UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q


(Mark
One)





[√]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934








For
the quarterly period ended June 30, 2009





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.)




1100 NW 163 Drive,
      Miami, 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 [  ]  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 [√]





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   [√]





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





The
Registrant had 9,749,800 shares of Common Stock, par value $0.001 per share,
outstanding as of July 27, 2009.




1


NetTalk.com,
Inc.
 INDEX
  PART
      I.
              Financial
      Information
              Page
      No.Item
      1.
              Financial
      StatementsCondensed
      Balance Sheets at June 30, 2009 (Unaudited) and September 30,
      2008
              3Condensed
      Statements of Operations (Unaudited) for the Three Months Ended June 30,
      2009 and 2008
              4Condensed
      Statements of Operations (Unaudited) for the Nine Months Ended June
      30,  2009 and 2008
              5Condensed
      Statements of Cash Flows (Unaudited) for the Nine Months Ended June 30,
      2009 and 2008
              6Notes
      to Condensed Consolidated Financial Statements
              8Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
              29Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risks
              39Item
      4T.
              Controls
      and Procedures
              40PART
      II.
              Other
      InformationItem
      1.
              Legal
      Proceedings
              40Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              40Item
      3.
              Defaults
      Upon Senior Securities
              41Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              41Item
      5.
              Other
      Information
              41Item
      6.
              Exhibits
              42SIGNATURES
              42
  2




Part
      I. Financial InformationItem
      1. Financial StatementsNetTalk.com,
      Inc.(A
      Development Stage Enterprise)Condensed
      Balance SheetsJune
      30,
                                                                          
                                                                          
                                                                          September
      30,2009
                                                                          
                                                                          
                                                                          2008(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                                                                          
                                                                          $
                                                                          105,637
                                                                          
                                                                          
                                                                          $
                                                                          342,793Inventory
                                                                          
                                                                          
                                                                          114,928
                                                                          
                                                                          
                                                                          
                                                                          -Prepaid
      advertising
                                                                          
                                                                          
                                                                          353,147
                                                                          
                                                                          
                                                                          
                                                                          -Total
      current assets
                                                                          
                                                                          
                                                                          573,712
                                                                          
                                                                          
                                                                          
                                                                          342,793Telecommunication
      equipment and other property, net
                                                                          
                                                                          
                                                                          695,240
                                                                          
                                                                          
                                                                          
                                                                          749,767Intangible
      assets, net
                                                                          
                                                                          
                                                                          653,658
                                                                          
                                                                          
                                                                          
                                                                          832,743Deferred
      financing costs and other assets
                                                                          
                                                                          
                                                                          173,624
                                                                          
                                                                          
                                                                          
                                                                          23,730Total
      assets
                                                                          
                                                                          $
                                                                          2,096,234
                                                                          
                                                                          
                                                                          $
                                                                          1,949,033Liabilities
      and Stockholders' Deficit:Accounts
      payable
                                                                          
                                                                          $
                                                                          195,288
                                                                          
                                                                          
                                                                          $
                                                                          13,753Due
      to officer
                                                                          
                                                                          
                                                                          100,000
                                                                          
                                                                          
                                                                          
                                                                          -Accrued
      expenses
                                                                          
                                                                          
                                                                          79,000
                                                                          
                                                                          
                                                                          
                                                                          10,000Total
      current liabilities
                                                                          
                                                                          
                                                                          374,288
                                                                          
                                                                          
                                                                          
                                                                          23,753Senior
      secured convertible debentures ($2,600,000 face value)
                                                                          
                                                                          
                                                                          2,011,795
                                                                          
                                                                          
                                                                          
                                                                          1,520,415Derivative
      liabilities
                                                                          
                                                                          
                                                                          841,864
                                                                          
                                                                          
                                                                          
                                                                          563,400Total
      liabilities
                                                                          
                                                                          
                                                                          3,227,947
                                                                          
                                                                          
                                                                          
                                                                          2,107,568Stockholders'
      Deficit:Preferred
      stock $.001 par value, 10,000,000 shares
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -authorized,
      none designated or issuedCommon
      stock, $.001 par value, 300,000,000 shares
                                                                          
                                                                          
                                                                          8,750
                                                                          
                                                                          
                                                                          
                                                                          8,750authorized,
      8,749,800 issued and outstandingCommon
      stock yet to be issued
                                                                          
                                                                          
                                                                          250,000
                                                                          
                                                                          
                                                                          
                                                                          -Additional
      paid in surplus
                                                                          
                                                                          
                                                                          2,684,275
                                                                          
                                                                          
                                                                          
                                                                          2,337,475Accumulated
      deficit
                                                                          
                                                                          
                                                                          (4,074,738
                                                                          )
                                                                          
                                                                          
                                                                          (2,504,760
                                                                          )Total
      stockholders' deficit
                                                                          
                                                                          
                                                                          (1,131,713
                                                                          )
                                                                          
                                                                          
                                                                          (158,535
                                                                          )Total
      liabilities and stockholders' deficit
                                                                          
                                                                          $
                                                                          2,096,234
                                                                          
                                                                          
                                                                          $
                                                                          1,949,033The
      accompanying notes are an integral part of the financial
      statements




3




NetTalk.com,
      Inc.(A
      Development Stage Enterprise)Condensed
      Statements of OperationsUnauditedFor
      the PeriodFrom
      InceptionThree
      Months Ended
                                        
                                        
                                        (May
      1, 2006)June
      30,
                                        
                                        
                                        Through2009
                                        
                                        
                                        2008
                                        
                                        
                                        June
      30, 2009(unaudited)
                                        
                                        
                                        (unaudited)
                                        
                                        
                                        (unaudited)Compensation
      and benefits
                                        
                                        $
                                        92,500
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        1,893,800Professional
      fees
                                        
                                        
                                        95,296
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        794,221Depreciation
      and amortization
                                        
                                        
                                        134,263
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        282,447Research
      and development
                                        
                                        
                                        123,743
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        235,740General
      and administrative expenses
                                        
                                        
                                        112,160
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        308,613Total
      operating expenses
                                        
                                        
                                        557,962
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,514,821Loss
      from continuing operations
                                        
                                        
                                        (557,962
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (3,514,821
                                        )Other
      income (expenses):Interest
      expense
                                        
                                        
                                        (160,830
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (351,918
                                        )Derivative
      income
                                        
                                        
                                        (73,944
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        83,170Interest
      income
                                        
                                        
                                        3,002
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        9,522(231,772
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (259,226
                                        )Loss
      from continuing operations before income taxes
                                        
                                        
                                        (789,734
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (3,774,047
                                        )Benefit
      for income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        8,033Loss
      from continuing operations
                                        
                                        
                                        (789,734
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (3,766,014
                                        )Discontinued
      operationsIncome
      (loss) from discontinued operations(including
      gain on disposal of equipment of$168,083
      in 2008)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (308,725
                                        )Net
      income (loss)
                                        
                                        $
                                        (789,734
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        (4,074,739
                                        )Net
      loss per shares:Continuing
      operations:Basic
      and diluted
                                        
                                        $
                                        (0.09
                                        )
                                        
                                        $
                                        -Weighted
      average shares, basic and diluted
                                        
                                        
                                        8,749,800
                                        
                                        
                                        
                                        599,800Discontinued
      operations:Basic
      and diluted
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Weighted
      average shares, basic and diluted
                                        
                                        
                                        8,749,800
                                        
                                        
                                        
                                        599,800The
      accompanying notes are an integral part of the financial
      statements




4




NetTalk.com,
      Inc.(A
      Development Stage Enterprise)Condensed
      Statements of OperationsUnauditedNine
      Months Ended June 30,2009
                            
                            
                            2008(unaudited)
                            
                            
                            (unaudited)Compensation
      and benefits
                            
                            $
                            349,099
                            
                            
                            $
                            -Professional
      fees
                            
                            
                            231,721
                            
                            
                            
                            -Depreciation
      and amortization
                            
                            
                            267,822
                            
                            
                            
                            -Research
      and development
                            
                            
                            235,740General
      and administrative expenses
                            
                            
                            258,876
                            
                            
                            
                            -Total
      operating expenses
                            
                            
                            1,343,258
                            
                            
                            
                            -Loss
      from continuing operations
                            
                            
                            (1,343,258
                            )
                            
                            
                            -Other
      income (expenses):Interest
      expense
                            
                            
                            (326,448
                            )
                            
                            
                            -Derivative
      income
                            
                            
                            90,970
                            
                            
                            
                            -Interest
      income
                            
                            
                            8,757
                            
                            
                            
                            -(226,721
                            )
                            
                            
                            -Loss
      from continuing operations before income taxes
                            
                            
                            (1,569,979
                            )
                            
                            
                            -Benefit
      for Income taxes
                            
                            
                            -
                            
                            
                            
                            -Loss
      from continuing operations
                            
                            
                            (1,569,979
                            )
                            
                            
                            -Discontinued
      operations (Note 11)Income
      (loss) from discontinued operations(including
      gain on disposal of equipment of$168,083
      in 2008)
                            
                            
                            -
                            
                            
                            
                            186,128Net
      income (loss)
                            
                            $
                            (1,569,979
                            )
                            
                            $
                            186,128Net
      loss per shares:Continuing
      operations:Basic
      and diluted
                            
                            $
                            (0.18
                            )
                            
                            $
                            -Weighted
      average shares, basic and diluted
                            
                            
                            8,749,800
                            
                            
                            
                            599,800Discontinued
      operations:Basic
      and diluted
                            
                            $
                            -
                            
                            
                            $
                            0.31Weighted
      average shares, basic and diluted
                            
                            
                            8,749,800
                            
                            
                            
                            599,800The
      accompanying notes are an integral part of the financial
      statements




5




NetTalk.com,
      Inc.(A
      Development Stage Enterprise)Condensed
      Statements of Cash FlowsUnauditedFor
      the PeriodFrom
      Inception(May
      1, 2006)Nine
      Months Ended June 30,
                                  
                                  
                                  Through2009
                                  
                                  
                                  2008
                                  
                                  
                                  June
      30, 2009(unaudited)
                                  
                                  
                                  (unaudited)
                                  
                                  
                                  (unaudited)Cash
      flow from operating activities:Net
      income (loss)
                                  
                                  $
                                  (1,569,978
                                  )
                                  
                                  $
                                  186,128
                                  
                                  
                                  $
                                  (4,074,739
                                  )Adjustments
      to reconcile net loss to cash used in operations:Depreciation
                                  
                                  
                                  88,738
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  95,142Amortization
                                  
                                  
                                  179,085
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  187,307Amortization
      finance costs
                                  
                                  
                                  43,880
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  44,548Amortization
      premium on debentures
                                  
                                  
                                  85,540
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  84,952Fair
      value of derivatives
                                  
                                  
                                  (90,970
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (83,170
                                  )Issuance
      of common stock to officers as compensation
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,500,000Issuance
      of common stock for consulting fees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  537,500Gain
      on sale of assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (168,083
                                  )Discontinued
      operations, net
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  71,820Expenses
      financed costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  14,802Deferred
      income taxes
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (8,033
                                  )Discontinued
      operations, net
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (186,128
                                  )
                                  
                                  
                                  -Changes
      in assets and liabilities:Changes
      in operating assets
                                  
                                  
                                  (240,925
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (240,925
                                  )Changes
      in operating liabilities
                                  
                                  
                                  250,535
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  274,288Net
      cash used in operating activities
                                  
                                  
                                  (1,254,095
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,764,591
                                  )Cash
      flow used in investing activities:Acquisition
      of fixed assets
                                  
                                  
                                  (34,211
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  414,089Proceeds
      loans from officer
                                  
                                  
                                  -Proceeds
      from sale of assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  85,812Net
      cash used in investing activities
                                  
                                  
                                  (34,211
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  499,901Cash
      flow used in financing activities:Issuance
      of Senior Secured Debentures
                                  
                                  
                                  951,150
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  951,150Due
      to officer
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  100,000Net
      cash used in investing activities
                                  
                                  
                                  1,051,150
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,051,150Changes
      in net assets - discontinued operations:Operating
      activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,856Investing
      activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (95,419
                                  )Financing
      activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  412,740Net
      cash provided by discontinued operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  319,177Net
      increase in cash
                                  
                                  
                                  (237,156
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  105,637Cash
      and equivalents, beginning
                                  
                                  
                                  342,793
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Cash
      and equivalents, ending
                                  
                                  $
                                  105,637
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  105,637The
      accompanying notes are an integral part of the financial
      statements




6




NetTalk.com,
      Inc.(A
      Development Stage Enterprise)Condensed
      Statements of Cash FlowsUnauditedFor
      the PeriodFrom
      Inception(May
      1, 2006)Nine
      Months Ended June 30,
                                
                                Through2009
                                
                                
                                2008
                                
                                
                                June
      30, 2009(unaudited)
                                
                                
                                (unaudited)
                                
                                
                                (unaudited)Supplemental
      disclosures:Cash
      paid for interest
                                
                                $
                                121,000
                                
                                
                                $
                                -
                                
                                
                                $
                                121,000Cash
      paid for income taxes
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                -Supplemental
      disclosures for non-cash items:Property
      and equipment - addtion
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                760,815Intangible
      assets - addition
                                
                                $
                                170,924
                                
                                
                                $
                                -
                                
                                
                                $
                                1,011,888Issuance
      of debentures
                                
                                $
                                405,840
                                
                                
                                $
                                -
                                
                                
                                $
                                1,426,254Issuance
      of warrants
                                
                                $
                                411,352
                                
                                
                                $
                                -
                                
                                
                                $
                                974,752Stock
      issued for note receivable
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                15,000Stock
      issued to placement agent
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                11,457The
      accompanying notes are an integral part of the financial
      statements




7




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 1 - Organization and
Basis of Presentation:
 
 The
accompanying unaudited financial statements as of June 30, 2009, including the
three months ended June 30, 2009 and 2008, and nine months ended June 30, 2009
and 2008 and the period from inception (May 1, 2006) to June 30, 2009 are
unaudited, but have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission for Form 10-Q. Accordingly, they do not include all the
information and footnotes required for complete financial statements. However,
the unaudited condensed financial information included in this report 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 financial statements included in this report should be
read in conjunction with the annual financial statements and notes thereto
included in our Registration Statement on Form S-1 and subsequent filings on
Form 8-K filed with the Securities and Exchange Commission. The operations for
the three months ended June 30, 2009 and nine months ended June 30, 2009 are not
necessarily indicative of the results for our fiscal year ending September 30,
2009.
 
 NetTalk.com,
Inc. (“NetTalk” or the “Company”) was incorporated on May 1, 2006 under the laws
of the State of Florida. We are engaged in the development of products and
services for the use of Voice over Internet Protocol (“VoIP”). Our applications
of VoIP technology are intended to allow principally consumers to make phone
calls over a broadband Internet connection instead of using a regular (or
analog) phone line. At this time, our main product under development is the TK
6000, which is designed to allow our future customer’s full mobile flexibility
by being able to transport the VoIP interface anywhere the customer has an
internet connection.
 
 We are
currently in the development stage, as that term is defined in Statement of
Accounting Standards No. 7, Accounting and Reporting by
Development Stage Enterprises (“SFAS 7”). During this stage of our
development, we are devoting substantially all of our efforts in developing the
TK 6000 product and service offerings and the methods of addressing related
markets where we will deploy this product. We are also engaged in developing our
business infrastructure and we are seeking capital to support the further
development and deployment of our product. We have successfully completed our
beta testing and will enter revenue generation status during the fourth quarter
of our fiscal year.
 
