | (2)                 |  | $ | 0     | (3)
|Kenneth Hosfeld, Director,       |  |                     | 2012 |  |        | $ | 96,000  | (8)                 |  | $ | 0     | (9)
|Vice President (7)               |  |                     | 2011 |  |        | $ | 96,000  | (8)                 |  | $ | 0     | (9)
|Guillermo Rodriguez, Director,   |  |                     | 2012 |  |        | $ | 65,000  | (5)                 |  | $ | 0     | (6)
|Chief Financial Officer (4)(4b)  |  |                     | 2011 |  |        | $ | 65,000  | (5)                 |  | $ | 0     | (6)



| | (1) | Mr. Kyriakides was appointed to serve as our Chief Executive Officer on September 10, 2008.
| | --- | -------------------------------------------------------------------------------------------



| | (2) | Mr. Kyriakides annual salary increased to $250,000 at January 1, 2012 per his amended employment agreement dated May 16, 2011.
| | --- | ------------------------------------------------------------------------------------------------------------------------------



| | (3) | No stock grants given for the years ended December 31, 2012 and 2011.
| | --- | ---------------------------------------------------------------------



| | (4)  | Mr. Rodriguez was appointed to serve as Chief Financial Officer on September 30, 2008.
| | ---- | --------------------------------------------------------------------------------------
| |      |                                                                                       
| | (4b) | Effective April 30, 2013, Mr. Rodriguez retired as CFO of the Company.                



| | (5) | Mr. Rodriguez annual salary is $65,000.
| | --- | ---------------------------------------



| | (6) | No stock grants given for the years ended December 31, 2012 and 2011.
| | --- | ---------------------------------------------------------------------



| | (7) | Mr. Hosfeld was appointed to serve as our Vice President on September 30, 2008.
| | --- | -------------------------------------------------------------------------------



| | (8) | Mr. Hosfeld annual salary is $96,000.
| | --- | -------------------------------------



| | (9) | No stock grants given for the years ended December 31, 2012 and 2011.
| | --- | ---------------------------------------------------------------------



30







Overview



The following is a discussion of our program for compensating
our named executive officers and directors. Currently, we do not have a compensation committee, and as such, our board of directors
is responsible for determining the compensation of our named executive officers. The primary goal of our executive compensation
policy is to attract and retain the most talented and loyal executives possible. Our intent is to ensure that our executives are
compensated effectively in a manner consistent with our strategy and competitive practice and to align executive compensation with
the achievement of our short and long term business objectives.



Our
board of directors considers a variety of factors in determining compensation of executives including the executive’s background,
training and prior work experience.



Elements of executive compensation



Our compensation program for the named executive officers consists
primarily of base salary. There is no bonus plan or retirement plan. Except for 2012 Stock Option Plan described in Item 4 above,
we have no long-term incentive plan or other such plans. The base salary we provide is intended to equitably compensate the named
executive officers based upon their level of responsibility, complexity and implementation of our business plan.



Compensation of Directors



None of the Company’s directors have received any additional
cash or equity remuneration since inception for their services as Directors except for Dr. George Gabb, one of the Company’s
Board of Directors, who received 75,000 shares of stock valued at $563 during the year ended December 31, 2011 and Shad Stastney,
another Director, who received 3,250,000 shares of stock valued at $3,250.



Director Independence



Our board of directors has determined that currently none
of it members qualify as “independent” as the term is used in Item 407 of Regulation S-K as promulgated by the SEC
and in the listing standards of The Nasdaq Stock Market, Inc. - Marketplace Rule 4200, except for Dr. George Gabb.



Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters



The following table sets forth certain information, as of December
31, 2012 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent;
(ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except
as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially
owned.



|Title                                                               |  | Name of beneficiary           |  | Amount
    and nature of owner |             |     | Percent | 
|------------------------------------------------------------------- |  | ----------------------------- |  | ------------------------------ | ----------- | --- | ------- | 
|Common stock                                                        |  | Anastasios
    Kyriakides     |  |                                | 20,126,500  | (3) |         | 
|Common stock                                                        |  | Kenneth A. Hosfeld            |  |                                | 2,238,000   |     |         | 
|Common stock                                                        |  | Guillermo Rodriguez (Retired) |  |                                | 2,483,000   |     |         | 
|Common stock                                                        |  | Dr. George Gabb               |  |                                | 106,000     |     |         | 
|Common
    stock                                                    |  | Shad
    Stastney (Resigned)  |  |                                | 3,250,000   |     |         | 
|Executive officers and
    directors (5 persons)                    |  |                               |  |                                | 28,203,500  |     |         | 
|Common
    stock                                                    |  | Vicis
    Capital Master Fund |  |                                | 116,859,612 | (4) |         | 
|Total
    Common stock of officers, directors and beneficial owners |  |                               |  |                                | 145,063,112 |     |         | 



31







| | (1) | Unless otherwise indicated, the address of each shareholder is 1080 NW 163rd Drive, Miami, Florida 33169. Vicis Capital Master
Fund is located in New York, NY.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Beneficial ownership of shares is determined under Rule 13d-3(d)(1) of the Exchange Act and generally includes any shares over
which a person exercises sole or shared voting or investment power and the number of shares that can be acquired within sixty (60)
days upon exercise of an option or conversion of warrants and debentures. Common stock subject to these convertible securities
are deemed to be outstanding for the purpose of computing the ownership percentage of the person holding such convertible security,
but are not deemed to be outstanding for the purpose of computing the ownership percentage of any other person. Applicable percentage
of ownership is based on 158,173,834 of fully diluted shares of Net Talk.com, Inc. common stock being issued and outstanding as
of December 31, 2012. Calculations do not include outstanding warrants or options, or other rights issued by the Company, unless
the reporting person is the beneficial owner of the warrants, options, or other rights.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Includes 20,126,500 shares of common stock owned by Kyriakides Investments, LLC.
| | --- | --------------------------------------------------------------------------------



| | (4) | Includes: 19,995,092 shares of common stock, 20,000,000 shares of common stock issuable upon conversion of 12% Redeemable preferred
stock. It also includes 76,864,520 shares of common stock issuable upon exercise of Common Stock Purchase Warrants, which may be
exercised, at the option of the holder, at an exercise price of $0.50 per share. Vicis Capital LLC serves as the investment
advisor to Vicis Capital Master Fund. For purposes of Rule 13d-3 under the Securities Exchange Act of 1934, as amended, Vicis Capital
LLC may be deemed to beneficially own, but has disclaimed ownership of, all shares owned by Vicis Capital Master Fund. The voting
and dispositive power granted to Vicis Capital LLC by Vicis Capital Master Fund may be revoked at any time. Shadron Stastney, a
member of Vicis Capital LLC and its chief operating officer, together with John Succo and Sky Lucas, have voting and dispositive
control over these securities. No single natural person can exercise voting or investment power with respect to the securities
owned by Vicis Capital Master Fund, and investment decisions with respect to these securities are made by a majority of these persons.
The address for Vicis Capital Master Fund and Mr. Stastney is 445 Park Avenue, Suite 1901, New York, New York 10022.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 13. Certain relationships and related
transactions, and director independence



There were no transactions since the beginning of our last
fiscal year, and there are no proposed transactions, that involve amounts in excess of the lesser of $50,000 or 1% of the average
of our total assets during our two most recently completed fiscal years, to which we were or are to become a party in which any
director, executive officer, beneficial owner of more than five (5%) percent of our common stock, or members of their
immediate families had, or is to have, a direct or indirect material interest, except, during the period ended December 31, 2012
we incurred and paid certain consulting service fees to a related party.



2012 Issuance of Non-Convertible Debentures



On March 29, 2012, we issued a face value $500,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013



On April 20, 2012, we issued a face value $500,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013.



On June 26, 2012, we issued a face value $450,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013.



During the year ended December 31, 2012, we received advances
in the total amount of $1,150,000, as part of a series of 10% senior secured debentures, due December 31, 2013, issued to our largest
investor.



During the year ended December 31, 2012, we received advances
in the total amount of $275,000, represented by Demand Notes, issued to our largest investor.



32







Item 14. Principal Accountant Fees and Services



Pre-Approval Policies and Procedures



The Company's board of directors reviews and approves audit
and permissible non-audit services performed by its independent accountants, as well as the fees charged for such services. In
its review of non-audit service fees and its appointment of Thomas Howell Ferguson P. A., as the Company's independent accountants,
the board of directors considered whether the provision of such services is compatible with maintaining independence. All of the
services provided and fees charged by Thomas Howell Ferguson P. A., were approved by the board of directors.



Audit Fees



The aggregate fees billed by Meeks International, LLC for professional
services for the audit of the annual financial statements of the Company and the reviews of the financial statements included in
the Company's quarterly reports on Form 10-Q for 2012 was $30,000, of which $24,000 was paid to Meeks International, LLC and $6,000
to Thomas Howell Ferguson P. A.



Audit-Related Fees



There were no other fees billed during the last two fiscal years
for assurance and related services that were reasonably related to the performance of the audit or review of the Company's financial
statements and not reported under "Audit Fees" above.



Tax Fees



There were no fees paid for tax or consulting services for the
year ended December 31, 2012.



All Other Fees



There were no other fees billed during the last three years
for products and services provided.



Part IV



Item 15. Exhibits, financial statement schedules



| | Exhibit No. | Description
| | ----------- | -----------

| | 10.1 | Form 8 K’s previously filed – Article of Incorporation, Amendment to Articles of Incorporation, Corporate By Laws,
issuances of Senior debentures and material agreements , previously reported during last two years.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.1 | Certification of Principal Executive Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31.2 | Certification of Principal Financial Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.1 | Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 | Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------



33







SIGNATURES



In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                        | NET TALK.COM, INC.                                                                            
|----------------------- | ----------------------------------------------------------------------------------------------
|                        |                                                                                               
|Date: September 4, 2013 | By: /s/ Anastasios Kyriakides                                                                 
|                        | Anastasios Kyriakides                                                                         
|                        | Chief Executive Officer (Principal Executive Officer)                                         
|                        |                                                                                               
|Date: September 4, 2013 | By: /s/ Anastasios Kyriakides                                                                 
|                        | Anastasios Kyriakides                                                                         
|                        | Chief Financial Officer (Principal Financial Officer and
        Principal Accounting Officer)



POWER OF ATTORNEY



Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Each person whose signature appears below hereby authorizes Anastasios Kyriakides or either of them acting in
the absence of the other as his or her true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution
for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this report,
and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.



|Name                      |  | Position                                             
|------------------------- |  | -----------------------------------------------------
|                          |  |                                                      
|/s/ Anastasios Kyriakides |  | Chief Executive Officer (Principal Executive Officer)
|Anastasios Kyriakides     |  | and Director                                         
|                          |  |                                                      
|/s/ Anastasios Kyriakides |  | Chief Executive Officer (Principal Executive Officer)
|Anastasios Kyriakides     |  | and Director                                         
|                          |  |                                                      
|/s/ Kenneth Hosfeld       |  | Vice President and Director                          
|Kenneth Hosfeld           |  |                                                      



34







|Index to financial statements                                                                                                                                      | Page
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----
|                                                                                                                                                                   |     
|Reports of Independent Registered Public Accountant                                                                                                                | 36  
|Balance sheets as of December 31, 2012 and 2011                                                                                                                    | 38  
|Statements of operations for the year ended December 31, 2012, three months ended December 31, 2011and fiscal years ended September 30, 2011 and 2010              | 39  
|Statements of cash flows for the year ended December 31, 2012, three months ended December 31, 2011 and fiscal years ended September 30, 2011 and 2010             | 40  
|Statements of stockholders’ deficit for the year ended December 31, 2012, three months ended December 31, 2011 and fiscal years ended September 30, 2011 and 2010. | 41  
|Notes to financial statements                                                                                                                                      | 42  



35







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Stockholders
of



NetTalk.com, Inc.

Miami Gardens, Florida



We have audited the accompanying balance
sheet of NetTalk.com, Inc. as of December 31, 2012 and the related statement of operations, stockholders’ deficit, and cash
flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these 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 financial statements
referred to above present fairly, in all material respects, the financial position of NetTalk.com, Inc. at December 31, 2012, and
the results of its operations, and its cash flows for the year then ended, in conformity with U. S. generally accepted accounting
principles .



The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 of the accompanying
financial statements, the Company has incurred significant recurring losses from operations its total liabilities exceeds its
total assets, and is dependent on outside sources of funding for continuation of its operations. These factors raise
substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note 2. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.



/s/ Thomas Howell Ferguson P. A.

Tallahassee, Florida



September 4, 2013



36







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Stockholders of



NetTalk.com, Inc.

