SECURITIES
      AND EXCHANGE
      COMMISSION


**Washington,
      D.C. 20549**









**FORM
      10-KSB**





ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


**For
                  the fiscal year ended December 31, 2005**
              **Commission
                  file number: 0-51111**









**PROTOCALL
      TECHNOLOGIES INCORPORATED**


(Name
      of
      small business issuer in its charter)




**Nevada**
            
            **41-2033500**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)**47
                Mall Drive**
              **Commack,
                New York**
            
            **11725-5717**(Address
                of principal
              executive
                offices)
            
            (Zip
                Code)




Issuer’s
      telephone number, including area code: (631) 543-3655




Securities
      registered under Section 12(b) of the Exchange Act: None




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




**Common
        Stock, par value**
 **$.001
        per share**









Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the preceding 12 months (or for such shorter
      period that the issuer was required to file such reports), and (2) has been
      subject to the filing requirements for the past 90 days. Yes x   No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B and no disclosure will be contained, to the best of the issuer’s
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
      x




The
      issuer’s revenues for the fiscal year ended December 31, 2005 were
      $505,512.




The
      number of shares outstanding of the issuer’s Common Stock as of March 31, 2006
      was 52,216,047 shares.







DOCUMENTS
      INCORPORATED BY REFERENCE














**PROTOCALL
      TECHNOLOGIES INCORPORATED**


**2005
      FORM 10-KSB ANNUAL REPORT**


**TABLE
      OF CONTENTS**





PART
                I
            
            1Item
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            9Item
                3.
            Legal
                Proceedings
            10Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            10PART
                II
            
            10Item
                5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            10Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            20Item
                7.
            Financial
                Statements
            28Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            28Item
                8A.
            Controls
                and Procedures
            28PART
                III
            
            30Item
                9, 10, 11 and 12
            40Item
                13.
            Exhibits
                and Reports on Form 8-K
            40Item
                14.
            Principal
                Accountant Fees and Services
            41





i


**PART** **I**




**Item
      1.**  **Description
      of Business**





**Our
      Business**




Protocall
      Technologies Incorporated is engaged in the development and commercialization
      of
      a proprietary system that enables retailers to produce fully packaged software,
      movie and television digital media products, on ** demand,
      at their stores and at their website fulfillment centers. Our system is an
      electronic display, storage and CD/DVD production system, similar in size to
      an
      ATM cash machine. Each retailer installation of our system is comprised of
      at
      least one Product Preview Station, for product merchandising and customer order
      placement (for walk-in stores), and one Order Fulfillment Station where CD
      and
      DVD products are produced and packaged.





Unlike
      conventional distribution and retailing, our system operates on a platform
      of
      virtual inventory, where each product remains in encrypted form on the Order
      Fulfillment Station until it is burned onto a compact disk (CD), or digital
      video disk (DVD), thereby reducing or potentially eliminating the need for
      physical stock at the retail or website location. We believe that our system
      has
      the capability to streamline purchases and upgrade offerings of digital media
      products at traditional sales outlets and will allow these products to be sold
      in new venues with minimal capital outlays and dedicated floor space. Based
      on
      published information, we believe that U.S. retail software sales totaled over
      $5 billion in 2005, and DVD sales exceeded $22 billion. We expect our revenues
      to increase as our system gains acceptance among retailers, cataloguers and
      online distributors. We believe that there are formidable challenges to
      potential competitors in terms of time and resources that would be required
      to
      duplicate our five years of systems development, licensing agreements with
      content providers, field testing and resolution of content provider security
      concerns.





Following
      five years of system development and three rounds of field testing, we commenced
      commercial rollout of our system in December 2003 at 25 CompUSA retail stores
      in
      the Dallas, San Francisco and Seattle markets. Recent discussions with CompUSA
      to determine what actions to take, if any, in order to continue the existing
      deployment and/or how to increase per site sales resulted in a mutual agreement
      to reduce the number of deployed sites from 25 to 10 in October 2005 and to
      revise software product selection. In August 2004, TigerDirect, a leading online
      direct marketer and subsidiary of Systemax, Inc., commenced its utilization
      of
      our system to fulfill a portion of its online software sales. Our management
      team believes that in addition to generating sales from these traditional
      pre-existing channels, our system can also be installed in other types of
      locations that have not historically sold digital media products due to
      inventory cost and space constraints.





Our
      system is currently utilized for delivery of software products under the product
      name “SoftwareToGo®;” however, we are vigorously pursuing an expansion of
      available products to include movie and television content. , We believe our
      technology is readily adaptable to these and other types of digital products
      without additional significant investment. In connection with movie and
      television content, we recently announced our new ‘TitleMatch’ system name,
      which was selected to reflect the inclusion of products other than consumer
      software.





Our
      system offers advantages over current physical distribution methods throughout
      the value chain from content publisher, to retailer and online distributors,
      to
      consumer. By offering meaningful value to each constituency along the chain,
      we
      believe that our system will be accepted in the general marketplace. By
      modernizing the distribution of digital media products, we believe our system
      enhances the availability of these products to consumers. From a content
      publisher’s perspective, our system accelerates the time to market for new
      titles, speeds implementation of publisher upgrades (e.g., software patches
      and
      revisions), increases exposure for niche content publishers and titles, enhances
      security to protect against piracy, extends product life cycles and expands
      the
      number and variety of outlets selling its content.




We
      have
      spent five years negotiating licensing agreements with more than 214 software
      publishers to distribute select titles through our system. Among our publishers
      are Atari, Avanquest, IBM, McAfee and Vivendi Universal. We have more than
      214
      licensing agreements currently covering approximately 1,048 software titles
      and
      are in discussions with several major movie studios regarding the licensing
      their movie and television content for inclusion on our system.




1


PROTOCALL
        TECHNOLOGIES INCORPORATED AND SUBSIDIARIES





From
      a
      retailer’s perspective, our system can reduce or potentially eliminate the need
      for inventory, minimize floor space allocated to physical inventory, reduce
      shipping and inventory tracking, prevent shrinkage and out-of-stock situations,
      offer better insights into product features (thus reducing potential returns),
      expand the number of digital media titles available for sale, and improve
      operating margins. Being able to deliver digital media products on demand to
      many retail locations can potentially position us to capture market share and
      to
      increase the overall size of the market. For consumers, our system can allow
      an
      assortment of software, movies and television episodes to be purchased anywhere
      our system is located, provide a broader selection of titles, ensure consistent
      in-stock availability for current offerings, and offer product previews so
      consumers have more information with which to make a purchase
      decision.




We
      license products such as software movies and television shows directly from
      the
      content publisher or owner and then distribute the products to retailers through
      our system, with the retailer determining final consumer pricing. License fees
      paid to the product publishers and content owners are proportional to the retail
      price of the product. In our relationship with publishers and content owners,
      we
      act as a wholesale distributor.


As
        more
        fully explained in the section entitled “Factors That May Affect the Future
        Results of our Business), we are experiencing an extreme shortage of cash.
        We
        estimate that cash on hand as of May 23, 2006 will enable us to continue
        operations through June 2006.





**Corporate
      History and July 2004 Transactions**




Protocall
      Technologies Incorporated was formed in December 1992. In 1998, we began
      focusing on the development and commercialization of our system. Until 1998,
      Protocall was primarily focused on licensing proprietary font software to large
      businesses and operated through its recently discontinued Precision Type, Inc.
      subsidiary. Active marketing of Protocall’s font software licensing business was
      discontinued in 2001, when Protocall determined to focus solely on developing
      its current distribution business; however, revenues from the font software
      business continued through June 2004.





On
      July
      22, 2004, we completed a reverse merger transaction with Quality Exchange,
      Inc.,
      a Nevada corporation formed in June 1998. Prior to the merger, Quality Exchange
      was a developmental stage company which, through its wholly-owned subsidiary,
      Orion Publishing, Inc., planned to provide an Internet-based vehicle for the
      purchase and exchange of collectible and new-issue comic books. We discontinued
      these activities simultaneously with the merger by the sale of that business
      to  Quality
      Exchange’s principal shareholder. Upon the closing of the merger, the directors
      and management of Protocall became the directors and management of Quality
      Exchange which then changed its name to Protocall Technologies Incorporated.
      For
      a more complete description of the reverse merger transaction and concurrent
      private offering in which we received approximately $7.25 million in gross
      proceeds, see our current report on Form 8-K dated July 22, 2004 and filed
      with
      the SEC on August 6, 2004.




Since
      our
      business is that of Protocall only, and the former Protocall stockholders
      control the merged companies, the information in this annual report is that
      of
      Protocall as if Protocall had been the registrant for all of the periods
      presented in this annual report. The section “Management's Discussion and
      Analysis or Plan of Operation” and the audited consolidated financial statements
      presented in this annual report are those of Protocall, as these provide the
      most relevant information about us on a continuing basis.





Our
      principal executive offices are located at 47 Mall Drive, Commack, New York
      11725-5717, and our telephone number is (631) 543-3655. Our website is located
      at www.protocall.com. Information on our website is not part of this annual
      report.





2
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Introduction
      to Technology**




Each
      walk-in store installation of our virtual inventory system is comprised of
      one
      or more Product Preview Stations to merchandise available products and an Order
      Fulfillment Station to produce orders. In the case of installations at
      internet/catalog retailers, the Product Preview Stations are usually not
      required. Collectively, these stations are controlled from our rights management
      servers via a virtual private network.




Retailers
      can also elect to produce products from the system in quantities in advance
      of
      consumer sale, thereby eliminating any change for consumers in how they shop
      for
      products produced from the system.




**Product
      Preview Station (PPS)**




To
      help
      consumers at retail stores quickly find the product they want, the system’s
      touch-screen Product Preview Station provides intuitive drill-down menus as
      well
      as key word and product sorting search options. Product descriptions include
      screen shots, video trailer promotions, text descriptions, independent product
      reviews and technical specifications (in the case of software) that, together,
      provide a more rapid and complete presentation of the product than could be
      obtained from a conventional package. Retailers can add additional Product
      Preview Station s
      to meet
      their customer traffic requirements. The Product Preview Station is designed
      to
      provide a maximum amount of information, including the retail price, in a
      minimum amount of time.




Once
      a
      consumer chooses a title, the Product Preview Station prints a bar-coded order
      ticket that is used to pay for the selected product at the store’s cashier or
      customer service area. After payment is made, authorized store personnel produce
      the selected product using the system’s Order Fulfillment Station.




**Order
      Fulfillment Station (OFS)**




The
      Order
      Fulfillment Station, which is used to produce the selected product onto CD
      or
      DVD media along with associated packaging, is located at the retailer’s store or
      website fulfillment center. To initiate an order from the OFS, store personnel
      enter a user-specific password and the product order number that appears on
      the
      consumer’s order-ticket. The OFS then automatically connects to our Rights
      Management Server via a private network connection to register the order and
      retrieve an order authorization.




The
      system uses the order authorization to release the selected product onto the
      CD
      or DVD media and then prints the content owner’s title-specific graphics and
      information onto the surface of the disk. Simultaneously, the system prints
      a
      title-specific four-color package cover and separate promotional or “getting
      started” installation sheet in the case of software. As with many software
      products sold today, product manuals are provided in digital form on the CD
      and
      are supplemented by publisher-sponsored online help. The finished CD or DVD,
      package cover and “getting started” or promotional sheet are placed into a
      DVD/CD plastic case and the case is sealed to complete the order.




For
      most
      titles, the entire process takes several minutes, depending on the content
      size
      of the product being produced. Consumption of supplies (CD or DVD, case,
      packaging and labeling) is tracked electronically and automatically replenished
      based on system usage. The system uses the latest CD/DVD writer technology
      and
      can be scaled to incorporate and handle larger volume orders by integrating
      up
      to four CD/DVD writers that process orders simultaneously. A standard two-CD
      writer system can produce an average of 34 single CD orders per hour and
      approximately 12 single DVD orders per hour. Products can be made in advance
      of
      anticipated sales for display on retail shelves, or they can be produced
      on-demand as single-item orders.




**Research
      and Product Development**





We
      have
      conducted research and product development of electronic software distribution
      systems since 1998. Research and product development expenditures were
      approximately $150,770 and $153,123 in the years ended December 31, 2005 and
      2004, respectively.





3
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Equipment
      Production, Installation and Support**




As
      more
      fully described below, we outsource the component purchasing, warehousing,
      testing and on-site unit assembly to third parties. Unit cost for each
      installation can range from $1,000 to $40,000, depending on system requirements
      and configuration, though this cost is expected to decline somewhat over time,
      assuming the continuing decline in computer hardware prices, of which there
      can
      be no assurance. Our system consists of personal computers, data storage
      equipment and CD/DVD replication equipment, all of which are generally available
      in the market from numerous suppliers.




**Assembly
      and Installation**




We
      intend
      to use third party resources if and when we have additional deployments. We
      believe there are numerous companies that can provide this service.




We
      have
      also selected a national enterprise solutions and service provider, GA Services,
      to perform on-site system installation services to our customers, as well as
      on-site maintenance and break-fix services. We pay this firm on the basis of
      each on-site visit.




**Technical
      Support and Unit Maintenance**




We
      maintain a call-in technical support team at our headquarters, available during
      all store hours (9:00 a.m. EST to 9:00 p.m. PST), seven days a week. Based
      on
      feedback from our retailer customers, we believe that we have established a
      reputation for excellent technical support by making it one of our top
      priorities. Our experience is that most problems are easily resolved through
      telephone and online support. However, if a customer requires on-site service
      and/or replacement of computer components or equipment, we contact our
      enterprise solutions and service provider to perform these services. Currently,
      technical support is furnished without additional charge to
      customers.




**Competitive
      Position**




**Virtual
      Inventory vs. Traditional Software Distribution**




Virtual
      inventory offers advantages over current physical distribution methods
      throughout the value chain from content owner through retailer to the consumer.
      By offering value to each constituency along the chain, we believe our system
      will be generally accepted in the marketplace. The relative advantages to each
      group are discussed below.




**Content
      Owner Perspective** -
      Virtual inventory provides the following compelling benefits to owners of
      digital media products:




·  Reduction
      in production costs - By avoiding up-front printing, packaging, shipping and
      inventory costs, content owners who use our system can potentially expect
      margins equal to or greater than with conventional distribution.





·  Increases
      distribution exposure for niche content owners and titles - Content from smaller
      software publishers or movie studios and even niche products from larger content
      owners are not always carried in retail stores. Our system makes it practical
      for stores to carry these titles.





·  Increased
      security - Virtual inventory offers the ability to produce individual serial
      numbers (in the case of software), digital security certificates and other
      measures for each product produced. These security features can be placed on
      the
      packaging, the CD/DVD media and even digitally encoded and embedded in the
      final
      product.





·  Addresses
      consumer concerns about the availability of software for alternative computing
      platforms (e.g., Apple Computer and Linux) - Promoters of alternative platforms
      often encounter consumer resistance based on software availability. Our system
      addresses these concerns and thus improves their competitive
      position.





4
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


·  Extends
      product life cycles - As unit sales of digital media products decline normally
      over the product life cycle, it eventually becomes uneconomical for content
      owners to produce and distribute their titles by traditional means. Virtual
      inventory improves the economics of content development by capturing incremental
      cash flows from titles with fully sunk production costs.





·  Speeds
      time to market - Producing and distributing stock for a myriad of retailer
      outlets in preparation for product launches is a daunting task, from both
      logistical and financial perspectives. Using our system, content owners can
      be
      ready for their commercial launches within days of completion of the digital
      master. Faster launches reduce working capital needs and speed the monetization
      of the investment that content owners have made in their products.





**Consumer
      Perspective** -
      Compared to current distribution techniques, consumers enjoy a number of
      benefits with no increase in cost:





·  Improved
      selection - By offering a virtual inventory of software, movies and television
      episodes, our system helps consumers get the exact title they are looking for
      in
      a single store visit. Consumers never miss out on hot titles that might
      otherwise be out of stock.





·  Latest
      software versions - The networked architecture of our system enables us to
      remotely update software in individual stores as updates become available from
      publishers.





**Retailer
      Perspective** - The
      virtual inventory distribution model offers retailers many advantages compared
      to current distribution methods:





·  Larger
      selection of titles - Our system currently has approximately 1,048 software
      titles from more than 214 publishers. We regularly discuss increasing these
      numbers with publishers. In comparison, we estimate that, based on discussions
      with our retail customers and other large retailers, with which we keep in
      contact, most retailers carry software stock of between 100 and 500 titles.
      Similarly, movie and television episodes on DVD have wide consumer appeal,
      yet
      maintaining a sufficient physical inventory is often a daunting and expensive
      endeavor for most retailers. An expanded offering of digital media products
      using our virtual inventory system enables retailers to capture incremental
      sales that would otherwise be lost to competitors - all while improving the
      customer experience.





·  Minimal
      Footprint - Our system occupies approximately 10 square feet. This enables
      retailers that stock digital media products to greatly increase their product
      offerings without increasing outlays for floor space.





·  Eliminates
      stocking risk - Because our system can be used to restock products in the event
      of strong sales and supply disruptions, retailers can eliminate the risk of
      lost
      sales. In addition, by eliminating out-of-stock conditions, retailers can
      operate with leaner inventories and reduced floor space, while minimizing costs
      associated with personnel handling typical inventory. Finally, because products
      on our virtual inventory system can be remotely updated to the latest version,
      retailers avoid the expense of product recalls and obsolete product
      returns.





·  Expands
      addressable base of retailers by allowing retailers with limited floor and
      shelf
      space to increase their product selection. Many retailers have unexploited
      synergies with software, movies and television products.





·  Potentially
      eliminates shrinkage - By producing product only as it is sold, retailers
      effectively eliminate the risk of customer and employee theft. In the case
      of
      software, with many titles priced over $100, this can measurably improve margins
      at the store level.





Many
      of
      these advantages also apply to catalog and online-based retailers. We believe
      our pricing maintains or slightly improves the margins presently enjoyed by
      retailers.




5
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Alternative
      Methods of Distribution**




Aside
      from traditional distribution methods, our competition falls into two general
      categories: direct competition from companies offering similar solutions and
      potential competition from other industry players. Both categories include
      companies that are larger and more established than we are and that have access
      to greater resources.




Direct
      competition may come from Tribeka Ltd., a company based in the United Kingdom.
      Tribeka has developed an electronic software delivery system that is similar
      in
      architecture and functionality to our system. The Tribeka system is operational
      in England under the name Softwide at a number of Tribeka-owned retail-site
      locations in Europe. It is also believed that Tribeka is planning to deploy
      its
      system in the United States, but we are not aware of the timing of any such
      development.




Potential
      competition comes from several independent companies that produce music delivery
      systems that are similar in functionality to our system. These companies could
      conceivably re-engineer their systems to deliver software, movie and television
      content; however, they would still face numerous issues related to establishing
      publisher and retailer agreements. In particular, potential entrants would
      face
      substantial development expense and delay stemming from their need to duplicate
      our elaborate end-to-end security capabilities without potentially infringing
      on
      aspects of our patented technology.




In
      the
      case of software, potential competition also exists with application service
      providers, known as ASPs. These companies enable businesses and consumers to
      use
      software that is installed on remote servers, thereby eliminating the need
      to
      purchase physical products. While the ASP market is expected to grow, we believe
      most consumers and businesses have been reluctant to outsource software and
      information requirements.




Software
      downloading is another source of competition. While this represents a growing
      source of competition, we believe that, based on discussions with software
      publishers, downloading will only represent 5% to 20% of their overall business
      in the long-term. This is because downloading is a major facilitator of software
      piracy, which is one of the primary reasons why many major publishers are
      reluctant to distribute their products via electronic download. In additional
      to
      security concerns, downloading is only practical for products that are small
      in
      size. For example, for a consumer purchasing a typical 350 megabyte product
      today, downloading via the internet is a time consuming process that could
      take
      up to 45 minutes via a broadband connection and over 15 hours via a dial-up
      connection. Many software products are significantly larger than this, and
      historical trends point toward increasingly sophisticated, even larger software
      applications.





In
      the
      case of movies and television episodes, potential competition also exists with
      on-line providers of streaming technologies that permit consumers to view these
      products on their computers, thereby eliminating the need to purchase physical
      products. While the market for online streaming of video to computers is
      expected to grow, we believe demand for television-set viewing will remain
      strong.





**Market
      Opportunity and Composition**




Hundreds
      of companies in the United States produce a broad selection of software, movies
      and television titles for distribution to consumers. We estimate that there
      are
      as many as 20,000 individual software titles and potentially tens-of-thousands
      movie and television titles available in today’s market. Most content owners
      have set up web sites to facilitate sales and to provide consumers with
      information about their products. However, the majority of sales of these
      products still occur through traditional distribution and retail
      channels.




**Protocall
      Virtual Inventory system Development and Commercialization
      Timeline**




2001
                -
            Protocall
                conducts “alpha” testing of
                SoftwareToGo.


Protocall
      incorporates over 30 improvements from field testing into
      SoftwareToGo.


39
      Publisher licensing agreements completed.




6
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


2002
                -
            Protocall
                conducts “beta” testing of SoftwareToGo in CompUSA
                stores.


Based
      on
      success of the Beta testing, Protocall signs deployment agreement with
      CompUSA.


100+
      Publisher licensing agreements completed.




2003
                -
            Apple
                Computer endorses SoftwareToGo to its Apple Developer Connection
                members.
                (See
                http://developer.apple.com/business/softwaretogo.html.)


CompUSA
      deployment commences (25 stores).


200+
      Publisher licensing agreements completed.




2004
                -
            229+
                Publisher agreements completed; more are under
                negotiation.


Protocall
      signs deployment agreement with web retailer TigerDirect.com.


TigerDirect
      deployment commences


Discussions
      begin with other major web and in-store retailers.





2005
              -
            Wireless
                communication within stores
                implemented.





2006
                -
            TitleMatch
                system announced for production of movies and television episodes.
                Protocall begins working with major movie studios to include their
                movie
                and television content on system.








**Rollout
      Strategy**




As
      an
      intermediary between content owners and retailers, our rollout strategy has
      consisted of assembling a core group of publishers and successfully testing
      SoftwareToGo in the field. After achieving demonstrable success in these areas,
      we have moved to monetize our technology and relationships by expanding products
      to include movies and television episodes and simultaneously deploying our
      system with both traditional and web-based software retailers. To date, two
      important retailer contracts have been secured, and we are continuing efforts
      to
      enlarge our retailer customer base. In September 2005, we began system testing
      with another retailer, however testing with this particular retailer was
      recently discontinued.




**Completed
      Retailer Contracts**




After
      successful field testing of the system at three CompUSA stores from April
      through July 2002, we signed our first electronic software distribution and
      site
      location agreement for the rollout of SoftwareToGo at several of CompUSA’s 225
      stores. Store installations began in December 2003, and SoftwareToGo was
      deployed in 25 CompUSA stores through October 2005. Sales results at CompUSA
      have not yet reached adequate levels to justify additional deployment. Recent
      discussions with CompUSA to determine what actions to take, if any, in order
      to
      continue the existing deployment and/or how to increase per site sales resulted
      in a mutual agreement to reduce the number of deployed sites from 25 to 10
      in
      October 2005 and to revise software product selection.. The term of the CompUSA
      agreement extends through June 2008. The agreement provides that CompUSA will
      provide site locations in its stores meeting certain specifications, and that
      we
      will install, operate and maintain the SoftwareToGo system units in those sites.
      The agreement further provides that we will provide CompUSA with software titles
      through the system at competitive prices, and that CompUSA is entitled to
      determine the retail price at which the titles are sold to customers. We intend
      to expand product selection at participating CompUSA stores to include movies
      and television content. CompUSA is one of the country’s largest retailers of
      consumer software and is using SoftwareToGo to ensure in-stock availability
      for
      current shelf offerings, while expanding the breadth and selection of titles
      available at its stores.