 Note 2 - Summary of
Significant Accounting Policies:
 
 Use of
Estimates
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make estimates and assumptions that affect the amounts reported in the financial
statements and footnotes. Significant estimates inherent in the preparation of
our financial statements include developing fair value measurements upon which
to base our accounting for acquisitions of intangible assets and issuances of
financial instruments, including our common stock. Our estimates also include
developing useful lives for our tangible and intangible assets and cash flow
projections upon which we determine the existence of, or the measurements for,
impairments. In all instances, estimates are made by competent employees under
the supervision of management, based upon the current circumstances and the best
information available. However, actual results could differ from those
estimates.
 
 Risk and
Uncertainties
 
 Our future
results of operations and financial condition will be impacted by the following
factors, among others: dependence on the worldwide telecommunication markets
characterized by intense competition and rapidly changing technology, on
third-party manufacturers and subcontractors, on third-party distributors in
certain markets, on the successful development and marketing of new products in
new and existing markets. Generally, we are unable to predict the future status
of these areas of risk and uncertainty. However, negative trends or conditions
in these areas could have an adverse affect on our business.
 
 8
  NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 Note 2 - Summary of
Significant Accounting Policies (Continued):
 
 Revenue
Recognition
 
 We are in
our development stage and have not generated revenue on our principal product
offering, the TK 6000. We are currently projecting revenue commencing during the
fourth quarter of our fiscal year. The content and terms of our revenue
producing arrangements is currently under development. Upon generating sales of
our products, we will recognize revenue when the arrangement is evidenced, the
price is fixed or determinable, we have delivered our products and services and
collectability is reasonably assured. Our offering will consist of both customer
premise equipment (“CPE”) and telephony services. That is, a multi-element
revenue producing arrangement. Revenue recognition accounting for multi-element
revenue producing arrangements is provided in EITF 00-12, Revenue Arrangements with
Multiple Deliverables (“EITF 00-12”) and other interpretive guidance.
Generally, revenue arrangements with multiple deliverables will require
allocation of the aggregate revenue stream to the individual elements, usually
based upon relative fair values. Upon allocation under this methodology,
principles of revenue recognition are applied to each component. Accordingly,
when we commence revenue generation, we will likely have multiple forms of
revenue, including products and services.
 
 Cash and Cash
Equivalents
 
 We
consider all highly liquid cash balances and debt instruments with an original
maturity of three months or less to be cash equivalents. We maintain cash
balances only in domestic bank accounts, which at times, may exceed federally
insured limits. Notwithstanding, the current economic environment has
significantly affected all financial institutions and, accordingly, the risk of
loss due to excessive deposits is very high at this time. We manage our risk by
assessing the ratings of financial institutions that we currently
use.
 
 Inventory
 
 Inventories
is stated at lower of cost or market and valued on a first-in, first-out basis
(“FIFO”).
 
 Telecommunications Equipment
and Other Property
 
 Telecommunications
equipment and other property are recorded at our cost (see Note 4). We
depreciate these assets using the straight-line method over lives that we
believe the assets will have utility. Our expenditures for additions,
improvements and renewals are capitalized, while normal expenditures for
maintenance and repairs are charged to expense
 
 Intangible
Assets
 
 Our
intangible assets were acquired in connection with the asset acquisition, more
fully described in Note 4. As noted therein, these assets were not recorded in
connection with a business combination, as that term is defined in Statements on
Financial Accounting Standards No. 141, Accounting for Business
Combinations. Rather, these intangible assets were recorded at our
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.
 
 Impairments and
Disposals
 
 We
evaluate our tangible and definite-lived intangible assets for impairment under
Statement of Financial Accounting
Standards      No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (“SFAS 144”) annually at the
beginning of our fourth fiscal quarter 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.
  9
  NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 Impairments and Disposals
(Continued)
 
 During the
prior fiscal year, our management and Board of Directors approved the
discontinuance and sale of our advertising business in order to devote all
resources to the development of our VoIP offerings. We concluded that the
advertising business constituted a component of our business, as defined in SFAS
144 and have presented the unit in the accompanying financial statements on the
basis that (a) the operations and cash flows of the component have been
eliminated from our ongoing operations as a result of the disposal transaction
and (b) we have no significant continuing involvement in the operations of the
component after the disposal transaction. See Note 12 for additional information
about the disposal.
 
 We have
certain intangible assets that are not subject to amortization because they
currently have indefinite lives. We are required to evaluate whether these
assets acquire a finite useful life annually and, if present, commence
amortization thereof. Prior to that event, if ever, we evaluate intangible
assets that are not subject to amortization under the guidance of Statement of
Financial Accounting Standards No. 142, Goodwill and Intangible
Assets   (“SFAS 142”). Under this standard, the impairment
test consists of a comparison of the fair values of the intangible assets with
the respective carrying values. An impairment loss would be required for an
excess in carrying value over the fair value on an asset-by-asset
basis.
 
 Research and Development and
Software Costs
 
 We expense
research and development expenses, as defined in Statements on Financial
Accounting Standards No. 2, Accounting for Research and
Development Expense, as these costs are incurred. We account for our
offering-related software development costs under Statements on Financial
Accounting Standards No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed (“SFAS 86”),
which specifies that costs incurred internally in creating a computer software
product shall be charged to expense when incurred as research and development
until technological feasibility has been established for the product.
Technological feasibility is established upon completion of a detail program
design or, in its absence, completion of a working model. Thereafter, all
software production costs shall be capitalized and subsequently reported at the
lower of unamortized cost or net realizable value. Capitalized costs are
amortized based on current and future revenue for each product with an annual
minimum equal to the straight-line amortization over the remaining estimated
economic life of the product. As of June 30, 2009, we had not achieved
technological feasibility as contemplated under SFAS 86 and, accordingly, our
software costs were expensed as research and development.
  For
      the PeriodFrom
      InceptionThree
      Months
                                                        
                                                        
                                                        Nine
      Months
                                                        
                                                        
                                                        (May
      1, 2006)Ended
                                                        
                                                        
                                                        Ended
                                                        
                                                        
                                                        throughComponents of Research and
      Development:
                                                        
                                                        June 30, 2009
                                                        
                                                        
                                                        June 30, 2009
                                                        
                                                        
                                                        June 30, 2009Product
      development and engineering
                                                        
                                                        $
                                                        47,175
                                                        
                                                        
                                                        $
                                                        114,105
                                                        
                                                        
                                                        $
                                                        114,105Payroll
      and benefits
                                                        
                                                        
                                                        76,568
                                                        
                                                        
                                                        
                                                        121,635
                                                        
                                                        
                                                        
                                                        121,635Total
                                                        
                                                        $
                                                        123,743
                                                        
                                                        
                                                        $
                                                        235,740
                                                        
                                                        
                                                        $
                                                        235,740
  Share-Based Payment
Arrangements
 
 We apply
the grant-date fair value method to our share-based payment arrangements with
employees under the rules provided in Statement of Financial Accounting
Standards No. 123R, Accounting for Share-Based
Payment (“SFAS 123R”). For share-based payment transactions with parties
other than employees we apply EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Under SFAS 123R, 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, which is
usually the vesting period for employees. Share-based payments to non-employees
are recorded at fair value on the measurement date and reflected in expense over
the service period.
  10




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 Note 2 - Summary of
Significant Accounting Policies (Continued):
 
 Share-Based Payment
Arrangements
 
 We apply
the grant-date fair value method to our share-based payment arrangements with
employees under the rules provided in Statement of Financial Accounting
Standards No. 123R, Accounting for Share-Based
Payment (“SFAS 123R”). For share-based payment transactions with parties
other than employees we apply EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Under SFAS 123R, 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, which is
usually the vesting period for employees. Share-based payments to non-employees
are recorded at fair value on the measurement date and reflected in expense over
the service period.
 
 Financial
Instruments
 
 Financial
instruments, as defined in Statement of Financial Accounting Standard No. 107,
Disclosures about Fair
Value of Financial Instruments (“SFAS 107”), consist of cash, evidence of
ownership in an entity, and contracts that both (i) impose on one entity a
contractual obligation to deliver cash or another financial instrument to a
second entity, or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (ii) conveys to that second entity
a contractual right (a) to receive cash or another financial instrument from the
first entity, or (b) to exchange other financial instruments on potentially
favorable terms with the first entity. Accordingly, our financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities, secured convertible debentures, and derivative financial
instruments.
 
 We carry
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities at historical costs since their respective estimated fair values
approximate carrying values due to their current nature. We also carry
convertible debentures at historical cost. However, the fair values of debt
instruments are estimated for disclosure purposes (below) based upon the present
value of the estimated cash flows at market interest rates applicable to similar
instruments.
 
 As of June
30, 2009, estimated fair values and respective carrying values of our secured
convertible debentures are as follows:




FinancialStatement
                                                                  
                                                                  
                                                                  Fair
                                                                  
                                                                  
                                                                  CarryingNote
                                                                  
                                                                  
                                                                  Value
                                                                  
                                                                  
                                                                  ValueFinancial Instruments$1,000,000
      12% SecuredConvertible
      Debenture
                                                                  
                                                                  
                                                                  7
                                                                  
                                                                  
                                                                  $
                                                                  1,014,002
                                                                  
                                                                  
                                                                  $
                                                                  1,008,339$  500,000
      12% SecuredConvertible
      Debenture
                                                                  
                                                                  
                                                                  7
                                                                  
                                                                  
                                                                  
                                                                  507,000
                                                                  
                                                                  
                                                                  
                                                                  504,168$
      600,000 12% SecuredConvertible
      Debenture
                                                                  
                                                                  
                                                                  7
                                                                  
                                                                  
                                                                  
                                                                  205,440
                                                                  
                                                                  
                                                                  
                                                                  256,874$
      500,000 12% SecuredConvertible
      Debenture
                                                                  
                                                                  
                                                                  7
                                                                  
                                                                  
                                                                  
                                                                  200,400
                                                                  
                                                                  
                                                                  
                                                                  242,414Total
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  1,926,842
                                                                  
                                                                  
                                                                  $
                                                                  2,011,795




Derivative
financial instruments, as defined in Statement of Financial Accounting Standard
No. 133, Accounting
for Derivative Financial Instruments and Hedging Activities (“SFAS 133”),
consist of financial instruments or other contracts that contain a notional
amount and one or more underlying variables (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.


11




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 Note 2 - Summary of
Significant Accounting Policies (Continued):
 
 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.
As required by SFAS 133, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial statements.
 
 June 30,2009
                                                          
                                                          
                                                          September 30, 2008Our
      derivative liabilities consist of the following:
                                                          
                                                          (unaudited)Class
      B Warrants, indexed to 10,400,000 shares of common stock:$1,000,000,
      12% Secured Convertible Debenture
                                                          
                                                          $
                                                          281,600
                                                          
                                                          
                                                          $
                                                          375,600$   500,000,
      12% Secured Convertible Debenture
                                                          
                                                          
                                                          140,800
                                                          
                                                          
                                                          
                                                          187,800$  600,000,
      12% Secured Convertible Debenture
                                                          
                                                          
                                                          212,544
                                                          
                                                          
                                                          
                                                          -$  500,000,
      12% Secured Convertible Debenture
                                                          
                                                          
                                                          206,920
                                                          
                                                          
                                                          
                                                          -Compound
      Derivative Financial Instruments:$1,000,000,
      12% Secured Convertible Debenture
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -$   500,000,
      12% Secured Convertible Debenture
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -$  600,000,
      12% Secured Convertible Debenture
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -$  500,000,
      12% Secured Convertible Debenture
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          -Total
                                                          
                                                          $
                                                          841,864
                                                          
                                                          
                                                          $
                                                          563,400
  The
following table summarizes the effects on our income associated with changes in
the fair values of our derivative financial instruments by type for the Three
and Nine Months Ended June 30, 2009 (unaudited) and for the Period from
Inception (May 1, 2006) through June 30, 2009 (unaudited):
 For
      the PeriodFrom
      InceptionThree
      Months
                                                                      
                                                                      
                                                                      Nine
      Months
                                                                      
                                                                      
                                                                      (May
      1, 2006)Ended
                                                                      
                                                                      
                                                                      Ended
                                                                      
                                                                      
                                                                      throughDerivative income (expense)
                                                                      
                                                                      June 30, 2009
                                                                      
                                                                      
                                                                      June 30, 2009
                                                                      
                                                                      
                                                                      June 30, 2009Class
      B Warrants, indexed to 10,400,000 shares of common stock:$1,000,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      $
                                                                      (36,800
                                                                      )
                                                                      
                                                                      $
                                                                      94,000
                                                                      
                                                                      
                                                                      $
                                                                      88,800$   500,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      
                                                                      (18.400
                                                                      )
                                                                      
                                                                      
                                                                      47,000
                                                                      
                                                                      
                                                                      
                                                                      44,400$   600,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      
                                                                      (9,504
                                                                      )
                                                                      
                                                                      
                                                                      (13,883
                                                                      )
                                                                      
                                                                      
                                                                      (13,883
                                                                      )$   500,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      
                                                                      (9,240
                                                                      )
                                                                      
                                                                      
                                                                      (36,147
                                                                      )
                                                                      
                                                                      
                                                                      (36,147
                                                                      )Compound
      Derivative Financial Instruments:$1,000,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -$   500,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -$   600,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -$   500,000,
      12% Secured Convertible Debenture
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Total
                                                                      
                                                                      $
                                                                      (73,944
                                                                      )
                                                                      
                                                                      $
                                                                      90,970
                                                                      
                                                                      
                                                                      $
                                                                      83,170




12




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 2 - Summary of
Significant Accounting Policies (Continued):
 
 Direct Financing
Costs
 
 We
allocate direct financing costs to the financial instruments issued based upon
their relative fair values. Amounts allocated to debt instruments are carried as
assets and amortized through charges to interest expense using the effective
interest method. Amounts allocated to derivative financial instruments are
charged upon inception to interest expense. Amounts associated with equity
instruments are included as reductions of the related credit to equity. Any
amounts paid directly to a creditor are reflected as a reduction in the carrying
amount of the debt instrument and amortized through charges to interest expense
using the effective interest method.
 
 Registration Rights
Agreements
 
 During
December 2006, the Financial Accounting Standards Board issued FASB Staff
Position EITF 00-19-2, Accounting for Registration
Payment Arrangements, which provides that registration payment
arrangements, such as the liquidated damages, should be accounted for pursuant
to Statement of Financial Accounting Standard No. 5, Accounting for
Contingencies. That is, all registration payments require recognition
when they are both probable and reasonably estimable. We currently have
registration rights agreements with investors in our secured convertible
debenture financing arrangements. However, these agreements do not embody
registration payment arrangements. If, in the future, we enter into registration
rights agreements that have registration payment arrangements, we will be
required to follow the guidance of this EITF.
 
 Fair Value
Measurements
 
 Fair value
measurement requirements are embodied in certain accounting standards applied in
the preparation of our financial statements. Significant fair value measurements
resulted from the application of SFAS 133 to our secured convertible debenture
and warrant financing arrangements described in Note 8, SFAS 123R to our
share-based payment arrangements described in Note 9 and SFAS 142 to our
business combination described in Note 4.
 
 Statement
of Financial Accounting Standard No. 157, Fair Value Measurements(“SFAS 157”) defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. It is effective for our fiscal year beginning
October 1, 2008. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this new standard does not require any new
fair value measurements. This standard did not result in a material financial
affect. However, we were required to expand our disclosures,   in
areas where other accounting principles require fair value measurements to
provide information related to the hierarchy of fair value inputs.
 