Miami Gardens, Florida



We have audited the accompanying balance
sheet of NetTalk.com, Inc. as of December 31, 2011 and the related statement of operations, stockholders’ deficit, and cash
flows for the three month period ended December 31, 2011 and each of the two years in the period ended September 30, 2011.These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
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 financial statements
referred to above present fairly, in all material respects, the financial position of NetTalk.com, Inc. at December 31, 2011, and
the results of its operations, changes in its stockholder’s deficit and their cash flows for the three months period ended
December 31, 2011, and each of the two years in the period ended September 30, 2011, in conformity with U. S. generally accepted
accounting principles.



/s/ Meeks International, LLC.

Tampa, Florida



March 19, 2012



37







Nettalk.com Inc.

Balance Sheets



|                                                                                                                                                             |  | December 31, |             |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | - | ------------ | -
|                                                                                                                                                             |  | 2012         |             |   | 2011         |  
|Assets                                                                                                                                                       |  |              |             |   |              |  
|Current assets:                                                                                                                                              |  |              |             |   |              |  
|Cash and cash equivalents                                                                                                                                    |  | $            | 96,347      |   |              | $
|Restricted cash                                                                                                                                              |  |              | 115,259     |   |              |  
|Accounts receivable, net                                                                                                                                     |  |              | 472,233     |   |              |  
|Inventory                                                                                                                                                    |  |              | 1,467,774   |   |              |  
|Prepaid expenses                                                                                                                                             |  |              | 277,908     |   |              |  
|Note receivable                                                                                                                                              |  |              | 7,000       |   |              |  
|Total current assets                                                                                                                                         |  |              | 2,436,521   |   |              |  
|                                                                                                                                                             |  |              |             |   |              |  
|Building, telecommunications equipment, land and other property, net                                                                                         |  |              | 2,980,068   |   |              |  
|Intangible assets, net                                                                                                                                       |  |              | 193,007     |   |              |  
|Other assets                                                                                                                                                 |  |              | 37,253      |   |              |  
|Total assets                                                                                                                                                 |  | $            | 5,646,849   |   |              | $
|                                                                                                                                                             |  |              |             |   |              |  
|Liabilities, redeemable preferred stock and stockholders' deficit                                                                                            |  |              |             |   |              |  
|Current liabilities:                                                                                                                                         |  |              |             |   |              |  
|Accounts payable                                                                                                                                             |  | $            | 2,211,622   |   |              | $
|Accrued dividends                                                                                                                                            |  |              | 1,301,116   |   |              |  
|Accrued expenses                                                                                                                                             |  |              | 477,743     |   |              |  
|Deferred revenue                                                                                                                                             |  |              | 2,246,052   |   |              |  
|Current portion of senior debentures and demand notes                                                                                                        |  |              | 15,640,336  |   |              |  
|Total current liabilities                                                                                                                                    |  |              | 21,876,869  |   |              |  
|                                                                                                                                                             |  |              |             |   |              |  
|Senior debentures                                                                                                                                            |  |              | -           |   |              |  
|Mortgage payable                                                                                                                                             |  |              | 1,000,000   |   |              |  
|Total liabilities                                                                                                                                            |  |              | 22,876,869  |   |              |  
|                                                                                                                                                             |  |              |             |   |              |  
|Redeemable preferred stock, $.001 par value, 10,000,000 shares authorized, 500 and 300 issued and outstanding as of December 31, 2012 and December 31, 2011. |  |              | 6,379,016   |   |              |  
|                                                                                                                                                             |  |              |             |   |              |  
|Stockholders' deficit:                                                                                                                                       |  |              |             |   |              |  
|Common stock, $.001 par value, 300,000,000 authorized, 60,251,355 and 39,464,892 issued and outstanding as of December 31, 2012 and December 31, 2011.       |  |              | 60,260      |   |              |  
|Additional paid in capital                                                                                                                                   |  |              | 33,084,420  |   |              |  
|Accumulated deficit                                                                                                                                          |  |              | 56,753,716  |   |              |  
|Total stockholders' deficit                                                                                                                                  |  |              | (23,609,036 | ) |              |  
|                                                                                                                                                             |  |              |             |   |              |  
|Total liabilities, redeemable preferred stock and stockholders' deficit                                                                                      |  | $            | 5,646,849   |   |              | $



The accompanying notes are an integral
part of the financial statements



38







Nettalk.com, Inc

Statements of Operations



|                                                              |  |              |             |   | Three months |   |            |                          |  |   |             |  
|------------------------------------------------------------- |  | ------------ | ----------- | - | ------------ | - | ---------- | ------------------------ |  | - | ----------- | -
|                                                              |  | Year ended   |             |   | ended        |   |            |                          |  |   |             |  
|                                                              |  | December 31, |             |   | December 31, |   |            | Year ended September 30, | 
|                                                              |  | 2012         |             |   | 2011         |   |            | 2011                     |  |   | 2010        |  
|Revenues                                                      |  |              |             |   |              |   |            |                          |  |   |             |  
|Sale of DUO products                                          |  | $            | 2,067,983   |   |              | $ | 756,675    |                          |  |   | 1,676,436   |  
|Renewals and access charges                                   |  |              | 3,509,282   |   |              |   | 482,093    |                          |  |   | 729,333     |  
|Other                                                         |  |              | 213,718     |   |              |   | 59,855     |                          |  |   | 314,696     |  
|Total revenue                                                 |  |              | 5,790,983   |   |              |   | 1,298,623  |                          |  |   | 2,720,465   |  
|Cost of sales                                                 |  |              |             |   |              |   |            |                          |  |   |             |  
|Cost of DUO products                                          |  |              | 2,698,971   |   |              |   | 931,322    |                          |  |   | 1,620,605   |  
|Network and carrier charges                                   |  |              | 2,924,180   |   |              |   | 446,110    |                          |  |   | 692,793     |  
|Other                                                         |  |              | 561,637     |   |              |   | 410,383    |                          |  |   | 784,968     |  
|Total cost of sales                                           |  |              | 6,184,787   |   |              |   | 1,787,815  |                          |  |   | 3,098,366   |  
|Gross margin                                                  |  |              | (393,804    | ) |              |   | (489,192   | )                        |  |   | (377,901    | )
|Advertising and marketing                                     |  |              | 1,019,882   |   |              |   | 606,209    |                          |  |   | 1,701,490   |  
|Compensation and benefits                                     |  |              | 1,692,237   |   |              |   | 289,652    |                          |  |   | 1,262,994   |  
|Professional fees                                             |  |              | 884,580     |   |              |   | 136,118    |                          |  |   | 235,756     |  
|Depreciation and amortization                                 |  |              | 262,842     |   |              |   | 60,765     |                          |  |   | 356,688     |  
|Research and development                                      |  |              | 1,211,711   |   |              |   | 270,782    |                          |  |   | 903,369     |  
|General and administrative expenses                           |  |              | 2,614,408   |   |              |   | 497,986    |                          |  |   | 1,484,971   |  
|Total operating expenses                                      |  |              | 7,685,660   |   |              |   | 1,861,512  |                          |  |   | 5,945,268   |  
|Loss from operations                                          |  |              | (8,079,464  | ) |              |   | (2,350,704 | )                        |  |   | (6,323,169  | )
|Other income (expenses):                                      |  |              |             |   |              |   |            |                          |  |   |             |  
|Interest expense                                              |  |              | (3,500,512  | ) |              |   | (1,090,735 | )                        |  |   | (1,070,522  | )
|Derivative (expense)                                          |  |              | -           |   |              |   | -          |                          |  |   | (17,280,018 | )
|Debt extinguishment (loss)                                    |  |              | (3,135,235  | ) |              |   | -          |                          |  |   | (1,293,538  | )
|Interest income                                               |  |              | 205         |   |              |   | 1,153      |                          |  |   | 4,160       |  
|Loss on sale of assets                                        |  |              |             |   |              |   | -          |                          |  |   | (213,478    | )
|                                                              |  |              | (6,635,542  | ) |              |   | (1,089,582 | )                        |  |   | (19,853,396 | )
|Net loss                                                      |  |              | (14,715,006 | ) |              |   | (3,440,286 | )                        |  |   | (26,176,565 | )
|Reconciliation of net loss applicable to common stockholders: |  |              |             |   |              |   |            |                          |  |   |             |  
|Accretion of preferred stock                                  |  |              | -           |   |              |   | -          |                          |  |   | (923,778    | )
|Preferred stock dividends                                     |  |              | -           |   |              |   | -          |                          |  |   | (586,667    | )
|Loss applicable to common stockholders                        |  | $            | (14,715,006 | ) |              | $ | (3,440,286 | )                        |  | $ | (27,687,010 | )
|Loss per common shares:                                       |  |              |             |   |              |   |            |                          |  |   |             |  
|Basic and diluted earnings per common share                   |  | $            | (0.28       | ) |              | $ | (0.09      | )                        |  | $ | (1.40       | )
|Weighted average shares:                                      |  |              |             |   |              |   |            |                          |  |   |             |  
|Basic and diluted                                             |  |              | 52,733,460  |   |              |   | 39,464,892 |                          |  |   | 19,792,214  |  



The accompanying notes are an integral
part of the financial statements



39







Nettalk.com, Inc.

Statements of Cash Flows



|                                                                         |  |              |             |   | Three months |   |            |                          |  |   |             |  
|------------------------------------------------------------------------ |  | ------------ | ----------- | - | ------------ | - | ---------- | ------------------------ |  | - | ----------- | -
|                                                                         |  | Year ended   |             |   | ended        |   |            |                          |  |   |             |  
|                                                                         |  | December 31, |             |   | December 31, |   |            | Year ended September 30, | 
|                                                                         |  | 2012         |             |   | 2011         |   |            | 2011                     |  |   | 2010        |  
|Cash flow (used) in operating activities:                                |  |              |             |   |              |   |            |                          |  |   |             |  
|Net loss                                                                 |  | $            | (14,715,006 | ) |              | $ | (3,440,286 | )                        |  | $ | (26,176,565 | )
|Adjustments to reconcile net loss to net cash (used) in operations:      |  |              |             |   |              |   |            |                          |  |   |             |  
|Depreciation                                                             |  |              | 193,249     |   |              |   | 43,992     |                          |  |   | 139,464     |  
|Amortization                                                             |  |              | 69,593      |   |              |   | 16,773     |                          |  |   | 217,224     |  
|Debt extinguished                                                        |  |              | 3,135,235   |   |              |   | -          |                          |  |   | 1,293,538   |  
|Amortization of debt discount                                            |  |              | -           |   |              |   | 932,752    |                          |  |   | 331,605     |  
|Cancellation of shares for services                                      |  |              | -           |   |              |   | -          |                          |  |   | (223,361    | )
|Derivative value adjustment                                              |  |              | 3,034,926   |   |              |   | -          |                          |  |   | 17,280,018  |  
|Warranty expense                                                         |  |              |             |   |              |   | -          |                          |  |   | -           |  
|Bad debt                                                                 |  |              |             |   |              |   | -          |                          |  |   | -           |  
|Changes in assets and liabilities:                                       |  |              |             |   |              |   |            |                          |  |   |             |  
|Accounts receivables                                                     |  |              | 103,927     |   |              |   | 120,180    |                          |  |   | (696,302    | )
|Prepaid expenses and other assets                                        |  |              | (238,397    | ) |              |   | 10,309     |                          |  |   | 233,831     |  
|Inventories                                                              |  |              | 737,481     |   |              |   | (293,607   | )                        |  |   | (1,343,088  | )
|Deferred revenues                                                        |  |              | 562,104     |   |              |   | 661,055    |                          |  |   | 929,984     |  
|Accounts payable                                                         |  |              | 1,322,629   |   |              |   | (312,334   | )                        |  |   | 666,604     |  
|Accrued expenses                                                         |  |              | 545,584     |   |              |   | 224,245    |                          |  |   | 246,399     |  
|Net cash (used) in operating activities                                  |  |              | (5,248,675  | ) |              |   | (2,036,921 | )                        |  |   | (7,100,649  | )
|Cash flow used in investing activities:                                  |  |              |             |   |              |   |            |                          |  |   |             |  
|Restricted cash                                                          |  |              | (16,382     | ) |              |   | 41,543     |                          |  |   | 1,877,235   |  
|Acquisition of corporate offices and operations center and  fixed assets |  |              | (303,514    | ) |              |   | (48,808    | )                        |  |   | (2,608,069  | )
|Decrease in deposits                                                     |  |              | 2,501       |   |              |   | -          |                          |  |   | (16,753     | )
|Net cash (used) in investing activities:                                 |  |              | (317,395    | ) |              |   | (7,265     | )                        |  |   | (747,587    | )
|Cash flow from financing activities:                                     |  |              |             |   |              |   |            |                          |  |   |             |  
|Notes payables - debentures                                              |  |              | 2,875,000   |   |              |   | -          |                          |  |   | 10,500,000  |  
|Mortgage payable                                                         |  |              | 1,000,000   |   |              |   | -          |                          |  |   | -           |  
|Payment on loans from officers                                           |  |              |             |   |              |   |            |                          |  |   | -           |  
|Cash paid for dividends on preferred stock                               |  |              |             |   |              |   | -          |                          |  |   | (90,000     | )
|Issuance of common stock (net)                                           |  |              | 248,154     |   |              |   | -          |                          |  |   | -           |  
|Net cash provided from financing activities                              |  |              | 4,123,154   |   |              |   | -          |                          |  |   | 10,410,000  |  
|Net increase (decrease) in cash                                          |  |              | (1,442,916  | ) |              |   | (2,044,186 | )                        |  |   | 2,561,764   |  
|Cash and cash equivalents, beginning                                     |  |              | 1,539,263   |   |              |   | 3,583,449  |                          |  |   | 1,021,684   |  
|Cash and cash equivalents, ending                                        |  |              | 96,347      |   |              | $ | 1,539,263  |                          |  |   | 3,583,448   |  
|Supplemental disclosures:                                                |  |              |             |   |              |   |            |                          |  |   |             |  
|Cash paid for interest                                                   |  | $            | -           |   |              | $ | -          |                          |  | $ | 149,953     |  
|Cash paid for income taxes                                               |  | $            | -           |   |              | $ | -          |                          |  | $ | -           |  
|Cash paid for preferred stock dividends                                  |  | $            | -           |   |              | $ | -          |                          |  | $ | 90,000      |  



The accompanying notes are an integral
part of the financial statements



40







Nettalk.com, Inc.