In
      March
      2004, we signed an agreement to deploy SoftwareToGo with web-based retailer
      TigerDirect, Inc. TigerDirect is a subsidiary of Systemax Inc., a leading direct
      marketer of computers and computer-related products. Under the terms of our
      agreement with Systemax, we have begun to fulfill TigerDirect’s order flow for
      software that is available via SoftwareToGo. The term of the TigerDirect
      agreement extends through March 2007, with the term automatically extended
      for
      successive one-year terms unless otherwise terminated. The agreement provides
      that we will provide TigerDirect with software titles through the system at
      competitive prices, and that TigerDirect is entitled to determine the retail
      price at which the titles are sold to customers. We intend to expand product
      selection with TigerDirect to include movies and television
      content.




7
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Software
      Publisher Contracts**




We
      have
      signed agreements with more than 214 software publishers to distribute select
      titles through SoftwareToGo, including Avanquest, Atari, IBM, McAfee and Vivendi
      Universal, and are in the process of finalizing agreements with others. Our
      licensing agreements currently cover over 1,048 titles. Most publishers have
      signed our standard publisher license agreement. These agreements allow us
      to
      resell the publisher’s products to one or more of our retail customers. The
      agreements set a price that we pay for each product licensed through our system.
      There are no minimum purchase requirements, and there are no limitations on
      the
      price we can resell their products to our customers. We pay the software
      publishers 45 days after month end with respect to sales during that month,
      which has allowed us to collect our accounts receivable prior to payment to
      the
      publishers. For a further description of the risks associated with maintaining
      our relationships with software publishers, see "Factors that May Affect the
      Future Results of our Business" in Item 5 below.




**Additional
      Contract Opportunities**




We
      are in
      various stages of discussions with other major United States retailers to use
      our system, though we cannot be certain that any of these discussions will
      lead
      to definitive agreements. System testing with one of these retailers began
      in
      September 2005, however testing with this particular retailer was recently
      discontinued.. The agreements with our two customers establish our fixed selling
      price for each product licensed through our system. There are no minimum
      purchase requirements and there are no limitations on the price at which the
      retailer can license the product to the consumer.





In
      our
      retailer agreements to date, we are obligated to install, maintain and provide
      technical support for the system. We are also required to provide the consumable
      items used in production of a final product. These consumables include; a CD-R
      and/or DVD-R disk, a DVD-style case, a printed cover sheet and a “getting
      started” instructional booklet or promotional sheet. In future agreements, we
      expect that some or all of these costs may be borne by our customer, which
      will
      be offset by increased discounts on license fees paid by the customer to
      us.





Our
      virtual inventory system is potentially valuable in situations where inventory
      management is complicated by the need to offer language-specific titles. With
      our system, these titles could be produced on demand, avoiding the need to
      physically import and simultaneously pay duty on inventory with limited appeal
      outside of the specific country.





We
      are
      aggressively pursuing both content and retailers to test the on-demand
      production of movie and television content on DVD’s in a retail location. To
      date, no definitive licensing agreements have been executed.




Our
      marketing and distribution program involves a direct sales force, headed by
      Donald Hoffmann, our Chief
      Executive Officer .
      We use
      our direct sales force to support our existing retailer contracts and to take
      advantage of direct sales opportunities **.**




**Regulation**




Our
      business activities currently are subject to no particular regulation by
      governmental agencies other than that routinely imposed on corporate businesses,
      and no such regulation is now anticipated.




**Patents
      and Intellectual Property**




We
      regard
      our system as proprietary and rely primarily on a combination of patent,
      copyright, trademark and trade secret laws of general applicability, employee
      confidentiality and invention assignment agreements, distribution and OEM
      software protection agreements and other intellectual property protection
      methods to safeguard our technology, processes and system.




8
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


We
      have
      received two United States patents for various aspects of our system. One patent
      protects the system by covering the retrieval of encrypted software from secure
      storage. This patent extends coverage into the field software distribution
      to
      include a three-tier system having an end user, who can be selectively coupled
      to a remote vendor who is in turn connected to a remote server.




The
      patent protects systems and methods where an end user, such as a retailer or
      consumer, may access software products from a CD-ROM or other storage device
      which is connected to the end user’s station or computer. The end user’s station
      is connected to a vendor station which requests decryption keys generated by
      a
      remote server. The software product is secured by an encryption technique that
      allows the retailer or consumer to access the software product upon receipt
      of
      the decryption key.




The
      second patent further expands our intellectual property protection over our
      system and its use in the retail environment. The patent covers systems and
      methods of implementing a supply chain’s return policy for digital products.
      Important proprietary aspects for managing digital products
      include:




·  verifying
      the origin of digital products to determine if it was produced from the supply
      chain, rendering the product unusable, and voiding the transaction for the
      product;





·  rendering
      digital products unusable based upon the physical nature of the
      product;





·  preventing
      the removal of returned digital products from physical storage until the origin
      of the product is verified or the product is rendered unusable;





·  examining
      the returned digital product’s internal files or external indicia to ascertain
      the product’s origin or return policy; and





·  using
      a
      record of the destruction which allows for a reversal of the entire transaction
      within the supply chain.





Our
      intellectual property also includes the copyrighted source code for our Product
      Preview Station, Order Fulfillment Station, back-end rights management system,
      B2B software delivery system and Internet web delivery engine.




We
      are
      the exclusive licensee for the use of the registered trademark SoftwareToGo®. We
      intend to submit a trademark application for our Protocall logo. We also rely
      upon our efforts to design and implement improvements to our system to maintain
      a competitive position in the marketplace.




**Employees**




As
      of May
      23, 2006, we had 9 employees, of whom 1 is in product development, engineering
      and help desk support, 1 in sales and marketing, and 7 in general,
      administrative and executive management. None of these employees is covered
      by a
      collective bargaining agreement and management considers relations with
      employees to be good.




**Item** **2.**  **Description
      of Property.**





Our
      corporate headquarters are located at 47 Mall Drive, Commack, New York
      11725-5717, in approximately 10,000 square feet of space occupied under a lease
      with a monthly rental rate of $9,912 that expired in January 2006. We are
      currently renting on a month- to- month basis (under the same payment terms
      as
      the expired lease) while negotiating with our landlord for a lease extension
      on
      approximately 5,000 square feet. We believe that this facility is adequate
      for
      our current business operations.




9
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Item
      3.**  **Legal
      Proceedings.**





Upon
      his
      termination from employment, our former CEO Mark Benedikt (see Recent Management
      Changes) asserted monetary claims under his Employment Agreement with us, and
      by
      demand dated October 19, 2005, sought arbitration of those claims which for
      purposes of the arbitration demand he had valued at $366,979. The Company
      settled with Mr. Benedikt on January 23, 2006. The terms of the settlement
      require us to make periodic cash payments to Mr. Benedikt totaling $100,000
      and
      to issue Mr. Benedikt a warrant to purchase 240,000 shares of common stock
      at an
      exercise price of $1.06 per share.





On
      August
      23, 2005, First Providence Financial Group, LLC filed a Demand for Arbitration
      against us with the American Arbitration Association. The Demand alleges that
      we
      breached a January 2000 placement agency agreement with First Providence. The
      Demand seeks $5 million in damages, plus fees and costs. The Demand alleges
      that
      First Providence had a right of first refusal and that we disregarded it. We
      believe that First Providence was not then in business, incapable of performing
      and failed to do so when requested to perform. The Company reached a settlement
      agreement with First Providence on January 31, 2006. We issued First Providence
      1,000,000 shares of common stock and reimbursed First Providence $8,000 for
      out
      of pocket costs. These shares were valued at $140,000 and accrued in December
      2005. First Providence withdrew the arbitration request.





The
      case
      of Code Ventures LLC v. Protocall Software Delivery Systems, Inc., et al.,
      case
      number GIC 853271, was filed in the Superior Court of the State of California,
      San Diego Judicial District, on or about August 31, 2005. The Complaint asserts
      claims for: (i) breach of a software development agreement between the parties
      dated October 13,1999; (ii) quantum merit; and (iii) goods sold, and seeks
      damages of $200,000, plus interest, attorneys’ fees, and cost. The plaintiff
      also seeks a judgment declaring that it is entitled to exercise certain options
      for stock in Protocall Software Delivery Systems, Inc. The Complaint was sent
      to
      us by U.S. mail but was not otherwise served upon us. Management believes it
      is
      likely we will prevail and accordingly, has not recorded any charges for any
      potential settlement.





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





The
      Company held its annual meeting of security holders on May 19, 2005 in which
      the
      security holders elected five members to the Board of Directors, approved the
      appointment of Eisner, LLP as our independent auditors and voted to approve
      the
      2004 Stock Option Plan.




**PART** **II**




**Item
      5.**  **Market
      for Common Equity, Related Stockholder Matters and Small Business Issuer
      Purchases of Equity Securities.**





**Common
      Stock Information**


As
        of May
        23, 2006, there were 270 record holders of our common stock and there were
        55,705,028 shares of our common stock outstanding.




Our
      shares of common stock are quoted on the OTC Bulletin Board under the trading
      symbol PCLI.OB. Our symbol was changed to PCLIE.OB on April 22, 2006.




The
      following table sets forth the high and low bid prices for our common stock
      for
      the periods indicated as reported by the OTC Bulletin Board:




10
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


High
            
            Low**Year
                Ended December 31, 2004:**First
                Quarter
            
            $
            .01
            
            $
            .01Second
                Quarter
            
            
            .01
            
            
            .01Third
                Quarter (July 1 to July 22)
            
            
            .01
            
            
            .01Third
                Quarter (July 23 to September 30)
            
            
            4.00
            
            
            2.60Fourth
                Quarter (October 1 to December 31)
            
            
            4.45
            
            
            2.50**Year
                Ended December 31, 2005:**First
                Quarter
            
            $
            3.85
            
            $
            .80Second
                Quarter
            
            
            2.35
            
            
            .82Third
                Quarter
            
            
            2.00
            
            
            .17Fourth
                Quarter
            
            
            .51
            
            
            .12First
                Quarter (through March 31, 2006 )
            
            $
            .25
            
            $
            .08




The
      prices are adjusted to reflect a 4-for-1 stock split effective June 29, 2004
      prior to the reverse merger. Third quarter 2004 market information is divided
      at
      July 22, 2004, the closing date of our reverse merger transaction. Our shares
      of
      common stock became eligible for quotation on the OTC Bulletin Board in April
      2003, at which time it related only to Quality Exchange (under the symbol
      QEXI.OB). In July 2004, the symbol was changed to PCLI.OB. In April 2006, the
      symbol was changed to PCLIE.OB. See Item 1, “Corporate History and July 2004
      Transactions.”




These
      bid
      prices represent prices quoted by broker-dealers on the OTC Bulletin Board.
      These quotations reflect inter-dealer prices, without retail mark-up, mark-down
      or commissions, and may not represent actual transactions.




**Dividend
      Policy**




We
      have
      not previously declared or paid any dividends on our common stock and do not
      anticipate declaring any dividends in the foreseeable future.  The payment
      of dividends on our common stock is within the discretion of our board of
      directors, subject to our articles of incorporation. We intend to retain any
      earnings for use in our operations and the expansion of our business. Payment
      of
      dividends in the future will depend on our future earnings, future capital
      needs
      and our operating and financial condition, among other factors that we may
      deem
      relevant.




**Equity
      Compensation Plan Information**




QEI assumed
      all of Protocall’s obligations under the Protocall Technologies Incorporated
      2000 Stock Incentive Plan. At the time of the merger, Protocall had outstanding
      stock options to purchase 2,951,922 shares of common stock, which outstanding
      options were assumed by action of our board of directors after the closing
      of
      the merger to become stock options to purchase shares of our common stock.
      Following the merger, our board voted to cease using the 2000 Stock Incentive
      Plan for future stock option grants, and adopted a new 2004 Stock Option Plan.
      Our board of directors then granted stock options to purchase a total of
      1,027,750 shares, of our common stock, net of cancellations, under the 2004
      Plan. See Note J of the notes to the accompanying consolidated financial
      statements for a detailed description of our option plans.




The
      following table provides information regarding the status of our existing equity
      compensation plans at December 31, 2005:




**Plan
                category**
            
            **Number
                of shares of common stock to be issued upon exercise of outstanding
                options, warrants and rights**
            
            **Weighted-average
                exercise price of outstanding options, warrants and
                rights**
            
            **Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in the previous
                columns)**Equity
                compensation plans approved by security holders
            
            
            6,680,773
            
            $
            1.06
            
            
            357,012







(1)
            Represents
                Protocall’s 2000 and 2004 Stock Incentive Plan, which we assumed as part
                of the reverse merger in July 2004.





11
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Recent
      Sales of Unregistered Securities**


On
        July
        22, 2004, we completed a reverse merger transaction with Quality Exchange,
        Inc.,
        a Nevada corporation formed in June 1998 (“QEI”). For a more complete
        description of the reverse merger transaction and concurrent private offering
        in
        which we received approximately $7.25 million in gross proceeds, see our
        current
        report on Form 8-K dated July 22, 2004 and filed with the SEC on August 6,
        2004.
        QEI issued 16,733,074 shares of our common stock to the former security holders
        of Protocall in the reverse merger and 5,859,200 shares of our common stock
        to
        accredited investors in the private offering.


In
      June
      2005, we entered into a series of securities purchase agreements with a limited
      number of accredited investors in a private placement exempt from the
      registration requirements under the Securities Act of 1933, as amended. In
      connection with the private placement, we sold 1,986,302 shares of our common
      stock at $.73 per share, and issued for no additional consideration warrants
      (the “June Warrants”) to purchase up to 993,151 shares of our common stock, for
      an aggregate of $1,450,000 ($1,335,570 net of finder’s fee and various other
      expenses). We have used the net proceeds of the private offering primarily
      for
      funding of working capital.


The
        June
        Warrants had an exercise price of $1.00 per share of common stock, are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the June Warrants is subject to adjustment
        in the event of specified dilutive or accretive events, such as stock splits
        and
        stock combinations. The exercise price, as well as the per share price of
        the
        common stock sold in the private placement is subject to further adjustment
        if
        we issue any shares of common stock or securities convertible or exercisable
        into common stock (subject to customary exceptions such as securities issued
        pursuant to equity incentive plans) through June 2006 at a price per share
        less
        than the per share price of the common stock and/or the exercise price of
        the
        June Warrants, in which case the per share price and/or the exercise price,
        as
        applicable, will be adjusted to equal the price of the securities in the
        new
        issuance. The adjustment in the per share price would result in the issuance
        of
        additional shares of common stock to the holders. Due to the private offerings
        entered into in September and December 2005 (see below), we issued an additional
        9,341,824 shares of common stock to the June investors and adjusted the June
        Warrants’ exercise price to $.128 per share pursuant to the anti-dilution
        provisions of the June 2005 securities purchase agreements.
  In
        September 2005, we entered into a securities purchase agreement with an
        accredited investor in a private placement exempt from the registration
        requirements under the Securities Act of 1933, as amended. In connection
        with
        the private placement, we sold 2,380,952 shares of the Company’s common stock,
        par value $0.001 per share, at $.336 per share, and warrants (the “September
        Warrants”) to purchase up to 2,380,952 shares of our common stock, for an
        aggregate of $800,000 ($715,260 net of finder’s fee and various other expenses).
        We used the net proceeds of the private offering primarily for funding of
        working capital.
  The
        September Warrants had an exercise price of $.50 per share of common stock,
        are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the September Warrants is subject to
        adjustment in the event of specified dilutive or accretive events, such as
        stock
        splits and stock combinations. The exercise price, as well as the per share
        price of the common stock sold in the private placement is subject to further
        adjustment if we issue any shares of common stock or securities convertible
        or
        exercisable into common stock (subject to customary exceptions such as
        securities issued pursuant to equity incentive plans) through September 2006
        at
        a price per share less than the per share price of the common stock and/or
        the
        exercise price of the September Warrants, in which case the per share price
        and/or the exercise price, as applicable, will be adjusted to equal the price
        of
        the securities in the new issuance. The adjustment in the per share price
        would
        result in the issuance of additional shares of Common Stock to the holders.
        Due
        to the private offerings entered into during December 2005 (see below) ,
        we
        issued an additional 3,869,048 shares of common stock to the September investor
        and adjusted the September Warrants’ exercise price to $.128 per share pursuant
        to the anti-dilution provisions of the September 2005 securities purchase
        agreement.




12
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
 In
          December 2005, we entered into a series of securities purchase agreements
          with
          accredited investors in private placements exempt from the registration
          requirements under the Securities Act of 1933, as amended. In connection
          with
          the private placements, we sold 3,441,314 shares of our common stock, par
          value
          $0.001 per share, at prices ranging from $.173 to $.128 per share, and
          warrants
          (the “December Warrants”) to purchase up to 1,720,657 shares of our common
          stock, for an aggregate of $550,000. We used the net proceeds of the private
          offering primarily for funding of working capital.
  The
          December Warrants had an exercise price of $.50 per share of common stock,
          are
          exercisable immediately and expire on the third year anniversary of the
          initial
          warrant date. The exercise price of the December Warrants is subject to
          adjustment in the event of specified dilutive or accretive events, such
          as stock
          splits and stock combinations. The exercise price, as well as the per share
          price of the common stock sold in the private placement is subject to further
          adjustment if we issue any shares of common stock or securities convertible
          or
          exercisable into common stock (subject to customary exceptions such as
          securities issued pursuant to equity incentive plans) through December
          2006 at a
          price per share less than the per share price of the common stock and/or
          the
          exercise price of the December Warrants, in which case the per share price
          and/or the exercise price, as applicable, will be adjusted to equal the
          price of
          the securities in the new issuance. The adjustment in the per share price
          would
          result in the issuance of additional shares of common stock to the holders.
          Due
          to the private offering of December 30, 2005, we issued an additional 855,561
          shares of common stock to the December investors and adjusted 1,330,032
          of the
          December Warrants’ exercise price to $.128 per share pursuant to the
          anti-dilution provisions of the December 2005 securities purchase
          agreements.
  In
          January 2006, we entered into a securities purchase agreement with an accredited
          investor in a private placement exempt from the registration requirements
          under
          the Securities Act of 1933, as amended. In connection with the private
          placement, we sold 2,222,222 shares of our common stock, par value $0.001
          per
          share, at $.135 per share, and warrants (the “January Warrants”) to purchase up
          to 1,111,111 shares of our Common Stock, for an aggregate of $300,000.
          We have
          used the net proceeds of the private offering primarily for funding of
          working
          capital.
  The
          January Warrants had an exercise price of $.50 per share of common stock,
          are
          exercisable immediately and expire on the third year anniversary of the
          initial
          warrant date. The exercise price of the January Warrants is subject to
          adjustment in the event of specified dilutive or accretive events, such
          as stock
          splits and stock combinations. The exercise price, as well as the per share
          price of the common stock sold in the private placement is subject to further
          adjustment if we issue any shares of common stock or securities convertible
          or
          exercisable into common stock (subject to customary exceptions such as
          securities issued pursuant to equity incentive plans) through January 2007
          at a
          price per share less than the per share price of the Common Stock and/or
          the
          exercise price of the January Warrants, in which case the per share price
          and/or
          the exercise price, as applicable, will be adjusted to equal the price
          of the
          securities in the new issuance. The adjustment in the per share price would
          result in the issuance of additional shares of common stock to the holder.
          Due
          to the private offering entered into in February 2006 (see below) , we
          issued an
          additional 121,528 shares of common stock and adjusted the January Warrants’
exercise price to $.128 per share pursuant to the anti-dilution provisions
          of
          the January 2006 securities purchase agreement.
  In
          February 2006, we entered into a securities purchase agreement with an
          accredited investor in a private placement exempt from the registration
          requirements under the Securities Act of 1933, as amended. In connection
          with
          the private placement, we sold 390,625 shares of our common stock, par
          value
          $0.001 per share, at $.128 per share, and warrants (the “February Warrants”) to
          purchase up to 585,938 shares of our Common Stock, for an aggregate of
          $50,000.
          We have used the net proceeds of the private offering primarily for funding
          of
          working capital.
  The
          February Warrants have an exercise price of $.128 per share of common stock,
          are
          exercisable immediately and expire on the third year anniversary of the
          initial
          warrant date. The exercise price of the February Warrants is subject to
          adjustment in the event of specified dilutive or accretive events, such
          as stock
          splits and stock combinations. The exercise price, as well as the per share
          price of the common stock sold in the private placement is subject to further
          adjustment if we issue any shares of common stock or securities convertible
          or
          exercisable into common stock (subject to customary exceptions such as
          securities issued pursuant to equity incentive plans) through February
          2007 at a
          price per share less than the per share price of the common stock and/or
          the
          exercise price of the February Warrants, in which case the per share price
          and/or the exercise price, as applicable, will be adjusted to equal the
          price of
          the securities in the new issuance. The adjustment in the per share price
          would
          result in the issuance of additional shares of common stock to the holder.





13
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
 In
          April
          2006, we entered into a securities purchase agreement with investors in
          a
          private placement. In connection with the private placement, we sold an
          aggregate of 1,819,363 shares of common stock, at $.162 per share, and
          warrants
          (the “Warrants”) to purchase up to 1,218,324 shares of our common stock, for an
          aggregate of $300,000.
  The
          April
          Warrants have an exercise price of $.20 per share of common stock, are
          exercisable immediately and expire on the third year anniversary of the
          initial
          warrant date. The exercise price of the April Warrants is subject to adjustment
          in the event of specified dilutive or accretive events, such as stock splits
          and
          stock combinations. The exercise price, as well as the per share price
          of the
          common stock sold in the private placement is subject to further adjustment
          if
          we issue any shares of common stock or securities convertible or exercisable
          into common stock (subject to customary exceptions such as securities issued
          pursuant to equity incentive plans) through April 2007 at a price per share
          less
          than the per share price of the common stock and/or the exercise price
          of the
          April Warrants, in which case the per share price and/or the exercise price,
          as
          applicable, will be adjusted to equal the price of the securities in the
          new
          issuance. The adjustment in the per share price would result in the issuance
          of
          additional shares of common stock to the holder.