 Statement
of Financial Accounting Standard No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS 159”), permits entities
to choose to measure many financial instruments and certain other items at fair
value. It is effective for our fiscal year beginning October 1, 2008. At this
time, we do not intend to reflect any of our current financial instruments at
fair value (except that we are required to carry our derivative financial
instruments at fair value). However, we will consider the appropriateness of
recognizing financial instruments at fair value on a case by case basis as they
arise in future periods.
  13
  NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 2 - Summary of
Significant Accounting Policies (Continued):
 
 Advertising
 
 In June
2009, we incurred prepaid advertising for the creation of an infomercial to be
aired during the deployment and launching of our TK6000.  The
deployment and launching of our TK6000 is projected for the fourth quarter of
our fiscal year.  Upon airing our infomercial and deployment of our
TK6000 we will expense the amount of $350,000 as advertising
expense.  Prepaid advertising is made up of following
items:




Items
                                
                                AmountCash
      payment
                                
                                $
                                100,000Share-based
      payment (1,000,000 common shares)
                                
                                
                                250,000Total
                                
                                $
                                350,000




Income
Taxes
 
 We record
our income taxes using the asset and liability method provided in Statement of
Financial Accounting Standard No. 109, Accounting for Income
Taxes (“SFAS 109”). 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.
 
 Net Loss per Common
Share
 
 We have
applied the provisions in Statement of Financial Accounting Standards No. 128,
Earnings per
Share (“SFAS 128”), in calculating our basic and diluted loss per common
share. Basic loss per common share represents our net loss divided by the
weighted average number of common shares outstanding during the period. Diluted
loss per common share gives effect to all potentially dilutive securities. We
compute the effects on diluted loss per common share arising from warrants and
options using the treasury stock method. We compute the effects on diluted loss
per common share arising from convertible securities using the if-converted
method. The effects, if anti-dilutive are excluded.
 
 Recent Accounting
Pronouncements
 
 We have
reviewed accounting pronouncements and interpretations thereof that have
effectiveness dates during the periods reported and in future periods. We
believe that the following impending standards may have an impact on our future
filings. Also see Fair Value Measurements, above. The applicability of any
standard is subject to the formal review of our financial management and certain
standards are under consideration.
 
 In
December 2007, the FASB issued SFAS No. 141R, Business Combinations
("SFAS 141R"), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination.  SFAS 141R is effective as of the beginning of
the first fiscal year beginning on or after December 15, 2008. The adoption of
SFAS 141R did not have a material impact on our financial position, results of
operations or cash flows.
 
 14
  NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 2 - Summary of
Significant Accounting Policies (Continued):
 
 In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and132(R) (“SFAS 158”). SFAS 158 improves
financial reporting by requiring an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization. SFAS 158 also improves
financial reporting by requiring an employer to measure the funded status of a
plan as of the date of its year-end statement of financial position, with
limited exceptions.  The effective date for an employer with publicly
traded equity securities is as of the end of the fiscal year ending after
December 15, 2006. The adoption of SFAS 158 did not have a material impact on
our financial position, results of operations or cash flows because we do not
have a defined benefit plan for our employees.
 
 In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements  - an Amendment of ARB No. 51
(“SFAS 160”).  This statement amends ARB No. 51 to establish
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 will
change the classification and reporting for minority interest and
non-controlling interests of variable interest entities.  Following
the effectiveness of SFAS 160, the minority interest and non-controlling
interest of variable interest entities will be carried as a component of
stockholders’ equity. This statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15,
2008.  Since we do not currently have any non-controlling interest
consolidated in our financial statements, adoption of this standard will not
have any material effect on our financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133 (“SFAS 161”).  SFAS 161 is intended to improve
financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows. It
is effective for financial statements issued for fiscal years beginning after
November 15, 2008. The adoption of SFAS 161 did not have a material impact on
our financial position, results of operations or cash flows.
 
 In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC's
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles." We do not expect the adoption of SFAS 162 will
have a material effect on our financial position, results of operations or cash
flows.
 
 In July
2006, the FASB issued Interpretation No. 48, Accountingfor Uncertainty in Income
Taxes(“FIN
48”). FIN 48 clarifies the accounting for income taxes by prescribing the
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. It also provides guidance on
de-recognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition and clearly scopes income taxes
out of SFAS No. 5, Accounting for
Contingencies.
FIN 48 was effective for fiscal years beginning after December 15, 2006.
Accordingly, we have implemented FIN 48 by summarizing and evaluating all
potential uncertain tax positions. As a result of our implementation, FIN 48 did
not have a material impact on our financial position, results of operations or
cash flows.
 
 15
 NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 Note 2 - Summary of
Significant Accounting Policies (Continued):
 
 In
December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements  (“EITF 00-19-2”) which addresses
accounting for registration payment arrangements. EITF 00-19-2 specifies that
the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with SFAS
No. 5, Accounting for
Contingencies.  EITF 00-19-2 further clarifies that a financial
instrument subject to a registration payment arrangement should be accounted for
in accordance with other applicable generally accepted accounting principles
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement.  For registration payment
arrangements and financial instruments subject to those arrangements that were
entered into prior to the issuance of EITF 00-19-2, this guidance shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2006 and interim periods within those fiscal years. The adoption of
EITF 00-19-02 did not have a material impact on our financial position, results
of operations or cash flows, because we have no current transactions that embody
Registration Payment Arrangements, as defined in the standard.
 
 In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05, Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock,
which supersedes the definition in EITF 06-01 for periods beginning after
December 15, 2008. The objective of this Issue is to provide guidance for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity's own stock and it applies to any freestanding financial
instrument or embedded feature that has all the characteristics of a derivative
of SFAS 133, for purposes of determining whether that instrument or embedded
feature qualifies for the first part of the scope exception in paragraph 11(a)
of SFAS 133 (the “Paragraph 11(a) Exemption). This Issue also applies to any
freestanding financial instrument that is potentially settled in an entity's own
stock, regardless of whether the instrument has all the characteristics of a
derivative in SFAS 133, for purposes of determining whether the instrument is
within the scope of EITF 00-19.  We currently have 14,942,912 warrants
that embody terms and conditions that require the reset of their strike prices
upon our sale of shares or equity-indexed financial instruments and amounts less
than the conversion prices. These features will no longer be treated as “equity”
under the EITF once it becomes effective. Rather, such instruments will require
classification as liabilities and measurement at fair value. Early adoption is
precluded. Accordingly, this standard will be adopted in our quarterly period
ended December 31, 2009.
 
 In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 08-04, Transition Guidance for
Conforming Changes to Issue 98-5 “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios”, which is effective for years ending after December 15, 2008.
Early adoption is not permitted. The overall objective of the Issue is to
conform the requirements of EITF 00-27 and SFAS No. 150 with EITF 98-5 to
provide for consistency in application of the standard. We computed and recorded
a beneficial conversion feature in connection with our convertible debentures
financing in our second quarter 2009.
 
 In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful
Life of Intangible Assets  (“FSP 142-3”). This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill
and Other Intangible Assets. We were required to adopt FSP 142-3 on
October 1, 2008. The guidance in FSP 142-3 for determining the useful life of a
recognized intangible asset was applied prospectively to intangible assets
acquired after adoption, and the disclosure requirements are applied
prospectively to all intangible assets recognized as of, and subsequent to,
adoption. We have evaluated the impact of FSP 142-3 on our financial position,
results of operations and cash flows, and believes that the established lives
will continue to be appropriate under the FSP.
 
 In May
2008, the FASB issued FSP Accounting Principles Board 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. The
adoption of FSP APB 14-1 did not have a material impact on our financial
position, results of operations or cash flows.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to have a material impact on our present or future financial
statements.
 
 16
 
 NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 Note 3 – Going
Concern:
 
 We have
prepared our financial statements under the presumption that we will continue as
a going concern for a reasonable period. However, as previously mentioned, we
are currently in our development stage and, accordingly, we have not generated
revenue nor do we expect to generate revenue until the fourth quarter of our
fiscal year. During the three months ended June 30, 2009 and 2008, we generated
losses of $789,734 and $0, respectively. During the nine months ended June 30,
2009 and 2008, we generated net income (loss) of $(1,569,979) and $186,128,
respectively.  These conditions and negative trends raise substantial
doubt about our ability to continue as a going concern.
 
 Our
management is currently addressing these conditions and trends. We have
discontinued our prior business that was engaged in providing advertising
services and, commencing with our purchase of assets from Interlink Asset Group
(see Note 4) on         September
10, 2008, we are devoting our efforts and our resources to the expeditious
development and deployment of the TK 6000 product line.
 
 Our
acquisition of the assets of Interlink Asset Group included an executive
management team who is undertaking these initiatives and have raised a total of
$2,600,000 in convertible debenture and warrant financing since September 10,
2008. Notwithstanding, our ability to continue is dependent upon raising the
additional capital necessary to complete the successful deployment of the TK
6000 product line and, ultimately, achieve profitable operations. There can be
no assurances that capital will be available at terms acceptable to our
management, if at all. The accompanying financial statements do not include any
adjustments that may result from the substantial doubt surrounding our ability
to continue as a going concern.
 
 Note 4 - Interlink Asset
Group Acquisition:
 
 On
September 10, 2008, we acquired certain tangible and intangible assets, formerly
owned by Interlink Global Corporation (“Interlink”), (the “Interlink Asset
Group”) directly from Interlink’s creditor who had seized the assets pursuant to
a Security and Collateral Agreement. Our purpose in acquiring these assets,
which included employment rights to the executive management team of Interlink,
was to advance the TK 6000 VoIP Technology Program, which Interlink launched in
July 2008. Accordingly, these assets substantially comprise our current business
assets and the infrastructure for our future operations. Contemporaneously with
this purchase, we executed an assignment and intellectual property agreement
with Interlink that served to perfect our ownership rights to the
assets.
 
 Consideration
for the acquisition consisted of a face value $1,000,000 convertible debenture,
plus warrants to purchase 4,000,000 shares of our common stock. On the date of
the Interlink Asset Group acquisition, we also entered into a financing
agreement with the creditor that provided for the issuance of a face value
$500,000 convertible debenture, plus warrants to purchase 2,000,000 shares of
our common stock for net cash consideration of $448,300. These financial
instruments, and our accounting therefore, are further addressed in Note
8.
 
 The
transfer of the Interlink Asset Group required us to determine whether the group
of assets constituted a business, and accordingly, required accounting under
Statement of Financial Accounting Standards No. 141, Business Combinations
(“SFAS 141”) or whether the group of assets did not constitute a business and,
accordingly, required accounting under other standards, including Statement of
Financial Accounting Standards No. 142, Goodwill and Intangible
Assets (“SFAS 142”). This determination is required to be made by
reference (by analogy) to guidance in EITF No. 98-3, Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or a
Business (“EITF 98-3”). It should be noted that the determination of what
constitutes a business for reporting purposes under Rules and Regulations of the
Securities and Exchange Commission differs from the guidance in EITF
98-3.
  17
  NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 Note 4 - Interlink Asset
Group Acquisition (Continued):
 
 We
accounted for the acquisition of the assets of Interlink Asset Group as an
acquisition of productive assets and not as a business. In applying the guidance
of EITF 98-3, a business is a self sustaining, integrated set of activities and
assets conducted and managed for the purpose of providing a return to investors
and, further, must consist of inputs, processes applied to those inputs, and
resulting outputs that are used to generate revenues. Based upon the guidance of
EITF 98-3, the Interlink Asset Group (i) did not possess the inputs because, on
the date of the acquisition, the critical asset (TK 6000 offering) had not
achieved a proven level of technological feasibility and (ii) did not possess
the outputs because, on the date of the acquisition, the assets did not include
a revenue generating offering and, therefore, no ability to access customers.
Further, we are unable to overcome the general presumption in EITF 98-3 that a
development stage enterprise is presumed not to be a business.
 
 In
addition to our analysis that gave rise to the conclusion that the Interlink
Asset Group did not constitute a business, we considered whether the two
aforementioned financing arrangements should be combined for purposes of
accounting for the acquisition. In reaching a conclusions that they should be
combined we considered and gave substantial weight to the facts that (i) they
were entered into contemporaneously and in contemplation of one another, (ii)
they were executed with the same counterparty and the terms and conditions of
the financial instruments and underlying contracts are substantially the same
and (iii) there is otherwise no economic need nor substantive business purpose
for structuring the transactions separately. Accordingly, for purposes of
accounting for the Interlink Asset Group acquisition we have combined the
financing arrangements associated with both the asset purchase and the cash
financing arrangement. Accounting for the financial instruments arising from
these arrangements is further discussed in Note 8.
 
 Notwithstanding
our conclusion that the Interlink Asset Group did not constitute a business,
SFAS 142 provides that intangible assets acquired as a group are initially
recognized at fair value applying the measurement principles for exchange
transactions provided in SFAS 141.5-7. Those measurement principles provide
that, when consideration is not in the form of cash, measurement is based upon
the fair value of the consideration given or the fair value of the assets
acquired, whichever is more clearly and closely evident and, thus more reliably
measureable. We have concluded that the value of the consideration given
representing the financial instruments, is more clearly evident and reliable for
this purpose because (i) the exchange resulted from exhaustive negotiations with
the creditor, (ii) fair value measurements of our financial instruments are in
part based upon market indicators and assumptions derived for active markets,
and (iii) while ultimately reasonable, our fair value measurements of the
significant tangible and intangible asset relies heavily on subjective estimates
and prospective financial information. The following table reflects the
components of the consideration paid to effect the
acquisition:




Financial
      Instrument or Cost:
                                    
                                    AmountConvertible
      debentures:$1,000,000
      face value, 12% convertible debentures
                                    
                                    $
                                    1,014,002$500,000
      face value, 12% convertible debentures
                                    
                                    
                                    507,000Class
      B warrants, indexed to 10,400,000 shares of common stock
                                    
                                    
                                    555,600Direct
      costs
                                    
                                    
                                    39,200$
                                    2,115,802




We have
evaluated the substance of the exchange for purposes of identifying all assets
acquired. The recognition of goodwill is not contemplated in an exchange that is
not a business or accounted for as a business combination under SFAS 141. The
following table reflects the acquisition date fair values and the final
allocation of the consideration to the assets acquired. The allocation was
performed in accordance with SFAS 142, which provides that an excess in
consideration over the fair values of the assets acquired is allocated to the
assets subject to depreciation and amortization, based upon their relative fair
values, and not to those assets with indefinite lives. A difference in the
recognized basis in the value of the consideration between book and income tax
gives rise to the deferred income taxes. The allocation of consideration in this
manner contemplates an immediate impairment analysis
under       SFAS 144. Our analysis did not
result in impairment, but we are required to continue to perform this analysis
as provided in our impairments policy (see Note 2).




18




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 4 - Interlink Asset
Group Acquisition (Continued):
 Asset or Account
                
                Fair
      Value
                
                
                AllocationCash
                
                $
                487,500
                
                
                $
                487,500Deferred
      finance costs
                
                
                24,398
                
                
                
                24,398Telecommunications
      equipment and other property
                
                
                411,203
                
                
                
                756,171Intangible
      assets:Knowhow
      of specialized employees
                
                
                212,254
                
                
                
                212,254Trademarks
                
                
                180,925
                
                
                
                332,708Employment
      arrangements
                
                
                122,400
                
                
                
                225,084Workforce
                
                
                54,000
                
                
                
                54,000Telephony
      license
                
                
                5,000
                
                
                
                9,195Domain
      names
                
                
                4,200
                
                
                
                7,723Deferred
      income taxes
                
                
                --
                
                
                
                (8,033
                )Interest
      expense (finance costs allocated to warrants)
                
                
                14,802
                
                
                
                14,802Total
                
                $
                1,516,682
                
                
                $
                2,115,802




In
connection with the above allocation, we evaluated the presence of in-process
research and development that may require recognition (and immediate write-off).
We concluded that in-process research and development was de minimus since
development is planned to be outsourced subsequent to the acquisition and, in
fact, no substantive effort and/or costs were found in the records of Interlink.
Research and development will be expensed as it is incurred.
 