Statement of Stockholders’ Deficit



|                                                                                                             |  | Preferred Stock |        |   | Common Stock |   |            | Additional Paid |  |  | Accumulated |   |  | Total   |       
|------------------------------------------------------------------------------------------------------------ |  | --------------- | ------ | - | ------------ | - | ---------- | --------------- |  |  | ----------- | - |  | ------- | ------
|                                                                                                             |  | Shares          |        |   | Amount       |   |            | Shares          |  |  | Amount      |   |  | Capital |       
|Balance at October 1, 2009                                                                                   |  |                 | -      |   |              | $ | -          |                 |  |  | 9,719,800   |   |  | $       | 9,720 
|Preferred stock to be issued at future date                                                                  |  |                 | 4,000  |   |              |   | 2,000,000  |                 |  |  | -           |   |  |         | -     
|Issuance of preferred shares                                                                                 |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Preferred stock dividends                                                                                    |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Stock issuance from stock option plan                                                                        |  |                 | -      |   |              |   | -          |                 |  |  | 3,709,500   |   |  |         | 3,710 
|Net loss                                                                                                     |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Balance at September 30, 2010                                                                                |  |                 | 4,000  |   |              |   | 2,000,000  |                 |  |  | 13,429,300  |   |  |         | 13,430
|                                                                                                             |  |                 |        |   |              |   |            |                 |  |  |             |   |  |         |       
|Cancellation of common shares for services                                                                   |  |                 | -      |   |              |   | -          |                 |  |  | (1,000,000  | ) |  |         | (1,000
|Accretion of preferred stock                                                                                 |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Reclass of preferred stock to mezzanine and derivative
    liabilities                                       |  |                 | (4,000 | ) |              |   | (2,000,000 | )               |  |  |             |   |  |         |       
|Preferred stock dividends                                                                                    |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Settlement shares                                                                                            |  |                 |        |   |              |   |            |                 |  |  | 750,000     |   |  |         | 750   
|Reclassification of warrants from liability to equity                                                        |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Conversion of convertible notes to common stock                                                              |  |                 | -      |   |              |   | -          |                 |  |  | 19,995,092  |   |  |         | 19,995
|Inducement warrants to convert debt to equity                                                                |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Modification of Mezzanine preferred stock and compound
    embedded derivatives treated as an extinguishment |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Settlement of accrued interest                                                                               |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Warrants issued with debt financings                                                                         |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Stock issuance related to 2010 stock option plan                                                             |  |                 | -      |   |              |   | -          |                 |  |  | 6,290,500   |   |  |         | 6,290 
|Net loss                                                                                                     |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Balance at September 30, 2011                                                                                |  |                 | -      |   |              |   | -          |                 |  |  | 39,464,892  |   |  |         | 39,465
|                                                                                                             |  |                 |        |   |              |   |            |                 |  |  |             |   |  |         |       
|Accretion of preferred stock                                                                                 |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Net loss                                                                                                     |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Balance at December 31, 2011                                                                                 |  |                 | -      |   |              |   | -          |                 |  |  | 39,464,892  |   |  | $       | 39,465
|New common shares                                                                                            |  |                 | -      |   |              |   | -          |                 |  |  | 20,786,463  |   |  |         | 20,795
|Accretion of preferred stock                                                                                 |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Net loss                                                                                                     |  |                 | -      |   |              |   | -          |                 |  |  | -           |   |  |         | -     
|Balance at December 31, 2012                                                                                 |  |                 | -      |   |              |   | -          |                 |  |  | 60,251,355  |   |  | $       | 60,260



41







NetTALK.COM, INC.

Notes to Financial Statements



Note 1 – Nature of operations
and basis of presentation:



NetTalk.com, Inc. (“NetTalk” or the “Company”)
was incorporated on May 1, 2006 under the laws of the State of Florida. We are a telephone company, who provides, sells and supplies
commercial and residential telecommunication services, including services utilizing voice over internet protocol (“VoIP”)
technology, session initiation protocol (“SIP”) technology, wireless fidelity technology, wireless maximum technology,
marine satellite services technology and other similar type technologies. Our main products are the DUO, DUO II and DUO WIFI, they
are analog telephone adapters that provides connectivity for analog telephones and faxes to home, home office or corporate local
area networks (“LAN”). The DUO WIFI can connect to an internet hotspot without the use of an Ethernet cable. Our DUO,
DUO II and DUO WIFI and their related services are a cost effective solution for individuals, small businesses and telecommuters
connecting to any analog telephone, fax or private branch exchange (“PBX”). Our DUO, DUO II and DUO WIFI provide one
USB port, one Ethernet port and one analog telephone port. The DUO WIFI offers an additional wireless chip that allows it to connect
to internet hotspots without the use of an ethernet cable. A full suite of internet protocol features is available to maximize
universal connectivity. In addition, analog telephones attached to our DUO. DUO II and DUO WIFI are able to use advanced calling
features such as call forwarding, caller ID, 3-way calling, call holding, call retrieval and call transfer.



Note 2 – Going concern and management’s
plans:



The presentation of financial statements
in accordance with generally accepted accounting principles contemplates that operations will be sustained for a reasonable period.
However, we have incurred operating losses of $14,715,006 and $28,389,302 during the years ended December 31, 2012 and 2011, respectively.
The company is also highly leverage with $15.6 million senior debentures and demand notes and $1.4 million in mortgage debt. In
addition, during these periods, we used cash of $5,248,675 and $7,577,533, respectively, in support of our operations. As more
fully discussed in Note 6, we have material redemption requirements associated with our senior debentures and demand notes, during
the year ended December 31, 2013. Since our inception, we have been substantially dependent upon funds raised through the sale of
preferred stock and warrants to sustain our operating and investing activities. These are conditions that raise substantial doubts
about our ability to continue as a going concern for a reasonable period.



If future defaults occur under the senior debentures or mortgage
agreement, the Company does not anticipate having sufficient cash and cash equivalents to repay the debt under these agreements
should it be accelerated and would be forced to restructure these agreements and/or seek alternative sources of financing. There
can be no assurances that restructuring of the debt or alternative financing will be available on acceptable terms or at all. In
the event of an acceleration of the Company’s obligations under the senior debentures or mortgage agreement and the Company’s
failure to pay the amounts that would then become due, the senior debenture lender and mortgage agreement lender could seek to
foreclose on the Company’s assets.



In order for the Company to meet the debt repayment requirements
under the senior debentures and mortgage agreement, the Company will need to raise additional capital by refinancing its debt,
raising equity capital or selling assets. Uncertainty in future credit markets may negatively impact the Company’s ability
to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. If additional capital
is raised through the issuance of debt securities or other debt financing, the terms of such debt may include different financial
covenants, restrictions and financial ratios other than what the Company currently operates under. Any equity financing transaction
could result in additional dilution to the Company’s existing stockholders.



In January 2013 the company received $400,000
of funding from an additional advance on a promissory note from the mortgage from 1080 NW 163 Drive, LLC. Notwithstanding the additional
funding, our ability to continue as a going concern for a reasonable period is dependent upon achieving our management’s
plan for the company generating profitable operations. We cannot give any assurances regarding the success of management’s
plan. Our financial statements do not include any adjustments relating to recoverability of recorded assets or liabilities that
may be necessary should we be unable to continue as a going concern.



Note 3 – Summary of Significant
Accounting Policies:



Change in Fiscal Year



On May 26, 2011, the Company’s Board of Directors approved
a change in the Company’s fiscal year end from September 30, to December 31, effective December 31, 2011. Unless otherwise
noted, all references to “years” of “fiscal” refer to the twelve-month fiscal year, which prior to October
1, 2011 ended on September 30. As a result of this change, the financial statements include the Company’s financial results
for the three month transition period of October 1, 2011 to December 31, 2011.



42







Use of Estimates



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect
the amounts reported in the financial statements and footnotes. Significant estimates inherent in the preparation of our financial
statements include developing fair value measurements upon which to base our accounting for acquisitions of intangible assets and
issuances of financial instruments, including our common stock. Our estimates also include developing useful lives for our tangible
and intangible assets and cash flow projections upon which we determine the existence of, or the measurements for, impairments.
In all instances, estimates are made by competent employees under the supervision of management, based upon the current circumstances
and the best information available.



Risk and Uncertainties



Our future results of operations and financial condition will
be impacted by the following factors, among others: dependence on the worldwide telecommunication markets characterized by intense
competition and rapidly changing technology, on third-party manufacturers and subcontractors, on third-party distributors in certain
markets, on the successful development and marketing of new products in new and existing markets. Generally, we are unable to predict
the future status of these areas of risk and uncertainty.



Revenue recognition



We derive revenue from (i) product sales and (ii) telecom services.
All revenues are recognized in accordance with ASC 605, Revenue Recognition and SAB 104 as follows: when evidence of an arrangement
exists, in the case of products, when the product is shipped to a customer, or in the case of telecom services, when the service
is used by the consumer, when the fee is fixed or determinable and finally when we have concluded that amounts are collectible
from the customers. Shipping costs billed to customers are included as a component of product sales. The associated cost of shipping
is included as a component of cost of product sales.



Operating revenue consist of customer equipment sales of our
main product the NetTalk DUO (“DUO”), telecommunication service revenues and shipping and handling revenues.



Our DUO provides for revenue recognition from the sale of the
device and from the sale of telephone service. The initial year of telephone service is included on the sale price at time of sale
and billed subsequently thereafter. Therefore, revenue recognition on our DUO is fully recognized at the time of our customer equipment
sale, the one year telephone service is amortized over 12 month cycle. Subsequent renewals of the annual telephone service are
amortized over the corresponding 12 months cycle.



International calls are billed as earned from our customers.
International calls are prepaid and customers account is debited as minutes are used and earned.



Cash and Cash Equivalents



We consider all highly liquid cash balances and debt instruments
with an original maturity of three months or less to be cash equivalents. We maintain cash balances only in domestic bank accounts,
which at times, may exceed FDIC limits. Our cash balances did not exceed the FDIC limits at December 31, 2012 and 2011.



Inventory



Inventories are recorded at average
cost or market, whichever is lower.



|                                 |  | December 31, |          
|-------------------------------- |  | ------------ | ---------
|Inventory                        |  | 2012         |          
|                                 |  |              |          
|Productive material and supplies |  | $            | 869,740  
|Finished goods                   |  |              | 598,034  
|Total                            |  | $            | 1,467,774



During the year ended December 31, 2012 and 2011, in accordance
with our lower of cost or market analyses, we did not record lower of cost or market adjustment to our finished goods inventories.



Of our $598,034 of finished goods inventory at December 31,
2012, $140,200 is held on consignment at one of our distributors.



Of our $1,018,339 of finished goods inventory at December 31,
2011, $170,402 was held on consignment at one of our distributors.