14
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES




In
        May
        2006, we entered into a securities purchase agreement with investors in a
        private placement. In connection with the private placement, we sold an
        aggregate of 1,079,136 shares of common stock, at $.139 per share, and warrants
        (the “Warrants”) to purchase up to 539,568 shares of common stock, for an
        aggregate of $150,000.
  The
        May
        Warrants have an exercise price of $.20 per share of common stock, are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the May Warrants is subject to adjustment
        in
        the event of specified dilutive or accretive events, such as stock splits
        and
        stock combinations. The exercise price, as well as the per share price of
        the
        common stock sold in the private placement is subject to further adjustment
        if
        we issue any shares of common stock or securities convertible or exercisable
        into common stock (subject to customary exceptions such as securities issued
        pursuant to equity incentive plans) through May 2007 at a price per share
        less
        than the per share price of the common stock and/or the exercise price of
        the
        May Warrants, in which case the per share price and/or the exercise price,
        as
        applicable, will be adjusted to equal the price of the securities in the
        new
        issuance. The adjustment in the per share price would result in the issuance
        of
        additional shares of common stock to the holder.




**Factors
      That May Affect** **the** **Future
      Results of** **our** **Business**




**Special
      Note on Forward-Looking Statements.** Certain
      statements in “Management’s Discussion and Analysis or Plan of Operation” below,
      and elsewhere in this annual report, are not related to historical results,
      and
      are forward-looking statements. Forward-looking statements present our
      expectations or forecasts of future events. You can identify these statements
      by
      the fact that they do not relate strictly to historical or current facts. These
      statements involve known and unknown risks, uncertainties and other factors
      that
      may cause our actual results, levels of activity, performance or achievements
      to
      be materially different from any future results, levels of activity, performance
      or achievements expressed or implied by such forward-looking statements.
      Forward-looking statements frequently are accompanied by such words such as
      “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative
      of such terms or other words and terms of similar meaning. Although we believe
      that the expectations reflected in the forward-looking statements are
      reasonable, we cannot guarantee future results, levels of activity, performance,
      achievements, or timeliness of such results. Moreover, neither we nor any other
      person assumes responsibility for the accuracy and completeness of such
      forward-looking statements. We are under no duty to update any of the
      forward-looking statements after the date of this annual report. Subsequent
      written and oral forward looking statements attributable to us or to persons
      acting in our behalf are expressly qualified in their entirety by the cautionary
      statements and risk factors set forth below and elsewhere in this annual report,
      and in other reports filed by us with the SEC.


**We
        have incurred significant losses in the past and expect losses in the future,
        which can have a detrimental effect on the long-term capital appreciation
        of our
        common stock.**  We
        have a
        limited operating history on which to base an evaluation of our business
        and
        prospects. Our prospects must be considered in light of inherent risks, expenses
        and difficulties encountered by companies in their early stage of development,
        particularly companies in new and evolving markets. Such risks include
        acceptance by software publishers, retailers and consumers in an evolving
        and
        unpredictable business environment, the lack of a well developed brand identity
        and the ability to bring products to market on a timely basis. For the years
        ended December 31, 2005 and 2004, we had net losses of $ 5,154,005 and
        $6,939,078, respectively. As of December 31, 2005, we had total stockholders’
deficiency of $ (2,189,880). No assurance can be given that we will ever
        generate significant revenue or become profitable. This could have a detrimental
        effect on the long-term capital appreciation of our capital stock.


**Due
      to our continual dependence upon outside financing, there is substantial doubt
      as to whether we** can
      continue as a Going Concern. We incurred net losses for the years ended December
      31, 2005 and 2004 of $(5,154,005) and $(6,939,078) respectively, and have an
      accumulated deficit of $(38,116,905) at December 31, 2005. Significantly
      contributing to the accumulated deficit was the interest expense related to
      our
      notes payable, which were converted to equity upon the consummation of the
      closing of the reverse merger on July 22, 2004 (see Note A(3)to our financial
      statements). Through 2005, we have been continually dependent upon borrowings
      through private offerings of convertible and non-convertible debt and equity
      from related and non-related parties to finance its business
      operations.


Management
          believes that cash on hand at May 23, 2006 will enable us to continue our
          business plan throughJune, 2006 although there can be no assurances that
          this
          will be the case. We are currently seeking additional financing to meet
          its
          short-term and long-term liquidity requirements, although there can be
          no
          assurances that such financing will be available, or if available, that
          it will
          be on terms acceptable to us. The accompanying financial statements have
          been
          prepared on the basis that we will continue as a going concern, which assumes
          the realization of assets and satisfaction of liabilities in the normal
          course
          of business. The
          uncertainties regarding the availability of continued financing and commencement
          of adequate commercial revenues raise substantial doubt about our ability
          to
          continue as a going concern, which contemplates the realization of assets
          and
          satisfaction of liabilities in the normal course of business.
 
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          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Until
        such time as we can rely on revenues generated from operations, we have a
        need
        for subsequent funding; if we are not successful in obtaining such funding,
        we
        will be forced to curtail or cease our activities.** We
        estimate that we will require additional cash resources by late June 2006.
        Our
        continued operations thereafter will depend upon the availability of cash
        flow,
        if any, from our operations or our ability to raise additional funds through
        equity or debt financing. There can be no assurance that we will be able
        to
        obtain additional funding when it is needed, or that such funding, if available,
        will be obtainable on terms favorable to or affordable by us. If we cannot
        obtain needed funds, we may be forced to curtail or cease our activities.
        The
        uncertainties regarding the availability of subsequent funding and commencement
        of adequate commercial revenues raise substantial doubt about our ability
        to
        continue as a going concern, which contemplates the realization of assets
        and
        satisfaction of liabilities in the normal course of business.




**We
      depend on continuing relationships with our software publishers, and if we
      lose
      these relationships our product offerings would be limited and less desirable
      to
      consumers and retailers.**  We
      generate revenue as a just-in-time software distributor to retail stores and
      e-commerce retailers. If we cannot develop and maintain satisfactory
      relationships with software publishers on acceptable commercial terms, we will
      likely experience a decline in revenue. We also depend on these software
      publishers to create, support and provide updates for software products that
      consumers will purchase. If we are unable to license a sufficient number of
      titles from software publishers, or if the quality of titles provided by these
      software publishers does not reach a satisfactory level, we may not be able
      to
      generate adequate interest among retailers or consumers to utilize the system.
      Our contracts with our software publisher clients are generally one to two
      years
      in duration, with an automatic renewal provision for additional one-year
      periods, unless we are provided with a written notice at least 90 days before
      the end of the contract. As is common in our industry, we have no long-term
      or
      exclusive contracts or arrangements with any software publishers that guarantee
      the availability of software products. Software publishers that currently supply
      software to us may not continue to do so and we may be unable to establish
      new
      relationships with software publishers to supplement or replace existing
      relationships.




**Our
      publisher license acquisition process is lengthy, which may cause us to incur
      substantial expenses and expend management time without generating corresponding
      revenue, which would impair our cash flow.** We
      market our services directly to software publishers and retailers. These
      relationships are typically complex and take time to finalize. Due to operating
      procedures in many organizations, a significant amount of time may pass between
      selection of our products and services by key decision-makers and the signing
      of
      a contract. The period between the initial sales call and the signing of a
      contract with significant sales potential is difficult to predict and typically
      ranges from one to twelve months for software publishers. If, at the end of
      a
      sales effort, a prospective publisher does not license its products to us,
      we
      may have incurred substantial expenses and expended management time that cannot
      be recovered and that will not generate corresponding revenue. As a result,
      our
      cash flow and our ability to fund expenditures incurred during the publisher
      license acquisition process may be impaired.




**Software-on-demand
      and DVD-on-demand technology is still evolving and unproven and the industry
      may
      ultimately fail to accept this technology, resulting in our products not being
      in demand.**  Our
      success will depend in large part on the growth in consumer acceptance of
      software-on-demand and DVD-on-demand technology as a method of distributing
      software products. Software-on-demand is a relatively new method of distributing
      software products to consumers, and unless it gains widespread market
      acceptance, we will be unable to achieve our business plan. Factors that will
      influence the market acceptance of the technology include:





The
      willingness of software publishers and movie and television content owners
      to
      license content for distribution through our system.




·
            Continuing
                demand by consumers for software products distributed on CD media
                and
                movie and television content on DVD
                media;


·
            Consumer
                behavior relating to product selection through touch-screen terminals
                for
                walk-in store deployments; and


·
            Consumer
                acceptance of DVD-style packages, which are the same as traditional
                packages for movie and television content on DVD, but smaller than
                traditional software packages.




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          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


Even
      if
      our technology achieves widespread acceptance, we may be unable to overcome
      the
      substantial existing and future technical challenges associated with on-site
      delivery of software and movies reliably and consistently on a long-term basis.
      Our failure to do so would impair our ability to execute our business
      plan.




**Our
      industry is characterized by rapid technological change that may make our
      technology and systems obsolete or cause us to incur substantial costs to adapt
      to these changes.**  To
      remain
      competitive, we must continue to enhance and improve the responsiveness,
      functionality and features of our system and the underlying network
      infrastructure. If we incur significant costs without adequate results, or
      are
      unable to adapt rapidly to technological changes, we may fail to achieve our
      business plan. The electronic commerce industry is characterized by rapid
      technological change, changes in user and client requirements and preferences,
      frequent new product and service introductions embodying new technologies and
      the emergence of new industry standards and practices that could render our
      technology and systems obsolete. To be successful, we must adapt to rapid
      technological change by licensing and internally developing leading technologies
      to enhance our existing services, developing new products, services and
      technologies that address the increasingly sophisticated and varied needs of
      our
      clients, and responding to technological advances and emerging industry
      standards and practices on a cost-effective and timely basis. The development
      of
      our system and other proprietary technologies involves significant technical
      and
      business risks. We may fail to use new technologies effectively or fail to
      adapt
      our proprietary technology and systems to client requirements or emerging
      industry standards.




**System
      failures could reduce the attractiveness of our service offerings; any prolonged
      interruptions in our operations could cause consumers to seek alternative
      providers** **of software.**  We
      provide electronic delivery of digital media products and product marketing
      services to our clients and end-users through our proprietary technology and
      rights management systems. These systems also maintain an electronic inventory
      of products. The satisfactory performance, reliability and availability of
      the
      technology and the underlying network infrastructure are critical to our
      operations, level of client service, reputation and ability to attract and
      retain clients. While we have engaged an outside service company to perform
      regular service on the systems in the field, we have experienced periodic
      interruptions, affecting all or a portion of our systems, which we believe
      will
      continue to occur from time to time. Any systems damage or interruption that
      impairs our ability to accept and fill client orders could result in an
      immediate loss of revenue to us, and could cause us to lose clients. In
      addition, frequent systems failures could harm our reputation.




**We
      may become liable to clients who are dissatisfied with our system, which would
      directly impact our prospects.**  We
      design, develop, implement and manage electronic commerce solutions that are
      crucial to the operation of our clients’ businesses. Defects in the solutions we
      develop could result in delayed or lost revenue, adverse consumer reaction,
      and/or negative publicity which could require expensive corrections. As a
      result, clients who experience these adverse consequences either directly or
      indirectly as a result of our services could bring claims against us for
      substantial damages. Any claims asserted could exceed the level of any insurance
      coverage that may be available to us. Moreover, the insurance we carry may
      not
      continue to be available on economically reasonable terms, or at all. The
      successful assertion of one or more large claims that are uninsured, that exceed
      insurance coverage or that result in changes to insurance policies (including
      premium increases) could adversely affect our operating results or financial
      condition.




**Because
      of the relatively small number of employees each of whom possess specialized
      knowledge about our business we would be adversely impacted if any one of those
      employees were to become unavailable.** We do
      not currently carry key-man life insurance on the lives of any of our executive
      officers.




**Our
      liability insurance may not be adequate in a catastrophic
      situation.**  Substantially
      all of our products are produced at our headquarters in Commack, New York or
      assembled in retailers’ stores. We currently maintain property damage insurance
      covering our inventory, furniture and equipment in our corporate headquarters.
      We maintain liability insurance, products and completed operations liability
      insurance and an umbrella liability policy. We also maintain insurance coverage
      for liability claims resulting from the use of our equipment located in retail
      stores and for equipment in-transit to and from retail stores. We also purchase
      business interruption insurance for losses relating to our facilities.
      Nevertheless, material damage to, or the loss of, our facilities, equipment
      or
      system data files, due to fire, severe weather, flood or other catastrophe,
      even
      if insured against, could result in a significant loss to us. We are currently
      preparing a disaster recovery plan.




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          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Our
      failure to protect our intellectual property could cause an erosion of our
      current competitive strengths** **.**  We
      regard
      the protection of our patents, trademarks, copyrights, trade secrets and other
      intellectual property as critical to our success. We rely on a combination
      of
      patent, copyright, trademark, service mark and trade secret laws and contractual
      restrictions to protect our proprietary rights. We have entered into
      confidentiality and non-disclosure agreements with our employees and
      contractors, and non-disclosure agreements with parties with whom we conduct
      business, in order to limit access to and disclosure of our proprietary
      information. See “Business -- Patents and Intellectual Property.” These
      contractual arrangements and the other steps taken by us to protect our
      intellectual property may not prevent misappropriation of our technology or
      deter independent third-party development of similar technologies. We also
      seek
      to protect our proprietary position by filing U.S. and foreign patent
      applications related to our proprietary technology, inventions and improvements
      that are important to the development of our business. Proprietary rights
      relating to our technologies will be protected from unauthorized use by third
      parties only to the extent they are covered by valid and enforceable patents
      or
      are effectively maintained as trade secrets. We pursue the registration of
      our
      trademarks and service marks in the United States and internationally. Effective
      patent, trademark, service mark, copyright and trade secret protection may
      not
      be available in every country in which our services are made available
      online.




The
      steps
      we have taken to protect our proprietary rights may be inadequate and third
      parties may infringe or misappropriate our trade secrets, trademarks and similar
      proprietary rights. Any significant failure on our part to protect our
      intellectual property could make it easier for our competitors to offer similar
      services and thereby adversely affect our market opportunities. In addition,
      litigation may be necessary in the future to enforce our intellectual property
      rights, to protect our trade secrets or to determine the validity and scope
      of
      the proprietary rights of others. Litigation could result in substantial costs
      and diversion of management and technical resources and may not be
      successful.




Claims
      against us related to the products that we deliver electronically and the
      products that we deliver physically could also require us to expend significant
      resources.  Claims
      may be made against us for negligence, copyright or trademark infringement,
      product liability or other theories based on the nature and content of software
      products or tangible goods that we deliver electronically and physically.
      Because we did not create these products, we are generally not in a position
      to
      know the quality or nature of the content of these products. Although we carry
      general liability insurance that requires our customers to indemnify us against
      consumer claims, our insurance and indemnification measures may not cover
      potential claims of this type, may not adequately cover all costs incurred
      in
      defense of potential claims, or may not reimburse us for all liability that
      may
      be imposed. Any costs or imposition of liability that are not covered by
      insurance or indemnification measures could be expensive and time-consuming
      to
      address, distract management and/or delay product deliveries, even if we are
      ultimately successful in the defense of these claims.




**Security
      breaches could hinder our ability to securely transmit confidential information
      and could harm our clients** **.** **** A
      significant barrier to electronic commerce and communications is the secure
      transmission of confidential information over public networks. Any compromise
      or
      elimination of our security could be costly to remedy, damage our reputation
      and
      expose us to liability, and dissuade existing and new clients from using our
      services. We rely on encryption and authentication technology licensed from
      third parties to provide the security and authentication necessary for secure
      transmission of confidential information, such as consumer credit card numbers.
      A party who circumvents our security measures could misappropriate proprietary
      information or interrupt our operations.




We
      may be
      required to expend significant capital and other resources to protect against
      security breaches or address problems caused by breaches. Concerns over the
      security of the Internet and other online transactions and the privacy of users
      could deter people from using the Internet to conduct transactions that involve
      transmitting confidential information, thereby inhibiting the growth of our
      business. To the extent that our activities or those of third-party contractors
      involve the storage and transmission of proprietary information, such as credit
      card numbers, security breaches could damage our reputation and expose us to
      a
      risk of loss or litigation and possible liability. Our security measures may
      not
      prevent security breaches and failure to prevent security breaches could lead
      to
      a loss of existing clients and deter potential clients away from our
      services.




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          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**We
      rely to a large degree on third parties for the manufacture and maintenance
      of
      our system, who could subject us to delays in satisfying customer
      needs.**  We
      rely
      heavily upon third parties to perform such tasks as assembly and on-site
      maintenance ofour system. Our ability to enter new markets and sustain
      satisfactory levels of sales in each market will depend in significant part
      upon
      the ability of these companies to perform effectively on our behalf. There
      can
      be no assurance that we will be successful in entering into agreements with
      all
      of these companies when necessary. In addition, once we enter into such
      manufacturing contracts, we face the possibility that such contracts will not
      be
      extended or replaced. We anticipate that we can obtain in a timely manner
      alternative third party services and that the failure to extend or replace
      existing contracts would not have a material adverse effect on us, although
      we
      can give no assurance in this regard.




**Implementation
      of our system requires capital, which we may not be able to
      provide** **,
      which could preclude us from entering into otherwise promising
      agreements** **.**  Utilizing
      our system in a retail environment requires a capital commitment for equipment
      and deployment costs, which we may not be able to provide. In agreements that
      call for users of our system to fund equipment and deployment costs themselves,
      we may be required to reduce our selling prices when
      compared to agreements in which we finance equipment and deployment costs. 
The retailer’s financial risk/reward decision might prevent it from
      entering an agreement with us or it may
      demand price concessions to mitigate the financial risk, which may ultimately
      result in the agreement not being economically feasible for us to
      perform .




**Sales
      are highly** **dependent** **on obtaining license rights** **,
      the failure of which would result in insufficient revenue to pay for system
      equipment and deployment costs** **.**  Sales
      of
      products through our system are highly dependent on the qualitative mix of
      titles that we are able to license from software publishers and movie studios
      for inclusion on our system. Although we have executed licensing agreements
      with more
      than 214
      software publishers covering
      approximately 1,048 titles , our current
      product offering is not adequate to achieve sufficient revenue for either a
      retailer or us to pay for system equipment and deployment costs. In
      order
      for us to be successful, we will need to improve the quality of titles on our
      system.




**The
      liquidity of our common stock is affected by its limited trading
      market.**  Shares
      of
      our common stock are quoted on the OTC Bulletin Board under the symbol PCLI.OB.
      We expect our shares to continue to be quoted in that market and not to be
      de-listed, as we have no intention to stop publicly reporting. An “established
      trading market” may never develop or be maintained. Active trading markets
      generally result in lower price volatility and more efficient execution of
      buy
      and sell orders. The absence of an active trading market reduces the liquidity
      of an investment in our shares. The trading volume of our common stock
      historically has been limited and sporadic. Our daily trading volume has
      averaged 18,390 from December 1, 2005 through March 24, 2006. As a result of
      this trading activity, the quoted price for our common stock on the OTC Bulletin
      Board is not necessarily a reliable indicator of its fair market value, and
      the
      low trading volume may expose the price of our common stock to volatility.
      Further, if we cease to be quoted, holders would find it more difficult to
      dispose of, or to obtain accurate quotations as to the market value of, our
      common stock and the market value of our common stock would likely
      decline.




**Our
      common stock may be considered a “penny stock” and may be difficult to sell when
      desired.**  The
      SEC
      has adopted regulations which generally define “penny stock” to be an equity
      security that has a market price of less than $5.00 per share or an exercise
      price of less than $5.00 per share, subject to specific exemptions. The market
      price of our common stock is less than $5.00 per share and therefore may be
      designated as a “penny stock” according to rules of the SEC. This designation
      requires any broker or dealer selling these securities to disclose certain
      information concerning the transaction, obtain a written agreement from the
      purchaser and determine that the purchaser is reasonably suitable to purchase
      the securities. These rules may restrict the ability of brokers or dealers
      to
      sell our common stock and may affect the ability of our stockholders to sell
      their shares. In addition, since our common stock is currently quoted on the
      OTC
      Bulletin Board, stockholders may find it difficult to obtain accurate quotations
      of our common stock and may experience a lack of buyers to purchase the stock
      or
      a lack of market makers to support the stock price.




**A
      significant number of our shares have become eligible for sale and their sale
      or
      potential sale may depress the market price of our common
      stock.**  On
      October 22, 2005 the 14,551,268 shares of our common stock held under “lock-up”
agreements became eligible for sale and their sale or potential sale may depress
      the market price of our common stock. As
      shares
      of our common stock become available for resale in the public market, the supply
      of our common stock will increase, which could decrease its price. We could
      also
      register further shares in connection with future financings. As of March 15,
      2006 there were an additional 257,667 shares of our common stock issuable upon
      exercise of outstanding stock options and an additional 3,414,236 shares of
      our
      common stock issuable upon exercise of outstanding warrants. Some or all of
      the
      shares of common stock may be offered from time to time in the open market
      pursuant to Rule 144, and these sales may have a depressive effect on the market
      for our shares of common stock. In general, a person who has held restricted
      shares for a period of one year may, upon filing with the SEC a notification
      on
      Form 144, sell into the market common stock in an amount equal to the greater
      of
      1% of the outstanding shares or the average weekly number of shares sold in
      the
      last four weeks prior to such sale. Such sales may be repeated once each three
      months, and any of the restricted shares may be sold by a non-affiliate after
      they have been held two years. In connection with the merger, substantially
      all
      of the former holders of Protocall common stock entered into “lock-up
      agreements” with us that prohibit those stockholders from, directly or
      indirectly, offering, selling, pledging or otherwise transferring or disposing
      of any of the 14,551,268 shares of our common stock acquired by them as a result
      of the merger until October 22, 2005 (15 months after the closing of the
      merger).




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          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Our
      principal stockholders have significant voting power and may take actions that
      may not be in the best interest of other stockholders.**  Our
      officers, directors and principal stockholders control 57.6%
      of
      our outstanding common stock ( excluding presently exercisable stock options and warrants), of which Peter Greenfield,
      our Chairman, controls approximately 16.2% and another significant stockholder
      controls approximately 30.1%. If these stockholders act together, they may
      be
      able to exert significant control over our management and affairs requiring
      stockholder approval, including approval of significant corporate transactions.
      This concentration of ownership may have the effect of delaying or preventing
      a
      change in control and might adversely affect the market price of our common
      stock. This concentration of ownership may not be in the best interests of
      all
      our stockholders.




**Investors
      should not anticipate receiving cash dividends on our common
      stock.**  We
      have
      never declared or paid any cash dividends or distributions on our capital stock.
      We currently intend to retain any future earnings to support operations and
      to
      finance expansion and, therefore, we do not anticipate paying any cash dividends
      on our common stock in the foreseeable future.




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





You
      should read the following description of our financial condition and results
      of
      operations in conjunction with the financial statements and accompanying notes
      included in this report beginning on page F-1.





**Overview**




On
      July
      22, 2004, we completed a reverse merger transaction with Quality Exchange,
      Inc.,
      a Nevada corporation formed in June 1998. Prior to the merger, Quality Exchange
      was a developmental stage com pany,
      which, through its wholly **-** owned
      subsidiary, Orion Publishing, Inc., planned to provide an Internet-based vehicle
      for the purchase and exchange of collectible and new-issue comic books. We
      discontinued these activities simultaneously with the
      merger by the sale of that business to Quality Exchange’s principal shareholder.
      Upon the closing of the merger, the directors
      and management of Protocall became the directors and management of Quality
      Exchange which then changed its name to Protocall Technologies Incorporated.
      For
      a more complete description of the reverse merger transaction and concurrent
      private offering in which we received approximately $7.25 million in gross
      proceeds, see our current report on Form 8-K, dated July 22, 2004 and filed
      with
      the SEC on August 6, 2004.