 As more
fully discussed in Note 9, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition. These
shares are compensatory in nature and are fully vested. We have valued the
shares at $1,500,000, consistent with fair value measurements used elsewhere in
our accounting, and recognized the expense in compensation for the
period.
 
 As
previously mentioned, the determination of what constitutes a business for
reporting purposes under the Rules and Regulations of the Securities and
Exchange Commission differs from the guidance in EITF 98-3. Under standards of
the Securities and Exchange Commission, we have concluded that our acquisition
of the assets of Interlink Asset Group is required to be reported (although not
accounted for) as a business. The reporting requirements provide for the filing
of audited and reviewed financial statements of the component of Interlink
comprising the Interlink Asset Group, as well as pro forma information. This
reporting information is included elsewhere in this filing.




Note 5 -
Inventories
 
 The
following table summarizes the components of our inventories:




June 30, 2009
                                  
                                  
                                  Sept. 30, 2008Productive
      material, work in process and supplies
                                  
                                  $
                                  114.928
                                  
                                  
                                  $
                                  -Finished
      product
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Total
                                  
                                  
                                  114,928
                                  
                                  
                                  
                                  -




19




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 6 - Telecommunications
Equipment and Other Property:
 
 Telecommunications
equipment and other property consist of the following:
  Life
                                                                                                    
                                                                                                    
                                                                                                    June 30, 2009
                                                                                                    
                                                                                                    
                                                                                                    September 30, 2008(unaudited)Telecommunication
      equipment
                                                                                                    
                                                                                                    
                                                                                                    7
                                                                                                    
                                                                                                    $
                                                                                                    650,804
                                                                                                    
                                                                                                    $
                                                                                                    641,460Computer
      equipment
                                                                                                    
                                                                                                    
                                                                                                    5
                                                                                                    
                                                                                                    
                                                                                                    105,777
                                                                                                    
                                                                                                    
                                                                                                    85,111Office
      equipment and furnishing
                                                                                                    
                                                                                                    
                                                                                                    7
                                                                                                    
                                                                                                    
                                                                                                    23,759
                                                                                                    
                                                                                                    
                                                                                                    19,559Purchased
      software
                                                                                                    
                                                                                                    
                                                                                                    3
                                                                                                    
                                                                                                    
                                                                                                    10,041
                                                                                                    
                                                                                                    
                                                                                                    10,041Sub
      – total
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    790,381
                                                                                                    
                                                                                                    
                                                                                                    756,171Less:
      accumulated depreciation
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (95,141)
                                                                                                    
                                                                                                    
                                                                                                    (6,404)Total
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    695,240
                                                                                                    
                                                                                                    $
                                                                                                    749,767
 
 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, which we lease
under an operating lease. Depreciation of the above assets amounted to $30,192
during the three months ended June 30, 2009 and $88,738 during nine months ended
June 30, 2009. Commencing with our generation of revenue, a portion of our
depreciation expense will be allocated to cost of sales.
 
 Note 7 - Intangible
Assets:
 
 Intangible
      assets consist of following:
                                                                                          
                                                                                          
                                                                                          Life
                                                                                          
                                                                                          
                                                                                          June 30, 2009
                                                                                          
                                                                                          
                                                                                          September 30, 2008(unaudited)Trademarks
                                                                                          
                                                                                          
                                                                                          5
                                                                                          
                                                                                          $
                                                                                          332,708
                                                                                          
                                                                                          $
                                                                                          332,708Employment
      agreements
                                                                                          
                                                                                          
                                                                                          3
                                                                                          
                                                                                          
                                                                                          225,084
                                                                                          
                                                                                          
                                                                                          225,084Knowhow
      and specialty skills
                                                                                          
                                                                                          
                                                                                          3
                                                                                          
                                                                                          
                                                                                          212,254
                                                                                          
                                                                                          
                                                                                          212,254Workforce
                                                                                          
                                                                                          
                                                                                          3
                                                                                          
                                                                                          
                                                                                          54,000
                                                                                          
                                                                                          
                                                                                          54,000Telephony
      licenses
                                                                                          
                                                                                          
                                                                                          2
                                                                                          
                                                                                          
                                                                                          9,195
                                                                                          
                                                                                          
                                                                                          9,195Domain
      names
                                                                                          
                                                                                          
                                                                                          2
                                                                                          
                                                                                          
                                                                                          7,723
                                                                                          
                                                                                          
                                                                                          7,723840,964
                                                                                          
                                                                                          
                                                                                          840,964Less
      accumulated amortization
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          (187,306)
                                                                                          
                                                                                          
                                                                                          (8,221)$
                                                                                          653,658
                                                                                          
                                                                                          $
                                                                                          832,743
  Amortization
of the above intangible assets amounted to $104,071 for the three months ended
June 30, 2009 and $179,085 the nine  months ended June 30, 2009.
Commencing with our generation of revenue, a portion of our depreciation expense
will be allocated to cost of sales. The weighted average amortization period for
the amortizable intangible assets is 3.3 years.
 
 Estimated
future amortization of intangible assets for each year ending June 30, 2009 is
as follows:
 
 2009
                  
                  $
                  59,6952010
                  
                  
                  238,3162011
                  
                  
                  226,2102012
                  
                  
                  66,5422013
                  
                  
                  62,895$
                  653,658


20




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 8 - Secured Convertible
Debentures and Warrant Financing Arrangements:
 
 Our
      convertible debentures consist of the following:
                                                                                                          
                                                                                                          June 30, 2009
                                                                                                          
                                                                                                          
                                                                                                          September 30, 2008(unaudited)$1,000,000
      face value, 12% secured convertible debenture, dueSeptember
      10, 2010, interest payable quarterly, secured by all
assets
                                                                                                          
                                                                                                          $
                                                                                                          1,008,339
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          1,013,611$500,000
      face value, 12% secured convertible debenture, dueSeptember
      10, 2010, interest payable quarterly, secured by all
assets
                                                                                                          
                                                                                                          
                                                                                                          504,168
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          506,804$600,000
      face value, 12% secured convertible debenture, dueJanuary
      30, 2011, interest payable quarterly, secured by all
assets
                                                                                                          
                                                                                                          
                                                                                                          256,874
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -$500,000
      face value, 12% secured convertible debenture, dueJanuary
      30, 2011, interest payable quarterly, secured by all
assets
                                                                                                          
                                                                                                          
                                                                                                          242,414
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -Total
                                                                                                          
                                                                                                          $
                                                                                                          2,011,795
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          1,520,415Common
      shares indexed to the financial instruments issuedin
      our convertible debenture and warrant financing
    arrangementsare
      as follows:
                                                                                                          
                                                                                                          June 30, 2009
                                                                                                          
                                                                                                          
                                                                                                          September 30, 2008(unaudited)Conversion
      feature embedded in the $1,000,000 face value,12%
      secured convertible debenture, due September 10, 2010
                                                                                                          
                                                                                                          
                                                                                                          4,000,000
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          4,000,000Class
      B warrants; $0.50 exercise price, expire September 13,
2013
                                                                                                          
                                                                                                          
                                                                                                          4,000,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          4,000,000Conversion
      feature embedded in the $500,000 face value,12%
      secured convertible debenture, due September 10, 2010
                                                                                                          
                                                                                                          
                                                                                                          2,000,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2,000,000Class
      B warrants; $0.50 exercise price, expire September 13,
2013
                                                                                                          
                                                                                                          
                                                                                                          2,000,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2,000,000Conversion
      feature embedded in the $600,000 face value,12%
      secured convertible debenture, due January 30, 2011
                                                                                                          
                                                                                                          
                                                                                                          2,400,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -Class
      B warrants; $0.50 exercise price, expire January 30, 2014
                                                                                                          
                                                                                                          
                                                                                                          2,400,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -Conversion
      feature embedded in the $500,000 face value,12%
      secured convertible debenture, due January 30, 2011
                                                                                                          
                                                                                                          
                                                                                                          2,000,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -Class
      B warrants; $0.50 exercise price, expire January 30, 2014
                                                                                                          
                                                                                                          
                                                                                                          2,000,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -Class
      BD warrants; $0.50 exercise price, expire January 30, 2014
                                                                                                          
                                                                                                          
                                                                                                          1,280,000
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -Total
                                                                                                          
                                                                                                          
                                                                                                          22,080,000
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          12,000,000


On
September 10, 2008, we issued a $1,000,000 face value, 12% secured convertible
debenture, due September 10, 2010 and Class B warrants indexed to 4,000,000
shares of our common stock in exchange for the Interlink Asset Group, discussed
in Note 4. Also on September 30, 2008, we issued a $500,000 face value 12%
secured convertible debenture, due September 10, 2010 and Class B warrants
indexed to 2,000,000 shares of our common stock for net cash proceeds of
$472,800. These financial instruments were issued to the same creditor under
contracts that are substantially similar, unless otherwise mentioned in the
following discussion.
 
 The
principal amount of the debentures is payable on September 10, 2010 and the
interest is payable quarterly, on a calendar quarter basis. While the debenture
is outstanding, the investor has the option to convert the principal balance,
and not the interest, into shares of our common stock at a conversion price of
$0.25 per common share. The terms of the conversion option provide for
anti-dilution protections for traditional restructurings of our equity, such as
stock-splits and reorganizations, if any, and for sales of our common stock, or
issuances of common-indexed financial instruments, at amounts below the
otherwise fixed conversion price.




21




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 8 - Secured Convertible
Debentures and Warrant Financing Arrangements (Continued)
 
 Further,
the terms of the convertible debenture provide for certain redemption features.
If, in the event of certain defaults on the terms of the debentures, some of
which are indexed to equity risks, we are required at the investors option to
pay the higher of (i) 110% of the principal balance, plus accrued interest or
(ii) the if-converted value of the underlying common stock, using the 110%
default amount, plus accrued interest. If this default redemption is not
exercised by the investor, we would incur a default interest rate of 18% and the
investor would have rights to our assets under the related Security Agreement.
We may redeem the convertible debentures at anytime at 110% of the principal
amount, plus accrued interest.
 
 We have
evaluated the terms and conditions of the secured convertible debentures under
the guidance of SFAS 133 and EITF 00-19. We have determined that, while the
anti-dilution protections preclude treatment of the embedded conversion option
as conventional, the conversion option is exempt from classification as a
derivative because it otherwise achieves the conditions for equity
classification (if freestanding) provided in SFAS 133 and EITF 00-19. We have
further determined that the default redemption features described above are not
exempt for treatment as derivative financial instruments, because they are not
clearly and closely related in terms of risk to the host debt agreement. On the
inception date of the arrangement and as of September 30, 2008, we determined
that the fair value of these compound derivatives is de minus. However, we are
required to re-evaluate this value at each reporting date and record changes in
its fair value, if any, in income. For purposes of determining the fair value of
the compound derivative, we have evaluated multiple, probability-weighted cash
flow scenarios. These cash flow scenarios include, and will continue to include
fair value information about our common stock. Accordingly, fluctuations in our
common stock value will significantly influence the future outcomes from
applying this technique.
 
 Since, as
discussed above, the embedded conversion options did not require treatment as
derivative financial instruments, we are required to evaluate the feature as
embodying a beneficial conversion feature under EITF No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios and EITF No. 00-27, Application of Issue No.
98-5 to Certain Convertible Instruments. A beneficial conversion feature
is present when the fair value of the underlying common share exceeds the
effective conversion price of the conversion option. The effective conversion
price is calculated as the basis in the financing arrangement allocated to the
hybrid convertible debt agreement, divided by the number of shares into which
the instrument is indexed.
 
 Because
the two hybrid debt contracts were issued as compensation for the Interlink
Asset Group (see Note 4) and as further discussed in that note we concluded that
they should be combined for accounting purposes, the accounting resulted in no
beneficial conversion feature.
 
 The
following table illustrates the initial allocation to the secured convertible
debentures and warrants financing arrangements:
 $1,000,000
                                        
                                        
                                        
                                        $500,000Secured convertible debentures, issued September
      10, 2008:
                                        
                                        Financing
                                        
                                        
                                        FinancingSecured
      convertible debentures
                                        
                                        $
                                        1,014,102
                                        
                                        
                                        $
                                        507,000Class
      B warrants (classified as liabilities)
                                        
                                        
                                        370,400
                                        
                                        
                                        
                                        185,200Compound
      derivative
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
                                        
                                        $
                                        1,384,502
                                        
                                        
                                        $
                                        692,200




22




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 8 - Secured Convertible
Debentures and Warrant Financing Arrangements (Continued):
 
 2009
Convertible Debenture Financing
 
 On
January 30, 2009, we entered into a Securities Purchase Agreement with Debt
Opportunity Fund, LLP (“DOF”) by which DOF purchased (a) 12% Senior Secured
Convertible Debentures in the aggregate principal amount of $1,100,000; and
(b) Series C Warrants to purchase 4,400,000 shares of common stock of the
Company. The maturity date of the debentures is January 30, 2011 and each
debenture bears interest on the principal amount outstanding and unpaid from
time to time at a rate of 12% per annum from the date of issuance until
paid in full. Interest is calculated on the basis of a 360-day year and paid for
the actual number of days elapsed, and accrues and is payable quarterly or upon
conversion (as to the principal amount then being converted). The debentures
convert into shares of our common stock at the option of the holder at $0.25 per
share (which conversion price is subject to adjustment under certain
circumstances).
 
 The
debentures are secured by a lien in all of the assets of the Company. The Series
C Common Stock Purchase Warrants entitle the holders to purchase up to an
aggregate of 4,400,000 shares of our common stock at an exercise price of
($0.50) per share. Each Series C Common Stock Purchase Warrant is exercisable,
in whole or in part, at any time after issuance and before the close of business
on the date five (5) years from the initial exercise date.
 
 Midtown
Partners & Co., LLC (“Midtown Partners”), an NASD registered broker
dealer, acted as the placement agent for the Company in connection with the 2009
Convertible Debt Offering. In connection with the 2009 Convertible Debt
Offering, we paid Midtown Partners a cash commission equal to $88,000 and issued
a Series BD Common Stock Purchase Warrant to Midtown Partners entitling Midtown
Partners to purchase 880,000 shares of the Company’s common stock at an initial
exercise price of $0.50 per share.
  The offer
and sale of the 12% Senior Secured Convertible Debentures, Series C Common Stock
Purchase Warrants and Series BD Common Stock Purchase Warrants was affected in
reliance on the exemptions for sales of securities not involving a public
offering, as set forth in Rule 506 promulgated under the Securities Act and in
Section 4(2) of the Securities Act, based on the following: (a) the
investors confirmed to us that they were either “accredited investors,” as
defined in Rule 501 of Regulation D promulgated under the Securities Act or had
such background, education and experience in financial and business matters as
to be able to evaluate the merits and risks of an investment in the securities;
(b) there was no public offering or general solicitation with respect to
the offering; (c) the investors were provided with certain disclosure
materials and all other information requested with respect to our company;
(d) the investors acknowledged that all securities being purchased were
“restricted securities” for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend
was placed on the certificates representing each such security stating that it
was restricted and could only be transferred if subsequently registered under
the Securities Act or transferred in a transaction exempt from registration
under the Securities Act.
 
 Premiums
on the secured convertible debentures arose from initial recognition at fair
value, which is higher than face value. Premiums are amortized through credits
to interest expense over the term of the debt agreement. Amortization of debt
premiums amounted to $2,630 during the three months ended June 30, 2009 and
$7,906 during the nine months ended June 30, 2009.
 