43







Telecommunications Equipment and Other
Property



Property, equipment and telecommunication equipment includes
acquired assets which consist of network equipment, computer hardware, furniture and software. All of our equipment is stated at
cost with depreciation calculated using the straight line method over the estimated useful lives of related assets, which range
from three to five years. The costs associated with major improvements are capitalized while the cost of maintenance and repairs
is charged to operating expenses.



Intangible Assets



Our intangible assets were recorded at our acquisition cost,
which encompassed estimates of their relative fair values, as well as estimates of the fair value of consideration that we issued.
We amortize our intangible assets using the straight-line method over lives that are predicated on contractual terms or over periods
we believe the assets will have utility.



Impairments and Disposals



We evaluate our tangible and definite-lived intangible assets
for impairment annually or more frequently in the presence of circumstances or trends that may be indicators of impairment. Our
evaluation is a two-step process. The first step is to compare our undiscounted cash flows, as projected over the remaining useful
lives of the assets, to their respective carrying values. In the event that the carrying values are not recovered by future undiscounted
cash flows, as a second step, we compare the carrying values to the related fair values and, if lower, record an impairment adjustment.
For purposes of fair value, we generally use replacement costs for tangible fixed assets and discounted cash flows, using risk-adjusted
discount rates for intangible assets.



Research and Development and Software
Costs



We expense research and development
costs, as these costs are incurred. We account for our offering-related software development costs as costs are incurred internally
in creating a computer software product which are charged to expense when incurred as research and development until technological
feasibility has been established for the product. Technological feasibility is established upon completion of a detail program
design or, in its absence, completion of a working model. Thereafter, all software production costs shall be capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future
revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life
of the product. Research and development costs reported in our financial statements relate to pre–marketing costs of new
upcoming products.



|                                        |  | Year ended |           |  | Period ended |   |         | Fiscal year ended | 
|--------------------------------------- |  | ---------- | --------- |  | ------------ | - | ------- | ----------------- | 
|                                        |  | 12/31/2012 |           |  | 12/31/2011   |   |         | 09/30/2011        | 
|Components of Research and development: |  |            |           |  |              |   |         |                   | 
|Product development and engineering     |  | $          | 88,917    |  |              | $ | 8,650   |                   | 
|Payroll and benefits                    |  |            | 1,122,794 |  |              |   | 262,132 |                   | 
|Total                                   |  | $          | 1,211,711 |  |              | $ | 270,782 |                   | 



Reclassifications



Certain reclassifications have been made to prior years financial
statements in order to conform to the current year’s presentation. The reclassification had no impact on net earnings previously
reported.



Share-Based Payment Arrangements



We apply the grant date fair value method to our share –
based payment arrangements with employees and consultants. Share – based compensation cost to employees is measured
at the grant date, fair value is based on the value of the award, and is recognized over the service period. Share – based
payments to non – employees are recorded at fair value on the measurement date and reflected in expense over the service
period.



2010 Stock Option Plan



On November 15, 2009, NetTalk adopted the 2010 Stock Option
Plan (the "Plan") which is intended to advance the interests of the Company’s shareholders
by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions
to the Company by providing such persons with equity ownership opportunities and performance-based incentives, thereby better aligning
the interests of such persons with those of the Company’s shareholders. All of the Company’s
employees, officers, and directors, and those Company’s consultants and advisors (i) that are natural persons and (ii) who
provide bona fide services to the Company not connected to a capital raising transaction or the promotion or creation of a market
for theCompany’s securities, are
eligible to be granted options or restricted stock awards under the Plan. The maximum aggregate number of shares of the
Company’s common stock that may be issued under the Plan is 10,000,000 shares of the Company’s common stock.



44







On July 26, 2010, we issued 3,709,500 shares
of common stock to our employees as part of our 2010 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On May 23 2011, we issued 3,890,000 shares
of common stock to our employees as part of our 2010 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On July 26 2011, we issued 2,400,500 shares
of common stock to our employees as part of our 2010 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



Summary of 2010 Stock Option Plan Issuances:



|July 26, 2010 |  |  | 3,709,500  | 
|------------- |  |  | ---------- | 
|May 23, 2011  |  |  | 3,890,000  | 
|July 26, 2011 |  |  | 2,400,500  | 
|Total         |  |  | 10,000,000 | 



2011 Stock Option Plan



On June 15, 2011, NetTalk adopted the 2011
Stock Option Plan (the "Plan") which is intended to advance the interests of the Company’s
shareholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives,
thereby better aligning the interests of such persons with those of the Company’s shareholders. All
of the Company’s employees, officers, and directors, and those Company’s consultants and advisors (i) that are natural
persons and (ii) who provide bona fide services to the Company not connected to a capital raising transaction or the promotion
or creation of a market for the Company’s securities, are eligible to be granted options or restricted stock awards under
the Plan. The maximum aggregate number of shares of the Company’s common stock that may be issued under the Plan is
20,000,000 shares of the Company’s common stock.



On January 6, 2012, we issued 3,483,500 shares
of common stock to our employees as part of our 2011 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On May 28, 2012, we issued 15,488,000 shares
of common stock to our employees as part of our 2011 Stock Option Plan. The shares are compensatory in nature and are fully vested.
We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



On July 25, 2012, we issued 1,028,500 shares
of common stock to our employees and vendors as part of our 2011 Stock Option Plan. The shares are compensatory in nature and are
fully vested. We have valued the shares consistent with fair value at the time of issuance including and adjusted for ownership
restrictions.



Summary of 2011 Stock Option Plan Issuances:



|January 6, 2012 |  |  | 3,483,500  | 
|--------------- |  |  | ---------- | 
|May 28, 2012    |  |  | 15,488,000 | 
|July 25, 2012   |  |  | 1,028,500  | 
|Total           |  |  | 20,000,000 | 



45







2012 Stock Option Plan



On July 25, 2012, NetTalk adopted the 2012
Stock Option Plan (the "Plan") which is intended to advance the interests of the Company’s
shareholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives,
thereby better aligning the interests of such persons with those of the Company’s shareholders. All
of the Company’s employees, officers, and directors, and those Company’s consultants and advisors (i) that are natural
persons and (ii) who provide bona fide services to the Company not connected to a capital raising transaction or the promotion
or creation of a market for the Company’s securities, are eligible to be granted options or restricted stock awards
under the Plan. The maximum aggregate number of shares of the Company’s common stock that may be issued under the
Plan is 20,000,000 shares of the Company’s common stock.



On July 25, 2012, we issued 471,500 shares
of common stock to our employees and vendors as part of our 2012 Stock Option Plan. The shares are compensatory in nature and are
fully vested. We have valued the shares consistent with fair value at the time of issuance adjusted for ownership restrictions.



Financial Instruments



Financial instruments, as defined in the Accounting Standards
Codification (“ASC”) 825 Financial Instruments, consist of cash, evidence of ownership in an entity, and contracts
that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity,
or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second
entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other
financial instruments on potentially favorable terms with the first entity. Accordingly, our financial instruments consist of cash
and cash equivalents, accounts receivable, accounts payable, accrued liabilities, secured convertible debentures, and derivative
financial instruments.



We carry cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities at historical costs since their respective estimated fair values approximate carrying values due
to their current nature. We also carry convertible debentures and redeemable preferred stock at fair values.



Derivative financial instruments, as defined in ASC 815-10-15-83
Derivatives and Hedging, consist of financial instruments or other contracts that contain a notional amount and one or more underlying
(e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative
financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments
are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.



Certain risks and concentration



Our manufacturing partner accounted for approximately 44% of
our cost of goods sold and 0% of outstanding accounts payable at year ended December 31, 2012.



One of our customers presently operates under a “Consignment
Agreement”. Under the agreement we sell and ship merchandise to our customer and collect payments upon sale of our product
to ultimate (final) consumer.



Redeemable Preferred Stock



Redeemable preferred stock is initially evaluated for possible
classification as liabilities under ASC 480 Distinguishing Liabilities from Equity. Redeemable preferred stock that does not, in
its entirety, require liability classification is evaluated for embedded features that may require bifurcation and separate classification
as derivative liabilities under ASC 815. In all instances, the classification of the redeemable preferred stock host contract that
does not require liability classification is evaluated for equity classification or mezzanine classification based upon the nature
of the redemption features. Generally, any feature that could require cash redemption for matters not within our control, irrespective
of probability of the event occurring, requires classification outside of stockholders’ equity. See Note 7 for further disclosures
about our redeemable preferred stock.



Loss per common share



Basic loss per common share represents our loss applicable to
common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted loss per common
share gives effect to all potentially dilutive securities. We compute the effects on diluted loss per common share arising from
warrants and options using the treasury stock method or, in the case of liability classified warrants, the reverse treasury stock
method. We compute the effects on diluted loss per common share arising from convertible securities using the if-converted method.
The effects, are all anti-dilutive and are excluded.



46







Recent accounting pronouncements



In May 2011, the FASB issued an update that amends the guidance
provided in ASC Topic 820, Fair Value Measurement, by clarifying some existing concepts, eliminating
wording differences between GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases,
changing some principles to achieve convergence between GAAP and IFRS. The update results in a consistent definition of fair value,
establishes common requirements for the measurement of and disclosure about fair value between GAAP and IFRS, and expands the disclosures
for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This update became effective in
the second quarter of fiscal 2012. The adoption of this update did not have a material impact on our financial statements.



Note 4 – Building, Telecommunications
Equipment, Land and Other Property:



|Telecommunications equipment and other property consist of the following: |  |      |  | December 31, December 31, |          
|------------------------------------------------------------------------- |  | ---- |  | ------------------------- | ---------
|                                                                          |  | Life |  | 2012                      |          
|                                                                          |  |      |  |                           |          
|Telecommunication equipment                                               |  | 7    |  | $                         | 356,154  
|Computer equipment                                                        |  | 5    |  |                           | 166,408  
|Building                                                                  |  | 35   |  |                           | 2,448,364
|Building improvement                                                      |  | 10   |  |                           | 81,342   
|Office equipment and furnishing                                           |  | 7    |  |                           | 48,212   
|Purchased software                                                        |  | 3    |  |                           | 34,147   
|Land                                                                      |  |      |  |                           | 270,000  
|                                                                          |  |      |  |                           | 3,404,627
|Less accumulated depreciation                                             |  |      |  |                           | (424,559 
|Total                                                                     |  |      |  | $                         | 2,980,068



Depreciation expenses amounted to $193,249 and $151,142 for
the years ended December 31, 2012 and 2011, respectively.



Our telecommunications equipment is deployed in our Network
Operations Center (“NOC”) as is most of the computer equipment. Other computer and office equipment and furnishings
are deployed at our corporate offices.



Note 5 - Intangible Assets:



|Intangible assets consist of following: |  | Life |  | December 31, December 31, |         
|--------------------------------------- |  | ---- |  | ------------------------- | --------
|                                        |  |      |  | 2012                      |         
|Trademarks                              |  | 5    |  | $                         | 332,708 
|Employment agreements                   |  | 3    |  |                           | 225,084 
|Knowhow and specialty skills            |  | 3    |  |                           | 212,254 
|Workforce                               |  | 3    |  |                           | 54,000  
|Patents                                 |  | 20   |  |                           | 102,942 
|Finance Cost                            |  | 2    |  |                           | 55,236  
|                                        |  |      |  |                           | 982,224 
|Less accumulated amortization           |  |      |  |                           | (789,217
|                                        |  |      |  | $                         | 193,007 



Amortization expenses amounted to $69,593
and $176,279 for the years ended December 31, 2012 and 2011, respectively.



Note 6 – Securities Option Agreement,
Secured Convertible Debentures, Senior Debentures and Demand Notes :



Mortgage promissory note:



On November 29, 2012, we borrowed
$1,000,000 from a lender and in exchange, the Company issued a 12% promissory note and a mortgage
and security agreement. The 12% promissory note, among other matters, accrues interest at 12% per annum, is payable in full on
November 29, 2014, and is secured by our corporate office building, located at 1080 NW 163rd Drive, Miami Gardens, FL
33169.



47







At December 31, 2012, principal repayments requirements on mortgage
payable were as follows:



|For the year ended December 31,: |  |   |          
|-------------------------------- |  | - | ---------
|                                 |  |   |          
|2013                             |  | $ | 0        
|2014                             |  | $ | 1,000,000
|                                 |  | $ | 1,000,000



On January 11, 2013, we received an additional advance of $400,000
pursuant to its existing lending facility with 1080 NW 163rd Drive, LLC. The additional advance of $400,000 was endorsed by a promissory
note which was consolidated with the initial advance of $1,000,000 from the mortgage on 1080 NW 163rd Drive, LLC. The consolidated
promissory mortgage note has an aggregate principal balance of $1,400,000, accrues interest at 12% per annum, is payable in full
on November 29, 2014, and is secured by our corporate office building, located at 1080 NW 163rd Drive, Miami Gardens, FL 33169.