For
      much
      of 2005, we have focused on supporting our SoftwareToGo system, pursuing new
      customers and publishers and developing our new TitleMatch System.




Protocall
      Technologies Incorporated was formed in New York in December 1992. Until 1998,
      Protocall was focused primarily on licensing proprietary font software to large
      businesses and operated through its recently discontinued Precision Type, Inc.
      subsidiary. Active marketing of Protocall's font software licensing business
      was
      discontinued in 2001, when Protocall determined to focus solely on developing
      its current software distribution business; however, revenues from the font
      software business continued through June 2004.





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          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES





Since
      our
      business is that of Protocall only, the former
      officers of
      Protocall were
      appointed to the same positions in our
      company and the former Protocall stockholders received a majority of the total
      common stock of our company in the reverse merger, the merger was accounted
      for
      as a recapitalization of Protocall, and the information in this annual report
      is
      that of Protocall.





Due
      to
      very limited revenues to date, management has not yet developed nor relied
      on
      any key performance indicators to assess our business.




**Revenue
      Model**




We
      employ
      two revenue models in our existing retailer agreements: one for conventional
      ("bricks and mortar") retailers, and another for online/catalog retailers.
      Under
      the "bricks and mortar" revenue model, we license content, integrate, install
      and maintain our system site equipment, provide system training to store
      personnel, supply the physical deliverables (CD, case, packaging and labeling),
      provide system help desk support during store hours and act as an on-demand
      distributor to the retailer. The retailer, in accordance with store
      configuration and consumer merchandising/promotion plans developed jointly
      with
      us, supplies prominent space for the Product Preview Stations within its stores
      as well as an appropriate location for the Order Fulfillment Station, and
      provides system promotion. Prior to deployment, we and the retailer jointly
      develop plans relating to sales reporting procedures, communication line setup,
      network wiring, POS system integration and product pricing.




For
      online and catalog retailers, the business model differs somewhat. For these
      retailers, a high-capacity Order Fulfillment Station is used without the need
      for a Product Preview Station. The system can be installed either at our
      facilities or at the customer's shipping center. If the system is installed
      at
      our facility, the system is operated by us and our employees ship the products.
      Under this model, we expect much higher capacity utilization for the Order
      Fulfillment Station and, consequently, a much faster payback on deployed
      capital.




We
      secure
      the right to replicate titles through licensing agreements with software
      publishers and other content owners, paying a licensing fee to each content
      owner per product vended. In instances where a consumer returns a product that
      was produced on our system, , the content owner license fee is credited to
      us.




We
      expect
      to be able to improve our licensing terms as the number of sites where our
      system is installed increases. Because our agreements with content owners
      provide for a longer time period to pay the licensing fees due for products
      sold
      than the period of time provided to the retailers to pay us for the software
      produced by the system, we do not anticipate an increase to working capital
      requirements from this aspect of the business as the business grows. We do
      not
      prepay or guarantee any minimum license fees to content owners. Our agreements
      provide for a fixed selling price for each product licensed through our system.
      We invoice our customers on a monthly basis, based on 30 day payment terms,
      for
      each unit sold during the prior month.




**Critical
      Accounting Policies**





Our
      discussion and analysis of results of operations and financial condition are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these consolidated financial statements requires
      us
      to make estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses, and related disclosure of contingent assets
      and liabilities. We evaluate our estimates on an ongoing basis, including those
      related to provisions for uncollectible accounts receivable, inventories, and
      contingencies and litigation. We base our estimates on historical experience
      and
      on various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions.





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  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


The
      accounting policies that we follow are set forth in Note A to our consolidated
      financial statements as included herein. These accounting policies conform
      to
      accounting principles generally accepted in the United States of America, and
      have been consistently applied in the preparation of the financial
      statements.




**Revenue
      Recognition**





We
      recognize revenue from retailers’ sales of product through our virtual inventory
      system and through catalogues, upon delivery to the retail customer or
      consumer.





Revenue
      from the license or sale of products through our system and font reference
      guide
      books from our discontinued business was recognized when the products were
      delivered or shipped to the customer.





Part
      of
      our marketing strategy to acquire new consumers includes retail promotions
      in
      which we pay retailers if they are successful in marketing software products
      on
      our system to consumers. These payments are recorded as a reduction in revenue
      in accordance with EITF No. 01-9. As a result of this accounting treatment,
      these payments, which totaled $16,870 in 2005, which we consider to be marketing
      costs, are not included in marketing expense, but instead, recorded as a
      reduction in revenue. Estimated customer rebates are reflected as a reduction
      in
      revenue in the period that the related sale is recorded. Customer returns,
      although not material, are also reflected as a reduction in revenue in the
      period that they are returned, or earlier if any such returns are
      anticipated.




**Seasonality**





We
      believe there will ultimately be a minor degree of seasonality in our business.
      We anticipate that the fourth quarter of each fiscal year (October to December)
      will show slightly higher revenues due to the holiday shopping
      season.





**Software
      Development Costs**





Costs
      associated with the development and enhancement of proprietary software incurred
      between the achievements of technological feasibility and availability for
      general release to the public were insignificant, and therefore not
      capitalized.





**Research
      and Product Development Costs**





We
      expense research and product development costs as incurred.





**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of Protocall Technologies
      Incorporated and its wholly-owned subsidiaries. All intercompany balances and
      transactions have been eliminated in consolidation.





**Results
      of Operations**





**Year
      ended December 31, 2005 compared to Year ended December 31,
      2004**





**Net
      Loss from Continuing Operations.** We had
      net losses from continuing operations of $5,154,005 and $6,947,525 for the
      years
      ended December 31, 2005 and 2004, respectively. During these periods, operations
      were financed through various equity and debt financing
      transactions.





**Net
      Income from Discontinued Operations.** Due to
      the completion of the development and the beginning of the commercialization
      of
      our virtual inventory system, effective June 30, 2004, we discontinued the
      operations of our wholly-owned subsidiary Precision Type, Inc.  Accordingly, Precision Type’s assets and liabilities have been segregated from
      the assets and liabilities of continuing operations in the consolidated balance
      sheets at December 31, 2004 and its operating results have been segregated
      from
      continuing operations and are reported as discontinued operations in the
      consolidated financial statements of operations and cash flows for all periods
      reported.





Precision
      Type had net income of $8,447 for the year ended December 31, 2004 and $0 in
      2005.





22
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Net
      Sales.** Net
      sales for the year ended December 31, 2005 were $505,512 compared to $206,005
      for the year ended December 31, 2004. This increase in net sales is principally
      due to sales resulting from the addition of TigerDirect.com as a customer in
      August 2004 as well as increased Tiger Direct sales in 2005.





**Research
      and Development Expenses.** Research
      and development expense, or R&D, decreased by $2,353 or 1.5%, from $153,123
      to $150,770 for the year ended December 31, 2005 as compared to the year ended
      December 31, 2004.


**Selling,
        General and Administrative Expenses.** Selling,
        general and administrative expenses increased by by $134,363, or 2.81%, to
        $4,935,839 for the year ended December 31, 2005 from $4,801,476 for the year
        ended December 31, 2004.
  Total
        salaries decreased $57,144, or 3.1%, to $1,779,562 in 2005 from $1,836.706
        in
        2004, due to additional hiring followed by personnel reduction. Depreciation
        and
        amortization expense decreased $5,402 in 2005, or 7.7%, to $657,043 from
        $712,445 in 2004, due to certain assets becoming fully depreciated. Consulting
        expenses increased $29,439 in 2005, or 7.2%, to $439,081 from $409,642 in
        2004,
        due to the use of outside consultants to assist in financing, marketing and
        accounting matters. Marketing expenses decreased $58,740 in 2005, or 17.3%,
        to
        $280,072 from $338,812 in 2004, due to decreased marketing of our SoftwareToGo
        system due to limited cash resources. Professional fees increased $3,510
        in
        2005, or .7%, to $517,920 from $514,410 in 2004. In addition, we recorded
        a
        $140,000 liability in connection with the First Providence arbitration (see Item
        3, Legal Proceedings)..





**Interest
      and Finance Charges.** Interest
      and finance expense combined decreased by $2,079,897 or 90.5%, to $218,382
      from
      $2,298,278 for the year ended December 31, 2005 compared to the year ended
      December 31, 2004.





Interest
      expense decreased $639,307, or 82.0%, to $140,465 from $779,772 for 2005 as
      compared to 2004. The decrease in interest expense was primarily due to the
      conversion of over $8 million of debt into common stock during
      2004.





Finance
      expense decreased $1,440,590, or 94.9%, to $77,916 from $1,518,506 for 2005
      as
      compared to 2004. This decrease is primarily due to debt discount amortized
      in
      2004 associated with an additional $2,601,000 of newly issued debt issued
      between January and June 2004 and the subsequent write-off of $554,009 of
      unamortized debt discount upon conversion of the related debt to equity in
      connection with the reverse merger.





**Forgiveness
      of Indebtedness.** We
      recorded $15,750 as income from forgiveness of indebtedness in 2005 as compared
      to $392,996 in 2004. This decrease is primarily due to negotiated agreements
      with creditors in connection with the conversion of debt associated with the
      reverse merger in July 2004. These creditors, pursuant to written agreements,
      provided us discounts and accepted cash payments or our common stock upon the
      closing of our reverse merger.





**Other
      Income.** Other
      income decreased $11,796, to $41,743 in 2005, or 22%, from $53,539 in
      2004.





**Liquidity
      and Capital Resources**


At
        December 31, 2005 we had a working capital deficit of $1,783,164 as compared
        to
        working capital of $77,385 at December 31, 2004. At December 31, 2004, we
        had an
        accumulated deficit in the amount of $32,962,900 as compared to an accumulated
        deficit of $38,116,905 at December 31, 2005. The accumulated losses resulted
        principally from costs incurred in developing our business plan, research
        and
        development, general and administrative expenses, seeking and establishing
        sales
        channels and capital raising activities. As of May 23, 2006 we had a cash
        balance of approximately $142,000.


We
          believe that cash on hand will enable us to continue our business plan
          through
          approximately June 2006 although there can be no assurances that this will
          be
          the case. We are attempting to obtain additional financing from an existing
          shareholder and collect customer accounts receivable. We are also actively
          pursuing additional short-term funding from existing shareholders and long-term
          funding from institutional investors. Our plan is to secure sufficient
          short-term capital to fund its operations through the completion of a larger
          institutional financing, although there can be no assurances that any financing
          will be available, or if available, that it will be on terms acceptable
          to us.
          We believe that our ability to secure short-term and long-term financing
          is
          directly related to our progress with new customers and movie content
          agreements, which are actively being pursued by us.
 
 23
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


In
        the
        event that sufficient short-term or long-term financing is not obtained,
        in
        order to enable the company to continue to pursue its customer and content
        negotiations over a longer term, the Chief Executive Officer has agreed to
        forgo
        compensation and to cause us to increasingly reduce its operating expenditures
        by, among other actions, making further personnel reductions. In addition,
        our
        two major stockholders agreed not to take any actions that would cause our
        operations to terminate prior to September 30, 2006.
 
 The
        accompanying financial statements have been prepared on the basis that we
        will
        continue as a going concern, which assumes the realization of assets and
        satisfaction of liabilities in the normal course of business. The
        uncertainties regarding the availability of continued financing and commencement
        of adequate commercial revenues raise substantial doubt about our ability
        to
        continue as a going concern, which contemplates the realization of assets
        and
        satisfaction of liabilities in the normal course of business. The financial
        statements do not include any adjustments relating to the recoverability
        of the
        recorded assets or the classification of liabilities that may be necessary
        should we be unable to continue as a going concern .


On
        July
        22, 2004, concurrently with the closing of a
        private
        offering of **** approximately
        $7.25 million in shares of our common stock (before related fees of
        approximately $900,000 and including the conversion of $1,825,000 of interim
        notes), QEI acquired the business of Protocall in a reverse merger transaction
        and, with the proceeds of the offering, are continuing the existing operations
        of Protocall as a publicly traded company. Protocall is the surviving entity
        and
        is the acquirer for accounting purposes. QEI issued 16,733,074 shares of
        our
        common stock to the former security holders of Protocall, representing 66.0%
        of
        our outstanding common stock following the reverse merger and giving effect
        to
        the shares issued in the private offering and to the conversion of indebtedness
        described below in exchange for 100% of the outstanding common stock of
        Protocall. Debt conversions, which were all effected at $1.25 per share,
        included (i) $2,601,000 of debt incurred in 2004 and (ii) $6,628,338 of prior
        debt, $199,102 of accrued interest and $981,571 of accounts payable and accrued
        expenses. In addition, 17,647,377 of Protocall’s warrants were exchanged for
        3,384,793 shares of our common stock. In order to facilitate the reverse
        merger
        and without receiving consideration, Protocall’s major shareholder forgave
        $1,099,915 of accrued interest on notes held by him, which notes were included
        in the prior debt described above. As part of the reverse merger, warrants
        to
        purchase 1,774,219 shares of Protocall common stock and stock options to
        purchase approximately 2,951,922 shares of Protocall common stock were converted
        into warrants and stock options to purchase our common stock.
 In
          June
          2005, we entered into a series of securities purchase agreements with a
          limited
          number of investors in a private placement exempt from the registration
          requirements under the Securities Act of 1933, as amended. In connection
          with
          the private placement, we sold 1,986,302 shares of our common stock at
          $.73 per
          share, and issued for no additional consideration warrants (the “June Warrants”)
          to purchase up to 993,151 shares of our common stock, for an aggregate
          of
          $1,450,000 ($1,335,570 net of finder’s fee and various other expenses). We have
          used the net proceeds of the private offering primarily for funding of
          working
          capital.





The
      June
      Warrants had an exercise price of $1.00 per share of common stock, are
      exercisable immediately and expire on the third year anniversary of the initial
      warrant date. The exercise price of the June Warrants is subject to adjustment
      in the event of specified dilutive or accretive events, such as stock splits
      and
      stock combinations. The exercise price, as well as the per share price of the
      Common Stock sold in the private placement is subject to further adjustment
      if
      we issue any shares of Common Stock or securities convertible or exercisable
      into Common Stock (subject to customary exceptions such as securities issued
      pursuant to equity incentive plans) through June 2006 at a price per share
      less
      than the per share price of the Common Stock and/or the exercise price of the
      June Warrants, in which case the per share price and/or the exercise price,
      as
      applicable, will be adjusted to equal the price of the securities in the new
      issuance. The adjustment in the per share price would result in the issuance
      of
      additional shares of Common Stock to the holders. Due to the private offerings
      entered into in September and December 2005 (see below), we issued an additional
      9,341,824 shares of common stock to the June investors and adjusted the June
      Warrants’ exercise price to $.128 per share pursuant to the anti-dilution
      provisions of the June 2005 securities purchase agreements.


In
        September 2005, we entered into a securities purchase agreement with an investor
        in a private placement exempt from the registration requirements under the
        Securities Act of 1933, as amended. In connection with the private placement,
        we
        sold 2,380,952 shares of the Company’s Common Stock, par value $0.001 per share,
        at $.336 per share, and warrants (the “September Warrants”) to purchase up to
        2,380,952 shares of our Common Stock, for an aggregate of $800,000 ($715,260
        net
        of finder’s fee and various other expenses). We used the net proceeds of the
        private offering primarily for funding of working capital.





The
      September Warrants had an exercise price of $.50 per share of Common Stock,
      are
      exercisable immediately and expire on the third year anniversary of the initial
      warrant date. The exercise price of the September Warrants is subject to
      adjustment in the event of specified dilutive or accretive events, such as
      stock
      splits and stock combinations. The exercise price, as well as the per share
      price of the Common Stock sold in the private placement is subject to further
      adjustment if we issue any shares of Common Stock or securities convertible
      or
      exercisable into Common Stock (subject to customary exceptions such as
      securities issued pursuant to equity incentive plans) through September 2006
      at
      a price per share less than the per share price of the Common Stock and/or
      the
      exercise price of the September Warrants, in which case the per share price
      and/or the exercise price, as applicable, will be adjusted to equal the price
      of
      the securities in the new issuance. The adjustment in the per share price would
      result in the issuance of additional shares of Common Stock to the holders.
      Due
      to the private offerings entered into during December 2005 (see below) , we
      issued an additional 3,869,048 shares of common stock to the September investor
      and adjusted the September Warrants’ exercise price to $.128 per share pursuant
      to the anti-dilution provisions of the September 2005 securities purchase
      agreement.





24
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


In
        December 2005, we entered into a series of securities purchase agreements
        with
        investors in private placements exempt from the registration requirements
        under
        the Securities Act of 1933, as amended. In connection with the private
        placements, we sold 3,441,314 shares of our Common Stock, par value $0.001
        per
        share, at prices ranging from $.173 to $.128 per share, and warrants (the
        “December Warrants”) to purchase up to 1,720,657 shares of our Common Stock, for
        an aggregate of $550,000. We used the net proceeds of the private offering
        primarily for funding of working capital.





The
      December Warrants had an exercise price of $.50 per share of Common Stock,
      are
      exercisable immediately and expire on the third year anniversary of the initial
      warrant date. The exercise price of the December Warrants is subject to
      adjustment in the event of specified dilutive or accretive events, such as
      stock
      splits and stock combinations. The exercise price, as well as the per share
      price of the Common Stock sold in the private placement is subject to further
      adjustment if we issue any shares of Common Stock or securities convertible
      or
      exercisable into Common Stock (subject to customary exceptions such as
      securities issued pursuant to equity incentive plans) through December 2006
      at a
      price per share less than the per share price of the Common Stock and/or the
      exercise price of the December Warrants, in which case the per share price
      and/or the exercise price, as applicable, will be adjusted to equal the price
      of
      the securities in the new issuance. The adjustment in the per share price would
      result in the issuance of additional shares of Common Stock to the holders.
      Due
      to the private offering of December 30, 2005, we issued an additional 855,561
      shares of common stock to the December investors and adjusted 1,330,032 of
      the
      December Warrants’ exercise price to $.128 per share pursuant to the
      anti-dilution provisions of the December 2005 securities purchase
      agreements.




In
        January 2006, we entered into a securities purchase agreement with an investor
        in a private placement exempt from the registration requirements under the
        Securities Act of 1933, as amended. In connection with the private placement,
        we
        sold 2,222,222 shares of our Common Stock, par value $0.001 per share, at
        $.135
        per share, and warrants (the “January Warrants”) to purchase up to 1,111,111
        shares of our Common Stock, for an aggregate of $300,000. We have used the
        net
        proceeds of the private offering primarily for funding of working capital.





The
      January Warrants had an exercise price of $.50 per share of Common Stock, are
      exercisable immediately and expire on the third year anniversary of the initial
      warrant date. The exercise price of the January Warrants is subject to
      adjustment in the event of specified dilutive or accretive events, such as
      stock
      splits and stock combinations. The exercise price, as well as the per share
      price of the Common Stock sold in the private placement is subject to further
      adjustment if we issue any shares of Common Stock or securities convertible
      or
      exercisable into Common Stock (subject to customary exceptions such as
      securities issued pursuant to equity incentive plans) through January 2007
      at a
      price per share less than the per share price of the Common Stock and/or the
      exercise price of the January Warrants, in which case the per share price and/or
      the exercise price, as applicable, will be adjusted to equal the price of the
      securities in the new issuance. The adjustment in the per share price would
      result in the issuance of additional shares of Common Stock to the holder.
      Due
      to the private offering entered into in February 2006 (see below) , we issued
      an
      additional 121,528 shares of common stock and adjusted the January Warrants’
exercise price to $.128 per share pursuant to the anti-dilution provisions
      of
      the January 2006 securities purchase agreement.


In
        February 2006, we entered into a securities purchase agreement with an investor
        in a private placement exempt from the registration requirements under the
        Securities Act of 1933, as amended. In connection with the private placement,
        we
        sold 390,625 shares of our Common Stock, par value $0.001 per share, at $.128
        per share, and warrants (the “February Warrants”) to purchase up to 585,938
        shares of our Common Stock, for an aggregate of $50,000. We have used the
        net
        proceeds of the private offering primarily for funding of working capital.


25
 
  PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
 The
          February Warrants have an exercise price of $.128 per share of Common Stock,
          are
          exercisable immediately and expire on the third year anniversary of the
          initial
          warrant date. The exercise price of the February Warrants is subject to
          adjustment in the event of specified dilutive or accretive events, such
          as stock
          splits and stock combinations. The exercise price, as well as the per share
          price of the Common Stock sold in the private placement is subject to further
          adjustment if we issue any shares of Common Stock or securities convertible
          or
          exercisable into Common Stock (subject to customary exceptions such as
          securities issued pursuant to equity incentive plans) through February
          2007 at a
          price per share less than the per share price of the Common Stock and/or
          the
          exercise price of the February Warrants, in which case the per share price
          and/or the exercise price, as applicable, will be adjusted to equal the
          price of
          the securities in the new issuance. The adjustment in the per share price
          would
          result in the issuance of additional shares of common stock to the
          holder.


In
        April
        2006, we entered into a securities purchase agreement with investors in a
        private placement. In connection with the private placement, we sold an
        aggregate of 1,819,363 shares of common stock, at $.162 per share, and warrants
        (the “Warrants”) to purchase up to 1,218,324 shares of common stock, for an
        aggregate of $300,000.
  The
        April
        Warrants have an exercise price of $.20 per share of common stock, are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the April Warrants is subject to adjustment
        in the event of specified dilutive or accretive events, such as stock splits
        and
        stock combinations. The exercise price, as well as the per share price of
        the
        common stock sold in the private placement is subject to further adjustment
        if
        the Company issues any shares of common stock or securities convertible or
        exercisable into common stock (subject to customary exceptions such as
        securities issued pursuant to equity incentive plans) through April 2007
        at a
        price per share less than the per share price of the common stock and/or
        the
        exercise price of the April Warrants, in which case the per share price and/or
        the exercise price, as applicable, will be adjusted to equal the price of
        the
        securities in the new issuance. The adjustment in the per share price would
        result in the issuance of additional shares of common stock to the
        holder.


26




In
        May
        2006, we entered into a securities purchase agreement with investors in a
        private placement. In connection with the private placement, the Company
        sold an
        aggregate of 1,079,136 shares of common stock, at $.139 per share, and warrants
        (the “Warrants”) to purchase up to 539,568 shares of common stock, for an
        aggregate of $150,000.
  The
        May
        Warrants have an exercise price of $.20 per share of common stock, are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the May Warrants is subject to adjustment
        in
        the event of specified dilutive or accretive events, such as stock splits
        and
        stock combinations. The exercise price, as well as the per share price of
        the
        common stock sold in the private placement is subject to further adjustment
        if
        the Company issues any shares of common stock or securities convertible or
        exercisable into common stock (subject to customary exceptions such as
        securities issued pursuant to equity incentive plans) through May 2007 at
        a
        price per share less than the per share price of the common stock and/or
        the
        exercise price of the May Warrants, in which case the per share price and/or
        the
        exercise price, as applicable, will be adjusted to equal the price of the
        securities in the new issuance. The adjustment in the per share price would
        result in the issuance of additional shares of common stock to the holder.