 Direct
financing costs are allocated to the financial instruments issued (hybrid debt
and warrants) based upon their relative fair values. Amounts related to the
hybrid debt are recorded as deferred finance costs and amortized through charges
to interest expense over the term of the arrangement using the effective
interest method. Amounts related to the warrants were charged directly to income
because the warrants were classified in liabilities, rather than equity, as
described above. Direct financing costs are amortized through charges to
interest expense over the term of the debt agreement.
  23
 NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 8 - Secured Convertible
Debentures and Warrant Financing Arrangements (Continued):
 
 2009
Convertible Debenture Financing (Continued)
 
 We have
evaluated the terms and conditions of the Class B warrants under the guidance of
Statement of Financial Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(“SFAS 150”). The warrants embody a fundamental change-in-control redemption
privilege wherein the holder may redeem the warrants in the event of a change in
control for a share of assets or consideration received in such a contingent
event. This redemption feature places the warrants within the scope of SFAS 150,
as put warrants and, accordingly, they are classified in liabilities and
measured at inception and on an ongoing basis at fair value. Fair value of the
warrants was measured using the Black-Scholes-Merton valuation technique and in
applying this technique we were required to develop certain subjective
assumptions. We have valued the underlying common shares at $0.25 on both the
inception and the financial statement date being representative of our best
estimates of our enterprise value, applying discounted cash flow techniques
consistent with approaches outlined by the American Institute of Certified
Public Accountants.
 
 2009
Convertible Debenture Financing
 
 On January
30, 2009, we issued a $600,000 face value 12% secured convertible debenture, due
January 31, 2011 and Class B warrants indexed to 2,400,000 shares of our common
stock for net cash proceeds of $507,900, as part of the Security Purchase
Agreement with Debt Opportunity Fund Ltd., dated January 30, 2009 .
 
 On
February 6, 2009, we issued a $500,000 face value 12% secured convertible
debenture, due January 31, 2011 and Class B warrants indexed to 2,000,000 shares
of our common stock for net cash proceeds of $443,250, as part of the Security
Purchase Agreement with Debt Opportunity Fund Ltd., dated February 6,
2009.
 
 The
following table illustrates the initial allocation to the secured convertible
debentures and warrants financing arrangements:




January
      30, 2009
                                            
                                            
                                            February
      6, 2009$600,000
                                            
                                            
                                            
                                            $500,000Secured convertible debentures,
      issued:
                                            
                                            Financing
                                            
                                            
                                            FinancingSecured
      convertible debentures
                                            
                                            $
                                            205,440
                                            
                                            
                                            $
                                            200,400Series
      C - 1warrants (classified as liabilities)
                                            
                                            
                                            185,760
                                            
                                            
                                            
                                            134,600Series
      C – 2 warrants (classified as liabilities)
                                            
                                            
                                            196,800
                                            
                                            
                                            
                                            150,000Beneficial
      conversion feature
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Total
                                            
                                            $
                                            588,000
                                            
                                            
                                            $
                                            485,000




Note 9 - Stockholders’
Deficit:
 
 Share-based payments
(employees):
 
 On
September 10, 2008, we issued 6,000,000 shares of common stock to our new
management team in connection with the Interlink Asset Group acquisition (see
Note 4). These shares are compensatory in nature and are fully vested. We have
valued the shares at $0.25, consistent with fair value measurements used
elsewhere in our accounting.




Officer
                                        
                                        Shares
                                        
                                        
                                        ExpenseAnastasios
      Kyriakides, CEO
                                        
                                        
                                        2,100,000
                                        
                                        
                                        $
                                        525,000Nicholas
      Kyriakides
                                        
                                        
                                        600,000
                                        
                                        
                                        
                                        150,000Kenneth
      Hosfeld,  EVP
                                        
                                        
                                        1,100,000
                                        
                                        
                                        
                                        275,000Leo
      Manzewitsch, CTO
                                        
                                        
                                        1,100,000
                                        
                                        
                                        
                                        275,000Guillermo
      Rodriguez, CFO
                                        
                                        
                                        1,100,000
                                        
                                        
                                        
                                        275,0006,000,000
                                        
                                        
                                        $
                                        1,500,000




24




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 9 - Stockholders’
Deficit (Continued):
 
 Share-based payment for
goods and services to non-employees:
 
 During the
year ended September 30, 2008, we issued 2,150,000 shares of common stock to
non-employees for goods and services.
 
 Consultant/Provider
                    
                    Shares
                    
                    
                    ExpenseFAMALOM,
      LLC
                    
                    
                    450,000
                    
                    
                    $
                    112,500Decembra
      Diamond
                    
                    
                    360,000
                    
                    
                    
                    90,000John
      Clarke
                    
                    
                    100,000
                    
                    
                    
                    25,000Deadalus
      Consulting, Inc.
                    
                    
                    90,000
                    
                    
                    
                    22,500Ron
      Roule
                    
                    
                    1,000,000
                    
                    
                    
                    250,000Iseal
      Aponte
                    
                    
                    150,000
                    
                    
                    
                    37,5002,150,000
                    
                    
                    $
                    537,500
 
 On July 9,
2009, we issued 1,000,000 shares of our common stock to non-employees for goods
and services.
 
 Consultant/Provider
                                  
                                  Shares
                                  
                                  
                                  PrepaidOmni
      Reliant
                                  
                                  
                                  1,000,000
                                  
                                  
                                  $
                                  250,000
 
 
 Warrants to purchase common
stock:
 
 On
February 6, 2009, we issued Series C – 2 warrants to purchase 2,000,000 shares
of our common stock in connection with financing transactions discussed in Note
8. These warrants have a strike price of $0.50 and expire five years from
issuance. We also issued Series BD warrants to purchase 800,000 shares of our
common stock in connection with financing transactions discussed in Note
7.
 
 On January
30, 2009, we issued Series C – 1 warrants to purchase 2,400,000 shares of our
common stock in connection with financing transactions discussed in Note 7.
These warrants have a strike price of $0.50 and expire five years from issuance.
We also issued Series BD warrants to purchase 480,000 shares of our common stock
in connection with financing transactions discussed in Note 7.
 
 On
September 10, 2008, we issued Class B warrants to purchase 6,000,000 shares of
our common stock in connection with financing transactions discussed in Note 7.
These warrants have a strike price of $0.50 and expire five years from
issuance.
 
 On January
17, 2007, we issued Class A warrants to purchase 3,262,712 shares of our common
stock in connection with a sale of common stock. These warrants have a strike
price of $1.00 and expire five years from issuance.
 
 Indexed Shares
                  
                  
                  Weighted StrikeOctober
      1, 2006
                  
                  
                  -Issued
                  
                  
                  3,262,712
                  
                  
                  $
                  1.00Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -September
      30, 2007
                  
                  
                  3,262,712
                  
                  
                  $
                  1.00Issued
                  
                  
                  6,000,000
                  
                  
                  $
                  0.50Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -September
      30, 2008
                  
                  
                  9,262,712
                  
                  
                  $
                  0.68Issued
                  
                  
                  5,680,000
                  
                  
                  $
                  0.50Exercised
                  
                  
                  -
                  
                  
                  
                  -Expired
                  
                  
                  -
                  
                  
                  
                  -June
      30, 2009 (Unaudited)
                  
                  
                  14,942,912
                  
                  
                  $
                  0.68




25




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 9 - Stockholders’
Deficit (Continued):
 
 The
weighted average remaining life of the aggregate warrants is 4.34
years.
 
 Refer to
Note 2 for income associated with the classification of warrants liabilities at
three months ended
 June 30,
2009, nine months ended June 30, 2009 and for the Period from Inception (May 1,
2006 through June 30, 2009).
 
 Note 10 - Commitment and
Contingencies:
 
 Leases
 
 We lease
our principal office space under an arrangement that is an operating lease. Rent
and associated occupancy expenses for the three and nine months ended June 30,
2009 was $41,760 and $124,280, respectively.
 
 Minimum
non-cancellable future lease payments as of June 30, 2009, were as follows:
2009—$26,925; 2010—$98,725.
 
 Employment
arrangements
 
 We have
entered into an employment agreement with our Chief Executive Officer,
Anastasios Kyriakides and in  consideration of his services to us, we
have agreed to pay him a base salary of $150,000 plus certain bonuses and awards
if the Company achieves certain profitability levels and adopts certain
incentive compensation plans. As of June 30, 2009, none of these incentive
arrangements and plans had been realized. This agreement is effective through
September 30, 2013.
 
 Note 11 - Related
Parties:
 
 A company
owned or controlled by a major shareholder of NetTalk.com, Inc., has provided
services to us, as follows:
 
 In June
2009, we incurred prepaid advertising for the creation of an infomercial to be
aired during the deployment and launching of our TK6000.  The
deployment and launching of our TK6000 is projected for the fourth quarter of
our fiscal year.  Upon airing our infomercial and deployment of our
TK6000 we will expense the amount of $350,000 as advertising
expense.  Prepaid advertising is made up of following
items:
 
 Items
                                  
                                  AmountCash
      payment
                                  
                                  $
                                  100,000Share-based
      payment (1,000,000 common shares)
                                  
                                  
                                  250,000Total
                                  
                                  $
                                  350,000




At June
30, 2009, Due to officer amounted to $100,000, the amount is revolving and will
be liquidated within one year.
  26




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 12 - Discontinued
Operations:
 
 On
September 10, 2008, at the time we acquired the Interlink Asset Group, our
management and Board of Directors committed to the discontinuance and disposal
of our advertising business. We disposed of this asset to be able to concentrate
our efforts exclusively on the deployment of the TK6000 product offering. We
concluded that the advertising business constituted a component of our business,
as defined in SFAS 144 and have presented the unit in the accompanying financial
statements on the basis that (a) the operations and cash flows of the component
have been eliminated from our ongoing operations a result of the disposal
transaction and (b) we have no significant continuing involvement in the
operations of the component after the disposal transaction. During fiscal year
ended  September 30, 2008, we sold the advertising business resulting
in a gain on sale of $168,083.
 
 There are
no assets or liabilities remaining at June 30, 2009 or December 31, 2008. The
caption discontinued operations on our statements of operations reflects the
following:
 
 Three
      Months Ended June 30,2009
                        
                        
                        2008Income
      from discontinued business
                        
                        $
                        -
                        
                        
                        $
                        -Loss
      from operations of discontinued business
                        
                        $
                        -
                        
                        
                        $
                        -Gain
      on sale of equipment
                        
                        $
                        -
                        
                        
                        $
                        -
 
 
 Nine
      Month Ended June 30,2009
                        
                        
                        2008Income
      from discontinued business
                        
                        $
                        -
                        
                        
                        $
                        -Loss
      from operations of discontinued business
                        
                        $
                        -
                        
                        
                        $
                        18,045Gain
      on sale of equipment
                        
                        $
                        -
                        
                        
                        $
                        168,083
 
 Note 13 - Income
taxes
 
 Accounting
for income taxes in interim periods is governed by APB Opinion No. 28, Interim Financial
Reporting(“APB 28”) and FASB
Interpretation No. 18, Accounting for Income Taxes
in Interim Periods(“FIN 18”), as amended
by Statement of Financial Accounting Standard No. 109, Accounting for Income
Taxes, collectively  (“SFAS 109”), these standards provide that
at the end of each interim period we are required to make our best estimate of
the effective tax rate expected to be applicable for our full fiscal year. The
rate so determined shall be used in providing for income taxes on a current
year-to-date basis. Further, the rate is revised, if necessary, as of the end of
each successive interim period during the fiscal year to the enterprise’s best
current estimate of its annual effective tax rate.
 
 We are
currently projecting a net loss for the current fiscal year for which we will
not be able to recognize a benefit due to limitations imposed by Statement SFAS
109 for companies with cumulative losses in recent years.
 
 Accordingly,
our interim financial information includes neither a provision nor a benefit.
However, in accordance with the above standards, we are required to evaluate the
accounting as to each quarterly reporting




27




NET
TALK.COM, INC.
 (A
Development Stage Enterprise)
 Notes
to Financial Statements
 for
the Three and Nine Months Ended June 30, 2009 (unaudited) and 2008
(unaudited)
 and
for the Period from Inception (May 1, 2006) through June 30, 2009
(unaudited)
 
 
 Note 14 - Subsequent
Events
 
 2009
Convertible Debenture Offering
 
 On July
20, 2009, we entered into a Securities Purchase Agreement with Debt Opportunity
Fund, LLP (“DOF”) by which DOF purchased (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $500,000; and (b) Series C
Warrants to purchase 2,000,000 shares of common stock of the Company. The
maturity date of the debentures is July 20, 2011 and each debenture bears
interest on the principal amount outstanding and unpaid from time to time at a
rate of 12% per annum from the date of issuance until paid in full.
Interest is calculated on the basis of a 360-day year and paid for the actual
number of days elapsed, and accrues and is payable quarterly or upon conversion
(as to the principal amount then being converted). The debentures convert into
shares of our common stock at the option of the holder at $0.25 per share (which
conversion price is subject to adjustment under certain circumstances). The
debentures are secured by a lien in all of the assets of the Company. The Series
C Common Stock Purchase Warrants entitle the holders to purchase up to an
aggregate of 2,000,000 shares of our common stock at an exercise price of
($0.50) per share. Each Series C Common Stock Purchase Warrant is exercisable,
in whole or in part, at any time after issuance and before the close of business
on the date five (5) years from the initial exercise date.
 
