UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q

(Mark One)



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



For the quarter ended March 31, 2013



OR



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



For the transition period from ______ to
______



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 incorporation or organization) | (I.R.S. employer identification no.)



|1080 NW 163rd Drive, Miami Gardens, FL   | 33169     
|---------------------------------------- | ----------
|(Address of principal executive offices) | (Zip code)



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



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 þ  No  ̈



Indicate by check mark whether the registrant has 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes  ̈  No þ



Indicate by check mark whether the registrant is a large 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. (Check one):



|Large accelerated filer   ̈ | Accelerated filer   ̈ | Non-accelerated filer   ̈ | Smaller reporting company  þ
|-------------------------- | -------------------- | ------------------------ | ----------------------------



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ̈  No þ



The Registrant had 61,309,313 shares of Common Stock, par value
$0.001 per share, outstanding as of May 15, 2013.











NET TALK.COM, INC.

FORM 10-Q QUARTERLY REPORT

QUARTER ENDED MARCH 31, 2013

INDEX



|                               |  |                                                                                                                                         |  | Page
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                                         |  |     
|Part I - FINANCIAL INFORMATION |  |                                                                                                                                        
|                               |  |                                                                                                                                         |  |     
|Item 1                         |  | Financial Statements                                                                                                                    |  | 3   
|                               |  |                                                                                                                                         |  |     
|                               |  | Balance Sheets at March 31, 2013 (Unaudited) and December 31, 2012                                                                      |  | 3   
|                               |  |                                                                                                                                         |  |     
|                               |  | Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended
    March     31,     2013     and 2012 (Unaudited) |  | 4   
|                               |  |                                                                                                                                         |  |     
|                               |  | Statements of Cash Flows for the Three Months Ended March 31, 2013  and 2012 (Unaudited)                                                |  | 5   
|                               |  |                                                                                                                                         |  |     
|                               |  | Notes to Financial Statements                                                                                                           |  | 6   
|                               |  |                                                                                                                                         |  |     
|Item 2                         |  | MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                         |  | 21  
|                               |  |                                                                                                                                         |  |     
|Item 3                         |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                              |  | 30  
|                               |  |                                                                                                                                         |  |     
|Item 4                         |  | CONTROLS AND PROCEDURES                                                                                                                 |  | 30  
|                               |  |                                                                                                                                         |  |     
|Part II                        |  | OTHER INFORMATION                                                                                                                       |  |     
|                               |  |                                                                                                                                         |  |     
|Item 1                         |  | LEGAL PROCEEDINGS                                                                                                                       |  | 31  
|                               |  |                                                                                                                                         |  |     
|Item 1A                        |  | RISK FACTORS                                                                                                                            |  | 32  
|                               |  |                                                                                                                                         |  |     
|Item 2                         |  | UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS                                                                                    |  | 32  
|                               |  |                                                                                                                                         |  |     
|Item 3                         |  | DEFAULTS UPON SENIOR SECURITIES                                                                                                         |  | 32  
|                               |  |                                                                                                                                         |  |     
|Item 4                         |  | MINE SAFETY DISCLOSURES                                                                                                                 |  | 32  
|                               |  |                                                                                                                                         |  |     
|Item 5                         |  | OTHER INFORMATION                                                                                                                       |  | 32  
|                               |  |                                                                                                                                         |  |     
|Item 6                         |  | EXHIBITS                                                                                                                                |  | 32  
|                               |  |                                                                                                                                         |  |     
|Item 9                         |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                    |  | 32  



2







NET TALK.COM, INC.

Balance Sheet



|                                                                                                                                                      |  | March 31, |             |   | December 31, |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ----------- | - | ------------ | -
|                                                                                                                                                      |  | 2013      |             |   | 2012         |  
|Assets                                                                                                                                                |  |           |             |   |              |  
|Current assets:                                                                                                                                       |  |           |             |   |              |  
|Cash and cash equivalents                                                                                                                             |  | $         | 29,050      |   |              | $
|Restricted cash                                                                                                                                       |  |           | 115,530     |   |              |  
|Accounts receivable, net                                                                                                                              |  |           | 350,509     |   |              |  
|Inventory                                                                                                                                             |  |           | 1,240,741   |   |              |  
|Prepaid expenses
    and other current assets                                                                                                         |  |           | 200,785     |   |              |  
|Total current assets                                                                                                                                  |  |           | 1,936,615   |   |              |  
|                                                                                                                                                      |  |           |             |   |              |  
|Property and equipment, net                                                                                                                           |  |           | 2,928,762   |   |              |  
|Intangible assets, net                                                                                                                                |  |           | 196,753     |   |              |  
|Other assets                                                                                                                                          |  |           | 37,253      |   |              |  
|Total assets                                                                                                                                          |  | $         | 5,099,383   |   |              | $
|                                                                                                                                                      |  |           |             |   |              |  
|Liabilities and Equity                                                                                                                                |  |           |             |   |              |  
|Current liabilities:                                                                                                                                  |  |           |             |   |              |  
|Accounts payable                                                                                                                                      |  | $         | 2,258,240   |   |              | $
|Accrued dividends                                                                                                                                     |  |           | 1,451,116   |   |              |  
|Accrued liabilities                                                                                                                                   |  |           | 691,043     |   |              |  
|Deferred revenue                                                                                                                                      |  |           | 2,289,168   |   |              |  
|Senior debentures                                                                                                                                     |  |           | 15,595,695  |   |              |  
|Demand notes                                                                                                                                          |  |           | 400,000     |   |              |  
|Total current liabilities                                                                                                                             |  |           | 22,685,262  |   |              |  
|Mortgage payable                                                                                                                                      |  |           | 1,400,000   |   |              |  
|Total liabilities                                                                                                                                     |  |           | 24,085,262  |   |              |  
|Redeemable preferred stock, $.001 par value, 10,000,000 shares
    authorized, 500 issued and outstanding as of March 31, 2013 and December 31, 2012. |  |           | 5,647,573   |   |              |  
|                                                                                                                                                      |  |           |             |   |              |  
|Stockholders’ Deficit                                                                                                                                 |  |           |             |   |              |  
|Common stock, $.001 par value                                                                                                                         |  |           |             |   |              |  
|Authorized: 300,000,000 shares                                                                                                                        |  |           |             |   |              |  
|Issued:    60,251,355 shares at March
    31, 2013                                                                                                    |  |           |             |   |              |  
|60,251,355 shares at December 31, 2012                                                                                                                |  |           | 60,260      |   |              |  
|                                                                                                                                                      |  |           |             |   |              |  
|Additional paid in capital                                                                                                                            |  |           | 33,665,863  |   |              |  
|                                                                                                                                                      |  |           |             |   |              |  
|Retained (deficit) earnings                                                                                                                           |  |           | (58,359,575 | ) |              |  
|                                                                                                                                                      |  |           |             |   |              |  
|Total stockholders' deficit                                                                                                                           |  |           | (24,633,452 | ) |              |  
|Total liabilities, redeemable preferred stock and stockholders'
    deficit                                                                           |  | $         | 5,099,383   |   |              | $