Securities Option Agreement:



On June 30, 2012, we executed a Securities Option Agreement
with Vicis Capital Master Fund (“Vicis”) whereby Vicis grants us an option to purchase and redeem all securities and
debentures held by Vicis. The option becomes exercisable on the date that all principal and accrued interest on all debentures
has been paid in full, and may be exercised at any time after initial exercise date through and including December 31, 2013 (expiration
date). Upon exercise of the “option” the redemption price for the securities shall be an amount equal to $16,000,000
minus the sum of principal and accrued interest paid on all debentures held by Vicis. Upon exercise of the option, any and all
unpaid dividends on the securities shall be surrendered and cancelled without payment of additional consideration.



Extension of Maturity Dates of Outstanding
Non-Convertible Debentures:



On June 30, 2012, we entered into an agreement to modify our
outstanding debentures solely to extend their maturity dates that originally ranged from June 30, 2012 to July 1, 2013 to December
31, 2013. There were no other material modifications to the debentures and the holders received no additional consideration to
effect the modification. As a result of these modifications, we evaluated each debenture to determine whether the maturity extension
constituted a substantial modification. Under current accounting standards, from a debtor’s perspective, a modification of
a debt instrument is deemed equivalent to the exchange of debt instruments if the present value of the cash flows under the terms
of the modified arrangement are at least 10 percent different from the present value of the remaining cash flows under the terms
of the original debt instrument. In cases where the difference in cash flows exceeds this level, extinguishment accounting is prescribed.
As a result of our calculations, we concluded that the present values, using the effective interest rates on the issuance dates,
of our face value $5,266,130, $2,000,000, and $3,500,000 debentures exceeded the substantive threshold. Accordingly, the debentures
were adjusted to their respective fair values of $6,150,160, $2,313,888, and $3,852,748 and a corresponding charge to income in
the amount of $3,135,235 representing the extinguishment loss.



The fair values of the debentures were determined based upon
their future cash flows, discounted at a credit-risk adjusted market interest rate of 7.4%.



2012 Issuance of Non-Convertible Debentures and Demand Notes



On March 29, 2012, we issued a face value $500,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013



On April 30, 2012, we issued a face value $500,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013.



On June 26, 2012, we issued a face value $450,000, 10% senior
secured debenture, due June 30, 2012, extended to December 31, 2013.



During the year ended December 31, 2012, we received advances
in the total amount of $1,150,000, as part of a series of 10% senior secured debentures, due December 31, 2013, issued to our largest
investor.



During the year ended December 31, 2012, we received advances
in the total amount of $275,000, represented by Demand Notes, issued to our largest investor.



48







The carrying values our senior debentures and demand notes consisted
of the following as of December 31, 2012 and December 31, 2011:



|                                                            |  | December 31, |            |  | December 31, |  
|----------------------------------------------------------- |  | ------------ | ---------- |  | ------------ | -
|                                                            |  | 2012         |            |  | 2011         |  
|$2,000,000 face value 12% debenture, due December 31, 2013  |  | $            | 2,398,153  |  |              | $
|$3,500,000 face value 12% debenture, due December 31, 2013  |  |              | 3,993,053  |  |              |  
|$5,266,130 face value 12% debenture, due December 31, 2013  |  |              | 6,374,130  |  |              |  
|$ 500,000 face value 10% debenture, due December 31, 2013   |  |              | 500,000    |  |              |  
|$ 500,000 face value 10% debenture, due December 31, 2013   |  |              | 500,000    |  |              |  
|$ 450,000 face value 10% debenture, due December 31, 2013   |  |              | 450,000    |  |              |  
|$1,150,000 advances on 10% debenture, due December 31, 2013 |  |              | 1,150,000  |  |              |  
|$ 275,000 demand notes, due on demand                       |  |              | 275,000    |  |              |  
|Total                                                       |  | $            | 15,640,336 |  |              | $



At December 31, 2012, principal repayments
requirements on senior debentures and demand notes were as follows:



|For year ended December 31, 2013: senior debentures and demand notes |  | $ | 15,640,336 | 
|-------------------------------------------------------------------- |  | - | ---------- | 



2011 Issuance of Non-Convertible Debentures



On August 8, 2011 and September 30, 2011, we issued face value
$2,000,000 12% debentures, due July 1, 2013, and face value $3,500,000 10% debentures, due June 30, 2012, respectively, for aggregate
cash of $5,500,000. Concurrent with these financing transactions we also issued the investor warrants to purchase an aggregate
of 18,000,000 shares of our common stock for $0.50 for periods of five years.



We allocated the gross proceeds from the financing transactions
to the debentures and the warrants based upon their relative fair values, as reflected in the following table:



|August 8, 2011 Financing Arrangement                  |  | Fair Values |           |  | Relative Fair Values |  
|----------------------------------------------------- |  | ----------- | --------- |  | -------------------- | -
|$2,000,000 face value of debentures                   |  | $           | 2,127,063 |  |                      | $
|Warrants to purchase 8,000,000 shares of common stock |  |             | 3,768,000 |  |                      |  
|                                                      |  | $           | 5,895,063 |  |                      | $



|September 30, 2011 Financing Arrangement               |  | Fair Values |           |  | Relative Fair Values |  
|------------------------------------------------------ |  | ----------- | --------- |  | -------------------- | -
|$3,500,000 face value of debentures                    |  | $           | 3,560,675 |  |                      | $
|Warrants to purchase 10,000,000 shares of common stock |  |             | 3,790,000 |  |                      |  
|                                                       |  | $           | 7,350,675 |  |                      | $



The fair value of the debentures was computed based upon the
present value of all future cash flows, using a credit risk adjusted discount rates ranging from 7.63% to 7.86%. This discount
rate was developed based upon bond curves of companies with similar high risk credit ratings plus a range of 0.25% to 0.36% risk
free rate based upon yields for zero coupon government securities with maturities consistent with those of the debentures. The
fair value of the warrants was determined using the Binomial Lattice technique. The effective volatility and risk free rates resulting
from the calculations were 55.15% — 129.86% and 0.07% — 1.11%, respectively.



June 30, 2011 Financing, Debt Settlement, and Accrued Interest
Settlement



On June 30, 2011, we issued face value $5,266,130, 12% debentures,
due July 1, 2013 and warrants to purchase 21,064,520 shares of our common stock for $0.50 per share, which expire five years from
the issuance date, for $2,500,000 cash, settlement of $2,500,000 in bridge financing and settlement of $266,130 in accrued interest
on the former convertible debentures. See discussion on the conversion of the convertible debentures, below. The cash and advance
settlement were accounted for as financing transactions. The settlement of the accrued interest was accounted for as an extinguishment
of debt.



49







The debentures were allocated $5,000,000 face value and $266,130
to the financing and extinguishment, respectively. Applying that same relationship, we allocated 20,000,000 and 1,064,520 warrants
to the financing and extinguishment, respectively.



We allocated the gross proceeds from the financing transaction
to the debentures and the warrants based upon their relative fair values, as reflected in the following table:



|                                                       |  | Fair Values |            |  | Relative Fair Values |  
|------------------------------------------------------ |  | ----------- | ---------- |  | -------------------- | -
|$5,000,000 face value of debentures                    |  | $           | 5,340,195  |  |                      | $
|Warrants to purchase 20,000,000 shares of common stock |  |             | 7,816,000  |  |                      |  
|                                                       |  | $           | 13,156,195 |  |                      | $



The fair value of the debentures was computed based upon the
present value of all future cash flows, using a credit risk adjusted discount rate of $7.75%. This discount rate was developed
based upon bond curves of companies with similar high risk credit ratings plus a 0.50% risk free rate based upon yields for zero
coupon government securities with maturities consistent with those of the debentures. The fair value of the warrants was determined
using the Binomial Lattice valuation technique. The effective volatility and risk free rate used in the calculation were 113.8%
and 1.70%, respectively.



For purposes of the extinguished instrument, we recorded the
allocated face value of the debentures and the allocated number of warrants at their fair values. The difference between these
amounts and the carrying value of the settled obligation was recorded as an extinguishment loss in our income, as follows:



|                                                      |  | Extinguishment Calculation |        
|----------------------------------------------------- |  | -------------------------- | -------
|$266,130 face value of debentures                     |  | $                          | 284,238
|Warrants to purchase 1,064,520 shares of common stock |  |                            | 416,014
|                                                      |  |                            | 700,252
|Carrying value of settled obligation                  |  |                            | 266,130
|Extinguishment loss                                   |  | $                          | 434,122



The fair value of the debentures and the warrants were determined
in the same manner as those allocated to the financing and as described above.



The total carrying value of the debentures arising from the
financing and the extinguishment transactions amounted to $2,313,774. This discounted balance is subject to amortization through
charges to interest expense over the term to maturity using the effective interest method. Amortization commenced on July 1, 2011.



2011 Conversion of All Outstanding Convertible
Debentures:



On June 30, 2011, the holder of all of our secured convertible
debentures issued in connection with 2010 Convertible Debenture Exchange (see discussion below) converted said debentures for an
aggregate of 19,995,092 shares of common stock, which was in accordance with the contractual conversion price. On the date of the
conversion, the compound embedded derivatives associated with the secured convertible debentures were adjusted to fair value resulting
in a credit to derivative income in the amount of $2,514,209. Following the derivative adjustment, the adjusted carrying value
of the compound embedded derivative ($8,797,840) and carrying value of the secured convertible notes ($4,998,773) were combined
in the amount of $13,796,613 and reclassified to stockholders equity to give effect to the issuance of the common shares.



Further, on the June 30, 2011 conversion date we issued the
holders of the secured convertible debentures warrants to purchase 1,000,000 shares of our common stock as conversion inducement
consideration. These warrants have a five year term and a strike price of $0.50 per common share. The warrants meet all conditions
for equity classification. The fair value of the warrants, determined using the Noreen Wolfson dilution adjustment model for the
Black Scholes Merton valuation technique, amounted to $390,800 which has been recorded in expense. The volatility and risk free
rate used in the Black Scholes Merton calculation were 113.8% and 1.70%, respectively.



50







2010 Convertible Debenture Exchange:



Our convertible debentures were issued on February 24, 2010
in connection with an exchange agreement with our creditors that provided for, among other things, the consolidation of our previous
secured convertible debt instruments, originally issued in connection with our 2008 Convertible Debenture Financing and 2009 Convertible
Debenture (see discussion below), and included the capitalization of $798,773 of accrued interest. The newly issued convertible
debentures bore interest at 12%, which was payable at the earlier of the maturity date or the date that the debentures were converted,
if ever. Such interest was payable at the Company’s option in cash or common stock at $0.25 per common share. The principal
amount of the debentures was convertible into common stock at $0.25. Accordingly, the convertible debenture was indexed to 19,995,092
shares of our common stock.



Our accounting for the aforementioned exchange transaction required
us to consider whether the exchange resulted in a substantial modification to the original convertible debentures based upon either
cash flows or the fair value of the embedded conversion feature, wherein is generally defined as a change greater than 10%. In
all instances, our calculations indicated that the exchange of convertible debentures resulted in changes that were substantial
to either cash flows, the embedded conversion option, or both. As a result, we were required to extinguish the prior debt instruments
and reestablish the new convertible debentures at fair value, with the difference reflected in our expenses.



The following table reflects the components
of our extinguishment calculations on February 24, 2010:



|                                  |  | Convertible Debenture Due |           |   |               |  
|--------------------------------- |  | ------------------------- | --------- | - | ------------- | -
|                                  |  | June 30, 2011             |           |   | July 20, 2011 |  
|Fair value of new debenture       |  | $                         | 7,767,450 |   |               | $
|Carrying value of old debentures: |  |                           |           |   |               |  
|Debentures                        |  |                           | 1,713,124 |   |               |  
|Accrued Interest                  |  |                           | 546,000   |   |               |  
|Compound embedded derivative      |  |                           | 3,723,200 |   |               |  
|Deferred finance costs            |  |                           | (85,372   | ) |               |  
|                                  |  |                           | 5,896,952 |   |               |  
|                                  |  |                           |           |   |               |  
|Extinguishment loss               |  | $                         | 1,870,498 |   |               | $



The fair values of the Secured Convertible Debentures were determined
based upon their respective discounted cash flow, using observable market rates, plus the fair value of the embedded conversion
options. Observable market rates on the exchange date ranged from 7.91% for one-year and 8.47% for two years and were derived from
publicly available surveys of corporate bond curves for issuers with similar risk characteristics as ours. The fair value of our
compound embedded derivatives were determined using the Monte Carlo Simulations model. See Note 8. The compound embedded derivatives
were adjusted to fair value on the exchange date, immediately before the exchange transaction, which amount is included in our
derivative income (expense).