 Midtown
Partners & Co., LLC (“Midtown Partners”), an NASD registered broker
dealer, acted as the placement agent for the Company in connection with the 2009
Convertible Debt Offering. In connection with the 2009 Convertible Debt
Offering, we paid Midtown Partners a cash commission equal to $40,000 and issued
a Series BD Common Stock Purchase Warrant to Midtown Partners entitling Midtown
Partners to purchase 400,000 shares of the Company’s common stock at an initial
exercise price of $0.50 per share.
  The offer
and sale of the 12% Senior Secured Convertible Debentures, Series C Common Stock
Purchase Warrants and Series BD Common Stock Purchase Warrants was affected in
reliance on the exemptions for sales of securities not involving a public
offering, as set forth in Rule 506 promulgated under the Securities Act and in
Section 4(2) of the Securities Act, based on the following: (a) the
investors confirmed to us that they were either “accredited investors,” as
defined in Rule 501 of Regulation D promulgated under the Securities Act or had
such background, education and experience in financial and business matters as
to be able to evaluate the merits and risks of an investment in the securities;
(b) there was no public offering or general solicitation with respect to
the offering; (c) the investors were provided with certain disclosure
materials and all other information requested with respect to our company;
(d) the investors acknowledged that all securities being purchased were
“restricted securities” for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend
was placed on the certificates representing each such security stating that it
was restricted and could only be transferred if subsequently registered under
the Securities Act or transferred in a transaction exempt from registration
under the Securities Act.
  28
  Item
2 – Management Discussion and Analysis of Financial Conditions and Results of
Operations
  Our
Management’s Discussion and Analysis should be read in conjunction with our
financial statements included in this report.
  Forward
Looking Statements
  Certain
statements contained in this report on 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:
  ·
                whether
      or not a market for our products and services develop and, if a market
      develops, the pace at which it
develops;
 ·
                our
      ability to successfully sell our products and services if a market
      develops;
 ·
                our
      ability to attract the qualified personnel to implement our growth
      strategies;
 ·
                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
  Prior to
September 10, 2008, we were engaged in the development of advertising services
and strategies. On September 10, 2008, at the time we acquired the Interlink
Asset Group, discussed below, our management and Board of Directors committed to
the discontinuance and disposal of our advertising business. We disposed of this
company to be able to concentrate our efforts exclusively on the deployment of
the TK6000 Product Offering. We concluded that the advertising business
constituted a component of our business, as defined in SFAS
144,  Accounting for the
Impairment or Disposal of Long-Lived Assets, and have presented the unit
in the accompanying financial statements on the basis that (a) the operations
and cash flows of the component have been eliminated from our ongoing operations
as a result of the disposal transaction and (b) we have no significant
continuing involvement in the operations of the component after the disposal
transaction. On September 10, 2008, we sold the advertising business resulting
in a gain on sale of $168,083.
  On
September 10, 2008, we acquired certain tangible and intangible assets, formerly
owned by Interlink Global Corporation (“Interlink”) (the “Interlink Asset
Group”), directly from Interlink’s creditor who had seized the assets pursuant
to a Security and Collateral Agreement. Our purpose in acquiring these assets,
which included employment rights to the executive management team of Interlink,
was to advance the TK 6000 VoIP Technology Program, which Interlink launched in
July 2008. Accordingly, these assets substantially comprise our current business
assets and the infrastructure for our future continuing operations.
Contemporaneously with this purchase, we executed an Assignment and Intellectual
Property Agreement with Interlink that served to perfect our ownership rights to
the assets. The transfer of the Interlink Asset Group required us to determine
whether the group of assets constituted a  business, and accordingly,
required accounting under Statement of Financial Accounting Standards No.
141,  Business
Combinations  (SFAS 141) or whether the group of assets did not
constitute a  business  and, accordingly, required
accounting under other standards, including Statement of Financial Accounting
Standards No. 142,  Goodwill and Intangible
Assets  (SFAS 142). This determination is required to be made
by reference (by analogy) to guidance in EITF No. 98-3,  Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or a
Business  (EITF 98-3). We accounted for the acquisition of the
Interlink Asset Group as an acquisition of productive assets and not as a
business. In applying the guidance of EITF 98-3, a business is a self
sustaining, integrated
  29
  set of
activities and assets conducted and managed for the purpose of providing a
return to investors and, further, must consist of inputs, processes applied to
those inputs, and resulting outputs that are used to generate revenues. Based
upon the guidance of EITF 98-3, the Interlink Asset Group (i) did not possess
the inputs because, on the date of the acquisition, the critical asset (TK 6000
offering) had not achieved a proven level of technological feasibility and (ii)
did not possess the outputs because, on the date of the acquisition, the assets
did not include a revenue generating offering and, therefore, no ability to
access customers. Further, we are unable to overcome the general presumption in
EITF 98-3 that a development stage enterprise is presumed not to be a
business.
  We have
evaluated the substance of the exchange for purposes of identifying all assets
acquired.  The recognition of goodwill is not contemplated in an
exchange that is not a business or accounted for as a business combination under
SFAS 141. The following table reflects the acquisition date fair values and the
final allocation of the consideration to the assets acquired. The allocation was
performed in accordance with SFAS 142, which provides that an excess in
consideration over the fair values of the assets acquired is allocated to the
assets subject to depreciation and amortization, based upon their relative fair
values, and not to those assets with indefinite lives. A difference in the
recognized basis in the value of the consideration between book and income tax
gives rise to the deferred income taxes. The allocation of consideration in this
manner contemplates an immediate impairment analysis under SFAS 144. Our
analysis did not result in impairment, but we are required to continue to
perform this analysis as provided in our impairments policy.
  Asset or Account
                            
                            Fair
      Value
                            
                            
                            AllocationCash
                            
                            $
                            487,500
                            
                            
                            $
                            487,500Deferred
      finance costs
                            
                            
                            24,398
                            
                            
                            
                            24,398Telecommunications
      equipment and other property
                            
                            
                            411,203
                            
                            
                            
                            756,171Intangible
      assets:Knowhow
      of specialized employees
                            
                            
                            212,254
                            
                            
                            
                            212,254Trademarks
                            
                            
                            180,925
                            
                            
                            
                            332,708Employment
      arrangements
                            
                            
                            122,400
                            
                            
                            
                            225,084Workforce
                            
                            
                            54,000
                            
                            
                            
                            54,000Telephony
      license
                            
                            
                            5,000
                            
                            
                            
                            9,195Domain
      names
                            
                            
                            4,200
                            
                            
                            
                            7,723Deferred
      income taxes
                            
                            
                            —
                            
                            
                            
                            (8,033
                            )Interest
      expense (finance costs allocated to warrants)
                            
                            
                            14,802
                            
                            
                            
                            14,802$
                            1,516,682
                            
                            
                            $
                            2,115,802
  Plan
of Operation
  We are a
development-stage company, which will offer, 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. During our
development stage, we are devoting substantially all of our efforts in
developing the TK 6000 product and service offerings and the methods of
addressing related markets where we will deploy this product. We are also
engaged in developing our business infrastructure and we are seeking capital to
support the further development and deployment of our product. Our TK 6000
commenced beta testing during March 2009 and we anticipate it will enter revenue
generation status in our fourth fiscal quarter of 2009. As of the date of this
report, our activities have been limited to various organizational matters,
limited operations, and the development of our business plan.
  During our
development stage, as discussed above, we will incur significant expenditures
for research and development, arising both internally and externally. We
currently estimate that research and development expenditures will amount to
approximately $530,000 and $330,000 during our fiscal years ending September 30,
2009 and 2010, respectively. However, these levels are entirely predicated on
the success of our financing efforts discussed in Liquidity and Capital
Resources, below. We currently anticipate that we will be required to pay for
our research and development with cash. However, to the extent that outside
parties will entertain share-based payment arrangements, we will likely pursue
negotiations on those lines.
  30
  We
anticipate the TK 6000 will be available for distribution to the public by our
fourth fiscal quarter of 2009. The TK 6000 will begin to generate revenues when
it is sold and paid for by our potential customers.
  We will
begin to earn revenue from Carrier Access Billing (“CAB”) as soon as the TK 6000
is on the market. However, we expect to experience a delay in realizing those
revenues. CAB is revenue we receive from allowing other service providers to use
our telecommunication infrastructure. It is a surcharge we receive for allowing
major carriers to use our infrastructure to reach the end phone user. We will
begin accruing CAB revenues as soon as the TK 6000 is used by our customers and
our infrastructure is used by other carriers. However, we will experience a
delay in the receipt of those revenues while the original billing carrier
collects that charge from its customers and allocates and distributes that
amount to all CAB recipients. We anticipate experiencing a 30-60 day delay in
receiving CAB revenues from the time the TK 6000 is put into service until we
realize the revenues associated with the CAB charge.
  Liquidity
and Capital Resources
  We have
prepared our financial statements under the presumption that we will continue as
a going concern for a reasonable period. However, we are currently a development
stage company and, as such, we are devoting substantially all of our efforts in
developing the TK 6000 product and service offerings and the methods of
addressing related markets where we will deploy this product. We are also
engaged in developing our business infrastructure and we are seeking capital to
support the further development and deployment of our product. Accordingly, we
have not generated revenue nor do we expect to generate revenue until
approximately our fourth fiscal quarter of 2009. During the three months ended
June 30, 2009 and 2008, we generated net loss of $(789,734) and $0,
respectively.  During the nine months ended June 30, 2009 and 2008, we
generated net income (losses) of $(1,569,979) and $186,128, respectively and
have a cumulative net loss of $(4,074,739). We used cash in our operations in
the amounts of $450,369 during the three months ended June 30, 2008 and
$1,254,095 during the nine months ended June 30, 2009.  We used cash
in our operations in the amounts of $1,764,591 during the period from inception
(May 1, 2006) through June 30, 2009.
  Our
management is currently addressing these conditions and trends. We have
discontinued our prior business that was engaged in providing advertising
services and, we are devoting our efforts and our resources to the expeditious
development and deployment of the TK 6000 product. Our executive management team
is currently undertaking these initiatives and has raised $500,000 in
convertible debenture and warrants financing during fiscal year ended September
30, 2008 and has raised an additional $1,100,000 in convertible debenture and
warrant financing during fiscal year ended September 30, 2009 (note that
management also secured the Interlink Asset Group in exchange for the issuance
of a $1,000,000 debenture and associated warrants). Notwithstanding the
foregoing, our ability to continue is dependent upon raising the additional
capital necessary to complete the successful deployment of the TK 6000 product
and, ultimately, achieve profitable operations. There can be no assurances that
additional capital will be available at terms acceptable to our management, if
at all. The financial statements included elsewhere herein do not include any
adjustments related to the possible outcome of this uncertainty.
  As of June
30, 2009, we had cash on hand of $105,637. Based on the current rate at which we
are using capital, we believe that we will need to obtain a minimum in financing
of approximately $2,000,000 to continue our current minimal operations for the
next twelve (12) months. However, we believe that to fully implement the initial
phase of our business plan, we will require financing in the amount of
approximately $3,200,000. If we are able to obtain $3,200,000, we intend to
continue our current operations, launch our main product and become fully
operational during the next 12 months. We may seek to raise this additional
capital through the public or private sale of our equity securities, the
procurement of advances from our majority shareholder, debt financing or
short-term loans, or a combination of the foregoing. We currently do not have
any financing commitments (binding or non-binding) and we cannot give you any
assurance that we will be able to secure the additional cash or working capital
we may require to continue our operations and fully implement the initial phase
of our business plan. If we do not secure at least $3,200,000 we will not be
able to fully implement our business plan, and if we do not secure at least
$2,000,000 we may not be able to continue our current minimal operations beyond
the next twelve months and our business plan may fail.
  Our
largest operating expenditures currently consist of the following items: $14,500
per month on leasing our corporate office space (this includes our base rent and
associated utility expenses, etc.) and $58,000 per month on payroll. We do not
anticipate that our leasing costs will change substantially during the next 12
months. However, if we are successful in developing the TK 6000 we may incur
additional payroll costs associated with hiring customer service and order
processing support staff to assist us with those functions. Currently, our staff
consists of ten full time and zero part time employees. We will also incur
increased costs for phone components as the TK 6000 goes into production.
However, we anticipate that the increase in components will be offset by the
correlating increase in revenues.
  31
  If we are
able to obtain $3,200,000 we anticipate incurring the following
expenditures:
  RESEARCH,
DEVELOPMENT AND DEPLOYMENT EXPENSES
  Category
                            
                            Fiscal Year 2009
                            
                            
                            Fiscal Year 2010Marketing
      and advertising
                            
                            $
                            860,000
                            
                            
                            $
                            250,000Interconnections
      operations*
                            
                            $
                            1,353,000
                            
                            
                            $
                            1,490,000CLEC
      licenses
                            
                            $
                            24,000
                            
                            
                            $
                            20,000Research
      and Development
                            
                            $
                            530,000
                            
                            
                            $
                            330,000Telecommunication
      deposits
                            
                            $
                            235,000
                            
                            
                            $
                            250,000Total
                            
                            $
                            3,002,000
                            
                            
                            $
                            2,340,000
  *
                  This
      is the expense we incur under our interconnection agreements whereby we
      obtain access to the facilities of incumbent local exchange carriers to
      provide services to our customers. We have negotiated two interconnection
      agreements with national carriers.
 
 These
development and deployment costs may increase substantially based on several
different factors. For example, if we decide to pursue a patent application for
additional technology, we will need to bear the legal and administrative expense
of the patent process. In addition, the CLEC licensing process is costly and
time consuming. For each new state we expand into, we incur additional costs
associated with complying with that state’s licensing procedure. In addition to
the cost of producing our infomercial, we will also incur broadcasting charges
related to airing the infomercial. Those costs will vary depending on the market
we are targeting and the time and number of broadcasts. Any additional marketing
we undertake will also result in additional expense.
  We
currently have no material firm commitments related to purchases of our TK 6000
or any services associated with the TK 6000. We have an aggregate of $1,500,000
face value convertible debentures that mature and are payable in September 2010.
We are required to make quarterly interest payments amounting to $45,000
($180,000 annually), in cash.
  We also
have $1,100,000 face value convertible debentures that mature and are payable in
January 2011. We are required to make quarterly interest payments amounting to
$33,000 ($132,000 annually), in cash.
  While we
note that the publicly reported inflation rate in the United States have been
increasing during the current calendar year (5.37% as of August 31, 2008), we do
not believe that the current trend will materially affect our business in the
near term, defined as eighteen-months. However, we continue to monitor
fluctuations in the rate, as it is published.
  Our
current long term business plan contemplates acquiring the ongoing business of
related companies, either through asset acquisitions or consolidations. However,
due to the substantial doubt about our ability to continue as a going concern,
we do not anticipate any acquisitions in the near future.
  We
currently have Series A Common Stock Purchase Warrants outstanding entitling the
holders to purchase up to an aggregate of 3,099,712 shares of our common stock
at an exercise price of $0.25 per share, Series B Common Stock Purchase Warrants
outstanding entitling the holders to purchase up to an aggregate of 6,000,000
shares of our common stock at an exercise price of $0.50 per share, Series C
Common Stock Purchase Warrants outstanding entitling the holders to purchase up
to an aggregate of 4,400,000 shares of our common stock at an exercise price of
$0.50 per share and Series BD Common Stock Purchase Warrants outstanding
entitling the holders to purchase up to an aggregate of up to 1,280,000 shares
of common stock at an exercise price of ($0.50) per share. If the holders of our
warrants exercise these warrants, we will receive aggregate proceeds of
$6,414,928. Management has no way of knowing whether the holders of these
warrants will choose to exercise their warrants. If the holders do not exercise
the warrants, we will not receive any proceeds.
  Borrowing
Arrangements
  12%
Senior Secured Convertible Debentures
  We issued
a series of 12% Senior Secured Convertible Debentures in the aggregate principal
amount of $2,600,000, all of which are currently held by Vicis Capital Master
Fund, our majority shareholder. $1,500,000 of the principal is due on September
10, 2010 and the remaining $1,100,000 is due on January 30, 2011. Each Debenture
bears interest on the principal amount outstanding and unpaid from time to time
at a rate of 12% per annum from the date of issuance until paid in full.
Interest is calculated on the basis of a 360-day year and paid for the actual
number of days elapsed, and accrues and is payable quarterly or upon conversion
(as to the principal amount then being converted). The Debentures convert into
shares of the Company’s common stock at the option of the holder at $0.25 per
share (which conversion price is subject to adjustment under certain
circumstances). The Debentures are secured by a lien in all of the assets of the
Company.
  32
  The
following events constitute events of default under the Debentures: (i) failure
to pay any interest or principal payment when due; (ii) failure to observe any
covenant contained in the secured debenture or the purchase agreement that we
executed in connection with the issuance of the Debentures; (iii) the occurrence
of an event of default by us under any other material agreement or lease; (iv)
entry of a judgment against us in excess of $150,000; and (v) the appointment of
a receiver, the filing of bankruptcy by us, or if we otherwise become insolvent.
Payment on all of our secured debentures is secured by a lien in all of our
assets. If we fail to repay the secured debentures on their respective maturity
dates or if an event of default occurs under the Debentures for any other
reason, it may result in a material adverse effect on our business operating
results and financial condition as Vicis Capital Master Fund may foreclose on
our assets in an effort to be repaid amounts due under the secured debentures.
Additionally, if we seek to prepay the secured debentures, we must pay a
prepayment penalty equal to 110% of the then outstanding principal, plus all
other amounts due.
  The
Debentures contain full ratchet anti-dilution price protection; therefore, if we
issue a security at a price per share less than the current conversion price in
effect for the Debentures, the conversion price will adjust downward (i.e. if we
sell a security for $0.10 per share, the price at which our Debentures converts
to common stock will decrease from $0.25 to $0.10).
  The
Debentures contain negative covenants that prohibit us from taking certain
corporate actions without the prior written consent of the holder of the
Debentures, Vicis Capital Master Fund, who is also our majority shareholder. We
cannot take the following actions without Vicis Capital Master Funds’ consent
while the Debentures remain outstanding: (i) incur any additional indebtedness
or allow any lien to be filed against our assets, except in certain limited
instances; (ii) amend our articles of incorporation or bylaws in a manner that
adversely effects the holder of our secured debentures; (iii) repay, repurchase
or otherwise acquire more than a de minimis number of shares of our common stock
or common stock equivalents from any security holder, except in certain limited
instances; (iv) enter into any transactions with our executive officers,
directors or affiliates; (v) increase our executive officers’ salary or bonus
more than 15% from what was paid in the previous year; or (vi) pay cash
dividends or distributions on any of our equity security. We are currently in
compliance with these restrictive covenants.
  Currently,
the conversion price of the Debentures is $0.25. Therefore, there are 10,400,000
shares of common stock currently issuable upon the conversion of the Debentures.
Due to the full ratchet anti-dilution feature contained in the Debentures, the
conversion price for the Debentures could adjust downward to $0.01 per share,
resulting in us having to issue 260,000,000 shares of common stock upon
conversion of the Debentures. If Vicis Capital Master Fund converts the
Debentures our existing shareholders could suffer substantial dilution of their
investment in terms of their percentage ownership as well as the book value of
their shares of common stock.  We currently have 9,749,800 shares of
common stock issued and outstanding.  If Vicis fully converts the
debentures, whether upon our default under the Debenture or upon voluntary
request by Vicis, the number of issued and outstanding common shares will more
than double. As a result, our existing shareholders’ overall percentage of
ownership in the Company will be substantially decreased.
  Results
of Operations
  Comparison
of Historical Results – Three Months Ended June 30, 2009 and 2008
  Our
continuing operating results for the three months ended June 30, 2009 reflect
the operation of a developing business; therefore, they reflect certain start-up
related expenses, and they are not indicative of the results of our operations
that may be realized during full fiscal years (or interim periods thereof) of
our future continuing operations.
  Compensation and Benefits: Our
compensation and benefits expense amounted to $92,500 for the three months ended
June 30, 2009 as compared to $0 for three months ended June 30,
2008.  This amount represents normal salaries and wages paid to
management members and employees.
  Professional Fees: Our
professional fees amounted to $95,296 for the three months ended June 30, 2009,
as compared to $0 for the three months ended June 30, 2008.  This
amount includes normal payments and accruals for legal, accounting and other
professional services.
  Depreciation and
Amortization:  Depreciation and amortization amounted to
$134,263 for the three months ended June 30, 2009, as compared to $0 for the
three months ended June 30, 2008.  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
quarter ended June 30, 2009, 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.
  33
  Research and Development: Research and development
costs amounted to $123,743 for the three months ended June 30, 2009 as compared
to $0 for the three months ended June 30, 2008. Such amount represented product
development and design and payroll and benefits allocated to the development of
our TK6000.
  Product
      development and
      engineering
                                        