See accompanying notes to financial
statements.



3







NET TALK.COM, INC

Statements of Operations and Comprehensive
Income (Loss)



For the three months ended March 31, 2013
and 2012

(Unaudited)



|                                        |  | Three months |            |   | Three months |  
|--------------------------------------- |  | ------------ | ---------- | - | ------------ | -
|                                        |  | ended        |            |   | ended        |  
|                                        |  | March 31,    |            |   | March 31,    |  
|                                        |  | 2013         |            |   | 2012         |  
|Revenues                                |  |              |            |   |              |  
|Sale of DUO products                    |  | $            | 317,601    |   |              | $
|Renewals and access charges             |  |              | 1,137,295  |   |              |  
|Other                                   |  |              | 98,369     |   |              |  
|Total revenue                           |  |              | 1,553,265  |   |              |  
|                                        |  |              |            |   |              |  
|Cost of sales                           |  |              |            |   |              |  
|Cost of DUO products                    |  |              | 503,624    |   |              |  
|Network and carrier charges             |  |              | 742,888    |   |              |  
|Other                                   |  |              | 103,072    |   |              |  
|Total cost of sales                     |  |              | 1,349,584  |   |              |  
|                                        |  |              |            |   |              |  
|Gross margin                            |  |              | 203,681    |   |              |  
|                                        |  |              |            |   |              |  
|Expenses                                |  |              |            |   |              |  
|Advertising and marketing               |  |              | 93,112     |   |              |  
|Compensation and benefits               |  |              | 374,423    |   |              |  
|Professional fees                       |  |              | 114,185    |   |              |  
|Depreciation and amortization           |  |              | 77,463     |   |              |  
|Research and development                |  |              | 296,003    |   |              |  
|General and administrative expenses     |  |              | 482,415    |   |              |  
|Total operating expenses                |  |              | 1,437,601  |   |              |  
|Loss from operations                    |  |              | (1,233,920 | ) |              |  
|Other (expenses) income:                |  |              |            |   |              |  
|Interest expense                        |  |              | (371,939   | ) |              |  
|Interest income                         |  |              | -          |   |              |  
|Total other (expense)                   |  |              | (371,939   | ) |              |  
|Loss before income tax                  |  |              | (1,605,859 | ) |              |  
|Income tax (expense) benefit            |  |              | -          |   |              |  
|                                        |  |              |            |   |              |  
|Net loss and comprehensive loss         |  | $            | (1,605,859 | ) |              | $
|                                        |  |              |            |   |              |  
|Basic and diluted loss per common share |  | $            | (0.03      | ) |              | $



See accompanying notes to financial
statements.



4







Net Talk.Com, Inc

Statements of Cash Flows

(Unaudited)



|                                                                              |  | Three Months Ended |           
|----------------------------------------------------------------------------- |  | ------------------ | ----------
|                                                                              |  | March 31, 2013     |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                          |  |                    |           
|Net loss                                                                      |  | $                  | (1,605,859
|Adjustments to reconcile net (loss) to net cash used in operating activities: |  |                    |           
|Depreciation and amortization                                                 |  |                    | 77,463    
|Amortization of discount on debt                                              |  |                    | 230,359   
|Recognition of deferred revenue                                               |  |                    | (1,190,568
|Changes in operating assets and liabilities :                                 |  |                    |           
|Restricted cash                                                               |  |                    | (271      
|Accounts receivable                                                           |  |                    | 121,724   
|Inventories                                                                   |  |                    | 227,033   
|Prepaid expenses                                                              |  |                    | 84,123    
|Deferred revenues                                                             |  |                    | 1,233,684 
|Accounts payable                                                              |  |                    | 46,618    
|Accrued liabilities                                                           |  |                    | 213,300   
|Net cash used in operating activities                                         |  |                    | (562,394  
|                                                                              |  |                    |           
|Cash Flows From Investing Activities                                          |  |                    |           
|Purchase of property and equipment                                            |  |                    | (8,446    
|Investment in intangible assets                                               |  |                    | (21,457   
|Net cash used in investing activities                                         |  |                    | (29,903   
|                                                                              |  |                    |           
|Cash Flows From Financing Activities                                          |  |                    |           
|Borrowings:                                                                   |  |                    |           
|Proceeds from demand notes                                                    |  |                    | 125,000   
|Proceeds from mortgage note                                                   |  |                    | 400,000   
|Issue of common stock                                                         |  |                    | -         
|Net cash provided by financing activities                                     |  |                    | 525,000   
|Net Decrease in Cash and Cash Equivalents                                     |  |                    | (67,297   
|Cash and cash equivalents -  beginning of period                              |  |                    | 96,347    
|                                                                              |  |                    |           
|Cash and cash equivalents -  end of period                                    |  |                    | 29,050    



See accompanying notes to financial
statements.