The fair value of the new convertible debentures was allocated
to the debt balance, the compound embedded derivative and paid-in capital. Paid-in capital arises in this transaction, because
the allocation resulted in premiums which, under accounting principles, are considered equity components. The following table summarizes
the allocation on the exchange date:



|                             |  | Convertible Debenture due |           |  |               |  
|---------------------------- |  | ------------------------- | --------- |  | ------------- | -
|                             |  | June 30, 2011             |           |  | July 20, 2011 |  
|Convertible debentures       |  | $                         | 3,146,000 |  |               | $
|Compound embedded derivative |  |                           | 4,505,072 |  |               |  
|Paid-in capital              |  |                           | 116,378   |  |               |  
|                             |  | $                         | 7,767,450 |  |               | $



Our accounting for the original debenture
financings is as follows:



2008 Convertible Debenture Financing



On September 10, 2008, we issued a $1,000,000 face value, 12%
secured convertible debenture (T-1), due September 10, 2010 and Series B warrants indexed to 4,000,000 shares of our common stock
in exchange for the Interlink Asset Group, discussed in Note 3. Also on September 30, 2008, we issued a $500,000 face value 12%
secured convertible debenture (T-2), due September 10, 2010 and Series B warrants indexed to 2,000,000 shares of our common stock
for net cash proceeds of $472,800. The warrants have a term of five years. These financial instruments were issued to the same
creditor under contracts that are substantially similar, unless otherwise mentioned in the following discussion.



51







The principal amount of the debentures was initially payable
on September 10, 2010 and the interest was payable quarterly, on a calendar quarter basis. While the debenture was outstanding,
the investor had the option to convert the principal balance, and not the interest, into shares of our common stock at a conversion
price of $0.25 per common share. Each such debenture was exchanged on February 24, 2010 for a new debenture issued by the Company.



2009 Convertible Debenture Financings



We entered into several Securities Purchase Agreements with
Debt Opportunity Fund, LLP (“DOF”) during the year ended September 30, 2009.



On January 30, 2009 we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $600,000 with a maturity date of January 30, 2011, convertible into shares of common
stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,400,000 shares of our common stock at an exercise
price of $0.50 for net cash proceeds of $507,900. The warrants have a term of five years.



On February 6, 2009 we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $500,000 with a maturity date of January 30, 2011, convertible into shares of common
stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise
price of $0.50 for net cash proceeds of $443,250. The warrants have a term of five years.



On July 20, 2009, we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $500,000 with a maturity date of July 20, 2011, convertible into shares of common
stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 2,000,000 shares of our common stock at an exercise
price of $0.50 for net cash proceeds of $446,250. The warrants have a term of five years.



On September 25, 2009, we issued (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $1,100,000 with a maturity date of July 20, 2011, convertible into shares of common
stock at a conversion price of $0.25; and (b) Series C Warrants to purchase 4,400,000 shares of our common stock at an exercise
price of $0.25 for net cash proceeds of $1,000,000. The warrants have a term of five years.



Each debenture bore interest at a rate of 12% per annum from
the date of issuance until paid in full. Each such debenture was exchanged on February 24, 2010 for a new debenture issued by the
Company. (see discussion above)



Midtown Partners & Co., LLC (“Midtown Partners”),
a NASD registered broker dealer, acted as the placement agent for the Company in connection with the January 30, July 20, and September
25, 2009 Convertible Debt Offerings (“2009 Convertible Debt Offerings”). We paid Midtown Partners cash commissions
equal to $198,000 and we issued Series BD Common Stock Purchase Warrants to Midtown Partners entitling Midtown Partners to purchase
1,720,000 shares of the Company’s common stock at an initial exercise price of $0.50 per share and 440,000 shares of the
Company’s common stock at an initial exercise price $0.25 per share. Since the Series BD warrants offered full ratchet anti-dilution
protection, any previously issued and outstanding warrants with a conversion price greater than $0.25 automatically had their conversion
price ratchet down to $0.25 as subsequent issuances were made with a conversion price of $0.25.



On September 22, 2009 we voided and reissued warrants in connection
with our financing transactions. The cancellation and reissuance of warrants was treated as a modification under ASC 470-50 Modifications
and Extinguishments although the change in cash flow was <10% so extinguishment accounting was not applicable.



Cancelled and re-issued warrants were as
follows:



|Original Warrants |  | Indexed Shares |           |  | Strike Price |   |      | Reissued Warrants |  | Indexed Shares |  |  | Strike Price | 
|----------------- |  | -------------- | --------- |  | ------------ | - | ---- | ----------------- |  | -------------- |  |  | ------------ | 
|C-1 warrants      |  |                | 2,400,000 |  |              | $ | 0.50 |                   |  | C-3 warrants   |  |  | 2,400,000    | 
|C-2 warrants      |  |                | 2,000,000 |  |              | $ | 0.50 |                   |  | C-4 warrants   |  |  | 2,000,000    | 
|BD-1 warrants     |  |                | 480,000   |  |              | $ | 0.50 |                   |  | BD-4 warrants  |  |  | 240,000      | 
|                  |  |                |           |  |              |   |      |                   |  | BD-5 warrants  |  |  | 240,000      | 
|BD-2 warrants     |  |                | 400,000   |  |              | $ | 0.50 |                   |  | BD-6 warrants  |  |  | 200,000      | 
|                  |  |                |           |  |              |   |      |                   |  | BD-7 warrants  |  |  | 200,000      | 
|BD-3 warrants     |  |                | 200,000   |  |              | $ | 0.50 |                   |  | BD-8 warrants  |  |  | 200,000      | 
|BD-4 warrants     |  |                | 200,000   |  |              | $ | 0.50 |                   |  | BD-9 warrants  |  |  | 200,000      | 



52







Accounting for the Financing Arrangements:



We have evaluated the terms and conditions of the secured convertible
debentures under the guidance of ASC 815, Derivatives and Hedging. We have determined that, while the anti-dilution protections
preclude treatment of the embedded conversion option as conventional, the conversion option is exempt from classification as a
derivative because it otherwise achieves the conditions for equity classification (if freestanding) provided in ASC 815. We have
further determined that the default redemption features described above are not exempt for treatment as derivative financial instruments,
because they are not clearly and closely related in terms of risk to the host debt agreement. On the inception date of the arrangements
through June 30, 2010, we determined that the fair value of these compound derivatives is de minus. However, we are required to
re-evaluate this value at each reporting date and record changes in its fair value, if any, in income. For purposes of determining
the fair value of the compound derivative, we have evaluated multiple, probability-weighted cash flow scenarios. These cash flow
scenarios include, and will continue to include fair value information about



our common stock. Accordingly, fluctuations in our common stock
value will significantly influence the future outcomes from applying this technique. As discussed above, the embedded conversion
options did not require treatment as derivative financial instruments; however, we were required to evaluate the feature as embodying
a beneficial conversion feature under ASC 470-20, Debt with Conversion and Other Options. A beneficial conversion feature (“BCF”)
is present when the fair value of the underlying common share exceeds the effective conversion price of the conversion option.
The effective conversion price is calculated as the basis in the financing arrangement allocated to the hybrid convertible debt
agreement, divided by the number of shares into which the instrument is indexed. Because the two hybrid debt contracts dated September
10, 2008 were issued as compensation for the Interlink Asset Group and as further discussed in Note 3 we concluded that they should
be combined for accounting purposes and the accounting resulted in no beneficial conversion feature. The financings issued in 2009
were found to have a BCF which gives effect to the (i) the trading market price on the contract dates and (ii) the effective conversion
price of each issuance after allocation of proceeds to all financial instruments sold based upon their relative fair values. Notwithstanding,
the BCF was limited to the value ascribed to the remaining hybrid contract (using the relative fair value approach). Accordingly,
the BCF allocated to paid-in capital from the 2009 financings amounted to $872,320 for the year ended September 30, 2009.



We evaluated the terms and conditions of the Series B, Series
C and Series BD warrants under the guidance of ASC 480, Distinguishing Liabilities from Equity (“ASC 480”). The warrants
embody a fundamental change-in-control redemption privilege wherein the holder may redeem the warrants in the event of a change
in control for a share of assets or consideration received in such a contingent event. This redemption feature places the warrants
within the scope of ASC 480-10, as put warrants and, accordingly, they are classified in liabilities and measured at inception
and on an ongoing basis at fair value. Fair value of the warrants was measured using the Black-Scholes-Merton valuation technique
and in applying this technique we were required to develop certain subjective assumptions which are listed in more detail below.



Premiums on the secured convertible debentures arose from initial
recognition at fair value, which is higher than face value. Discounts arose from initial recognition at fair value, which is lower
than face value. Premiums and discounts are amortized through credits and debits to interest expense over the term of the debt
agreement.



Direct financing costs were allocated to the financial instruments
issued (hybrid debt and warrants) based upon their relative fair values. Amounts related to the hybrid debt are recorded as deferred
finance costs and amortized through charges to interest expense over the term of the arrangement using the effective interest method.
Amounts related to the warrants were charged directly to income because the warrants were classified in liabilities, rather than
equity, as described above. Direct financing costs are amortized through charges to interest expense over the term of the debt
agreement.



Note 7 – Redeemable Preferred
Stock and Stock Option Agreement:



Securities Option Agreement:



On June 30, 2012, we executed Securities
Option Agreement with Vicis Capital Master Fund (“Vicis”) whereby Vicis grants us an option to purchase and redeem
all securities and debentures then held by Vicis. The option becomes exercisable on the date that all principal and accrued interest
on all debentures has been paid in full, and may be exercised at any time after initial exercise date through and including December
31, 2013 (expiration date).



Upon exercise of the “option” the redemption price
for the securities shall be an amount equal to $16,000,000 minus the sum of principal and accrued interest paid on all debentures
then outstanding.



In addition, upon exercise of the option, any and all unpaid
dividends on the securities shall be surrendered and cancelled without payment of additional consideration.



53







|Redeemable preferred stock consists of the following as of:                                                                                                                                                                                                                     |  | December 31, 2012 |            |   | December 31, 2011 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | -
|Series A Convertible Preferred Stock, par value $0.001 per share, stated value $10,000 per share; 500 shares issued and outstanding at December 31, 2012; redemption value $5,000,000, and 500 shares issued and outstanding at December 31, 2011; redemption value $5,000,000. |  |                   |            |   |                   |  
|Initial carrying value                                                                                                                                                                                                                                                          |  | $                 | 13,246,609 |   |                   | $
|Accumulated accretion                                                                                                                                                                                                                                                           |  |                   | (6,867,593 | ) |                   |  
|Carrying values                                                                                                                                                                                                                                                                 |  | $                 | 6,379,016  |   |                   | $



Our Series A Convertible Preferred Stock became mandatorily
redeemable for cash of $5,000,000 on June 30, 2011. On that date, after negotiations with our preferred investors, we modified
the underlying Certificate of Designation solely to extend the mandatory redemption date to July 1, 2013 (extended to December
31, 2013). In considering all facts and circumstances, including the changes in future cash flows and the fair value of the embedded
conversion feature, we concluded that the modification to the Series A Convertible Preferred Stock was substantial, thus warranting
accounting analogous to extinguishment accounting for debt wherein the fair value of the amended contracts replace the carrying
value of the original contracts. The difference between those two amounts in the case of preferred stock is recorded in stockholders
equity.



We first accreted the Series A Convertible to the June 30, 2011
redemption date with a charge to paid-in capital (in the absence of accumulated earning) in the amount of $2,442,686. The accretion
adjustment resulted in a carrying value of our redeemable preferred stock in the amount of $5,000,000. We then adjusted the compound
embedded derivative that had been carried in liabilities at fair value on the modification date, which resulted in a reduction
credit of $2,500,000 and was recorded in income. The derivative fair value adjustment resulted in a carrying value of $8,800,000.
Therefore, the combined carrying value of the Series A Convertible Preferred immediately preceding the modification amounted to
$13,800,000. We computed the fair value using a combination of the forward cash flow, at risk adjusted discount rates, plus the
fair value of the embedded conversion feature using Monte Carlo Simulation (“MCS”) techniques. The value of the preferred
stock on this basis amounted to $13,246,609. As a result, our calculation of the extinguishment resulted in a credit to paid-in
capital in the amount of $553,391.



The discount rate that we used to present value future cash
flows from the modified preferred stock amounted to 7.75%. This rate was developed using bond curves for companies with similar
high-risk credit ratings, plus a risk free rate of 0.50% representing the yield on zero coupon government securities with two year
remaining terms. Material inputs into the MCS included volatilities ranging from 89.9% to 105.3%, a market interest rate equal
to the contractual coupon of 12%, and credit adjusted yields ranging from 7.19% to 7.75%.