The
      following table summarizes our fixed cash obligations as of December 31, 2005
      over various future years:




**Payments
                Due By Period****Total**
            
            **Less
                than 1 Year**
            
            **1-3
                Years**
            
            **4-5
                Years**
            
            **After
                5 Years**Notes
                payable and long-term debt
            
            $
            727,433
            
            $
            37,414
            
            $
            690,019
            
            $
            0
            
            $
            0Capital
                leases
            
            
            834,026
            
            
            339,796
            
            
            494,230
            
            
            0
            
            
            0Operating
                leases
            
            
            9,912
            
            
            9,912
            
            
            
            
            
            0
            
            
            0Employment
                contracts
            
            
            395,840
            
            
            395,840
            
            
            0
            
            
            0
            
            
            0$
            1,967,211
            
            $
            782,962
            
            $
            1,184,249
            
            $
            0
            
            $
            0





**Related
      Party Transactions**





On
      September 30, 2003, a stockholder/director opened a one year, irrevocable
      standby letter of credit on our behalf in the amount of $300,000, as required
      by
      an agreement with a publisher to guarantee the payment of any license fees
      due
      the publisher. As compensation to the stockholder/director, we issued a warrant
      to purchase 150,000 shares of common stock exercisable at the lower of $2.75
      per
      share or the sales price of common stock in subsequent offerings. The fair
      value
      of the warrant was $77,321, utilizing the Black-Scholes option-pricing model
      with the following assumptions: 50% volatility, seven-year expected life,
      risk-free interest rate of 3.63% and dividend yield ratio of 0%. The warrant
      was
      originally scheduled to expire on September 30, 2010 but was converted into
      approximately 27,413 shares of common stock in connection with the reverse
      merger on July 22, 2004. The fair value of the warrant was recorded as a
      deferred finance cost and was amortized, on a straight-line basis, over the
      one
      year term of the letter of credit. This letter of credit was canceled during
      September 2004 due to the termination of the publisher agreement and was never
      drawn upon.





On
      October 14, 2003, the same stockholder/director opened an irrevocable standby
      letter of credit on our behalf as required by our equipment lease agreement,
      which is to be retained for the entire term of the lease obligation or until
      such time as we are able to replace this letter of credit, in the amount of
      $1,040,000. As compensation, we issued a warrant to purchase 520,000 shares
      of
      common stock exercisable at the lower of $2.75 per share or the sales price
      of
      common stock in subsequent offerings. The fair value of the warrant was $269,470
      utilizing the Black-Scholes option-pricing model with the following assumptions:
      50% volatility, seven-year expected life, risk-free interest rate of 3.86%
      and
      dividend yield of 0%. The warrant was originally scheduled to expire on October
      14, 2010, but was converted into approximately 95,047 shares of common stock
      in
      connection with the reverse merger on July 22, 2004. The fair value of the
      warrant has been recorded as a deferred lease cost and is being amortized,
      on a
      straight-line basis, over the term of the lease obligation which terminates
      April 1, 2007. In November 30,2005, the balance of this letter of credit was
      reduced to $750,462. We are contingently liable for the amounts of this letter
      of credit in the event the stockholder/director is obligated to make payments
      thereunder as a result of our noncompliance with the terms of the lease
      agreement.





27
 
 Pursuant
          to the June 13, 2005 resignation and consulting agreement with the Company’s
          former President and Chief Executive Officer, accrued salaries were reduced
          by
          $669,506 ($111,125 net of authorized payments of $558,381). Pursuant to
          the July
          31, 2002 Salary Adjustment Agreement, upon the termination of employment
          of one
          of the participants, $75,906 of accrued but unpaid salary was converted
          to a
          note. The note is payable in four equal quarterly installments beginning
          January
          2007. At December 31, 2005, accrued but unpaid salaries totaled $737,300
          (this
          amount was reduced to $394,272 after deducting authorized payments of
          $343,028).





Upon
      the
      consummation of the merger, our board of directors approved a five-year
      employment agreement with the President and Chief Executive Officer, providing
      for a base annual compensation of $195,000, along with standard fringe benefits
      available to all employees and provides for bonus compensation and/or stock
      options as determined by the board of directors.





Mr.
      Newman resigned on June 13, 2005 and entered into a consulting agreement with
      us. Mr. Newman’s consulting agreement provides for a monthly consulting fee of
      $16,250 and reimbursement of expenses as may be agreed between us and Mr. Newman
      for specific projects. The agreement also contains covenants (a) restricting
      Mr.
      Newman from competing with us or soliciting our customers or employees during
      the term of his agreement and one year thereafter, and (b) prohibiting him
      from
      disclosure of confidential information regarding our company. Mr. Newman agreed
      to forego deferred salary owed to him and we agreed to forgive loans and
      advances made by us to him. Mr. Newman’s employment agreement was terminated and
      Mr. Newman is not entitled to receive any of the severance payments mentioned
      in
      the agreement. Effective September 9, 2005, Mr. Newman rejoined the board of
      directors.





**Recently
      Issued Accounting Pronouncements**


In
        December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share
        Based Payment (* FAS
        123R), which replaces FAS 123 and supersedes APB No. 25. FAS 123R requires
        all
        share-based payments to employees, including grants of employee stock options,
        to be recognized in the financial statements based on their fair values
        beginning with the first interim or annual period after December 15, 2005
        for
        public entities that file as small business issuers, with early adoption
        encouraged. The pro forma disclosures previously permitted under FAS 123
        no
        longer will be an alternative to financial statement recognition. We are
        required to adopt FAS 123R beginning January 1, 2006. Under FAS 123R, we
        must
        determine the appropriate fair value model to be used for valuing share-based
        payments, the amortization method for compensation cost and the transition
        method to be used at date of adoption. The transition methods include
        prospective and retroactive adoption options. We are evaluating the requirements
        of FAS 123R and expect that the adoption of FAS 123R will have a material
        impact
        on our consolidated results of operations and earnings per share. We have
        not
        yet determined the impact of FAS 123R on our results of operations, compensation
        policies or plans.





In
      November 2004, the FASB issued SFAS No. 151, *Inventory
      Costs, an amendment of ARB No. 43, Chapter 4* (FAS
      151). FAS 151 amends Accounting Research Bulletin No. 43, Chapter 4, to clarify
      that abnormal amounts of idle facility expenses, freight, handling costs and
      wasted materials (spoilage) should be recognized as current-period charges.
      In
      addition, FAS No. 151 requires that allocation of fixed production overhead
      to
      inventory be based on the normal capacity of the production facilities. We
      are
      required to adopt FAS 151 beginning January 1, 2006. We are currently assessing
      the impact that FAS No. 151 will have on our results of operations, financial
      position andcash flows.


In
        December 2004, the FASB issued SFAS No. 153, *Exchange
        of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary
        Transactions* (FAS
        153). FAS 153 amends APB No. 29 to eliminate the exception for nonmonetary
        exchanges of similar productive assets and replaces it with a general exception
        for exchanges of nonmonetary assets that do not have commercial substance.
        A
        nonmonetary exchange has commercial substance if the future cash flows of
        the
        entity are expected to change significantly as a result of the exchange.
        We are
        required to adopt FAS 153, on a prospective basis, for nonmonetary exchanges
        beginning after June 15, 2005. FAS No. 153 has not had a material impact
        on our
        results of operations or financial position.


28





In
      May
      2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements"
      ("FAS 154"). FAS 154 provides guidance on the accounting for and reporting
      of
      accounting changes and error corrections. It establishes, unless impracticable,
      retrospective application as the required method for reporting a change in
      accounting principle in the absence of explicit transition requirements specific
      to the newly adopted accounting principle. FAS 154 also provides guidance for
      determining whether retrospective application of a change in accounting
      principle is impracticable and for reporting a change when retrospective
      application is impracticable. The provisions of this Statement are effective
      for
      accounting changes and corrections of errors made in fiscal periods beginning
      after December 15, 2005. The adoption of the provisions of FAS 154 is not
      expected to have a material impact on the Company's financial position or
      results of operations.





In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments an amendment of FASB Statements No. 133 and 140." SFAS
      155
      provides the framework for fair value re-measurement of any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation as well as establishing a requirement to evaluate interests in
      securitized financial assets to identify interests. SFAS 155 also eliminates the
      prohibition on a qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. The guidance SFAS 155 also clarifies which interest-only
      strips and principal-only strips are not subject to the requirements
      of SFAS 133 "Accounting for Derivative Instruments and Hedging Activities"
      and concentrations of credit risk in the form of subordination are not
      embedded derivatives. This statement is effective for all financial instruments
      acquired or issued after the beginning of an entity's first fiscal year
      that
      begins after September 15, 2006.





**Item
      7.**  **Financial
      Statements.**





The
      response to this item is submitted as a separate section of this report
      beginning on page F-1.





**Item
      8.**  **Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.**





None.





**Item
      8A.**  **Controls
      and Procedures**





**Evaluation
      of our Disclosure Controls and Procedures**





We
      maintain disclosure controls and procedures that are designed to provide
      reasonable assurance that information required to be disclosed in our reports
      filed under the Securities Exchange Act of 1934, or the Exchange Act, is
      recorded, processed, summarized and reported within the time periods specified
      in the Securities and Exchange Commission's rules and forms, and that such
      information is accumulated and communicated to our management, including our
      principal executive officer and principal financial officer, as appropriate,
      to
      allow timely decisions regarding required disclosure. In designing and
      evaluating the disclosure controls and procedures, management recognized that
      any controls and procedures, no matter how well designed and operated, can
      provide only reasonable assurance of achieving the desired control objective,
      and management necessarily was required to apply its judgment in evaluating
      the
      cost-benefit relationship of possible controls and procedures.


As
        required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation,
        under the supervision and with the participation of management, including
        our
        principal executive officer and principal financial officer, of the
        effectiveness of the design and operation of our disclosure controls and
        procedures. Based on the foregoing, our principal executive officer and
        principal financial officer concluded that, as of the end of the period covered
        by this report, our disclosure controls and procedures were effective at
        the
        reasonable assurance level to ensure that information required to be disclosed
        by us in reports that we file under the Exchange Act is recorded, processed,
        summarized and reported within the time periods specified in SEC rules and
        forms, however we are late in filing this form 10Kfor the year ended December
        31, 2005.





29





There
      have been no changes in our internal controls over financial reporting during
      the year ended December 31, 2005, that have materially affected, or are
      reasonably likely to materially affect, our internal controls over financial
      reporting.





30





**PART
      III**





**Item** **10.
      Directors and Executive Officers**





**Directors**





The
      following table sets forth the names and ages of the members of our Board of
      Directors.




**Name**
            
            **Age**
            
            **Director
                Since**Donald
                Hoffmann
            
            48
            
            2005Bruce
                Newman
            
            45
            
            2004Peter
                Greenfield
            
            64
            
            2004




The
      principal occupations for the past five years (and, in some instances, for
      prior
      years) of each of our directors are as follows:





**Donald
      J. Hoffmann - Chief Executive Officer** .
      Mr.
      Hoffmann has been our Chief Executive Officer since September 9, 2005. Mr.
      Hoffmann had been our Vice President and Chief Operating Officer since August
      9,
      2004. Mr.
      Hoffmann previously spent 20 years working in many aspects of finance,
      administration and sales support for Computer Associates International, Inc.,
      a
      large provider of management software. At Computer Associates, he most recently
      served as Vice President of North America Sales Accounting. Except for a
      one-year term as Chief Financial Officer for Gemco-Ware Incorporated from 1992
      to 1993, Mr. Hoffmann served at Computer Associates in a variety of executive
      and managerial capacities in European and North America Sales Operations,
      internal audit, administration and retail sales operations. Mr. Hoffmann
      received a B.S. degree in accounting from New York University.





**Bruce
      Newman - Founder and Director** .
      Mr.
      Newman was the President, Chief Executive Officer and a member of the board
      of
      directors of privately-held Protocall since its
      formation. He became our President and Chief Executive Officer and a member
      of
      our board of directors on July 22, 2004, resigned as chief executive officer
      and
      a director on June 13, 2005, and rejoined the board of directors on September
      9,
      2005. Mr. Newman has more than 20 years of entrepreneurial investment and
      management experience with technology and software distribution companies.
      Prior
      to forming Protocall, Mr. Newman was the President of Precision Type & Form,
      Inc. (no relation to Protocall’s Precision Type font software licensing
      subsidiary), a computer photocomposition and high-resolution electronic imaging
      service company, from 1982 to 1993, when the two operating businesses were
      sold.





**Peter
      Greenfield - Chairman of the Board of Directors** .
      Mr.
      Greenfield was a member of the board of directors of privately-held Protocall
      since 1998. He became the Chairman of our board of directors on July 22, 2004.
      He founded and has served as the President of Greenfield Industries, a
      manufacturer and supplier of quality aluminum and zinc castings, since
      1966.





On
      May
      17, 2006, Don Hoffmann resigned as the Company’s Chief Executive Officer and
      from the Board of Directors. Bruce Newman, our former Chief Executive Officer
      and a director was renamed Chief Executive Officer.





**EXECUTIVE
      OFFICERS**





The
      following table sets forth the names and ages of our executive officers who
      are
      not also directors.




**Name**
            
            **Age**
            
            **Position**Brenda
                Newman
            
            45
            
            Senior
                Vice President, Operations and Rights
                Management





31





The
      principal occupations for the past five years (and, in some instances, for
      prior
      years) of each of our executive officers (other than those executive officers
      who are also directors):





**Brenda
      Newman - Senior Vice President, Operations and Rights
      Management** .
      Ms.
      Newman has been the Senior Vice President, Operations and Rights Management
      of
      Protocall since formation. She became our Senior Vice President, Operations
      and
      Rights Management on July 22, 2004. Ms. Newman has in-depth experience in the
      licensing, multi-channel distribution and reporting of digitally-based
      intellectual property. She served as Executive Vice President of Protocall’s
      Precision Type subsidiary, where she managed day-to-day operations and oversaw
      the trademark, copyright, and digital rights management with over 100 suppliers
      and approximately 18,000 individual software products. Ms. Newman also served
      as
      Executive Vice President in two computer service companies, where she managed
      technical operations. Ms. Newman and Bruce Newman are siblings.





**INDEBTEDNESS
      OF EXECUTIVE OFFICERS AND DIRECTORS**





No
      executive officer, director or any member of these individuals’ immediate
      families or any corporation or organization with whom any of these individuals
      is an affiliate is or has been indebted to us since the beginning of our last
      fiscal year.





**FAMILY
      RELATIONSHIPS**





There
      are
      no family relationships among our executive officers and directors, except
      that
      Bruce Newman, one of our directos, and Brenda Newman, our Senior Vice-President,
      Operations and Rights Management, are siblings.





**LEGAL
      PROCEEDINGS**





As
      of the
      date of this filing, there are no material proceedings to which any of our
      directors, executive officers, affiliates or stockholders is a party adverse
      to
      us.





**THE
      BOARD OF DIRECTORS AND CORPORATE GOVERNANCE**





Our
      Board
      of Directors is responsible for establishing broad corporate policies and for
      overseeing our overall management. In addition to considering various matters
      which require Board approval, the Board provides advice and counsel to, and
      ultimately monitors the performance of, our senior management.





The
      Board, its committees and our management strive to perform and fulfill their
      respective duties and obligations in a responsible and ethical manner. The
      Board
      and the Audit and Compensation Committees each perform annual self evaluations.
      We have adopted a comprehensive Code of Business Conduct and Ethics for all
      directors, officers and employees and a Code of Ethics for our Chief Executive
      Officer and our senior financial officer. Each of these codes are available
      at
      our website, www.protocall.com.





During
      2005, the Board of Directors met 10 times. While we do not have a formal policy
      requiring members of the Board to attend the Annual Meeting of Stockholders,
      we
      strongly encourage all directors to attend.





**Committees
      of the Board**





*Audit
      Committee.* The
      entire Board of Directors is acting as our audit committee, as specified in
      section 3(a)(58)(B) of the Exchange Act. The Audit Committee functions pursuant
      to a written Charter which was adopted by the Board. The Audit Committee has
      such powers as may be assigned to it by the Board from time to time. The Audit
      Committee conducted 2 formal meetings in 2005. The Audit Committee is currently
      charged with, among other things:





·
            recommending
                to the Board of Directors the engagement or discharge of our independent
                public accountants, including pre-approving all audit and non-audit
                related services;





32





·
            the
                appointment, compensation, retention and oversight of the work of
                the
                independent auditor engaged by us for the purpose of preparing or
                issuing
                an audit report or performing other audit review or attest services
                for
                us;





·
            establishing
                procedures for the receipt, retention and treatment of complaints
                received
                by us regarding accounting, internal accounting controls or auditing
                matters and for the confidential, anonymous submission by our employees
                of
                concerns regarding questionable accounting or auditing
                matters;





·
            approving
                the scope of the financial audit;





·
            requiring
                the rotation of the lead audit
                partner;





·
            consulting
                regarding the completeness of our financial
                statements;





·
            reviewing
                changes in accounting principles;





·
            reviewing
                the audit plan and results of the auditing engagement with our independent
                auditors and with our officers;





·
            reviewing
                with our officers, the scope and nature and adequacy of our internal
                accounting and other internal controls over financial reporting and
                disclosure controls and procedures;





·
            reviewing
                the adequacy of the Audit Committee Charter at least
                annually;





·
            meeting
                with our Internal Auditor on a regular
                basis;





·
            performing
                an internal evaluation of the Audit Committee on an annual basis;
                and





·
            reporting
                to the Board of Directors on the Audit Committee's activities, conclusions
                and recommendations.





*Compensation
      Committee.* The
      Entire Board is acting as the Compensation Committee. The Compensation Committee
      functions pursuant to a written Charter which was adopted by the Board. The
      Compensation Committee has such powers as may be assigned to it by the Board
      from time to time. It is currently charged with, among other things, assisting
      the Board in:





·
            approving
                and evaluating the compensation of directors and executive
                officers;





·
            establishing
                strategies and compensation policies and programs for employees to
                provide
                incentives for delivery of value to our
                shareholders;





·
            establishing
                policies to hire and retain senior executives, with the objective
                of
                aligning the compensation of senior management with our business
                and the
                interests of our shareholders;





·
            together
                with management, surveying the amount and types of executive compensation
                paid by comparable companies, and engaging consultants as necessary
                to
                assist them;





·
            periodically
                reviewing corporate goals and objectives relevant to executive
                compensation and making recommendations to the Board for
                changes;





·
            assisting
                management in evaluating each executive officer's performance in
                light of
                corporate goals and objectives, and recommending to the Board (for
                approval by the independent directors) the executive officers'
                compensation levels based on this
                evaluation;





33


·
            overseeing
                our stock option plan or other stock-based plans with respect to
                our
                executive officers and employee Board members, who are subject to
                the
                short-swing profit restrictions of Section 16 of the Securities Exchange
                Act of 1934, as amended;





·
            reviewing
                the overall performance of our employee benefit plans and making
                recommendations to the Board regarding incentive-compensation plans
                and
                equity-based plans;





·
            together
                with the full Board, reviewing and making recommendations to the
                independent directors of the Board regarding the form and amount
                of
                director compensation;





·
            ensuring
                that our compensation policies meet or exceed all legal and regulatory
                requirements and any other requirements imposed on us by the Board;
                and





·
            producing
                an annual report on executive compensation for inclusion in our proxy
                statement.





In
      general, the Compensation Committee formulates and recommends compensation
      policies for Board approval, oversees and implements these Board-approved
      policies, and keeps the Board apprised of its activities on a regular basis.
      In
      addition, the Compensation Committee together with the full Board, develops
      criteria to assist the Board's assessment of the Chief Executive Officer's
      leadership of our company.





**Director
      Compensation**





Directors
      are expected to timely and fully participate in all regular and special board
      meetings, and all meetings of committees that they serve on. We have agreed
      to
      pay each non-employee director a retainer fee of $2,500 per quarter, but
      deferred until we have sufficient cash flow as determined by our board, and
      no
      participation fee for attendance at regular or special meetings of the board.
      We
      have also agreed to pay a special committee retainer fee of $1,000 per quarter,
      payable at the end of each quarter, and no participation fee for attendance
      at
      meetings of a committee of the board. Mr. Schutz, a former director, agreed
      to
      voluntarily waive his special committee quarterly cash fee for the first year
      of
      his service on our board. We will also reimburse each director for reasonable
      accommodations, coach travel and other miscellaneous expenses relating to each
      director’s attendance at board meetings and committee meetings promptly upon
      submission of actual receipts to our chief financial officer. Effective May 17, 2005, due to greater levels of work effort, the quarterly
      director retainer fee was increased to $5,000 and the special committee retainer
      fee was increased to $2,000 per quarter.





Non-employee
      directors were awarded an initial grant of non-qualified stock options to
      purchase 50,000 shares. Due to anticipated greater levels of oversight and
      work
      effort, the Chairman of the Board received an initial additional grant of 50,000
      shares, and the Audit and Compensation Committee chairs received an initial
      additional grant of 50,000 shares and 25,000 shares, respectively. Such option
      awards have an exercise price equal to $1.25 per share, the purchase price
      of
      our shares in our recent private offering, vesting in equal quarterly
      installments over a one-year service period and have a term of five years from
      the date of award. On May 18, 2005, non-employee directors were awarded an
      additional grant of non-qualified stock options to purchase 50,000 shares.
      The
      Chairman of the Board received an additional grant of 50,000 shares, and the
      Audit and Compensation Committee chairs received an additional grant of 100,000
      shares. These options all had an exercise price of $.89. All of the option
      grants to non-employee directors are pursuant to the 2004 Stock Option Plan.
      Other terms and conditions of the option grants are on the standard terms and
      conditions as those option grants to employees.





The
      Compensation Committee will review the director compensation plan annually,
      and
      adjust it according to then current market conditions and good business
      practices.





34


**Item
      11. Executive Compensation**





**EXECUTIVE
      COMPENSATION AND RELATED MATTERS**





The
      following table sets forth the cash compensation (including cash bonuses) paid
      or accrued by us for our years ended December 31, 2005, 2004 and 2003 to our
      Chief Executive Officer and our four most highly compensated officers other
      than
      the Chief Executive Officer at December 31, 2005.