5







NET TALK.COM, INC.

Notes to Unaudited Financial Statements



Note 1 – Nature of Business Operations



NET TALK.COM, INC. (“NetTalk”
or the “Company”) was incorporated on May 1, 2006 under the laws of the State of Florida, under the name Discover
Screens Inc. On September 10, 2008 the Company changed its name to NetTalk.com Inc. 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 DUOWIFI, analog telephone adapters that provide connectivity for analog telephones and faxes to home,
home office or corporate local area networks (“LAN”). Our DUO products 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 products provide one USB port, one Ethernet port and one analog telephone port. A full suite of internet
protocol features is available to maximize universal connectivity. In addition, analog telephones attached to our DUO products
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 - Summary of Significant Accounting Policies



Basis of presentation



The accompanying unaudited interim financial
statements are presented in U.S. dollars in conformity with accounting principles generally accepted in the United States (“GAAP”)
and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) for reporting
of interim financial information. Pursuant to such rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been condensed or omitted. However, the unaudited condensed
financial information includes all adjustments which are, in the opinion of management, necessary to fairly present the financial
position and the results of operations for the interim periods presented. The operations for the three months ended March 31,
2013 are not necessarily indicative of the results for the year ending December 31, 2013.



The
balance sheet as of December 31, 2012 was derived from audited financial statements included in our 2012
Annual Report on Form 10-K but does not include all disclosures required by GAAP. These consolidated financial statements should
be read in conjunction with our December 31, 2012 consolidated financial statements included in our 2012 Annual
Report on Form 10-K and the notes to the financial statements included therein,filed with the Securities and Exchange
Commission.



Use of Estimates



The preparation of financial statements
in conformity with GAAP 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. Actual results could differ significantly from these estimates and assumptions, and the differences could be material.



Risk factors



Our Form 10 Q 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
2 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.



6







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
Quarterly Report on Form 10-Q and the other documents that we will file from time to time with the SEC.



RISKS RELATED TO OUR BUSINESS



We have never sustained profits and our
losses could continue. Without sufficient additional capital 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 recorded net losses of $1,605,859 and
$3,533,013 for the three month ended March 31, 2013 and 2012, respectively; net losses of $14,715,006 and $28,249,635, for the
years ended December 31, 2012 and 2011, respectively; net losses of $1,367,216 for the three months ended December 31, 2010 and
for fiscal year ended September 30, 2010 we recorded net losses of $6,399,963. As of March 31, 2013, we were indebted for $15,595,695
in current senior debentures, $400,000 in demand notes and $1,400,000 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.



Going concern and management’s
plans



The presentation of financial statements
in accordance with GAAP contemplates that operations will be sustained for a reasonable period. However, we have incurred operating
losses of $1,605,859 and $3,533,013 during the three months ended March 31, 2013 and 2012, respectively. The company is also highly
leveraged with $15,995,695 in senior debentures and demand notes and $1,400,000 in mortgage debt. In addition, during these periods,
we used cash of $562,394 and $1,656,251, 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, due 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.



7







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.



During the first quarter of 2013, the
company received $400,000 of funding from an additional advance on a promissory note on 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.



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 May 31, 2013, the Company issued to
Samer Bishay 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, the Company issued to Samer Bishay 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 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, are non-interest bearing
and are due on demand. Interest will be imputed on these notes at current market rates.



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 formal promissory
notes.



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 is non-interest bearing. Interest will be imputed on
these notes at current market rates.



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.



8







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 in domestic
and Canadian bank accounts; the balances in our domestic accounts may at times exceed the FDIC limits. Management believes cash
and cash equivalent balances are not exposed to significant credit risk due to the financial position of the depository institutions
in which these deposits are held.



Accounts receivables



In December 2011, we entered into an accounts
receivable factoring arrangement with a financial institution (the “Factor”). Pursuant to the terms of this arrangement,
from time to time we may sell to the Factor certain of our accounts receivable balances on a non-recourse basis for credit approved
accounts. The Factor shall then remit 80% of the accounts receivable balance, with the remaining balance, less fees to be forwarded
once the Factor collects the full accounts receivable balance from the customer. Factoring fees range from 7.3% to 9% of the face
value of the invoice factored, determined by the number of days required for collection of the invoice. We expect to use this
factoring arrangement periodically to assist with general working capital requirements.



We also grant to the factor, as security
for all present and future obligations owing to factor, a continuing security interest in all of our existing and later acquired
receivables.



Inventory



Inventories are recorded at the lower of cost or net realizable
value.



|                                                  |  | March 31, |           |  | December 31, |  
|------------------------------------------------- |  | --------- | --------- |  | ------------ | -
|                                                  |  | 2013      |           |  | 2012         |  
|                                                  |  |           |           |  |              |  
|Productive material, work in process and supplies |  | $         | 654,250   |  |              | $
|Finished products                                 |  |           | 586,491   |  |              |  
|Total                                             |  | $         | 1,240,741 |  |              | $



During the three months ended March 31,
2013 and for the year ended December 31, 2012, we evaluated our inventory for impairments in accordance with our lower of cost
or net realizable value analyses. Based on our analysis no impairments were deemed necessary to our finished goods inventories.



At March 31, 2013, $113,305 of our finished goods inventory
is held on consignment at one of our distributors.



Fair Value of Financial Instruments



A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The
three levels of valuation hierarchy are defined as follows:



Level 1 -
inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.