On February 24, 2010, we designated 500 shares of our authorized
preferred stock as Series A Convertible Preferred Stock; par value $0.001 per share, stated value $10,000 per share (“Preferred
Stock”). The Preferred Stock is redeemable for cash on June 30, 2011 at the stated value, plus accrued and unpaid dividends.
Dividends accrue, whether or not declared, at a rate of 12% of the stated value. The Preferred Stock is convertible into common
stock at the holder’s option at $0.25 based upon the stated value (20,000,000 linked common shares). Such conversion rate
is subject to adjustment for traditional reorganizations and recapitalization and in the event that we sell common stock or other
equity-linked instruments below the conversion price. Holders of the Preferred Stock are entitled to a preference equal to the
stated value, plus accrued and unpaid dividends. While the Preferred Stock is outstanding, holders vote the number of indexed common
shares.



We sold 300 shares of Series A Preferred on February 24, 2010,
with warrants to purchase 12,000,000 shares of our common stock for proceeds of $3,000,000. We sold 200 shares of Series A Preferred
on October 25, 2010, with warrants to purchase 8,000,000 shares of our common stock for proceeds of $2,000,000.



Our accounting for the Preferred Stock and warrant financing
transaction required us to evaluate the classification of the embedded conversion feature and the warrants. As a prerequisite to
establishing the classification of the embedded conversion option, we were required to determine the nature of the hybrid Preferred
Stock contract based upon its risks as either a debt-type or equity-type contract. The presence of the mandatory cash redemption
and the requirement to accrue dividends were persuasive evidence that the Preferred Stock was more akin to a debt than an equity
contract, with insufficient evidence to the contrary (e.g. voting privilege). Given that the embedded conversion feature, when
evaluated as embodied in a debt-type contract, did not meet the definition for an instrument indexed to a company’s own stock,
the embedded conversion feature required bifurcation and classification in liabilities, at fair value. Similarly, the warrants
did not meet the definition for an instrument indexed to a company’s own stock, resulting in their classification in liabilities,
at fair value.



54







The following table reflects the allocation
of the purchase price on the financing date:



|Allocation:                                              |  | October 25, 2010 |           |  | February 24, 2010 |  
|-------------------------------------------------------- |  | ---------------- | --------- |  | ----------------- | -
|Redeemable preferred Stock                               |  | $                | 624,000   |  |                   | $
|Warrants                                                 |  |                  | 936,000   |  |                   |  
|Compound embedded derivative                             |  |                  | 440,000   |  |                   |  
|Derivative loss, included in derivative income (expense) |  |                  | —         |  |                   |  
|                                                         |  | $                | 2,000,000 |  |                   | $



Warrants issued with the February 24, 2010 financing were valued
on the financing date using the Black-Scholes-Merton valuation technique. Significant assumptions were as follows: Market value
of underlying, using the trading market of $0.58; expected term, using the contractual term of 5.0 years; market volatility, using
a peer group of 90.20%; and, risk free rate, using the yield on zero coupon government instruments of 2.40%. Warrants issued with
the October 25, 2010 financing were valued on the financing date and subsequently using Binomial Lattice. Significant assumptions
were as follows: Market value of the underlying, using the trading market of $0.26; market volatility, using a peer group ranged
from 76.06% to 99.78% with an equivalent volatility of 89.40%; and risk free rate using the yield on zero coupon government instruments
ranging from 0.12% to 2.01% with an equivalent rate of 0.66%. The implied expected life of the warrant is 4.7 years.



The compound embedded derivative was valued using the Monte
Carlo Simulations (“MCS”) technique. The MSC technique is a generally accepted valuation technique for valuing embedded
conversion features in hybrid convertible notes, because it is an open-ended valuation model that embodies all significant assumption
types, and ranges of assumption inputs that management of the Company believe would likely be considered in connection with the
arms-length negotiation related to the transference of the instrument by market participants. However, there may be other circumstances
or considerations, other than those addressed herein, that relate to both internal and external factors that would be considered
by market participants as it relates specifically to the Company and the subject financial instruments.



Given its redeemable nature, we are required to classify our
Series A Preferred Stock outside of stockholders’ equity. Further, the inception date carrying value is subject to accretion
to its ultimate redemption value over the term to redemption, using the effective method. During the period from its issuance to
September 30, 2010, we accreted $224,969, which was reflected as a charge to paid-in capital in the absence of accumulated earnings.



Note 8 – Derivative Financial
Instruments:



On June 30, 2011, our investors agreed to modifications of our
Series A Preferred Stock and our Series D Warrants that provided for reclassification of the derivatives to stockholder’s
equity or, in the case of the preferred stock, redeemable preferred stock. The components of our derivative liabilities consisted
of the following at June 29, 2011 (the last closing prices available prior to the modifications) and September 30, 2010:



|                                                                                  |  | June 29, 2011  |            |  |            |  
|--------------------------------------------------------------------------------- |  | -------------- | ---------- |  | ---------- | -
|Derivative Financial Instrument                                                   |  | Indexed Shares |            |  | Fair Value |  
|                                                                                  |  |                |            |  |            |  
|Compound Derivative Financial Instruments:                                        |  |                |            |  |            |  
|February 24, 2010 Secured Convertible Debentures                                  |  |                | 19,995,092 |  |            | $
|February 24, 2010 Series A Convertible Preferred Stock                            |  |                | 12,000,000 |  |            |  
|October 24, 2010 Series A Convertible Preferred Stock                             |  |                | 8,000,000  |  |            |  
|February 24, 2010 Series D warrants, issued with the preferred financing (Note 7) |  |                | 12,000,000 |  |            |  
|February 24, 2010 Series D warrants, issued with the exchange (Note 7)            |  |                | 16,800,000 |  |            |  
|October 25, 2010 Series D warrants, issued with the financing (Note 7)            |  |                | 8,000,000  |  |            |  
|Financing warrants issued to brokers                                              |  |                | 2,160,000  |  |            |  
|Total                                                                             |  |                | 78,955,092 |  |            | $



55







On January 11, 2011, certain warrants previously issued to brokers
and that were linked to 2,160,000 shares of our common stock were modified to remove provisions that could result in adjustments
to the exercise prices if we sold common shares or common share linked contracts at a per share price that was less than the exercise
price of these warrants. As a result of this modification, these warrants no longer require liability classification and measurement
at fair value. On the modification date we adjusted these warrants to their fair values with a charge to income and reclassified
the balance, amounting to $274,200 to paid-in capital. On June 30, 2011, warrants linked to 36,800,000 shares of our common stock
were modified to remove provisions that could result in adjustments to the exercise prices if we sold common shares or common share
linked contracts at a per share price that was less than the exercise price of these warrants. As a result of this modification,
these warrants no longer require liability classification and measurement at fair value. On the modification date we adjusted these
warrants to their fair values with a charge to income and reclassified the balance, amounting to $6,689,600 to paid-in capital.



The following table reflects the activity
in our derivative liability balances from October 1, 2010 to December 31, 2011:



|                                     |  | Compound |            |   | Warrants |   |            | Total | 
|------------------------------------ |  | -------- | ---------- | - | -------- | - | ---------- | ----- | 
|Balances at October 1, 2010          |  | $        | 3,680,794  |   |          | $ | 2,224,828  |       | 
|Issuances                            |  |          | 936,000    |   |          |   | 440,000    |       | 
|Conversion and redemption            |  |          | —          |   |          |   | —          |       | 
|Unrealized derivative (gains) losses |  |          | 618,764    |   |          |   | (512,988   | )     | 
|Balances at December 31, 2010        |  |          | 5,235,558  |   |          |   | 2,151,840  |       | 
|                                     |  |          |            |   |          |   |            |       | 
|Reclassifications                    |  |          | —          |   |          |   | (274,200   | )     | 
|Unrealized derivative (gains) losses |  |          | 17,376,491 |   |          |   | 4,883,960  |       | 
|Balances at March 31, 2011           |  |          | 22,612,049 |   |          |   | 6,761,600  |       | 
|Conversion and redemption            |  |          | (8,797,840 | ) |          |   | —          |       | 
|Reclassifications                    |  |          | (8,800,000 | ) |          |   | (6,689,600 | )     | 
|Unrealized derivative (gains) losses |  |          | (5,014,209 | ) |          |   | (72,000    | )     | 
|Balances at December 31, 2011        |  | $        | —          |   |          | $ | —          |       | 



Effective on January 1, 2011, we changed our method for valuing
our derivative warrants from a Black-Scholes Merton Model, adjusted to give effect to the anti-dilution features (the Noreen Wolfson
Model) to Binomial Lattice. Binomial Lattice was considered by our management to be more appropriate because it both provides for
early exercise scenarios and incorporates the down-round anti-dilution protection possibilities that could arise in early exercise
scenarios.



The following table reflects the activity
in our derivative liability balances from October 1, 2009 to December 31, 2012:



|                                     |  | Compound |            |   | Warrants |   |            | Total | 
|------------------------------------ |  | -------- | ---------- | - | -------- | - | ---------- | ----- | 
|Balances at October 1, 2009          |  | $        | —          |   |          | $ | 1,327,272  |       | 
|Accounting change                    |  |          | 1,865,600  |   |          |   | —          |       | 
|Effect of exchange transaction       |  |          | 1,158,382  |   |          |   | —          |       | 
|Issuances                            |  |          | 4,260,000  |   |          |   | 5,062,800  |       | 
|Conversion and redemption            |  |          | —          |   |          |   | —          |       | 
|Unrealized derivative (gains) losses |  |          | (3,603,188 | ) |          |   | (4,165,244 | )     | 
|Balances at December 31, 2012        |  | $        | 3,680,794  |   |          | $ | 2,224,828  |       | 



Effective on October 1, 2009, we adopted Emerging Issues Task
Force Consensus No. 07-05 Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own
Stock (“EITF 07-05”). EITF 07-05 amended previous guidance related to the determination of whether equity-linked
contracts, such as our convertible debentures, meet the exclusion to bifurcation and derivative classification of the respective
embedded conversion feature. Under EITF 07-05, the embedded conversion option was no longer exempt from bifurcation and derivative
classification because the conversion option was subject to adjustments that are not allowable under the new standard. We have
accounted for the change as a change in accounting principle where the derivative liability in the amount of $1,865,600 was established
and the cumulative effect, which amounted to $872,319, was charged to our opening accumulated deficit on October 1, 2009.



As more fully discussed in Note 6, on February 24, 2010, we
exchanged our convertible debentures for newly issued convertible debentures. This amount represents the change in the fair value
of the compound embedded derivatives between the old and new debentures, which in part arose from the capitalization of accrued
interest and in part arose from other changes to the debentures. As further noted in Note 6, the exchange transaction gave rise
to the extinguishment of the old debentures, and therefore the compound derivative, due to the substantive nature of these changes.
Since an extinguishment is recorded by replacing the carrying value of the old debentures with the fair value of the new debentures,
with a charge to expense for the difference, this amount is included in the extinguishment loss that we recorded in connection
with the exchange.



56







Fair Value Considerations



We adopted the provisions of ASC 820 Fair Value Measurements
and Disclosures(“ASC 820”) with respect to our financial instruments. As required by ASC 820, assets and liabilities
measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value
measurement. Our derivative financial instruments which are required to be measured at fair value on a recurring basis under of
ASC 815 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of the assets or liabilities.