**Summary
      Compensation Table**




**Name
                and Principal Position**
            
            **Fiscal
                Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Other
                Annual Compensation ($) (1)**
            
            **Long-Term
                Compensation - Awards - Securities Underlying Options (#
                shares)**Donald
                Hoffmann, Chief Executive Officer of Protocall (3)
            
            
            2005
              
              2004
              
              2003
            
            
            149,423
              
              59,135
              
              -
            
            
            10,000
              
              -
              
              -
            
            
            15,000
              
              -
              
              -
            
            
            950,000
              
              50,000
              
              -Bruce
                Newman, Chief Executive Officer through 6/05, Director and Consultant
                9/05-12/05 (6)
            
            
            2005
              
              2004
              
              2003
            
            
            195,000
              
              113,750
              
              52,000
            
            
            -
              
              -
              
              -
            
            
            77,188
              
              94,250
            
            
            750,000
              
              98,125
              
              97,500Anthony
                Andrews, former Executive Vice President-Corporate Development of
                Protocall (2)
            
            
            2005
              
              2004
              
              2003
            
            
            42,500
              
              143,699
              
              92,768
            
            
            -
              
              -
              
              -
            
            
            -
              
              -
              
              -
            
            
            -
              
              4,584
              
              55,008Brenda
                Newman, Senior Vice President-Content and Digital Rights Management
                of
                Protocall
            
            
            2005
              
              2004
              
              2003
            
            
            146,435
              
              85,750
              
              42,900
            
            
            -
              
              -
              
              -
            
            
            -
              
              58,188
              
              67,350
            
            
            350,000
              
              109,875
              
              73,500Syd
                Dufton, Vice President Sales and Channel Marketing (4)
            
            
            2005
              
              2004
              
              2003
            
            
            124,234
              
              40,304
            
            
            22,500
              
              -
            
            
            
            
            
            450,000
              
              50,000
              
              -Andrew
                D. Owens, President and Chief Executive Officer of Quality Exchange
                (5)
            
            
            2005
              
              2004
              
              2003
            
            
            -
              
              -
              
              -
            
            
            -
              
              -
              
              -
            
            
            -
              
              -
              
              -
            
            
            -
              
              -
              
              -




35








(1)
            Other
                Compensation does not include the cost to Protocall for health and
                welfare
                benefits received by the above named officers. The aggregate amounts
                of
                such personal benefits did not exceed the lesser of $50,000 or 10%
                of the
                total annual compensation of such
                officer.





(2)
            Mr.
                Andrews resigned as an officer effective October 31, 2004. Amounts
                paid in
                2005 are severance payments as per the terms of Mr. Andrews employment
                contract.





(3)
            Mr.
                Hoffmann joined us in August 2004 as Chief Operating Officer. Mr.
                Hoffmann
                became our Chief Executive Officer in September
                2005.





(4)
            Mr.
                Dufton was employed by the Company from September 2004 through August
                2005.





(5)
            Mr.
                Owens resigned as an officer and director on July 22,
                2004.





(6)
            Pursuant
                to the Resignation and Consulting Agreement between Mr. Newman and
                Protocall dated June 13, 2005 Mr. Newman forfeited $669,506 worth
                of
                accrued salary and Protocall forgave loans totaling
                $558,381.





**Options
      Grants in Last Fiscal Year**





The
      following table sets forth information with respect to grants of options to
      purchase our common stock under the 2000 Stock Incentive Plan and 2004 Stock
      Option Plan of Protocall Technologies Incorporated to our executive officers
      during the fiscal year ended December 31, 2005.


**Name**
              
              **Number
                  of Securities**
                **Underlying
                  Options****Granted**
              
              **Percent
                  of Total**
                **options**
                **Granted**
                **to
                  Employees**
                **in
                  Fiscal Year**
              
              **Exercise**
                **or
                  Base Price**
              
              **Expiration**(#)
              
              (%)
              
              ($/Sh)Donald
                  Hoffmann
              
              
              950,000
              
              
              21.51
              
              
              .33-1.35
              
              
              (1)Bruce
                  Newman
              
              
              90,000
              
              
              2.04
              
              
              1.35
              
              
              (2)Brenda
                  Newman
              
              
              350,000
              
              
              7.92
              
              
              .33-1.35
              
              
              (3)Mark
                  Benedikt
              
              
              1,841,667
              
              
              41.69
              
              
              .85-1.35
              
              
              (4)Syd
                  Dufton
              
              
              450,000
              
              
              10.19
              
              
              1.35
              
              
              (5)




36


(1)
            450,000
                options expire 3/28/2015 and 500,000 expire
                11/3/2015.





(2)
            Options
                forfeited due to resignation. Received 750,000 options as a
                director.





(3)
            200,000
                options expire 3/28/2015 and 150,000 options expire
                11/3/2015.





(4)
            Options
                forfeited.





(5)
            375,000
                options forfeited, 75,000 options expire
                8/8/2008.





**Aggregate
      Option Exercises in Last Fiscal Year and Fiscal Year End Option Values**





The
      following table sets forth with respect to our executive officers information
      with respect to options exercised, unexercised options and year-end option
      values in each case with respect to options to purchase shares of our common
      stock.




**Number
                of Securities Underlying Unexercised Options at December 31,
                2005**
            
            **Value
                of Unexercised In The Money Options At**
              **December
                31, 2005(1)****Name**
            
            **Shares
                Acquired on Exercise (#)**
            
            **Value
                Realized ($)**
            
            **Exercisable
                (#)**
            
            **Unexercisable
                (#)**
            
            **Exercisable
                ($)**
            
            **Unexercisable
                ($)**Bruce
                Newman
            
            
            -
            
            
            -
            
            
            605,494
            
            
            750,000
            (2)
            
            -
            
            
            -Brenda
                Newman
            
            
            -
            
            
            -
            
            
            675,595
            
            
            369,167
            
            
            -
            
            
            -Donald
                Hoffmann
            
            
            -
            
            
            -
            
            
            370,834
            
            
            629,166
            
            
            -
            
            
            -





(1)
            Represents
                the difference between $.15 per share, the last reported sale price
                of our
                common stock on December 31, 2005, and the exercise price of the
                option multiplied by the applicable number of
                shares.





(2)
            750,000
                options were issued to Bruce Newman as a
                director.





On
      May
      17, 2006, Don Hoffmann resigned as the Company’s Chief Executive Officer and
      from the Board of Directors. Bruce Newman, our former Chief Executive Officer
      and a director was renamed Chief Executive Officer.





**Employment
      Agreements**





In
      July
      2004, Bruce Newman, our President and Chief Executive Officer, entered into
      an
      employment agreement with us to serve as our President and Chief Executive
      Officer for a term of five years. Donald J. Hoffmann, our Vice President and
      Chief Operating Officer, also
      entered into an employment agreement with us for a term of two years, commencing
      on August 9, 2004. Under these employment agreements, Messrs. Newman and
      Hoffmann will devote all of his business time and efforts to our
      business.





Mr.
        Newman’s employment agreement provided that he would initially receive a fixed
        base salary at an annual rate of $195,000. Mr. Newman was also entitled to
        receive incentive compensation upon meeting specified financial and operating
        milestones as determined by our board. We also agreed to initially grant
        Mr.
        Newman stock options to purchase 90,000 shares of our common stock under
        our
        2004 Stock Option Plan at an exercise price of $1.25 per share, vesting in
        equal
        annual installments over a three-year period.





Mr.
      Hoffmann’s employment agreement provides that he will initially receive a fixed
      base salary at an annual rate of $150,000. Mr. Hoffmann will also be entitled
      to
      receive incentive compensation upon meeting specified financial and operating
      milestones as determined by our board. We also agreed to initially grant Mr.
      Hoffmann stock options to purchase 50,000 shares of our common stock under
      our
      2004 Stock Option Plan at an exercise price of $1.25 per share, vesting in
      equal
      annual installments over a three-year period





37


Effective
      September 9 ,2005, Mr. Hoffmann is our Chief Executive Officer. In November
      2005
      the Board of Directors awarded Mr. Hoffmann a $50,000 bonus to be paid in equal
      monthly installments from October 2005 through July 2006. Due to lack of
      available funds as of December 31, 2005 the Company has accrued but not paid
      $15,000 as bonus expense. In March 2005, Mr. Hoffmann was awarded stock options
      to puchase 450,000 shares of our common stock at an exercise price of $1.35
      per
      share, vesting in equal quarterly installments over a three year period. In
      November 2005, Mr. Hoffmann was awarded stock options to purchase 500,000 shares
      of our common stock at an exercise price of $.33 per share. 166,667 of these
      options vested immediately with the balance vesting in equal quarterly
      installments over a three-year period.





Each
      employment agreement provides for termination by us upon each executive’s death
      or disability (defined as 90 days of incapacity during any 365-day period)
      or
      upon conviction of a felony of moral turpitude or a material breach of his
      obligations to us. In the event an executive’s contract is terminated by us
      without cause, in the case of Mr. Newman, he will be entitled to compensation
      for 24 months, and in the case of Mr. Hoffmann, he will be entitled to
      compensation for six months.





Each
      employment agreement also contains covenants (a) restricting the executive
      from
      engaging in any activities competitive with our business during the term of
      his
      employment agreement and one year thereafter, (b) prohibiting him from
      disclosure of confidential information regarding our company, and (c) confirming
      that all intellectual property developed by him and relating to our business
      constitutes our sole and exclusive property.





Mr.
      Newman resigned on June 13, 2005 and entered into a consulting agreement with
      us. Mr. Newman’s consulting agreement provides for a monthly consulting fee of
      $16,250 and reimbursement of expenses as may be agreed between us and Mr. Newman
      for specific projects. The agreement also contains covenants (a) restricting
      Mr.
      Newman from competing with us or soliciting our customers or employees during
      the term of his agreement and one year thereafter, and (b) prohibiting him
      from
      disclosure of confidential information regarding our company. Mr. Newman agreed
      to forego deferred salary owed to him and we agreed to forgive loans and
      advances made by us to him. Mr. Newman’s employment agreement was terminated and
      Mr. Newman is not entitled to receive any of the severance payments mentioned
      in
      the July 2004 employment agreement. Effective September 9, 2005, Mr. Newman
      rejoined the board of directors and has been actively engaged since that time
      working on behalf of Protocall. In November 2005, Mr Newman was awarded stock
      options to purchase 750,000 shares of our common stock at an exercise price
      of
      $.33 per share, vesting in equal quarterly installments over a one-year period.





On
      May
      17, 2006, Don Hoffmann resigned as the Company’s Chief Executive Officer and
      from the Board of Directors. Bruce Newman, our former Chief Executive Officer
      and a director was renamed Chief Executive Officer.





38





**Item
      12. Security Ownership of Certain Beneficial Owners and
      Management**








**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth information as to the shares of our common stock
      beneficially owned as of December 31, 2005 by (i) each person known to us to
      be
      the beneficial owner of more than 5% of our common stock; (ii) each director;
      (iii) each executive officer; and (iv) all of our directors and executive
      officers as a group. Unless otherwise indicated in the footnotes following
      the
      table, the persons as to whom the information is given had sole voting and
      investment power over the shares of common stock shown as beneficially owned
      by
      them. Unless otherwise indicated, the address of each person shown is c/o
      Protocall Technologies Incorporated, 47 Mall Drive, Commack, New York
      11725-5717.





**Name
                and Address of Beneficial Owner**
            
            **Amount
                Beneficially Owned (1)**
            
            **Percent
                of Class (1)**Bruce
                Newman
            
            
            1,555,594
                (2
            )
            
            3.2
            %Brenda
                Newman
            
            
            1,450,695
                (3
            )
            
            2.99
            %Donald
                Hoffmann
            
            
            436,112
                (4
            )
            
            *Peter
                Greenfield
            
            
            8,106,361
                (5
            )
            
            16.83
            %CIMOS,
                Inc
            
            
            4,248,716
                (6
            )
            
            8.83
            %Joachim
                R Anzer
            
            
            19,179,364
                (7
            )
            
            36.92
            %Robert
                Schrier
            
            
            3,187,278
                (8
            )
            
            6.61
            %Directors
                and executive officers as a group (four persons)
            
            
            11,548,762
                (9
            )
            
            23.1
            %







***Less
      than one percent.**





(1)
            In
                accordance with Rule 13d-3(d)(1)(i) of the Securities Exchange Act
                of
                1934, as amended, or the Exchange Act, shares beneficially owned
                at any
                date include shares issuable upon the exercise of stock options,
                warrants,
                rights or conversion privileges within 60 days of that date. For
                the
                purpose of computing the percentage of outstanding shares beneficially
                owned by a particular person, any securities not outstanding that
                are
                subject to stock options, warrants, rights or conversion privileges
                exercisable by that person within 60 days of December 31, 2005 have
                been
                deemed to be outstanding, but have not been deemed outstanding for
                the
                purpose of computing the percentage of the class beneficially owned
                by any
                other person.





(2)
            Includes
                605,494 shares of common stock issuable upon exercise of stock options
                granted under the Protocall 2000 Stock Incentive Plan, which are
                currently
                exercisable and 187,500 shares of common stock issuable upon exercise
                of
                stock options granted under the Protocall 2004 Stock Incentive Plan
                which
                are currently exercisable.





(3)
            Includes
                591,012 shares of common stock issuable upon exercise of stock options
                granted under the Protocall 2000 Stock Incentive Plan, which are
                currently
                exercisable and 97,083 shares of common stock issuable upon exercise
                of
                stock options granted under the Protocall 2004 Stock Incentive Plan
                which
                are currently exercisable.





(4)
            Represents
                currently-exercisable stock options granted under the Protocall 2004
                Stock
                Incentive Plan





39


(5)
            Includes
                362,500 shares of common stock issuable upon the exercise of stock
                options
                granted and currently exercisable under the Protocall 2004 Stock
                Incentive
                Plan.





(6)
            Includes
                342,466 shares of common stock issuable upon the exercise of a currently
                exercisable three-year warrant.





(7)
            Includes
                4,155,057 shares of common stock issuable upon the exercise of a
                currently
                exercisable three-year warrant.





(8)
            Includes
                426,003 shares of common stock issuable upon the exercise of a currently
                exercisable three-year warrant.





(9)
            Includes
                1,196,506 shares of common stock issuable upon exercise of stock
                options
                granted and currently exercisable under the Protocall 2000 Stock
                Incentive
                Plan. Also includes 1,070,695 shares of common stock issuable upon
                exercise of stock options granted under the Protocall 2004 Stock
                Incentive
                Plan.





On
      May
      17, 2006, Don Hoffmann resigned as the Company’s Chief Executive Officer and
      from the Board of Directors. Bruce Newman, our former Chief Executive Officer
      and a director was renamed Chief Executive Officer.





**Item
      Certain Relationships and Related Transactions**





On
      September 30, 2003, a stockholder/director opened a one year, irrevocable
      standby letter of credit on our behalf in the amount of $300,000, as required
      by
      an agreement with a publisher to guarantee the payment of any license fees
      due
      the publisher. As compensation to the stockholder/director, we issued a warrant
      to purchase 150,000 shares of common stock exercisable at the lower of $2.75
      per
      share or the sales price of common stock in subsequent offerings. The fair
      value
      of the warrant was $77,321, utilizing the Black-Scholes option-pricing model
      with the following assumptions: 50% volatility, seven-year expected life,
      risk-free interest rate of 3.63% and dividend yield ratio of 0%. The warrant
      was
      originally scheduled to expire on September 30, 2010 but was converted into
      approximately 27,413 shares of common stock in connection with the reverse
      merger on July 22, 2004. The fair value of the warrant was recorded as a
      deferred finance cost and was amortized, on a straight-line basis, over the
      one
      year term of the letter of credit. This letter of credit was canceled during
      September 2004 due to the termination of the publisher agreement and was never
      drawn upon.





On
      October 14, 2003, the same stockholder/director opened an irrevocable standby
      letter of credit on our behalf as required by our equipment lease agreement,
      which is to be retained for the entire term of the lease obligation or until
      such time as we are able to replace this letter of credit, in the amount of
      $1,040,000. As compensation, we issued a warrant to purchase 520,000 shares
      of
      common stock exercisable at the lower of $2.75 per share or the sales price
      of
      common stock in subsequent offerings. The fair value of the warrant was $269,470
      utilizing the Black-Scholes option-pricing model with the following assumptions:
      50% volatility, seven-year expected life, risk-free interest rate of 3.86%
      and
      dividend yield of 0%. The warrant was originally scheduled to expire on October
      14, 2010, but was converted into approximately 95,047 shares of common stock
      in
      connection with the reverse merger on July 22, 2004. The fair value of the
      warrant has been recorded as a deferred lease cost and is being amortized,
      on a
      straight-line basis, over the term of the lease obligation which terminates
      April 1, 2007. The balance of this letter of credit was reduced to $750,462
      in
      November 2005. We are contingently liable for the amounts of this letter of
      credit in the event the stockholder/director is obligated to make payments
      thereunder as a result of our noncompliance with the terms of the lease
      agreement.





Pursuant
      to an agreement entered into prior to becoming a stockholder or director, we
      paid another stockholder $57,515 at closing of the reverse merger by us for
      advisory services rendered in connection with the reverse merger transaction.
      Subsequent to this transaction he was appointed to the board of
      directors.





Immediately
      prior to the closing of the merger, holders of Protocall’s then-existing
      promissory notes in the aggregate outstanding amount of approximately $7.4
      million and Protocall’s then-existing warrants to purchase 17,647,377 shares of
      Protocall common stock exchanged their promissory notes and warrants for shares
      of Protocall’s common stock and, in turn, received shares of our common stock or
      warrants to purchase our common stock in the merger. Peter Greenfield, the
      chairman of our board of directors, was the holder of approximately $5.3 million
      in principal amount of the promissory notes, representing 72% of the total
      outstanding amount, and warrants to purchase approximately 11.0 million shares
      of Protocall common stock, representing 63% of all outstanding warrants. Mr.
      Greenfield converted his promissory notes into 4,243,874 shares of our common
      stock and his warrants were converted into 2,120,964 shares of our common stock.
      Ellen and Jerome Kaufman, the parents of the spouse of Bruce Newman, our
      President, Chief Executive Officer and a director, also held approximately
      $600,000 in principal amount of the promissory notes, of which approximately
      $367,000 was converted into 294,321 shares of our common stock and the balance
      was rolled over into a 4% note due 3 years from July 22, 2004. Neither Mr.
      Greenfield nor the parents of Mr. Newman’s spouse were offered any special
      inducement to exchange their promissory notes and warrants which was no
      different from any other holder doing so.





40


In
      order
      to facilitate the reverse merger and without receiving consideration, Mr.
      Greenfield forgave $1,099,915 of accrued interest on notes held by
      him.





Jed
      Schutz, one of our former directors, was the holder of $150,000 in principal
      amount of an interim promissory note, which was converted into 120,000 shares
      of
      our common stock in the merger.





We
      currently sublease our office space in Commack, New York from K&N Holding
      Corp., a corporation controlled by members of Bruce Newman’s family, which in
      turn leases the office space directly from an unaffiliated third party real
      estate company. The sublease rental rate we pay is the identical rate for
      identical square footage charged by the unaffiliated real estate company to
      the
      corporation controlled by members of Mr. Newman’s family ,
      and
      Protocall reimburses K&N Holding for certain administrative
      costs.





In
      connection with the merger, a total of 7,875,000 shares of our common stock
      owned by Andrew D. Owens, our sole director prior to the closing of the merger,
      were repurchased by us for an aggregate consideration of $15,000, plus all
      of
      the issued and outstanding capital stock of Orion Publishing, Inc., our
      wholly-owned subsidiary prior to the closing of the merger. The shares of our
      common stock that were repurchased from Mr. Owens were then cancelled at the
      closing of the merger. The sale of the issued and outstanding capital stock
      of
      Orion Publishing, Inc. was valued at less than $60,000.





**Item
      13.**  **Exhibits
      and Reports on Form 8-K.**





(a)
            Exhibits:




**Exhibit
                No.**
            
            **Description
                of Exhibit**2.1
            
            Agreement
                of Merger and Plan of Reorganization, dated July 22, 2004, among
                Quality
                Exchange, Inc., PTCL Acquisition Corp. and Protocall Technologies
                Incorporated.(1)3.1
            
            Articles
                of Incorporation of Quality Exchange, Inc., filed with the Nevada
                Secretary of State on June 3, 1998. (2)3.2
            
            Certificate
                of Amendment to Articles of Incorporation of Quality Exchange, Inc.,
                filed
                with the Nevada Secretary of State on May 19, 2004.(3)3.3
            
            Certificate
                of Amendment to Articles of Incorporation of Quality Exchange, Inc.,
                filed
                with the Nevada Secretary of State on July 22, 2004.(3)3.4
            
            Bylaws
                of Quality Exchange, Inc., adopted on June 17, 1998.
                (2)4.1
            
            Form
                of Warrant.(4)10.1
            
            2000
                Stock Incentive Plan.(5)10.2
            
            2004
                Stock Option Plan.(4)10.3
            
            Employment
                Agreement, dated as of July 22, 2004, between Bruce Newman and Protocall
                Technologies Incorporated.(5)10.4
            
            Electronic
                Software Distribution and Site Location Agreement,dated
                November 29, 2002, between Protocall Software Delivery Systems Inc.
                and
                CompUSA Inc., as amended by Amendment No. 1 thereto, dated as of
                June 15,
                2004. (6)




41


10.5
            
            Electronic
                Software Distribution and Site Location Agreement,dated
                March 25, 2004, between Protocall Software Delivery Systems Inc.
                and
                Systemax Inc. (6)14.1
            
            Code
                of Business Conduct and Ethics.(4)14.2
            
            Code
                of Ethics for CEO and Senior Financial Officers.(4)21.1
            
            Subsidiaries
                of Protocall Technologies Incorporated.24.1
            
            Power
                of Attorney (set forth on signature page of the Annual
                Report).31.1
            
            Certification
                of Principal Executive Officer Required by Exchange Act Rule
                13a-14(a).31.2
            
            Certification
                of Principal Financial Officer Required by Exchange Act Rule
                13a-14(a).32.1
            
            Joint
                Certification of Principal Executive Officer and Principal Financial
                Officer Required by Exchange Act Rule
                13a-14(b).







(1)
            Incorporated
                by reference to the exhibits filed with the Current Report on Form
                8-K,
                dated July 22, 2004 (filed with the SEC on July 26,
                2004).


(2)
            Incorporated
                by reference to the exhibits filed with Registration Statement on
                Form
                SB-2, filed with the SEC on April 17,
                2002.


(3)
            Incorporated
                by reference to the exhibits filed with Registration Statement on
                Form
                8-A, dated January 7, 2005 (filed with the SEC on January 7,
                2005).


(4)
            Incorporated
                by reference to the exhibits filed with the Registration Statement
                on Form
                SB-2 (filed with the SEC on January 13,
                2005).





(5)
            Incorporated
                by reference to the exhibits filed with the Current Report on Form
                8-K,
                dated July 22, 2004 (filed with the SEC on August 6,
                2004).





(6)
            To
                be filed by amendment to the Registration Statement on Form SB-2
                referenced in Note 4 above.





(b)
            Reports
                on Form 8-K.




During
      the three months ended December 31, 2005, we filed the following current reports
      on Form 8-K:





·
            Current
                Report on Form 8-K filed on October 3, 2005 regarding completion
                of
                private placement.




·
            Current
                Report on Form 8-K filed on October 19, 2005 attaching a press release
                regarding recent management
                changes.




·
            Current
                Report on Form 8-K dated November 16, 2005 and filed with the SEC
                on
                November 19, 2005.




·
            Current
                Report on Form 8-K filed on December 13, 2005 regarding completion
                of a
                private placement.




·
            Current
                Report on Form 8-K filed on January 5, 2006 regarding completion
                of a
                private placement.