Level 2 -
inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.



Level 3 -
inputs to the valuation methodology are unobservable and significant to the fair value measurement.



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. The carrying amounts of debt obligations approximate their fair
values as the terms are comparable to terms currently offered by local lending institutions for arrangements with similar terms
to industry peers with comparable credit characteristics.



9







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 historical
cost.



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.



Property and Equipment



Property, equipment and telecommunication
equipment includes acquired assets which consist of buildings, 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 ranges 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 acquisition cost, which
encompassed estimates of their respective and 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.



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;
with the associated cost of shipping included as a component in cost of product sales.



Operating revenue consists of customer
equipment sales of our products the NetTalk DUO (“DUO”); DUO II and DUO WIFI, telecommunication service revenues and
shipping and handling revenues.



Our DUO products 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
in the sale price at time of sale and billed subsequently thereafter. Therefore, revenue recognition on our DUO products are fully
recognized at the time of our customer equipment sale, and the one year telephone service is amortized over a 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.



Impairments and Disposals



We evaluate our tangible and definite-lived
intangible assets for impairment annually or more frequently in the presence ofcircumstances 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.



10







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 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. Thereafter, all software development costs shall be capitalized and subsequently
reported at the lower of unamortized cost or net realizable value. Development 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. At this time our main products, the DUO, DUO II and DUOWIFI are being sold in the market place. Therefore,
research and development cost reported in our financial statements relates to pre–marketing costs and are expensed accordingly.



|                                        |  | Three Months Ended |        
|--------------------------------------- |  | ------------------ | -------
|                                        |  | March 31,          |        
|                                        |  | 2013               |        
|Components of research and development: |  |                    |        
|                                        |  |                    |        
|Product development and engineering     |  | $                  | 7,528  
|Payroll and benefits                    |  |                    | 288,475
|                                        |  | $                  | 296,003



Reclassification



Certain reclassifications have been made
to prior years financial statements in order to conform to the current quarter’s presentation.



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 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.



Stock Option Plans



In 2009, 2011 and 2012, NetTalk adopted
various Stock Option Plans which is intended to advance the interests of the Company’s shareholders
by enhancing the Company’s ability to attract, retain and motivate personnel who make (or are expected to make) important
contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and
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 provides 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.



On November 15, 2009, NetTalk adopted
the 2010 Stock Option 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. During 2010, we issued 10,000,000 shares of common stock to
our employees. 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.



On June 15, 2011, NetTalk adopted the
2011 Stock Option 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. During 2012, we issued 20,000,000 shares of common stock to our
employees. 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.



11







On July 25, 2012, NetTalk adopted the
2012 Stock Option 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.



Certain risks and concentration



Our largest manufacturer accounted for
approximately 52% and 36% of our cost of goods sold for the three months ended March 31, 2013 and 2012, respectively.



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



On September 26, 2013, the Company elected
to terminate the “Consignment Agreement” based on the specified contractual terms.



Redeemable Preferred Stock



Redeemable preferred stock (and other
redeemable financial instruments we may enter into) is initially evaluated for possible classification as liabilities under ASC
480 Distinguishing Liabilities from Equity. Redeemable preferred stock classified as liabilities is recorded and carried at fair
value. 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 6 for further disclosures about our redeemable preferred stock.



Loss per common share



Basic earnings (loss) per share is calculated
by dividing net income (loss) attributable to the Company available to common stockholders by the weighted average number of common
shares outstanding for the three months ended March 31, 2013 and 2012. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the Company. In accordance with ASC 260, the effect of potentially
dilutive securities is not considered during periods of loss or if the effect is anti-dilutive. 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. If required, we compute the effects on diluted loss per common share arising from
convertible securities using the if-converted method.



The following table represents a reconciliation
of the net income and weighted average shares outstanding for the calculation of basic and diluted earnings per share for the
three months ended March 31, 2013 and 2012:





|                                                      |  | Three Months Ended |           
|----------------------------------------------------- |  | ------------------ | ----------
|                                                      |  | March 31,          |           
|                                                      |  | 2013               |           
|Numerator:                                            |  |                    |           
|Basic and diluted - net
    loss                      |  | $                  | (1,605,859
|                                                      |  |                    |           
|Denominator:                                          |  |                    |           
|Basic and diluted weighted average shares outstanding |  |                    | 60,251,355



12







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 becomes effective in the second quarter of fiscal 2012. We do not expect the adoption of this update to have
a material impact on our consolidated financial statements.



In December 2011, the FASB issued amended
guidance requiring companies to disclose information about offsetting and related arrangements to enable users of its financial
statements to understand the effect of those arrangements on its financial position. This guidance is required to be applied retrospectively
for all prior periods presented and is effective for annual periods for fiscal years beginning on or after January 1, 2013,
and interim periods within those annual fiscal years. The adoption of this standard did not have an impact on the results of operations
and financial condition.



In July 2012, the FASB issued ASU 2012-02,
“Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in
Accounting Standards Update No. 2012-02. This update amends ASU 2011-08, Intangibles – Goodwill and Other (Topic 350):
Testing Indefinite-Lived Intangible Assets for Impairment and permits an entity first to assess qualitative factors to determine
whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it
is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other
- General Intangibles Other than Goodwill. The amendments are effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment
tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual
or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. As the Company
does not currently have any indefinite-lived intangible assets, the adoption of ASU 2012-02 did not impact our financial position
or results of operations.



Income Taxes



We record our income taxes using the asset
and liability method. Under this method, the future tax consequences attributed to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax basis are reflected as tax assets and liabilities
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences reverse. Changes
in these deferred tax assets and liabilities are reflected in the provision for income taxes. However, we are required to evaluate
the recoverability of net deferred tax assets. If it is more likely than not that some portion of a net deferred tax asset will
not be realized, a valuation allowance is recognized with a charge to the provision for income taxes.