                                        $
                                        47,175Payroll
      and
      benefits
                                        
                                        
                                        76,668Total
                                        
                                        $
                                        123,743
  General and Administrative Expenses.General and administrative expenses amounted to $112,160 for the three
months ended June 30, 2009 as compared to $0 for the three months ended June 30,
2008 and consisted of general corporate expenses and certain other startup
expenses.  General corporate expenses included $41,760 in occupancy
costs.
  We have
experienced a recent increase in our general and administrative costs primarily
because of professional accounting and legal fees incurred in connection with
the preparation and filing of our registration statement on Form
S-1.  We believe that these increased costs are associated with our
efforts to become a public company. However, our administrative and overall
general costs will continue to remain high now that our registration statement
has been declared effective.  Our costs associated with legal and
accounting fees will remain higher than historical amounts because, as a
reporting company, we are required to comply with the reporting requirements of
the Securities and Exchange Act of 1934. This involves the preparation and
filing of the quarterly and annual reports required under the Exchange Act as
well as the other filing requirements found in that Act. We will also incur
additional expenses associated with the services provided by our transfer agent.
In addition, to the work we are presently doing, we will need to focus our time
and energy to complying with the Exchange Act. This will detract from our
ability and efforts to develop and market
the           TK 6000 and
future product and service offerings.
  We
anticipate incurring these additional expenses related to being a public company
without receiving a substantial increase in revenues associated with this
undertaking. Therefore, these additional expenses will not be offset by an
increase in revenue. There is currently no public market for our common stock.
We plan to have our common stock quoted on the Over the Counter Bulletin Board
(the “OTCBB”), however, even if we become listed on the OTCBB, we do not
anticipate having access to public investors. We will need to compensate for
these additional costs associated with becoming a public company by revenues
generated from our TK 6000 (when that product becomes marketable) or from the
public or private sale of or equity securities, the procurement of advances from
our majority shareholder, debt financing or short-term loans, or a combination
of the foregoing. As discussed elsewhere in this report, we currently do not
have any financing commitments (binding or non-binding) and we cannot give you
any assurance that we will be able to secure the additional cash or working
capital we may require to continue our operations and meet these increased
costs.
  Interest Expense: Interest
expense amounted to $160,830 for the three months ended June 30, 2009 as
compared to$0 for the three months ended June 30, 2008.  Such amount
represented (i) stipulated interest under our aggregate $2,600,000 face value
convertible debentures issued, (ii) the related amortization of premiums and
(iii) the amortization of deferred finance costs.
  Derivative Expense: Derivative
income (expense) amounted to $(73,944) for the three months ended June 30, 2009
as compared to $0 for the three months ended June 30, 2008.  Such
amount represents the change in fair value of liability-classified warrants
(indexed to 14,400,000 shares of our common stock).  As required by
FAS 133, derivative financial instruments are required to be carried as
liabilities, at fair value, in our financial statements with changes reflected
in income. In addition to the liability-classified warrants, we also have
certain compound derivative financial instruments related to our $2,600,000 face
value convertible debentures that had de minimus values. We are required to
adjust our warrant and compound derivatives to fair value at each reporting
period. The fair value of our warrant derivative is largely based upon
fluctuations in the fair value of our common stock. The fair value of our
compound derivative is largely based upon estimates of cash flow arising from
the derivative and credit-risk adjusted interest rates. Accordingly, the
volatility in these underlying valuation assumptions will have future effects on
our earnings.
  Income Taxes: Income tax
provision amounted to $0 and $0for the three months ended June 30, 2009 and
2008, respectively, due to our present operating losses.
  Discontinued Operations:
Income (loss) from discontinued operations amounted to $0 and $0, for the three
months ended June 30, 2009 and 2008, respectively.  Prior to its
discontinuance, the former advertising business was a non-revenue producing
development stage enterprise. During these periods, the discontinued business
incurred compensation and general administrative costs. We have no continuing
involvement with that business.
  34
 Net Loss: The net loss
amounted to $789,734 for the three months ended June 30, 2009, as compared to a
net loss of $0 for the three months ended June 30, 2008, respectively. The
increase in net loss is primarily due to start up expenses associated with our
status as a development stage enterprise.
  Net Loss Per Common Share: We
have applied the provisions in Statement of Financial Accounting Standards No.
128,Earnings per
Share (SFAS 128) in calculating our basic and diluted loss per common
share. Basic loss per common share represents our net loss divided by the
weighted average number of common shares outstanding during the period. Diluted
loss per common share gives effect to all potentially dilutive securities. We
compute the effects on diluted loss per common share arising from warrants and
options using the treasury stock method. Applying this method, 14,942,912 shares
indexed to warrants were excluded from our computation because the effect was
anti-dilutive. We compute the effects on diluted loss per common share arising
from convertible securities using the if-converted method. The effects, if
anti-dilutive are excluded. Applying this method, 14,400,000 shares indexed to
our convertible debentures were excluded from our computation because the effect
was anti-dilutive.
  Comparison
of Historical Results – Nine Months Ended June 30, 2009 and 2008
  Our
continuing operating results reflect that we are a developmental stage business
with no revenues. Therefore, our operating results reflect certain start-up
related expenses, and may not indicative of the results of our operations that
may be realized during full fiscal years of our future continuing
operations.
  Compensation and Benefits: Our
compensation and benefits expense amounted to $349,099 for the nine months ended
June 30, 2009 as compared to $0for the nine months ended June 30,
2008.  This amount represents normal salaries and wages paid to
management members and employees.
  Professional Fees: Our
professional fees amounted to $231,721 for the nine months ended June 30, 2009
as compared to$0for the nine months ended June 30, 2008. This amount includes
normal payments and accruals for legal, accounting and other professional
services.
  Depreciation and Amortization:
Depreciation and amortization amounted to $267,822 for the nine months ended
June 30, 2009 as compared to $0for the nine months ended June 30,
2008.  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 nine months ended June 30, 2009, we did not
calculate or record impairment charges. However, negative trends in our business
and our inability to meet our projected future results could give rise to
impairment charges in future periods.
  Research and Development: Research and development
costs amounted to $235,740 for the nine months ended June 30, 2009 as compared
to $0 for the nine months ended June 30, 2008. Such amount represented product
development and design and payroll and benefits allocated to the development of
our TK6000.
  Product
      development and
      engineering
                                  
                                  $
                                  114,105Payroll
      and
      benefits
                                  
                                  
                                  121,635Total
                                  
                                  $
                                  235,740
  General and Administrative
Expenses. General and administrative expenses amounted to $258,876 for
the nine months ended June 30, 2009 as compared to$0for the nine months ended
June 30, 2008 and consisted of general corporate expenses and certain other
start up expenses. General corporate expenses included $124,280 in occupancy
costs.
  We have
experienced a recent increase in our general and administrative costs primarily
because of professional accounting and legal fees incurred in connection with
the preparation and filing of our registration statement on Form
S-1.  We believe that these increased costs are associated with our
efforts to become a public company. However, our administrative and overall
general costs will continue to remain high now that our registration statement
has been declared effective.  Our costs associated with legal and
accounting fees will remain higher than historical amounts because, as a
reporting company, we are required to comply with the reporting requirements of
the Securities and Exchange Act of 1934. This involves the preparation and
filing of the quarterly and annual reports required under the Exchange Act as
well as the other filing requirements found in that Act. We will also incur
additional expenses
 
 35
  associated
with the services provided by our transfer agent. In addition, to the work we
are presently doing, we will need to focus our time and energy to complying with
the Exchange Act. This will detract from our ability and efforts to develop and
market the TK 6000 and future product and service offerings.
  We
anticipate incurring these additional expenses related to being a public company
without receiving a substantial increase in revenues associated with this
undertaking. Therefore, these additional expenses will not be offset by an
increase in revenue. There is currently no public market for our common stock.
We plan to have our common stock quoted on the Over the Counter Bulletin Board
(the “OTCBB”), however, even if we become listed on the OTCBB, we do not
anticipate having access to public investors. We will need to compensate for
these additional costs associated with becoming a public company by revenues
generated from our TK 6000 (when that product becomes marketable) or from the
public or private sale of or equity securities, the procurement of advances from
our majority shareholder, debt financing or short-term loans, or a combination
of the foregoing. As discussed elsewhere in this report, we currently do not
have any financing commitments (binding or non-binding) and we cannot give you
any assurance that we will be able to secure the additional cash or working
capital we may require to continue our operations and meet these increased
costs.
  Interest Expense: Interest
expense amounted to $326,448 for the nine months ended June 30, 2009 as compared
to$0 for the nine months ended June 30, 2008. Such amount represented (i)
stipulated interest under our aggregate $2,600,000 face value convertible
debentures, (ii) the related amortization of premiums (iii) the amortization of
deferred finance costs.  Aggregate premiums continue to be credited to
interest expense over the term of the debentures using the effective interest
method.
  Derivative Income : Derivative
income amounted to $90,970 for the nine months ended June 30, 2009 as compared
to $0for the nine months ended June 30, 2008. Such amount represents the change
in fair value of liability-classified warrants (indexed to 14,400,000 shares of
our common stock). As required by FAS 133, derivative financial instruments are
required to be carried as liabilities, at fair value, in our financial
statements with changes reflected in income. In addition to the
liability-classified warrants, we also have certain compound derivative
financial instruments related to our $2,100,000 face value convertible
debentures that had de minimus values. We are required to adjust our warrant and
compound derivatives to fair value at each reporting period. The fair value of
our warrant derivative is largely based upon fluctuations in the fair value of
our common stock. The fair value of our compound derivative is largely based
upon estimates of cash flow arising from the derivative and credit-risk adjusted
interest rates. Accordingly, the volatility in these underlying valuation
assumptions will have future effects on our earnings.
  Discontinued Operations:
Income (loss) from discontinued operations amounted to $0 and $186,128 for the
nine months ended    June 30, 2009 and 2008,
respectively.  Income from discontinued operations during 2008 is net
of $168,083 related to the gain on sale of assets and $18,045 related to a gain
on debt forgiveness of an unrelated third-party. Prior to its discontinuance,
the former advertising business was a non-revenue producing development stage
enterprise. During these periods, the discontinued business incurred
compensation and general administrative costs. We have no continuing involvement
with that business.
  Net Income (Loss). The net
income (loss) amounted to $(1,569,979) for the nine months ended June 30, 2009,
as compared to a net income of $186,128 for the nine months ended June 30,
2008.  The increase in net loss is primarily due to start up expenses
associated with our status as a development stage enterprise.
  Net Income (Loss) Per Common
Share: We have applied the provisions in Statement of Financial
Accounting Standards No. 128,Earnings per Share
(SFAS 128) in calculating our basic and diluted loss per common share. Basic
loss per common share represents our net loss divided by the weighted average
number of common shares outstanding during the period. Diluted loss per common
share gives effect to all potentially dilutive securities. We compute the
effects on diluted loss per common share arising from warrants and options using
the treasury stock method. Applying this method,14,942,912 shares indexed to
warrants were excluded from our computation because the effect was
anti-dilutive. We computed the effects on diluted loss per common share arising
from convertible securities using the if-converted method. The effects, if
anti-dilutive are excluded. Applying this method, 14,400,000 shares indexed to
our convertible debentures were excluded from our computation because the effect
was anti-dilutive.
  Off-Balance
Sheet Arrangements
  We lease
our principal office space under an arrangement that is an operating lease. Rent
and associated occupancy expenses for the three months ended June 30, 2009 was
$41,760 and during nine months ended June 30, 2009 was
$124,280.                              Minimum
non-cancellable future lease payments as of June 30, 2009, were as follows:
2009—$26,925 and 2010—$98,725.
  We have
warrants outstanding to purchase 14,942,912 shares of our common stock,
2,262,712 of which are classified in stockholders’ equity.
  36
  Critical
Accounting Policies
  The
financial information contained in our comparative results of operations and
liquidity disclosures has been derived from our financial statements included in
this prospectus. 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 have made in the
preparation of our consolidated 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 under Statement of Financial Accounting Standards
      No. 144Accounting
      for the Impairment or Disposal of Long-Lived
      Assets  (SFAS 144) annually at the beginning of our
      fourth fiscal quarter 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. We have certain
      intangible assets that are not subject to amortization because they
      currently have indefinite lives. We are also required to evaluate whether
      these assets acquire a finite useful life annually and, if present,
      commence amortization thereof. Prior to that event, if ever, we evaluate
      intangible assets that are not subject to amortization under the guidance
      of Statement of Financial Accounting Standards No. 142 Goodwill and
      Intangible Assets (SFAS 142). Under this standard, the impairment test
      consists of a comparison of the fair values of the intangible assets with
      the respective carrying values. An impairment loss would be required for
      an excess in carrying value over the fair value on an asset-by-asset
      basis. Our estimates in making our impairment analysis and related
      decisions are highly subjective because they rely largely on the
      development of prospective financial information. 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. We intend to
      follow the available guidance (e.g. FAS 123R, SAB 107) in making these
      decisions. However, we will not know definitively our historical trends
      until our shares trade for periods consistent with the remaining terms of
      these instruments, which could be many
years.
 ·
                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. We will look to those values should our shares
      ultimately be listed and traded. Prior to that, we have utilized the
      income approach to enterprise valuation coupled with our common shares
      outstanding to estimate the fair value of our common stock per share. The
      income approach requires us to develop subjective estimates about our
      future operating performance and cash flows. It also requires us to
      develop estimates related to the discount rate necessary to discount
      future cash flows. As with any estimates, actual results could be
      different.
 ·
                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. As
      required by FAS 133, these instruments are required to be carried as
      derivative liabilities, at fair value, in our financial statements. The
      fair value of share-indexed derivatives will be significantly influenced
      by the fair value of our common stock (see Common Stock Valuation, above).
      Certain other elements of forward-type derivatives are significantly
      influenced by credit-adjusted interest rates used in cash-flow analysis.
      Since we are required to carry derivative financial instruments at fair
      value and make adjustments through earnings, our future profitability will
      reflect the influences arising from changes in our stock price, changes in
      interest rates, and changes in our credit
  standing.
  37
  Recent
Accounting Pronouncements
  We have
reviewed accounting pronouncements and interpretations thereof that have
effectiveness dates during the periods reported and in future periods. We
believe that the following impending standards may have an impact on our future
filings. The applicability of any standard is subject to the formal review of
our financial management and certain standards are under
consideration.
  In
December 2007, the FASB issued SFAS No. 141(R),Business
Combinations (“SFAS 141(R)”), which establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in an acquire, including the recognition and
measurement of goodwill acquired in a business combination. SFAS 141R is
effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. The adoption of SFAS 141 R did not have a material impact on
our financial position, results of operations or cash flows.
  In
September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and132(R) (“SFAS 158”). SFAS 158 improves
financial reporting by requiring an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement
plan                          (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit
organization.
  SFAS 158
also improves financial reporting by requiring an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The effective date for an employer with publicly traded
equity securities is as of the end of the fiscal year ending after December 15,
2006. The adoption of SFAS 158 did not have a material impact on our financial
position, results of operations or cash flows because we do not have a defined
benefit plan for our employees.
  In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No. 51
.. This statement amends ARB No. 51 to establish accounting and reporting
standards for the Non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 will change the classification and
reporting for minority interest and non-controlling interests of variable
interest entities. Following the effectiveness of SFAS 160, the minority
interest and non-controlling interest of variable interest entities will be
carried as a component of stockholders’ equity. Accordingly, upon the
effectiveness of this statement, we will begin to reflect non-controlling
interest in our consolidated variable interest entities as a component of
stockholders’ equity. This statement is effective for fiscal years and interim
periods within those fiscal years, beginning on or after December 15,
2008.  Since we do not currently have any non-controlling interest
consolidated in our financial statements, adoption of this standard will not
have any material effect on our financial statements.
  In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133  (“SFAS 161”). SFAS 161 is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. Entities
are required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations; and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years beginning after November 15,
2008.  The adoption of SFAS 161 did not have a material impact on our
financial position, results of operations or cash flows.
  In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.” We do not expect the adoption of SFAS 162 will
have a material effect on our financial position, results of operations or cash
flows.
  In July
2006, the FASB issued Interpretation No. 48,Accounting for uncertainty
in Income Taxes (“FIN 48”). FIN No. 48 clarifies the accounting for
Income Taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition and clearly
scopes income taxes out of SFAS No. 5,  Accounting for
Contingencies . FIN 48 was effective for fiscal years beginning after
December 15, 2006. Accordingly, we have implemented FIN 48 by summarizing and
evaluating all potential uncertain tax positions. As a result of our
implementation, FIN 48 did not have a material impact on our financial position,
results of operations or cash flows.
 