42


**Item
      14.**  **Principal
      Accountant Fees and Services.**





**Audit
      Fees**


We
        incurred fees of approximately $110,000 to Eisner, LLP for the audit of the
        annual financial statements of Protocall Technologies Incorporated for the
        year
        ended December 31, 2005 and the reviews of the 2005 quarterly financial
        statements. We also incurred fees of $136,000 to Eisner LLP in connection
        with
        the audit of the financial statements of Protocall Technologies Incorporated
        for
        the year ended December 31,2004. We also incurred audit fees of $270,000
        to
        Eisner LLP in 2004 in connection with the audits of the financial statements
        of
        Protocall Technologies Incorporated for the years ended December 31, 2003,
        2002
        and 2001 and the reviews of the 2004 quarterly financial
        statements






**Tax
      Fees**





There
      were no fees billed to us by Eisner, LLP for services rendered to us during
      the
      last two fiscal years for tax compliance, tax advice, or tax
      planning.





**All
      Other Fees**





There
      were no fees billed to us by Eisner, LLP for services rendered to us during
      the
      last two fiscal years, other than the services described above under “Audit
      Fees” and “Audit-Related Fees.”





It
      is the
      audit committee’s policy to pre-approve all services provided by Eisner,
      LLP.





As
      of the
      date of this filing, our current policy is not to engage Eisner, LLP to provide,
      among other things, bookkeeping services, appraisal or valuation services,
      or
      international audit services. The policy provides that we engage Eisner, LLP
      to
      provide audit, tax, and other assurance services, such as review of SEC reports
      or filings.





43





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**PROTOCALL
                TECHNOLOGIES INCORPORATED**Date:May
                24, 2006
            By:
            /s/
              Bruce NewmanBruce
              NewmanChief
                Executive Officer (Principal Executive and
              Financial
                Officer and Principal Accounting
                Officer)




**POWER
      OF ATTORNEY**




We,
      the
      undersigned officers and directors of Protocall Technologies Incorporated,
      hereby severally constitute and appoint Bruce Newman, our true and lawful
      attorney-in-fact and agent, with full power of substitution, for us and in
      our
      stead, in any and all capacities, to sign any and all amendments to this annual
      report and all documents relating thereto, and to file the same, with all
      exhibits thereto, and other documents in connection therewith, with the U.S.
      Securities and Exchange Commission, granting to said attorney-in-fact and agent,
      full power and authority to do and perform each and every act and thing
      necessary or advisable to be done in and about the premises, as full to all
      intents and purposes as he might or could do in person, hereby ratifying and
      confirming the said attorney-in-fact and agent, or his substitute or substitutes
      may lawfully do or cause to be done by virtue hereof.





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated:




/s/
                  Peter Greenfield
              
              Peter
                Greenfield
            
            Chairman
                of the Board of Directors
            
            May
                24, 2006/s/ Bruce
                Newman
              Bruce
                Newman
            
            Director,
                Chief Executive Officer
            
            May
                24, 2006





44




PROTOCALL
        TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**PROTOCALL
      TECHNOLOGIES INCORPORATED**




**FORM
      10-KSB**




**ITEM
      7**




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




PageReport
                of Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheets at December 31, 2005 and 2004
            
            F-2Consolidated
                Statements of Operations for the years ended December 31, 2005, and
                2004
            
            F-3Consolidated
                Statements of Stockholders' Equity (Deficit) for the years ended
                December
                31, 2005, and 2004
            
            F-4Consolidated
                Statements of Cash Flows for the years ended December 31, 2005, and
                2004
            
            F-5Notes
                to Consolidated Financial Statements
            
            F-7











REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
      of
      Directors and Stockholders


Protocall
      Technologies Incorporated





We
      have
      audited the accompanying consolidated balance sheets of Protocall Technologies
      Incorporated and subsidiaries (the "Company") as of December 31, 2005 and
      2004, and the related consolidated statements of operations, stockholders'
      equity (deficit) and cash flows for the years then ended. These financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Protocall Technologies
      Incorporated and subsidiaries as of December 31, 2005 and 2004, and the
      consolidated results of their operations and their consolidated cash flows
      for
      the years then ended, in conformity with U.S. generally accepted accounting
      principles.





The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note A[2] to the financial
        statements, the Company has not generated any significant revenues, has incurred
        losses since inception, has an accumulated deficit and has been dependent
        upon
        funds generated from the sale of common stock and loans. These conditions
        raise
        substantial doubt about the Company's ability to continue as a going concern.
        Management's plans in regards to these matters are also described in
        Note A[2]. The financial statements do not include any adjustments that
        might result from the outcome of this uncertainty.








Eisner
      LLP





New
      York,
      New York


May
        22,
        2006


F-1




PROTOCALL
        TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Consolidated
      Balance Sheets**


**December 31,****2005**
              
              **2004****ASSETS**Current
                  assets:Cash
              
              $
              402,221
              
              $
              2,133,223Accounts
                  receivable, net
              
              
              56,980
              
              
              64,301Inventory
              
              
              28,106
              
              
              21,919Prepaid
                  expenses and other current assets
              
              
              69,735Total
                  current assets
              
              
              557,042
              
              
              2,219,443Property
                  and equipment, net
              
              
              510,670
              
              
              1,067,819Patents,
                  net
              
              
              25,567
              
              
              28,000Deferred
                  lease costs
              
              
              97,405
              
              
              175,321Other
                  assets
              
              
              
              
              
              15,890**TOTAL
                  ASSETS**
              
              $
              1,190,684
              
              $
              3,506,473**LIABILITIES
                  AND STOCKHOLDERS' (DEFICIT) EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              511,274
              
              $
              418,514Accrued
                  expenses
              
              
              892,781
              
              
              500,132Notes
                  payable to officers/stockholders
              
              
              7,927
              
              
              18,802Accrued
                  salaries - officers/stockholders
              
              
              394,272
              
              
              587,407Other
                  current liabilities
              
              
              27,375
              
              
              30,750Current
                  portion of net liabilities of discontinued operations
              
              
              207,352
              
              
              224,463Current
                  portion of obligations under capital leases
              
              
              299,225
              
              
              361,990Total
                  current liabilities
              
              
              2,340,206
              
              
              2,142,058Net
                  liabilities of discontinued operations, less current
                  portion
              
              
              56,610
              
              
              64,138Obligations
                  under capital leases, less current portion
              
              
              461,227
              
              
              648,151Other
                  notes payable, including accrued interest of $28,483 and $8,721
                  at
                  December 31, 2005 and 2004 respectively
              
              
              522,522
              
              
              502,759Total
                  liabilities
              
              
              3,380,565
              
              
              3,357,106Commitments
                  and contingenciesStockholders'
                  (deficit) equity:Common
                  stock, $0.001 par value, 100,000,000 shares authorized, 47,789,364
                  and
                  25,383,710 shares issued and outstanding at December 31, 2005 and
                  2004,
                  respectively
              
              
              47,789
              
              
              25,383Additional
                  paid-in capital
              
              
              36,083,723
              
              
              33,381,197Stock
                  subscription receivable
              
              
              --
              
              
              (6,665
              )Deferred
                  sales fee, net
              
              
              (204,488
              )
              
              (287,648
              )Accumulated
                  deficit
              
              
              (38,116,905
              )
              
              (32,962,900
              )Total
                  stockholders' (deficit) equity
              
              
              (2,189,881
              )
              
              149,367**TOTAL
                  LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY**
              
              $
              1,190,684
              
              $
              3,506,473




*See
      notes to consolidated financial statements*





F-2


PROTOCALL
        TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Consolidated
      Statements of Operations**




**Year
                Ended December 31,****2005**
            
            **2004**Net
                sales
            
            $
            505,512
            
            $
            206,005Cost
                of sales
            
            
            383,920
            
            
            160,097Gross
                profit
            
            
            121,592
            
            
            45,908Selling,
                general and administrative expenses
            
            
            4,935,839
            
            
            4,801,472Research
                and development expenses
            
            
            150,770
            
            
            153,123Operating
                loss
            
            
            (4,965,017
            )
            
            (4,908,687
            )Interest
                expense, including amortization of debt discounts and beneficial
                conversion feature
            
            
            (218,382
            )
            
            (2,298,278
            )Gain
                on forgiveness of indebtedness
            
            
            15,750
            
            
            392,995Loss
                on disposal of fixed assets
            
            
            (28,099
            )
            
            (187,094
            )Other
                income, net
            
            
            41,743
            
            
            53,539Net
                loss from continuing operations
            
            
            (5,154,005
            )
            
            (6,947,525
            )Net
                income from discontinued operations
            
            
            
            
            
            8,447Net
                loss
            
            $
            (5,154,005
            )
            $
            (6,939,078
            )Per
                Share Data - basic and diluted:Loss
                from continuing operations
            
            $
            (.17
            )
            $
            (.47
            )Income
                from discontinued operations
            
            
            .00
            
            
            .00Net
                loss
            
            $
            (.17
            )
            $
            (.47
            )Weighted
                average number of shares - basic and diluted
            
            
            29,641,044
            
            
            14,837,925





*See
        notes to consolidated financial statements*


F-3


PROTOCALL
        TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Consolidated
      Statements of Stockholders' (Deficit) Equity**




**Common
                Stock****Par
                Value $0.001****Number**
            
            
            
            **Additional**
            
            **Stock****of**
            
            
            
            **Paid-In**
            
            **Subscription**
            
            **Deferred**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Capital**
            
            **Receivable**
            
            **Sales
                Fee, net**
            
            **Deficit**
            
            **Total****Balance
                - January 1, 2004**
            
            
            6,480,271
            
            $
            6,480
            
            $
            16,323,795
            
            $
            (6,665
            )
            
            
            
            $
            (26,023,822
            )
            $
            (9,700,212
            )Contribution
                to capital from forgiveness ofindebtedness
            
            
            
            
            
            
            
            
            1,099,915
            
            
            
            
            
            
            
            
            
            
            
            1,099,915Conversion
                of notes payable and accountspayable
                to common stock
            
            
            6,708,010
            
            
            6,708
            
            
            8,378,304
            
            
            
            
            
            
            
            
            
            
            
            8,385,012Conversion
                of accrued officers’ salaries tocommon
                stock
            
            
            160,000
            
            
            160
            
            
            199,840
            
            
            
            
            
            
            
            
            
            
            
            200,000Issuance
                of warrants in connection withconvertible
                notes payable
            
            
            
            
            
            
            
            
            658,272
            
            
            
            
            
            
            
            
            
            
            
            658,272Conversion
                of warrants to common stock inconnection
                with reverse merger
            
            
            3,384,793
            
            
            3,385
            
            
            (3,385
            )Issuance
                of common stock in privateoffering,
                net of costs
            
            
            5,859,200
            
            
            5,859
            
            
            6,383,471
            
            
            
            
            
            
            
            
            
            
            
            6,389,330Issuance
                of common stock as privateoffering
                fees
            
            
            1,666,436
            
            
            1,666
            
            
            (1,666
            )Issuance
                of common stock in exchange forcommon
                stock of QEI
            
            
            1,125,000
            
            
            1,125
            
            
            (1,125
            )Issuance
                of warrants in connection withsoftware
                distribution & site agreement
            
            
            
            
            
            
            
            
            332,693
            
            
            
            
            $
            (332,693
            )Amortization
                of deferred sales fee
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,045
            
            
            
            
            
            45,045Options
                granted to employee ascompensation
            
            
            
            
            
            
            
            
            11,083
            
            
            
            
            
            
            
            
            
            
            
            11,083Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,939,078
            )
            
            (6,939,078
            )**Balance
                - December 31, 2004**
            
            
            25,383,710
            
            $
            25,383
            
            $
            33,381,197
            
            $
            (6,665
            )
            $
            (287,648
            )
            $
            (32,962,900
            )
            $
            149,367Issuance
                of common stock in privateofferings,
                net of costs
            
            
            21,875,000
            
            
            21,875
            
            
            2,778,125
            
            
            
            
            
            
            
            
            
            
            
            2,800,000Amortization
                of deferred sales fee
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            83,160
            
            
            
            
            
            83,160Issuance
                of common stock as payment ofdebt
            
            
            400,000
            
            
            400
            
            
            87,600
            
            
            
            
            
            
            
            
            
            
            
            88,000Costs
                associated with private placementofferings
            
            
            
            
            
            
            
            
            (254,171
            )
            
            
            
            
            
            
            
            
            
            
            (254,171
            )Issuance
                of stock associated with cashlessexercise
                of warrants
            
            
            130,654
            
            
            131
            
            
            (131
            )
            
            
            
            
            
            
            
            
            
            
            --Options
                granted to consultants ascompensation
            
            
            
            
            
            
            
            
            96,103
            
            
            
            
            
            
            
            
            
            
            
            96,103Write-off
                subscription receivable
            
            
            
            
            
            
            
            
            (5,000
            )
            
            6,665
            
            
            
            
            
            
            
            
            1,665Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (5,154,,005
            )
            
            (5,154,005
            )**Balance-December
                31, 2005**
            
            
            47,789,364
            
            $
            47,789
            
            $
            36,083,723
            
            $
            0
            
            $
            (204,488
            )
            $
            (38,116,905
            )
            $
            (2,189,881
            )




*See
        notes to consolidated financial statements*
 F-4


PROTOCALL
        TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Consolidated
      Statements of Cash Flows**


**Year
                  Ended December 31,****2005**
              
              **2004****Cash
                  flows from operating activities:**Net
                  loss from continuing operations
              
              $
              (5,154,005
              )
              $
              (6,947,525
              )Adjustments
                  to reconcile net loss to net cash used in operatingActivities:Loss
                  on disposal of fixed assets
              
              
              28,099
              
              
              187,094Depreciation
                  and amortization
              
              
              657,042
              
              
              712,445Amortization
                  of deferred financing costs
              
              
              0
              
              
              213,789Equity
                  compensation cost
              
              
              96,103
              
              
              11,083Equity
                  Investor Relations Expense
              
              
              88,000Noncash
                  financing and interest expenses
              
              
              0
              
              
              1,114,332Amortization
                  of deferred lease costs
              
              
              77,916
              
              
              77,916Gain
                  on settlement of trade notes and accounts payable
              
              
              (15,750
              )
              
              (392,995
              )Stock
                  Subscription Receivable Written Off
              
              
              1,665
              
              
              --Common
                  stock and warrants issued as premium to bridge lenders
              
              
              
              
              
              112,467Changes
                  in:Accounts
                  receivable
              
              
              7,321
              
              
              (59,058
              )Inventory
              
              
              (6,187
              )
              
              2,275Prepaid
                  expenses and other assets
              
              
              (53,845
              )
              
              22,384Loans
                  due officers/stockholders
              
              
              (10,875
              )
              
              (14,752
              )Accounts
                  payable and accrued expenses
              
              
              390,036
              
              
              117,565Accrued
                  salaries - officers/stockholders
              
              
              (82,010
              )
              
              (34,677
              )Other
                  payables
              
              
              (3,375
              )
              
              (19,750
              )Accrued
                  interest on convertible notes
              
              
              19,762
              
              
              551,323Net
                  cash used in discontinued operations
              
              
              (24,639
              )
              
              (128,861
              )Net
                  cash used in operating activities
              
              
              (3,984,742
              )
              
              (4,474,945
              )**Cash
                  flows from investing activities:**Capital
                  expenditures
              
              
              (42,399
              )
              
              (283,153
              )Proceeds
                  from sale of fixed assets
              
              
              --
              
              
              1,528Net
                  cash used in investing activities
              
              
              (42,399
              )
              
              (281,625
              )**Cash
                  flows from financing activities:**Proceeds
                  from issuance of convertible notes payable to stockholder
              
              
              **--**
              
              
              595,000Proceeds
                  from issuance of note payable to others
              
              
              **--**
              
              
              1,325,000Proceeds
                  from issuance of convertible bridge notes to others
              
              
              **--**
              
              
              500,000Proceeds
                  from issuance of convertible notes payable to others
              
              
              **--**
              
              
              181,000Proceeds
                  from private offering issuance of common stock, net of
                  costs
              
              
              2,545,829
              
              
              4,451,863Repayment
                  of loans - others
              
              
              --
              
              
              (32,690
              )Repayment
                  of capitalized lease obligations
              
              
              (249,690
              )
              
              (284,624
              )Net
                  cash provided by financing activities
              
              
              2,296,139
              
              
              6,735,549**Net
                  (decrease) increase in cash**
              
              
              (1,731,002
              )
              
              1,978,979Cash
                  - beginning of year
              
              
              2,133,223
              
              
              154,244**Cash
                  - end of year**
              
              $
              402,221
              
              $
              2,133,223





*See
        notes to consolidated financial statements*




F-5




PROTOCALL
      TECHNOLOGIES INCORPORATED AND SUBSIDIARIES





**Consolidated
      Statements of Cash Flows (continued)**





**Year
                Ended December 31,****2005**
            
            **2004****Supplemental
                cash flow information:**Cash
                paid for:Interest
            
            $
            69,416
            
            $
            37,733Taxes
            
            
            1,832
            
            
            816Noncash
                transactions:Debt
                discount and beneficial conversion feature on convertible and
              nonconvertible
                notes
            
            
            
            
            
            658,272Issuance
                of warrants in connection with Software Distribution andSite
                Agreement
            
            
            
            
            
            332,693Conversion
                of accounts payable to common stock
            
            
            88,000
            
            
            781,571Conversion
                of notes payable to common stock
            
            
            
            
            
            9,428,440Conversion
                of accrued officers’ salaries to common stock
            
            
            
            
            
            200,000Contribution
                to capital from forgiveness of debt
            
            
            
            
            
            1,099,915Fixed
                assets acquired through capital lease
            
            
            
            
            
            1,104,628





*See
        notes to consolidated financial statements*
 F-6




PROTOCALL
        TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
   **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Note
      A - Summary of Significant Accounting Policies and Related
      Matters**




**[1]**  **Description
      of business:**




The
      accompanying consolidated financial statements include the accounts of Protocall
      Technologies Incorporated and its wholly owned subsidiaries, Protocall Software
      Delivery Systems, Inc. ("PSD") and Precision Type, Inc. (collectively, the
      "Company"). The Company has recently focused all of its time and resources
      on
      its virtual inventory system in its PSD subsidiary. PSD was founded in 1998
      to
      develop and commercialize a proprietary system that enables software retailers
      to produce fully packaged software CDs, on-demand, at their stores and at their
      web site fulfillment centers. The “System” is a software display, storage and
      production system, similar in size to an ATM cash machine. The System is
      designed to complement physical inventory systems and enable traditional
      resellers to create "on demand" inventory at point of sale for walk-in as well
      as Internet customers. The Company intends to market and distribute its System
      to major retailers. The Company signs license agreements with software
      publishers, allowing the Company to resell their software products to one or
      more of the Company’s retail customers. The Company intends to pursue an
      expansion of available products to include audio books, console video games
      and
      movies. Management of the Company believes the Company’s technology is readily
      adaptable to other digital products such as movies and television episodes
      on
      DVD without additional significant investment. In connection with movie and
      television content, the Company recently announced its ‘TitleMatch’ system name,
      which was selected to reflect the inclusion of products other than consumer
      software.





Precision
      Type Inc., which marketed and distributed font software products using its
      electronic software distribution system to dealers and commercial end-users,
      was
      discontinued on June 30, 2004 (Note N).





**[2]**  **Going
      Concern**





The
      Company incurred net losses for the year ended December 31, 2005 and 2004 of
      $(5,154,005) and $(6,939,078) respectively, and has an accumulated deficit
      of
      $(38,116,905) at December 31, 2005. Significantly contributing to the
      accumulated deficit was the interest expense related to the Company’s notes
      payable, which were converted to equity upon the consummation of the closing
      of
      the reverse merger on July 22, 2004 (see Note A(3)). Through 2005, the Company
      has been continually dependent upon borrowings through private offerings of
      convertible and non-convertible debt and equity securities from related and
      non-related parties to finance its business operations.





Management
          believes that cash on hand will enable the Company to continue its business
          plan
          through approximately June 2006 although there can be no assurances that
          this
          will be the case. The Company is attempting to obtain additional financing
          from
          an existing shareholder and collect customer accounts receivable. The Company
          is
          also actively pursuing additional short-term funding from existing shareholders
          and long-term funding from institutional investors. Management’s plan is to
          secure sufficient short-term capital to fund its operations through the
          completion of a larger institutional financing, although there can be no
          assurances that any financing will be available, or if available, that
          it will
          be on terms acceptable to the Company. Management believes that its ability
          to
          secure short-term and long-term financing is directly related to the Company’s
          progress with new customers and movie content agreements, which are actively
          being pursued by us.
 In
            the
            event that sufficient short-term or long-term financing is not obtained,
            in
            order to enable the company to continue to pursue its customer and content
            negotiations over a longer term, the Chief Executive Officer has agreed
            to forgo
            compensation and to cause the Company to increasingly reduce its operating
            expenditures by, among other actions, making further personnel reductions.
            In
            addition, the Company’s two major stockholders agreed not to take any actions
            that would cause the Company’s operations to terminate prior to September 30,
            2006.


The
        accompanying financial statements have been prepared on the basis that the
        Company will continue as a going concern, which assumes the realization of
        assets and satisfaction of liabilities in the normal course of
        business. The
        uncertainties regarding the availability of continued financing and commencement
        of adequate commercial revenues raise substantial doubt about the Company's
        ability to continue as a going concern, which contemplates the realization
        of
        assets and satisfaction of liabilities in the normal course of business.
        The
        financial statements do not include any adjustments relating to the
        recoverability of the recorded assets or the classification of liabilities
        that
        may be necessary should the Company be unable to continue as a going
        concern .


**[3]**  **Reverse
      Merger and 2004 Private Offering**




On
        July
        22, 2004, the Company completed a recapitalization in the form of a "reverse
        acquisition" transaction with Quality Exchange, Inc. (QEI) in which QEI acquired
        all the outstanding capital stock of the Company, in consideration for the
        issuance of 16,733,074 shares of QEI's common stock, representing 65.9% of
        the
        outstanding QEI stock. Prior to the completion of the reverse acquisition,
        QEI
        redeemed and cancelled 7,875,000 shares of its 9,000,000 outstanding shares
        of
        common stock for one dollar and sold all of its assets and transferred all
        of
        its liabilities to its majority stockholder. The reverse acquisition was
        completed pursuant to an Agreement of Purchase and Sale, dated as of July
        22,
        2004. Immediately following the closing of the reverse acquisition, QEI changed
        its name to Protocall Technologies Incorporated. Concurrent with the closing
        of
        the reverse acquisition, the Company completed a private offering of 5,859,200
        shares of common stock at a price of $1.25 per share, and received net proceeds
        of approximately $6,300,000, including $1,825,000 in proceeds from 10% bridge
        convertible promissory notes issued between April 8, 2004 and June 10, 2004.
        The
        Company issued 1,666,436 shares of its common stock as private offering fees
        to
        the underwriter in the reverse merger. In addition, concurrent with the closing
        of the above transactions, creditors of the Company converted an aggregate
        of
        approximately $8.6 million of debt to common stock of the Company. A
        stockholder/director of the Company forgave $1,099,915 of accrued interest
        upon
        the consummation of the reverse merger. In addition certain creditors provided
        discounts and accepted reduced cash payments and shares of common stock in
        settlement of certain liabilities.