Note 3 – Property and equipment



Telecommunications equipment and other
property consist of the following:



|                                |  |      |  | March 31, |           |   | December 31, |  
|------------------------------- |  | ---- |  | --------- | --------- | - | ------------ | -
|                                |  | Life |  | 2013      |           |   | 2012         |  
|                                |  |      |  |           |           |   |              |  
|Telecommunication equipment     |  | 7    |  | $         | 356,154   |   |              | $
|Computer equipment              |  | 5    |  |           | 169,754   |   |              |  
|Building                        |  | 35   |  |           | 2,448,364 |   |              |  
|Building improvements           |  | 10   |  |           | 86,442    |   |              |  
|Office equipment and furnishing |  | 7    |  |           | 48,212    |   |              |  
|Purchased software              |  | 3    |  |           | 34,147    |   |              |  
|Land                            |  |      |  |           | 270,000   |   |              |  
|Sub – total                     |  |      |  |           | 3,413,073 |   |              |  
|Less: accumulated depreciation  |  |      |  |           | (484,311  | ) |              |  
|Property and equipment, net     |  |      |  | $         | 2,928,762 |   |              | $



13







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. Depreciation expense on the above assets was $59,752 and $45,786 for the
three months ending March 31, 2013 and 2012, respectively.



Note 4 - Intangible Assets



Intangible assets consist of following:



|                                      |  |      |  | March 31, |           |   | December 31, |  
|------------------------------------- |  | ---- |  | --------- | --------- | - | ------------ | -
|                                      |  | Life |  | 2013      |           |   | 2012         |  
|                                      |  |      |  |           |           |   |              |  
|Trademarks National and International |  | 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    |  |           | 76,693    |   |              |  
|                                      |  |      |  |           | 1,003,681 |   |              |  
|Less accumulated amortization         |  |      |  |           | (806,928  | ) |              |  
|Intangible assets, net                |  |      |  | $         | 196,753   |   |              | $



Amortization on the above assets was $17,711
and $16,773 for the three months ending March 31, 2013 and 2012, respectively. The weighted average amortization period for the
intangible assets is 18 years.



The estimated future amortization of intangible
assets for each of the following years as of March 31, 2013, is as follows:



|2013         |  |   | 53,133  | 
|------------ |  | - | ------- | 
|2014         |  |   | 70,844  | 
|2015         |  |   | 3,750   | 
|Future years |  |   | 69,026  | 
|Total        |  | $ | 196,753 | 



Note 5 – 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.



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.



14







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.



The carrying values our senior debentures
and demand notes consisted of the following as of March 31, 2013 and December 31, 2012:



|                                                            |  | March 31, |            |  | December 31, |  
|----------------------------------------------------------- |  | --------- | ---------- |  | ------------ | -
|                                                            |  | 2013      |            |  | 2012         |  
|                                                            |  |           |            |  |              |  
|$2,000,000 face value 12% debenture, due December 31, 2013  |  | $         | 2,441,429  |  |              | $
|$3,500,000 face value 12% debenture, due December 31, 2013  |  |           | 4,065,111  |  |              |  
|$5,266,130 face value 12% debenture, due December 31, 2013  |  |           | 6,489,155  |  |              |  
|$   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  |  |              |  
|                                                            |  | $         | 15,595,695 |  |              | $
|                                                            |  |           |            |  |              |  
|Demand notes                                                |  | $         | 400,000    |  |              | $



Principal repayments on the senior debentures
are due in full in December 2013.



15







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 over a five year period.



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:



|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 |  |                      | $



|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 |  |                      | $



The fair value of the debentures was computed
based upon the present value of all future cash flows, using credit risk adjusted discount rates ranging from 7.63% to 7.86%.
The 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.



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.



16







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.



2013 Demand Notes and Convertible Debt



On February 15, 2013 we received an additional
advance of $100,000 from 1080 NW 163rd Drive, LLC. This advance is not evidenced by a formal promissory note. This additional
advance accrues interest at 8% per year, and was payable in full on June 9, 2013. This note is now in default.



On February 19, 2013, the Company’s
CEO advanced the Company $25,000. This advance is not evidenced by a formal promissory note. The advance was for working capital,
is non-interest bearing and is due on demand. Interest will be imputed on these notes at current market rates.



Subsequent to March 31, 2013, the Company issued convertible
debt securities and entered into additional demand note agreements.



On April 22, 2013 and May 3, 2013 the Company 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, the Company issued to
Samer Bishay 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 7, 2013, August 9, 2013, August
9, 2013, August 15, 2013 and August 22, 2013 the Company 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 are non-interest bearing. Interest will be imputed
on these notes at current market rates.



On July 15, 2013, the Company issued to Samer Bishay 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 August 9, 2013, August 14, 2013 and
September 3, 2013, the Company’s CEO advanced the Company $5,000, $20,000 and $25,000 respectively. These advances are not
evidenced by a formal promissory note. These advances were for working capital, are non-interest bearing and are due on demand.
Interest will be imputed on these notes at current market rates.



17







Note 6 – 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.



|Redeemable preferred stock consists of the following as of:                                                                                                                                                                                                                          |  | March 31, 2013 |            |   | December 31, 2012 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ---------- | - | ----------------- | -
|Series A Convertible Preferred Stock, par
    value $0.001 per share, stated value $10,000 per share; 500 shares issued and outstanding at March 31, 2013; redemption value
    $5,000,000, and 500 shares issued and outstanding at December 31, 2012; redemption value $5,000,000. |  |                |            |   |                   |  
|Initial carrying value                                                                                                                                                                                                                                                               |  | $              | 13,246,609 |   |                   | $
|Accumulated accretion                                                                                                                                                                                                                                                                |  |                | (7,599,036 | ) |                   |  
|Carrying values                                                                                                                                                                                                                                                                      |  | $              | 5,647,573  |   |                   | $



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.