We selected the Monte Carlo Simulations valuation technique
to fair value the compound embedded derivative because we believe that this technique is reflective of all significant assumption
types, and ranges of assumption inputs, that market participants would likely consider in transactions involving such types of
derivatives while the financial instruments were outstanding. Such assumptions include, among other inputs, interest risk assumptions,
credit risk assumptions and redemption behaviors in addition to traditional inputs for option models such as market trading volatility
and risk free rates. On June 29, 2011, we valued the compound embedded derivatives at intrinsic value since there was no or no
material remaining time value associated with mature or near mature financial instruments.



|                                                                        |  | June 29, |      | September 30, |             | June 30, |            
|----------------------------------------------------------------------- |  | -------- | ---- | ------------- | ----------- | -------- | -----------
|                                                                        |  | 2011     |      | 2010          |             | 2010     |            
|Quoted market price of our common stock                                 |  | $        | 0.69 |               | $0.25       |          | $0.18      
|Contractual conversion rate                                             |  | $        | 0.25 |               | $0.25       |          | $0.25      
|Implied expected term (years)                                           |  |          | NA   |               | 0.59—0.92   |          | 0.96—1.18  
|Market volatility:                                                      |  |          |      |               |             |          |            
|Range of volatilities                                                   |  |          | NA   |               | 134%-160%   |          | 113%-127%  
|Equivalent volatility                                                   |  |          | NA   |               | 145%—152%   |          | 118%-125%  
|Market-risk adjusted interest rate:                                     |  |          |      |               |             |          |            
|Range of rates                                                          |  |          | NA   |               | 12.0%       |          | 12.0%      
|Equivalent market-risk adjusted interest rate                           |  |          | NA   |               | 12.0%       |          | 12.0%      
|Credit-risk adjusted yield rate:                                        |  |          |      |               |             |          |            
|Range of rates                                                          |  |          | NA   |               | 7.5%-8.0%   |          | 8.0%-8.8%  
|Equivalent credit-risk adjusted yield rate                              |  |          | NA   |               | 7.7%        |          | 8.4%       
|Risk-free rates using yields on zero coupon US Treasury Security rates: |  |          |      |               |             |          |            
|Range of rates                                                          |  |          | NA   |               | 0.27%-0.64% |          | 0.32%-1.00%



The warrants are valued using the Binomial Lattice Valuation
technique on June 30, 2011 and Black-Scholes-Merton (“BSM”) valuation methodology on September 30, 2010, adjusted to
give effect to the anti-dilution features, because that model embodies all of the relevant assumptions that address the features
underlying these instruments. Significant assumptions were as follows as of June 30, 2011 and September 30, 2010:



|June 29, 2011 (Assumptions for            |  | Series D    |  | BD       |  | BD       | 
|----------------------------------------- |  | ----------- |  | -------- |  | -------- | 
|BD Warrants are January 11, 2011)         |  | Warrants    |  | Warrants |  | Warrants | 
|Contractual strike price                  |  | $0.50       |  | —        |  | —        | 
|Adjusted strike price (for anti-dilution) |  | $0.69       |  | —        |  | —        | 
|Term to expiration                        |  | 3.6-4.3     |  | —        |  | —        | 
|Implied expected life                     |  | 3.6-4.3     |  | —        |  | —        | 
|Volatility range                          |  | 94%-114%    |  | —        |  | —        | 
|Effective volatility                      |  | 107%-107%   |  | —        |  | —        | 
|Risk-free rate ranges                     |  | 0.02%-1.47% |  | —        |  | —        | 
|Effective risk free rates                 |  | 0.42%-0.51% |  | —        |  | —        | 



|September 30, 2010       |  | Series D

Warrants |       | BD
        Warrants |               | BD
        Warrants |              
|------------------------ |  | ------------------ | ----- | ------------------- | ------------- | ------------------- | -------------
|Contractual strike price |  | $                  | 0.50  |                     | $0.25         |                     | $0.50        
|Adjusted strike price    |  | $                  | 0.43  |                     | $0.23         |                     | $0.43        
|Volatility               |  |                    | 107.9 | %                   | 111.5%-116.7% |                     | 111.5%-116.7%
|Term to expiration       |  |                    | 4.40  |                     | 3.33—4.00     |                     | 3.33—4.00    
|Risk-free rate           |  |                    | 1.27  |                     | 0.64-1.27     |                     | 0.64-1.27    
|Dividends                |  |                    | —     |                     | —             |                     | —            



57







Note 9 – Commitment and Contingencies:



On May 16, 2011, we executed an Amended Employment Agreement
with Mr. Kyriakides our Chief Executive Officer and President as follows:



Salary set at $199,000 per year and $250,000
starting on January 1, 2012.



Three year term with automatic renewal
of two years.



Change of control cash payment set at $1,500,000



On April 4, 2012, MagicJack Vocaltec Ltd. filed a complaint
in United States District Court For the Southern District of Florida, Civil Action No.: 9:12-cv-80360-DMM,against the Company,
alleging patent infringement, seeking injunctive relief and damages as a result of the alleged patent infringement. The Company
answered the complaint, denying all of its material allegations, asserting a number of affirmative defenses, and seeking counterclaims
for declaratory relief. The Company’s patent counsel has provided an opinion that the NetTalk DUO does not infringe their
patent. MagicJack Vocaltec Ltd. and NetTalk filed a Joint Stipulation and motion for the dismissal.Effective November 2012, the federal court has dismissed the entire case with prejudice, including
all claims, counterclaims, defenses and causes of action.



On September 21, 2012, NetTalk.com, Inc. filed a complaint in
United States District Court For the Southern District of Florida, Civil Action No.: 9:12-cv-81022-CIV-MIDDLEBROOK/BRANNON,against MAGICJACK VOCALTECLTD, MAGIJACK HOLDINGS CORPORATION f/k/a YMAX HOLDINGS CORPORATION and DANIEL BORISLOW, In the complaint,
we allege patent infringement by the defendants, seeking injunctive relief and damages as a result of the alleged patent infringement
by defendants.



On September 14, 2012, a supplier filed a complaint in the United
States District Court for the Southern District of Florida, Case No.: 1:12-cv-23366-FAM, alleging breach of contract by
the Company and seeking damages of not less than $473,319 due to such alleged breach. The supplier alleges in the complaint that
Net Talk failed to pay for component parts manufactured for the Company’s products. The Company filed an answer to the complaint
denying the supplier’s allegations and asserting affirmative defenses.



NetTalk reached a settlement with the supplier
and as of December 31, 2012 we are in full compliance with said settlement.



On November 26, 2012, a supplier to the
Client, Broadvox, LLC (“Broadvox”), filed a complaint in the Court of Common Pleas, Cuyahoga County, Ohio, Case
No.: CV-12-796095, alleging breach of contract by the Company and seeking damages of not less than $111,701 due to such alleged
breach. The Company and Broadvox entered into a settlement agreement providing for the payment of all past due amounts.



A Statement of Claim was served by DACS Marketing & Sponsorship
Inc. on NetTalk.com Inc. on June 20, 2012. The claim is for $125,834.21 for amounts DACS claims is owing to it pursuant to its
agreement as well as $126,000 for general damages for breach of contract.



A Statement of Defence was delivered on August
31, 2012, denying all claims.



The following offers to settle have been made by the parties
but to date, the parties have not accepted any proposed offers:



| | 1. | November 7, 2012, NetTalk offered to settle the action by payment to DACS of $5,000.
| | -- | ------------------------------------------------------------------------------------

| | 2. | December 18, 2012, DACS offered to settle the action by NetTalk paying to DACS the sum of $85,000.
| | -- | --------------------------------------------------------------------------------------------------

| | 3. | December 27, 2012, NetTalk offered to settle the action by payment to DACS of $10,000.
| | -- | --------------------------------------------------------------------------------------



To date, we have heard nothing further from the lawyer for DACS.



Note 10 - Related party:



During the year ended December 31, 2012
we incurred and paid consulting service fees of $62,100 to a related party.



58







Note 11 – Income taxes:



Our income tax provision (benefit) for the year ended December
31, 2012, three months ended December 31, 2011 and fiscal years ended September 30, 2011 and 2011 consisted of the following:



Our effective tax rate differs from statutory rates, as follows:



|                                   |  | 12/31/2012 |       |    | 12/31/2011 |  |       | 09/30/2011 |  |  | 09/30/2010 |   
|---------------------------------- |  | ---------- | ----- | -- | ---------- |  | ----- | ---------- |  |  | ---------- | --
|Federal statutory rate             |  |            | 34.0  | %  |            |  | 34.0  | %          |  |  | 34.0       | % 
|State rate, net of federal benefit |  |            | 3.6   | %  |            |  | 3.6   | %          |  |  | 3.6        | % 
|Derivative income                  |  |            | 0.0   | %  |            |  | 4.3   | %          |  |  | 4.3        | % 
|Change in valuation allowance      |  |            | (37.6 | )% |            |  | (41.9 | )%         |  |  | (41.9      | )%
|Effective tax rate                 |  |            | 0.0   | %  |            |  | 0.0   | %          |  |  | 0.0        | % 



Deferred tax assets and (liabilities) reflects the net tax effect
of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used
for income tax purposes. Significant components of our deferred taxes are as follows:



|                                                  |  | 12/31/2012 |             |   | 12/31/2011 |   |            | 09/30/2011 |  |   | 09/30/2010 |  
|------------------------------------------------- |  | ---------- | ----------- | - | ---------- | - | ---------- | ---------- |  | - | ---------- | -
|Property and
    fixed assets                     |  | $          | (58,032     | ) |            | $ | (34,102    | )          |  | $ | (37,723    | )
|Reserves and accruals                             |  |            | 8,554       |   |            |   | 8,554      |            |  |   | 8,554      |  
|Net
    operating loss carry forwards             |  |            | 12,355,046  |   |            |   | 7,069,018  |            |  |   | 5,786,123  |  
|                                                  |  |            | 12,305,568  |   |            |   | 7,043,470  |            |  |   | 5,756,954  |  
|Valuation
    allowance                           |  |            | (12,305,568 | ) |            |   | (7,043,470 | )          |  |   | (5,756,954 | )
|Net
    deferred taxes, after valuation allowance |  | $          | -           |   |            | $ | -          |            |  | $ | -          |  



Our valuation allowance increased $5, 262,098 and $1,286,506
during the period ended December 31, 2012 and December 31, 2011, respectively.



Based on our prior earnings and insufficiency of income to be
utilized in carry back years and future taxable income, we have concluded that it is more likely than not that these net deferred
tax assets will not be utilized. Therefore, a valuation allowance has been set up to reduce deferred tax assets to zero. As of
December 31, 2012, we have net operating loss carry forwards amounting to $35,490,620 that are available, subject to limitations,
to offset future taxable income through 2031. The company is also not taking any uncertain tax position in the calculation of current
or deferred taxes.



The Company files income tax returns for U. S. Federal and State
of Florida purposes. The Company is not currently under any tax examination, but the statute of limitations has not yet expired.
The company generally remains subject to examination of its U. S. Federal income tax returns for 2009 and subsequent years as the
Internal Revenue Service has a three year window to assess/collect taxes. In addition, the company also remains subject to examination
of its State of Florida tax returns for 2009 and subsequent years.



Note 12 – Subsequent Events:



On January 11, 2013, we received an additional advance of $400,000
pursuant to the existing lending facility with 1080 NW 163rd Drive, LLC. The additional advance of $400,000 was endorsed by a promissory
note which was consolidated with the initial advance of $1,000,000 from the mortgage on 1080 NW 163rd Drive, LLC. The consolidated
promissory mortgage note has an aggregate principal balance of $1,400,000, accrues interest at 12% per annum, is payable in full
on November 29, 2014, and is secured by our corporate office building, located at 1080 NW 163rd Drive, Miami Gardens, FL 33169.



On February 15, 2013 and April 10, 2013 we received additional
advances of $100,000 and $75,000 from 1080 NW 163rd Drive, LLC. These advances are not evidenced by a formal promissory note. The
additional advances of $100,000 and $75,000 accrue interest at 8% per year, and were payable in full on June 9, 2013. These notes
are now in default.



On February 19, 2013, August 9, 2013, August 14, 2013 and September
3, 2013, the Company’s CEO advanced the Company $25,000, $5,000, $20,000 and $25,000 respectively. These advances are not
evidenced by a formal promissory note. These advances were for working capital and bear no interest and are due on demand.



On April 22, 2013 and May 3, 2013 we received advances from
Vicis in the amount of $50,000 and $25,000, respectively, both due on demand. These advances are not evidenced by a formal promissory
note.



59







On May 31, 2013, we issued a $300,000 face
value, 5% Secured Convertible Promissory Note, due December 1, 2013. This note is convertible into shares of the Company’s
common stock at a rate of $0.08 per share, for a total of 3,750,000 common shares. This note has a second priority security interest,
junior in priority only to the holder of the first priority interest, to all real property of the Company and any and all cash
proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting
obligations and the security therefore or for any right to payment.



On July 15, 2013, we issued a $200,000
face value, 5% Secured Convertible Promissory Note, due January 15, 2014. This note is convertible into shares of the Company’s
common stock at a rate of $0.08 per share, for a total of 2,500,000 common shares. This note has a second priority security interest,
junior in priority only to the holder of the first priority interest, to all real property of the Company and any and all cash
proceeds and/or noncash proceeds of any of the foregoing, including, without limitation, insurance proceeds, and all supporting
obligations and the security therefor or for any right to payment.



On July 7, 2013, August 9, 2013, August
9, 2013, August 15, 2013 and August 22, 2013 we received $111,000, $111,000, $55,000, $75,000 and $125,000 respectively, for working
capital from an outside party. These notes are due on demand and carry a 0% interest rate. Interest will be imputed on these notes
at current market rates.



60