 38
  In
December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements (FSP 00-19-2) which addresses accounting for
registration payment arrangements. FSP 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or
included as a provision of a financial instrument or other agreement, should be
separately recognized and measured in accordance with SFAS No. 5,Accounting for
Contingencies . FSP 00-19-2 further clarifies that a financial instrument
subject to a registration payment arrangement should be accounted for in
accordance with other applicable generally accepted accounting principles
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement. For registration payment arrangements
and financial instruments subject to those arrangements that were entered into
prior to the issuance of EITF 00-19-2, this guidance shall be effective for
financial statements issued for fiscal years beginning after December 15, 2006
and interim periods within those fiscal years. The adoption of EITF 00-19-02 did
not have a material impact on our financial position, results of operations or
cash flows, because we have no current transactions that embody Registration
Payment Arrangements, as defined in the standard.
  In June
2008, the Emerging Issues Task Force issued EITF Consensus No. 07-05 Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock ,
which supersedes the definition in EITF 06-01 for periods beginning after
December 15, 2008 (our fiscal year ending September 30, 2010). The objective of
this Issue is to provide guidance for determining whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity’s own stock
and it applies to any freestanding financial instrument or embedded feature that
has all the characteristics of a derivative in of Statement 133, for purposes of
determining whether that instrument or embedded feature qualifies for the first
part of the scope exception in paragraph 11(a) of Statement 133 (the “Paragraph
11(a) Exemption). This Issue also applies to any freestanding financial
instrument that is potentially settled in an entity’s own stock, regardless of
whether the instrument has all the characteristics of a derivative in Statement
133, for purposes of determining whether the instrument is within the scope of
Issue 00-19. We currently have 14,379,712 warrants that embody terms and
conditions that require the reset of their strike prices upon our sale of shares
or equity-indexed financial instruments and amounts less than the conversion
prices. These features will no longer be treated as “equity” under the EITF once
it becomes effective. Rather, such instruments will require classification as
liabilities and measurement at fair value. Early adoption is precluded.
Accordingly, this standard will be adopted in our quarterly period ended
December 31, 2009.
  In June
2008, the Emerging Issues Task Force issue EITF Consensus No. 08-04 Transition Guidance for
Conforming Changes to Issue 98-5 “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios, which is effective for years ending after December 15, 2008 (our
fiscal year ending September 30, 2009).  The overall objective of the
Issue is to conform the requirements of EITF 00-27 and Financial Accounting
Standard No. 150 with EITF 98-5 to provide for consistency in application of the
standard.  We computed and recorded a beneficial conversion feature in
connection with our convertible debentures financing in our second quarter of
2009.
  In April
2008, the FASB issued FSP No.FAS 142-3.  Determination of the Useful
Life of Intangible Assets. This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other
Intangible Assets . We were required to adopt FSP 142-3 on October 1,
2008. The guidance in FSP 142-3 for determining the useful life of a recognized
intangible asset shall be applied prospectively to intangible assets acquired
after adoption, and the disclosure requirements shall be applied prospectively
to all intangible assets recognized as of, and subsequent to, adoption. We have
evaluated the impact of FSP 142-3 on our financial position, results of
operations and cash flows, and we believe that the established lives will
continue to be appropriate under the FSP.
  In May
2008, the FASB issued FSP Accounting Principles Board 14-1, Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement), (“FSP APB 14-1”). FSP APB 14-1 requires the issuer of
certain convertible debt instruments that may be settled in cash (or other
assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the
issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for
fiscal years beginning after December 15, 2008 on a retroactive basis. The
adoption of FSP APB 14-1 did not have a material impact on our financial
position, results of operations or cash flows.
  Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on our present or future financial
statements.
  Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
  We had no
changes in or disagreements with our accountants.
  Item
3. Quantitative and Qualitative Disclosure about Market Risk
  Not
applicable to smaller reporting companies.
  39
  Item
4-T  Controls and Procedures
  Evaluation
of Disclosure Controls and Procedures
 
 The
Company maintains disclosure controls and procedures, as such terms are defined
in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”).  The Company, under the supervision and with the participation
of its management, including its Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of such
disclosure controls and procedures for this Report.  Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company’s disclosure controls and procedures were effective
as of June 30, 2009 to provide reasonable assurance that material information
required to be disclosed by the Company in this Report was recorded, processed,
summarized and communicated to the Company’s management as appropriate and
within the time periods specified in SEC rules and forms.
 
 Management’s
Report on Internal Control over Financial Reporting
 
 There have
not been any changes in the Company’s internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act, during its last fiscal quarter that have materially affected, or are
reasonably likely to materially affect its internal control over financial
reporting.
 
 
 PART
II                      OTHER
INFORMATION
 
 Item
1.                      Legal Proceedings -None.
 
 Item
2.                      Unregistered
Sales of Equity Securities and Use of Proceeds
 
 2009
Convertible Debenture Offering
 
 On July
20, 2009, we entered into a Securities Purchase Agreement with Debt Opportunity
Fund, LLP (“DOF”) by which DOF purchased (a) 12% Senior Secured Convertible
Debentures in the aggregate principal amount of $500,000 (the “Debentures”); and
(b) Series C Warrants to purchase 2,000,000 shares of common stock of the
Company. The maturity date of the debentures is July 20, 2011 and each debenture
bears interest on the principal amount outstanding and unpaid from time to time
at a rate of 12% per annum from the date of issuance until paid in full.
Interest is calculated on the basis of a 360-day year and paid for the actual
number of days elapsed, and accrues and is payable quarterly or upon conversion
(as to the principal amount then being converted). The debentures convert into
shares of our common stock at the option of the holder at $0.25 per share (which
conversion price is subject to adjustment under certain circumstances). The
debentures are secured by a lien in all of the assets of the Company. The Series
C Common Stock Purchase Warrants entitle the holders to purchase up to an
aggregate of 2,000,000 shares of our common stock at an exercise price of
($0.50) per share. Each Series C Common Stock Purchase Warrant is exercisable,
in whole or in part, at any time after issuance and before the close of business
on the date five (5) years from the initial exercise date.
  The
following events constitute events of default under the Debentures: (i) failure
to pay any interest or principal payment when due; (ii) failure to observe any
covenant contained in the secured debenture or the purchase agreement that we
executed in connection with the issuance of the Debentures; (iii) the occurrence
of an event of default by us under any other material agreement or lease; (iv)
entry of a judgment against us in excess of $150,000; and (v) the appointment of
a receiver, the filing of bankruptcy by us, or if we otherwise become insolvent.
Payment on all of our secured debentures is secured by a lien in all of our
assets. If we fail to repay the secured debentures on their respective maturity
dates or if an event of default occurs under the Debentures for any other
reason, it may result in a material adverse effect on our business operating
results and financial condition as DOF may foreclose on our assets in an effort
to be repaid amounts due under the secured debentures. Additionally, if we seek
to prepay the secured debentures, we must pay a prepayment penalty equal to 110%
of the then outstanding principal, plus all other amounts due.
  The
Debentures contain full ratchet anti-dilution price protection; therefore, if we
issue a security at a price per share less than the current conversion price in
effect for the Debentures, the conversion price will adjust downward (i.e. if we
sell a security for $0.10 per share, the price at which our Debentures converts
to common stock will decrease from $0.25 to $0.10).
  40




The
Debentures contain negative covenants that prohibit us from taking certain
corporate actions without the prior written consent of the holder of the
Debentures, DOF. We cannot take the following actions without DOF’s consent
while the Debentures remain outstanding: (i) incur any additional indebtedness
or allow any lien to be filed against our assets, except in certain limited
instances; (ii) amend our articles of incorporation or bylaws in a manner that
adversely effects the holder of our secured debentures; (iii) repay, repurchase
or otherwise acquire more than a de minimis number of shares of our common stock
or common stock equivalents from any security holder, except in certain limited
instances; (iv) enter into any transactions with our executive officers,
directors or affiliates; (v) increase our executive officers’ salary or bonus
more than 15% from what was paid in the previous year; or (vi) pay cash
dividends or distributions on any of our equity security. We are currently in
compliance with these restrictive covenants.
 
 Midtown
Partners & Co., LLC (“Midtown Partners”), an NASD registered broker
dealer, acted as the placement agent for the Company in connection with the 2009
Convertible Debenture Offering. In connection with the 2009 Convertible
Debenture Offering, we paid Midtown Partners a cash commission equal to $40,000
and issued a Series BD Common Stock Purchase Warrant to Midtown Partners
entitling Midtown Partners to purchase 400,000 shares of the Company’s common
stock at an initial exercise price of $0.50 per share.
 
 The
Company also entered into Registration Rights Agreements dated July 20, 2009, to
register the common stock underlying the 12% Senior Secured Convertible
Debentures, the Series C Common Stock Purchase Warrants and the Series BD Common
Stock Purchase Warrants for resale with the SEC for the benefit of purchasers of
the Company’s 12% Senior Secured Convertible Debentures, Series C Common Stock
Purchase Warrants and Series BD Common Stock Purchase Warrants. The Registration
Rights Agreement provides the holders of the Debentures, the Series C Common
Stock Purchase Warrants and the Series BD Common Stock Purchase Warrants with
piggy-back registration rights.  As such, if the Company registers any
of its securities for public sale, including pursuant to any
stockholder-initiated demand registration (but excluding any registration
statement filed on Form S-4 or S-8), these holders have the right to include
their shares in the registration statement.
 
 The offer
and sale of the 12% Senior Secured Convertible Debentures, Series C Common Stock
Purchase Warrants and Series BD Common Stock Purchase Warrants was affected in
reliance on the exemptions for sales of securities not involving a public
offering, as set forth in Rule 506 promulgated under the Securities Act and in
Section 4(2) of the Securities Act, based on the following: (a) the
investors confirmed to us that they were either “accredited investors,” as
defined in Rule 501 of Regulation D promulgated under the Securities Act or had
such background, education and experience in financial and business matters as
to be able to evaluate the merits and risks of an investment in the securities;
(b) there was no public offering or general solicitation with respect to
the offering; (c) the investors were provided with certain disclosure
materials and all other information requested with respect to our company;
(d) the investors acknowledged that all securities being purchased were
“restricted securities” for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend
was placed on the certificates representing each such security stating that it
was restricted and could only be transferred if subsequently registered under
the Securities Act or transferred in a transaction exempt from registration
under the Securities Act.
 
 Item 3. Defaults Upon Senior Securities -None.
 
 Item
4.                      Submission of Matters to a Vote of
Security Holders -None.
 
 Item 5. Other Information –None.
 
 41
  Item
6.                      Exhibits
 
 Exhibit No.
                          
                          Description3.01(1)
                          
                          Articles
      of Incorporation of Net Talk.com, Inc.3.02(1)
                          
                          Articles
      of Amendment to the Articles of Incorporation of Net Talk.com,
      Inc.3.03(1)
                          
                          Articles
      of Amendment to the Articles of Incorporation of Net Talk.com,
      Inc.3.04(1)
                          
                          Articles
      of Amendment to the Articles of Incorporation of Net Talk.com,
      Inc.3.05(1)
                          
                          Bylaws
      of Net Talk.com.10.01(2)
                          
                          Securities
      Purchase Agreement dated as of July 20, 2009 by and among the Company and
      Debt Opportunity Fund, LLLP.10.02(2)
                          
                          Form
      of 12% Senior Secured Convertible Debenture due July 20,
    2011.10.03
      (2)
                          
                          Form
      of Series C Common Stock Purchase Warrant.10.04
      (2)
                          
                          Form
      of Series BD Common Stock Purchase Warrant.10.05
      (2)
                          
                          Registration
      Rights Agreement dated July 20, 2009.31.01(2)
                          
                          Certification
      of Chief Executive 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
      July 30, 2009.31.02(2)
                          
                          Certification
      of 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
      July 30, 2009.32.01(2)
                          
                          Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 30,
      2009.32.02(2)
                          
                          Certification
      of Acting 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
      July30,
2009.
 
 (1)
Previously filed as an exhibit to the Registration Statement on Form S-1 filed
with the Securities and Exchange Commission dated February 9, 2009.
 
 (2) Filed
herewith.
 
 
 
 
 SIGNATURE
 
 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.
  NET
      TALK.COM, INC.By:
                                                            /s/ Anastasios KyriakidesAnastasios
      Kyriakides, Chief Executive OfficerBy:
                                                            /s/ Guillermo RodriguezGuillermo
      Rodriguez, Chief Financial OfficerDated:
      July 31, 2009
   42