18







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.



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 7 – 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



19







On September 14, 2012, a supplier to the
Company, Arrow Electronics, Inc. (“Arrow”), 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 Company and Arrow Electronics, Inc. entered into a settlement agreement
providing for the payment of past due amounts. A final order was entered into on December 12, 2012 dismissing the litigation.
As of September 30, 2013, the Company owes Arrow Electronics approximately $123,000 and will continue making frequent payments
until the obligation is satisfied.



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 Defense was
delivered on behalf of the Company 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.



On February 13, 2013, Rates Technology,
Inc. (“RTI”)sent a letter allegingthat the Company breached an agreement dated June 22, 2012; RTI
has threatened litigation. RTI has alleged, among other matters, that the Company breached the agreement by failing to make a
payment of $60,000, breached certain confidentiality provisions in the Agreement, and has failed to timely file its reports under
the Exchange Act. The Company denies RTI’s allegations and intends to defend any lawsuit if brought.



ADP filed a lawsuit against the Company on or about September
1, 2013. The claim is for an amount not exceeding $89,000 for general damages for alleged breach of contract. Company is in the
process of settling this action.



Note 8 - Related party



At March 31, 2013, there is $25,000 Due
to Officers, the amount is non-interest bearing and is due on demand.



Note 9 – Subsequent events



On September 23, 2013 NetTalk.com, Inc.
changed independent accountants from Thomas, Howell, Ferguson, CPA's to Zachary Salum Auditors P.A. Information regarding the
change in independent accountants was reported in NetTalk.com, Inc.’s Current Report on Form 8-K dated September 23, 2013.
There were no disagreements or any reportable events subject to Item 304(b) requiring disclosure.



20







Item 2 – Management Discussion
and Analysis of Financial Conditions and Results of Operations



Our Management’s discussion
and analysis of our financial condition and results of operations should be read in conjunction with the financial statements included
elsewhere in this Quarterly Report and the audited financial statements for the year ended December 31, 2012, included in
our Annual Report on Form 10-K. This Quarterly Report contains, in addition to unaudited historical information, forward-looking
statements, which involve risk and uncertainties. The words “believe,” “expect,” “estimate,”
“may,” “will,” “could,” “plan,” or “continue” and similar expressions
are intended to identify forward-looking statements. Our actual results could differ significantly from the results discussed
in such forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include,
without limitation, those discussed under the headings “Risk Factors” in our 2012 Annual Report on Form 10-K and
this Quarterly Report on Form 10-Q, if any. Readers are urged not to place undue reliance on these forward-looking statements,
which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to (and we expressly disclaim
any obligation to) revise or update any forward-looking statement, whether as a result of new information, subsequent events, or
otherwise (except as may be required by law), in order to reflect any event or circumstance which may arise after the date of this
Quarterly Report on Form 10-Q.



Cautionary
Statement about Forward Looking Statements



Certain statements contained in this Form
10-Q 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 the sections of this prospectus, including the section captioned “Plan of
    Operation”.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



Background



Company and Business



We are a telephone company, which 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 the “DUO WIFI”. The DUO WIFI and DUO II are presently sold and distributed to our customers.
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.



21







Our DUO, DOU 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, DUO II 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, 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.



History and Overview



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



Prior to September 10, 2008, we were
known as Discover Screens, a company dedicated to providing advertising through interactive, audiovisual, information and advertising
portals located in high-traffic indoor venues. Our name and business operations changed in a series of transactions beginning in
December of 2007.



On September 10, 2008, we changed
our name from Discover Screens, Inc. to NetTalk.com, Inc.



On September 10, 2008, we acquired
certain tangible and intangible assets, formerly owned by Interlink Global Corporation (“Interlink”), directly from
Interlink’s creditor who had seized the assets pursuant to a Security and Collateral Agreement.



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.



Our Products



At this time, our main products are the
DUO and DUO WIFI. Our DUO 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 and DUO WIFI both have interface
components so that the customer can purchase multiple units that can communicate with each other allowing simultaneous ringing
from multiple locations.



Our 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.



22







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 products are currently under US Design
Patent No. D674785 and US Patent No. 8,243,722 titled “VOIP Analogue System”. These patents have been issued. US Patent
No. 8,243,722 is currently in the re-review process at the United States Patent and Trademark Office. NetTalk fully expects to
prevail in the re-review process. The Company also has international patents pending in over 123 countries.



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.



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 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. To date, we are fully compliant with CALEA.



23







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 or are applying for
Competitive Local Exchange Carrier (“CLEC”) Licenses in forty three states, as follows:



|Alabama     | Indiana       | Montana    | North Carolina | Utah      
|----------- | ------------- | ---------- | -------------- | ----------
|Arkansas    | Kansas        | Nebraska   | Ohio           | Washington
|California  | Kentucky      | Nevada     | Oregon         | Wisconsin 
|Connecticut | Maryland      | New Jersey | Pennsylvania   |           
|Florida     | Massachusetts | New Mexico | South Dakota   |           
|Georgia     | Missouri      | New York   | 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.



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 iswww.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 DUO, DUO WIFI and DUO II products. 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 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.



24







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 wholesale sales to retail stores.



Geographic Markets



Our primary geographic market is our home
market of South Florida. Our target audience is 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 wholesale sales to retail stores.



Results of Operations

For the Three months ended March 31,
2013 compared to three months ended March 31, 2012



Revenues: Our revenues amounted
to $1,553,265 and $1,056,321 for the three months ended March 31, 2013, and 2012, respectively. The increase in revenues relates
to new products and increase in sales activities due to market penetration and sales to large retailers.



Cost of sales: Our cost of sales
amounted to $1,349,584 and $1,412,297 for the three months ended March 31, 2013, and 2012, respectively. The decrease in cost of
sales relates to production efficiencies quantities of scale.



Gross margin:Our gross margin (loss)
amounted to $203,681 and ($355,976) for the three months ended March 31, 2013, and 2012, respectively. We expected our per unit
manufacturing cost to decrease over time consistent with sales as we take advantages of economies of scale. Further, we are working
with call terminating vendors to reduce our price per minute costs, which we expect to be much lower as we expand our subscriber
base and take advantage of economies of scale and other opportunities.



Advertising and marketing:Our advertising
and marketing expenses amounted to $93,112 and $429,243 for the three months ended March 31, 2013 and 2012, respectively.



Smartphone Application: We released
our Smartphone application during December of 2010. The smart phone application continues to be one of the top downloaded apps
in Canada. We had more than 1,000,000 users of our application at March 31, 2013.



Compensation and Benefits: Our compensation
and benefits expense amounted to $374,423 and $321,996 for the three months ended March 31, 2013 and 2012, respectively. This amount
represents normal salaries and wages paid to management members and employees including marketing and administrative functions.
We continue to increase our technical staff by hiring IT engineers and software developers.



Professional Fees: Our professional
fees amounted to $114,185 and $141,635 for the three months ended March 31, 2013 and 2012, respectively. This amount includes normal
payments and accruals for legal, accounting and other professional services. Our costs associated with legal and accounting fees
will remain higher than historical amounts because, as a publicly traded company, we will incur additional expenses associated
with the services provided by our transfer agent and also with costs incurred for compliance with the reporting requirements of
the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). This involves the preparation and filing
of quarterly and annual reports, as well as, other reporting requirements required under the Exchange Act.



Depreciation and Amortization: Depreciation
and amortization amounted to $77,463 and $62,559 for the three months ended March 31, 2013 and 2012, respectively. These amounts
represent amortization of our long-lived tangible and intangible assets using straight-line methods 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 March 31, 2013, 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.



25







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 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.



|                                        |  | Three Months Ended |        
|--------------------------------------- |  | ------------------ | -------
|                                        |  | March 31,          |        
|                                        |  | 2013               |        
|Components of research and development: |  |                    |        
|                                        |  |                    |        
|Product development and engineering     |  | $                  | 7,528  
|Payroll and benefits                    |  |                    | 288,475
|                                        |  | $                  | 296,003



General and Administrative Expenses:
General and administrative expenses amounted to $482,416 and $582,490 for the three months ended March 31, 2013 and 2012, respectively,
and consisted of general corporate expenses. Included in these expenses are occupancy costs of $0 and $81,105 for the three months
ended March 31, 2013 and d March 31, 2012.



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



|                   |  | March 31, |        
|------------------ |  | --------- | -------
|                   |  | 2013      |        
|Commission         |  | $         | 117,966
|Rent and occupancy |  |           | -      
|Insurance          |  |           | 84,164 
|Taxes and licenses |  |           | 25,270 
|Travel             |  |           | 13,285 
|Other              |  |           | 241,730
|Total              |  | $         | 482,415



Loss from operations: Loss from
operations amounted to ($1,233,920) for the three months ended March 31, 2013 compared to ($2,231,292) for the three months ended
March 31, 2012.



Interest Expense: Interest expense
amounted to $371,939 and $1,301,969 for the three months ended March 31, 2013 and 2012 respectively. Included in these amounts
are stipulated interest under our convertible debentures, the related amortization of premiums and discounts and 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.



Extended maturity dates on existing
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 $3,135,148 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%.



26







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
the 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.



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.



Net loss applicable to common stockholders:



The net loss applicable to common stockholders
amounted to ($1,605,859) and ($3,533,013) for the three months ended March 31, 2013 and 2012, respectively. Net loss applicable
to common stockholders includes extraordinary items such as: derivative income or loss associated with the valuation of debentures,
embedded conversion features and warrants and debt extinguishment expense. These items are non-cash, non-recurring and extraordinary.



Net loss Per Common Share:



Basic income (loss) per common share represents
our income (loss) applicable to common shareholders divided by the weighted average number of common shares outstanding during
the period. Diluted income (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.



Liquidity and Capital Resources



Our principal sources of liquidity
are our cash and cash equivalents balances, cash flow from operations, our lines of credit, and access to financial markets. Our
principal uses of cash are operating expenses, working capital requirements, capital expenditures, repayment of debt. We believe
our sources of liquidity, including cash flow from operations, existing cash and cash equivalents, and borrowing capacity under
our credit facilities will be sufficient to meet our projected cash requirements. We will monitor our capital requirements thereafter
to ensure our needs are in line with available capital resources.



Cash Flows



As of March 31, 2013, our cash and cash
equivalents totaled $29,050 and accounts receivable, net of allowance for doubtful accounts, totaled $350,509, compared to $96,347
and $472,233, respectively, on December 31, 2012. As of March 31, 2013, our accounts payable accrued dividends, and accrued
liabilities were $2,258,240, $1,451,116, and $691,043, respectively, compared to $2,211,622, $1,301,116, and $477,743, respectively,
on December 31, 2012. Also, as of March 31, 2013, we had senior debentures and demand notes payable of $15,595,695 and $400,000
respectively; compared to $15,365,336 and $275,000, respectively, on December 31, 2012. Our largest operating expenditure
currently consists of payroll for approximately $300,000 per month.



Operating activities

For the three
months ended March 31, 2013, net cash used in operating activities amounted to $562,394 primarily attributable to net losses of
$1,605,859 partly offset by a decrease of $121,724 in accounts receivable, a net increase in deferred revenue and the related amortization
of $43,116, and by non-cash charges of $307,822 related to depreciation and discount amortization. Operating expenses were affected
byincreased telecommunication expenses, research and development expenses related to new products, marketing expenses,
travel expenses incurred to visit manufacturing facilities in China, and increases in wage and other general and administrative
expenses, due to new hires.



27







For the three months ended March
31, 2012 net cash used in operating activities amounted to $1,656,251 primarily attributable to net losses of $3,533,013 and
an increase of $226,360 in accounts receivable, partially offset by non-cash charges of $62,559 from depreciation
and amortization; and a net increase of $268,363 in deferred revenues and increases of $597,140 in accounts payable and
accrued liabilities.



Investing activities

For the three months ended March 31,
2013, net cash used in investing activities amounted to $29,903 primarily resulting from cash used for expenditures on intangible
assets.



For the three months ended March 31,
2012, net cash used in investing activities amounted to $56,511 primarily resulting from cash used for the purchase of property
and equipment.



Financing activities

For the three
months ended March 31, 2013, net cash provided by financing activities amounted to $525,000 primarily attributable to proceeds
from additionalfinancing activities on the 12% mortgage payable. On February 15, 2013 we received an additional advance
of $100,000 from 1080 NW 163rd Drive, LLC. This advance is not evidenced by a formal promissory note, accrues interest at 8% per
year, and was payable in full on June 9, 2013. This note is now in default. On February 19, 2013, the Company’s CEO advanced
the Company $25,000. This advance is for working capital and is not evidenced by a formal promissory note, is non-interest bearing
and is due on demand. Interest will be imputed on this note at current market rates. On March 31, 2013,
we had restricted cash of $115,530.



For
the three months ended March 31, 2012, net cash provided by financing activities amounted to $684,844 primarily attributable tofinancing activities from proceeds on a 12% mortgage payable.



Subsequent to the end of the first quarter
the Company entered into various financing agreements described below:



On April 10, 2013 we received an additional
advance of $75,000 from 1080 NW 163rd Drive, LLC. This advance is not evidenced by a formal promissory note. This additional advance
accrues interest at 8% per year, and was payable in full on June 9, 2013. This note is now in default.



On May 31, 2013, the Company issued to
Samer Bishay 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, the Company issued to Samer Bishay 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 August 9, 2013, August 14, 2013 and
September 3, 2013, the Company’s CEO advanced the Company $5,000, $20,000, and $25,000 respectively. These advances are for
working capital and are not evidenced by a formal promissory note, are non-interest bearing and are due on demand. Interest will
be imputed on these notes at current market rates.



On April 22, 2013 and May 3, 2013 the Company 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 July 7, 2013, August 9, 2013, August
9, 2013, August 15, 2013 and August 22, 2013 the Company 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 are non-interest bearing. Interest will be imputed
on these notes at current market rates.



Off-Balance Sheet Arrangements



We did not have any off-balance sheet arrangements
as of March 31, 2013.



28







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 carry 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.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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.



29







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



Our DUO products 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 products are 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.



Item 3 Quantitative and Qualitative
Disclosures About Market Risk



Not
applicable.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 4 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 its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.



As of March 31, 2013, 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 March 31, 2013:



Due to the limited resources, we have insufficient
personnel resources and technical accounting and reporting expertise to properly address all of the accounting matters inherent
in our financial transactions. We do not have a formal audit committee and the Board of Directors does not have a financial expert,
thus we lack the Board oversight role within the financial reporting process.



Our small size prohibits the segregation
of duties and the timely review of accounts payable, expense reporting, inventory management and banking information.



30







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 will be 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.



Changes in Internal Controls.



During the three months ended March 31,
2013, 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.



PART II         OTHER INFORMATION



Item 1.    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 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 NetTalk 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. The
Company and Arrow Electronics, Inc. subsequently entered into a settlement agreement providing for the payment of past due amounts.
A final order was entered into on December 12, 2012 dismissing the litigation.



NetTalk reached a settlement with the supplier
and is in full compliance with said settlement.



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 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 Defense 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.



31







Item 1A. Risk Factors



For
the quarter ended March 31, 2013, there are no material changes to the risk factors set forth in “Item 1A, Risk Factors”
of our Annual Report on Form 10-K.



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



None, except as previously included in
a current report on Form 8 K previously filed.



Item 3.   Defaults Upon Senior Securities



None.

Item 4.   Mine Safety Disclosures



Not Applicable.



Item 5.   Other Information.



None.



Item 6.   Exhibits



|Exhibit No. | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1        | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 15, 2012.                                                                                                                                                                                                                                                                               
|32.1        | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section # 906 of the Sarbanes-Oxley Act of 2002, dated November 15, 2012.                                                                                                                                                                                                                                                                                  
|101.        | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) Condensed Statement of Operations for the three months ended March 31m 2013and 2012, (iii) Condensed Statement of Cash Flows for the three months ended March 31, 2013and 2012, and (iv) Notes to Condensed Financial Statements*.



| | * | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files submitted as Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL

DISCLOSURE



NetTalk.com, Inc. changed independent accountants
in September 2013 from Thomas, Howell, Ferguson, CPA's to Zachary Salum Auditors P.A. Information regarding the change in independent
accountants was reported in NetTalk.com, Inc. Current Report on Form 8-K dated September 23, 2013. There were no disagreements
or any reportable events subject to Item 304(b) requiring disclosure.



32







SIGNATURES



Pursuant to the requirements of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       | NetTalk.com, Inc.                                    
|---------------------- | -----------------------------------------------------
|                       |                                                      
|Date:  October 8, 2013 | By                                                   
|                       | Anastasios Kyriakides                                
|                       | Chief Executive Officer (Principal Executive Officer)



33