F-7
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


In
      addition, 17,647,377 of the Company's warrants were exchanged for 3,384,793
      shares of QEI common stock. As part of the reverse merger, warrants to purchase
      1,774,219 shares of the Company's common stock and stock options to purchase
      2,951,922 shares of the Company's common stock were converted into identical
      QEI
      instruments.





For
      accounting purposes, the Company is considered the acquirer in the reverse
      acquisition transaction, and consequently, the financial statements of the
      Company are the historical financial statements of Protocall Technologies
      Incorporated and the reverse merger has been treated as a recapitalization
      of
      Protocall Technologies Incorporated.





**[4]**  **Basis
      of consolidation:**




The
      consolidated financial statements include the accounts of Protocall Technologies
      Incorporated and its wholly owned subsidiaries. All significant intercompany
      balances and transactions have been eliminated in consolidation.




**[5]**  **Revenue
      recognition:**




The
      Company recognizes revenue from retailer sales of product through its software
      delivery system upon delivery to the consumer.





Revenue
      from the license or sale of software products and font reference guide books
      from the discontinued business was recognized when the products were delivered
      or shipped to the customer.


Rebates
      and refunds are recorded as a reduction of revenue in accordance with Emerging
      Issues Task Force ("EITF") Issue No. 01-9, *Accounting
      for Consideration Given by a Vendor to a Customer (Including a Reseller of
      the
      Vendor's Products).*





**[6]**  **Cash
      equivalents:**




The
      Company considers all highly liquid investments with original maturities of
      three months when purchased or less to be cash equivalents.




**[7]**  **Inventory:**




Inventory,
      consisting primarily of blank CDs, CD cases and other supplies associated with
      products distributed on the Company's virtual inventory system, are valued
      at
      the lower of cost (first-in, first-out) or market.




**[8]**  **Property
      and equipment:**




Property
      and equipment are stated at cost, less accumulated depreciation and
      amortization. Depreciation is calculated using the straight-line method over
      the
      estimated useful lives of the assets, which are three years for deployed
      equipment and computer and other equipment and seven years for all other assets.
      Leasehold improvements and assets capitalized under capital leases are amortized
      over the shorter of the lease term or the assets' estimated useful
      lives.




F-8
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**[9]**  **Software
      development costs:**




Costs
      associated with the development and enhancement of proprietary software incurred
      between the achievements of technological feasibility and availability for
      general release to the public were insignificant, and therefore not
      capitalized.




**[10]**  **Patents:**




Costs
      associated with obtaining patents for the Company's proprietary software are
      capitalized and amortized over their estimated useful lives, or the life of
      the
      patent if shorter, upon the completion and approval of the patents.




**[11]**  **Income
      taxes:**




Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income for the years in which those temporary differences are expected
      to be recovered or settled. The effect on deferred tax assets and liabilities
      of
      a change in tax rates is recognized in income in the period that includes the
      enactment date.




**[12]**  **Fair
      value of financial instruments:**




The
      fair
      values of cash, accounts receivable, accounts payable and accrued expenses
      approximate their carrying values in the consolidated financial statements
      because of the short-term maturity of these instruments. The carrying value
      of
      notes payable to banks approximates fair value since those instruments carry
      prime-based interest rates that are adjusted for market rate fluctuations.
      The
      carrying amount of the convertible notes payable approximates fair value based
      on interest rates and debt instruments with similar terms. The fair values
      of
      notes payable to related parties and notes payable to officers/stockholders
      are
      not reasonably determinable.




**[13]**  **Long-lived
      assets:**




The
      Company reviews long-lived assets, such as computers and equipment and
      identifiable intangibles for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. If the sum of the expected undiscounted cash flow, is less than
      the
      carrying amount of the asset, an impairment loss is recognized as the amount
      by
      which the carrying amount of the asset exceeds its fair value.




**[14]**  **Use
      of estimates:**




The
      preparation of the consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period. Such
      estimations include valuations of warrants issued in connection with various
      forms of financing by the Company. Actual results could differ from those
      estimates.




**[15]**  **Accounting
      for stock options:**




The
      Company applies Accounting Principles Board (APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees and Related Interpretations,* in
      accounting for stock option grants to employees and, accordingly, recognizes
      compensation cost, over the vesting period equal to the excess of the fair
      value
      of the Company's shares at the grant date over the exercise price.




Had
      compensation costs for the Company's stock option grants been determined based
      on the fair value at the grant dates consistent with the methodology of
      Statement of Financial Accounting Standards (SFAS) No. 123, the Company's net
      loss per share for the periods indicated would have been increased to the pro
      forma amounts indicated as follows:




F-9
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Year
                Ended December 31****2005**
            
            **2004**Net
                loss as reported
            
            $
            (5,154,005
            )
            $
            (6,939,078
            )Stock-based
                employee compensationexpense
                included in reported net loss,net
                of related tax effects
            
            
            96,103
            
            
            11,083Stock-based
                employee compensationdetermined
                under the fair value basedmethod
            
            
            (1,284,238
            )
            
            (210,667
            )Pro
                forma net loss
            
            $
            (6,342,140
            )
            $
            (7,138,662
            )


Net
                loss per share (basic and diluted):As
                reported
            
            $
            (.17
            )
            $
            (.47
            )Pro
                forma
            
            $
            (.21
            )
            $
            (.48
            )




The
      weighted average fair value of stock options is estimated at the grant date
      using the Black-Scholes option-pricing model with the following weighted average
      assumptions:





**Year
                Ended December 31****2005**
            
            **2004**Risk-free
                interest rate
            
            
            4.12
            %
            
            3.52
            %Expected
                life of options
            
            
            4.90
                years
            
            
            4.43
                yearsExpected
                dividend yield
            
            
            0.00
            %
            
            0.00
            %Expected
                volatility
            
            
            150.19
            %
            
            79.32
            %Weighted
                average fair value
            
            $
            .62
            
            $
            .78




**[16]**  **Loss
      per share and common share equivalent:**




The
        Company's basic and diluted net loss per share is computed by dividing net
        loss
        by the weighted average number of outstanding common shares. Potentially
        dilutive securities, were excluded from the computation of diluted loss per
        share because their inclusion would have been anti-dilutive, are as
        follows:





**Year
                Ended December 31****2005**
            
            **2004**Options
            
            
            6,680,773
            
            
            3,986,672Warrants
            
            
            7,772,249
            
            
            1,774,219Convertible
                Notes
            
            
            644,263Total
                dilutive shares
            
            
            15,097,285
            
            
            5,760,891




**(1)
        Represents aggregate principal and accrued interest of $82,466 convertible
        into
        equity at $0.128 per share.**


**[17]**  **Recent
      accounting pronouncements:**


In
        December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share
        Based Payment (* FAS
        123R), which replaces FAS 123 and supersedes APB No. 25. FAS 123R requires
        all
        share-based payments to employees, including grants of employee stock options,
        to be recognized in the financial statements based on their fair values at
        the
        grant date beginning with the first interim or annual period after December
        15,
        2005 for public entities that file as small business issuers, with early
        adoption encouraged. The pro forma disclosures previously permitted under
        FAS
        123 no longer will be an alternative to financial statement recognition.
        The
        Company is required to adopt FAS 123R beginning January 1, 2006. Under FAS
        123R,
        the Company must determine the appropriate fair value model to be used for
        valuing share-based payments, the amortization method for compensation cost
        and
        the transition method to be used at date of adoption. The transition methods
        include prospective and retroactive adoption options. The Company is evaluating
        the requirements of FAS 123R and expects that the adoption of FAS 123R will
        have
        a material impact on the Company’s consolidated results of operations and
        earnings per share. The Company has not yet determined the impact of FAS
        123R on
        its results of operations, compensation policies or plans.





F-10
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


In
      November 2004, the FASB issued SFAS No. 151, *Inventory
      Costs, an amendment of ARB No. 43, Chapter 4* (FAS
      151). FAS 151 amends Accounting Research Bulletin No. 43, Chapter 4, to clarify
      that abnormal amounts of idle facility expense, freight, handling costs and
      wasted materials (spoilage) should be recognized as current-period charges.
      In
      addition, FAS No. 151 requires that the allocation of fixed production overhead
      to inventory be based on the normal capacity of the production facilities.
      The
      Company is required to adopt FAS 151 beginning January 1, 2006. The Company
      is
      currently assessing the impact that FAS No. 151 will have on its results of
      operations, financial position and cash flows.


In
        December 2004, the FASB issued SFAS No. 153, *Exchange
        of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary
        Transactions* (FAS
        153). FAS 153 amends APB No. 29 to eliminate the exception for nonmonetary
        exchanges of similar productive assets and replaces it with a general exception
        for exchanges of nonmonetary assets that do not have commercial substance.
        A
        nonmonetary exchange has commercial substance if the future cash flows of
        the
        entity are expected to change significantly as a result of the exchange.
        The
        Company is required to adopt FAS 153, on a prospective basis, for nonmonetary
        exchanges beginning after June 15, 2005. FAS No. 153 has not had a material
        impact on the Company’s results of operations or financial
        position.





In
      May
      2005, the FASB issued FASB Statement No. 154, "Accounting Changes and Error
      Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB
      Statement No. 3, Reporting Accounting Changes in Interim Financial Statements"
      ("FAS 154"). FAS 154 provides guidance on the accounting for and reporting
      of
      accounting changes and error corrections. It establishes, unless impracticable,
      retrospective application as the required method for reporting a change in
      accounting principle in the absence of explicit transition requirements specific
      to the newly adopted accounting principle. FAS 154 also provides guidance for
      determining whether retrospective application of a change in accounting
      principle is impracticable and for reporting a change when retrospective
      application is impracticable. The provisions of this Statement are effective
      for
      accounting changes and corrections of errors made in fiscal periods beginning
      after December 15, 2005. The adoption of the provisions of FAS 154 is not
      expected to have a material impact on the Company's financial position or
      results of operations.





In
      February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments an amendment of FASB Statements No. 133 and 140." SFAS
      155
      provides the framework for fair value re-measurement of any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation as well as establishing a requirement to evaluate interests in
      securitized financial assets to identify interests. SFAS 155 also eliminates the
      prohibition on a qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. The guidance SFAS 155 also clarifies which interest-only
      strips and principal-only strips are not subject to the requirements
      of SFAS 133 "Accounting for Derivative Instruments and Hedging Activities"
      and concentrations of credit risk in the form of subordination are not
      embedded derivatives. This statement is effective for all financial instruments
      acquired or issued after the beginning of an entity's first fiscal year
      that
      begins after September 15, 2006.





**[18]**  **Research
      and development:**




The
      Company expenses research and development costs as incurred.




**[19]**  **Segment
      reporting:**




The
      Company formerly operated in two reporting segments; however, substantially
      all
      assets and operating expenses relate to the Company’s virtual inventory business
      and the Company discontinued its font software operations, effective June 30,
      2004.




F-11
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Note
      B - Property and Equipment**




Property
      and equipment consist of the following:





**December
                31,**
            
            **Estimated
                Useful Lives****2005**
            
            **2004**
            
            **(Years)**Deployed
                equipment
            
            $
            1,128,593
            
            $
            1,220,554
            
            
            3Computer
                and other equipment
            
            
            409,960
            
            
            470,064
            
            
            3Furniture
                and fixtures
            
            
            34,284
            
            
            31,239
            
            
            7Purchased
                software
            
            
            79,062
            
            
            90,000
            
            
            3Leasehold
                improvement
            
            
            65,463
            
            
            65,463
            
            
            Various1,717,362
            
            
            1,877,320Less
                accumulated depreciation
            
            
            1,206,692
            
            
            809,501$
            510,670
            
            $
            1,067,819





Included
      in property and equipment are assets under capital leases with a net book value
      of $309,426 and $727,595 at December 31, 2005 and 2004, respectively.
      Depreciation expense was $ 571,450 and $ 664,966 for the years ended December
      31,2005 and 2004 respectively.





**Note
      C - Notes Payable to Banks**




Notes
      payable to banks are included in the net liabilities of discontinued operations
      (See Note N) and consist of the following:





**December
                31,****2005**
            
            **2004**Note
                payable with interest at prime plus 2% (9.25% at December31,
                2005 and 7.25% at December 31, 2004) (1)
            
            $
            84,915
            
            $
            92,89384,915
            
            
            92,893Less
                current portion
            
            
            28,305
            
            
            28,755$
            56,610
            
            $
            64,138







(1)
            The
                Company obtained a $100,000 line of credit from a bank in 1994. Interest
                is payable on a monthly basis. The bank has the option to terminate
                the
                line of credit at its sole discretion, at which time the Company
                can elect
                to pay the then outstanding balance in thirty-six monthly installments
                of
                principal and interest at the rate then in effect. The loan is personally
                guaranteed by certain of the officers/stockholders of the Company.
                At
                December 31, 2005, the bank had not terminated the line of
                credit.




Aggregate
      principal payments are shown based on the repayment of the loan over a
      thirty-six month period commencing January 2006 as follows:




**Year**
            
            **Amount**2006
            
            $
            28,3052007
            
            
            28,3052008
            
            
            28,30584,915Less
                current portion
            
            
            28,305$
            56,610




F-12
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Note
      D - Notes Payable to Officers/Stockholders**




Notes
      payable to officers/stockholders consists of the following:




**December
                31,****2005**
            
            **2004**Promissory
                notes due on demand, bearing no interest
            
            $
            7,927
            
            $
            18,802




**Note
      E - Convertible Notes Payable - Stockholder**




As
      fully
      described in Note A, on July 22, 2004, in connection with the reverse merger,
      a
      stockholder/director of the Company converted his entire principal amount of
      convertible promissory notes, aggregating $5,304,843, into common stock of
      the
      Company at a price of $1.25 per share. The stockholder simultaneously forgave
      an
      aggregate of $1,099,915 of accrued interest on the notes for no consideration
      and is included as capital contribution in the accompanying financial
      statements. The convertible notes were issued as described below:





During
      2001, the Company received $1,350,000 of proceeds from the issuance of
      convertible notes to a stockholder/director. The notes were automatically
      convertible into common stock at such time as the Company received aggregate
      proceeds of not less than $5,000,000 in equity financing as defined in the
      note
      agreement. Notes issued subsequent to January 2, 2002 were to automatically
      convert into common stock upon receipt of $2,000,000 in equity financing, as
      defined in the note agreement. The holder had the option to convert all or
      any
      portion of the note into shares of common stock, computed by dividing the
      principal amount of the note together with accrued interest at the lower of
      $2.75 or the sales price of the common stock in subsequent offerings by the
      Company. The notes accrued interest at 12% per annum, and were due on
      January 2, 2002. Upon issuance of the notes, the Company also issued
      warrants to the note holder to purchase an aggregate of 3,080,000 shares of
      common stock, exercisable at the lower of $2.75 per share or the sales price
      of
      the common stock in subsequent offerings. The warrants were exercisable until
      the earlier of five years after the date of any initial registered public
      offering of the common stock or seven years from date of issuance. The fair
      value of the warrants was $2,220,136, utilizing the Black-Scholes option-pricing
      model with the following assumptions: 50% volatility, seven-year expected life,
      risk-free interest rate ranging from 4.06% to 5.5% and a dividend yield ratio
      of
      0%. In accordance with EITF 00-27, "Application of Issue No. 98-5 to
      Certain Convertible Instruments," the Company allocated the net proceeds between
      the convertible notes and the warrants based on the relative fair value-based
      method. The proceeds were allocated to the value of warrants of $965,969 as
      debt
      discount, which, along with the value of the beneficial conversion feature
      of
      $384,031 (based on a $1.25 value per common share), was amortized over the
      life
      of the convertible notes as additional interest. On January 2, 2002, all
      the 2001 notes along with the interest of $54,843 that had accrued as of
      December 31, 2001 were rolled into one convertible promissory note bearing
      interest at 12% per annum due on December 31, 2002. The note was
      subsequently extended to September 30, 2004, for consideration given to the
      note holder as described below.




During
      2002, the Company received $1,505,000 in proceeds from the issuance of
      convertible notes to the same stockholder/director on the same terms and
      conditions as above. Upon issuance of the notes, the Company also issued
      warrants to the note holder to purchase an aggregate amount of 6,066,200 shares
      of common stock with the same terms as above. The fair value of the warrants
      was
      $4,350,891, utilizing the Black-Scholes option-pricing model with the following
      assumptions: 50% volatility, seven-year expected life, risk-free interest rate
      ranging from 3.63% to 5.26% and a dividend yield ratio of 0%. The proceeds
      were
      allocated to the value of warrants of $1,063,996 as debt discount, which, along
      with the value of the beneficial conversion feature (based on a $1.25 value
      per
      common share) of $391,058, was being amortized over the life of the convertible
      notes as additional interest expense. During 2003, the due dates on these notes
      were extended to September 30, 2004 for consideration given to the note
      holder as described below.




On
      January 10, 2003, the Company received $100,000 in proceeds from the
      issuance of a convertible note to the same stockholder/director on the same
      terms and conditions as above. The note accrued interest at 12% per annum,
      and
      had a due date of March 31, 2003. Upon issuance of the note, the Company
      also issued warrants to the note holder to purchase 50,000 shares of common
      stock with the same terms as above. The fair value of the warrants was $52,133
      utilizing the Black-Scholes option-pricing model with the following assumptions:
      50% volatility, seven-year expected life, risk-free interest rate of 3.66%
      and a
      dividend yield ratio of 0%. The proceeds were allocated to the value of warrants
      of $34,268 as debt discount, which, along with the value of the beneficial
      conversion feature (based on a $1.25 value per common share) of $34,268, was
      being amortized over the life of the convertible note as additional interest
      expense. On April 1, 2003, all the convertible notes issued to the
      stockholder/director in 2001, 2002 and 2003 that had due dates of March 31,
      2003 were extended to September 30, 2004, and in exchange, the holder
      received 266,484 warrants to purchase common stock exercisable at the lower
      of
      $2.75 per share or the sales price of common stock in subsequent offerings.
      The
      warrants were valued at $184,000 using the Black-Scholes option-pricing model
      with the following assumptions: 50% volatility, seven-year expected life,
      risk-free interest rate of 3.51%, and a dividend yield ratio of 0%. The value
      of
      the warrants was amortized over the extension period as additional interest
      expense. As of December 31, 2003, the total accrued interest on all of the
      outstanding notes amounted to $727,294.





F-13
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


During
        2004, the Company received from the same stockholder/director, $595,000 in
        proceeds in convertible promissory notes and seven-year warrants with a right
        to
        purchase 297,500 shares of common stock at $4.00 per share. The bridge term
        notes were originally scheduled to mature on September 30, 2004. The fair
        value of the warrants was $206,167, utilizing the Black-Scholes option-pricing
        model with the following assumptions: 50% volatility, seven year expected
        life,
        risk-free interest rate ranging from 3.43% to 3.67% and a dividend yield
        ratio
        of 0%. The Company allocated the net proceeds between the convertible notes
        and
        the warrants based on the relative fair value-based method. The proceeds
        were
        allocated to the value of warrants of $153,113 as debt discount which along
        with
        the value of the beneficial conversion feature (based on a $1.25 value per
        common share) of $153,113 was amortized over the life of the convertible
        notes
        as additional interest expense. Upon the conversion of the notes prior to
        maturity into common stock, the unamortized debt discount was recognized
        as
        additional interest expense in the amount of $128,828.


**Note
      F - Convertible Notes Payable - Other**




As
      fully
      described in Note A, on July 22, 2004, in connection with the reverse merger,
      holders of convertible promissory notes of the Company converted their notes
      and
      associated warrants into common stock of the Company at a price of $1.25 per
      share. These notes are described below.





During
      the year ended December 31, 2002, the Company issued Convertible Promissory
      Notes totaling $425,000 in a private offering. The notes were to automatically
      convert into common stock upon the receipt by the Company of $2,000,000 in
      equity financing, as defined in the note agreement. The holder had the option
      to
      convert all or any portion of the note into the number of shares of the
      Company's common stock, par value $.001 per share computed by dividing the
      principal amount of the note to be converted together with accrued interest
      by
      the lower of $2.75 per share or the sales price of common stock in subsequent
      offerings by the Company. The notes bore interest at 12% and were due
      March 31, 2003. In connection with the issuance of the notes, the Company
      issued warrants to the note holders to purchase 212,500 shares of common stock,
      exercisable at the lower of $2.75 per share or the sales price of the common
      stock in subsequent offerings. The warrants were to be exercised through the
      earlier of five years after the date of any initial registered public offering
      of the Company’s common stock or seven years from date of issuance. The fair
      value of the warrants was $146,585, utilizing the Black-Scholes option-pricing
      model with the following assumptions: 50% volatility, seven-year expected life,
      risk-free interest rate ranging from 3.31% to 3.65% and a dividend yield ratio
      of 0%. The Company allocated the net proceeds between the convertible notes
      and
      the warrants based on the relative fair value-based method. The proceeds were
      allocated to the value of warrants of $108,992 as debt discount, which, along
      with the value of the beneficial conversion feature of $108,992 (based on a
      $1.25 value per common share), was amortized over the life of the convertible
      notes as additional interest expense. In connection with the sale of these
      notes, the Company incurred an aggregate of $71,817 in costs consisting of
      placement agent fees of approximately $42,500 and warrants to placement agents
      to purchase 42,500 shares of common stock at the lower of $2.75 per share or
      the
      sales price of the common stock in subsequent offerings by the Company valued
      at
      $29,317. The warrants were valued by utilizing the Black-Scholes option-pricing
      model with the following assumptions: 50% volatility, seven-year expected life,
      risk-free interest rate ranging from 3.31% to 3.65% and a dividend yield ratio
      of 0%. During 2003, the due dates on these notes were extended to
      September 30, 2004 for consideration given to the note holder as described
      below.




During
      the year ended December 31, 2003, the Company issued Convertible Promissory
      Notes totaling $1,000,000 in private offerings on the same terms and conditions
      as above. The notes bore interest at a range of 9% to 12% and their due dates
      ranged from March 31, 2003 to September 30, 2004. In connection with
      the issuance of the notes, the Company also issued warrants to the note holders
      to purchase 500,000 shares of common stock, generally with the same terms as
      above. The fair value of the warrants was $345,299, utilizing the Black-Scholes
      option-pricing model with the following assumptions: 50% volatility, seven-year
      expected life, risk-free interest rate ranging from 2.93% to 3.76% and a
      dividend yield ratio of 0%. In accordance with EITF 00-27, "Application of
      Issue No. 98-5 to Certain Convertible Instruments," the Company allocated
      the net proceeds between the convertible notes and the warrants based on the
      relative fair value-based method. The proceeds were allocated to the value
      of
      warrants of $256,666 as debt discount, which, along with the value of the
      beneficial conversion feature of $256,666 (based on a $1.25 value per common
      share), was amortized over the life of the convertible notes as additional
      interest expense. Upon the conversion of the notes into common stock, the
      unamortized debt discount balance was recognized as additional interest expense.
      In connection with the sale of these notes, the Company incurred an aggregate
      of
      $116,609 in costs consisting of placement agent fees of approximately $62,500
      and warrants to placement agents to purchase 65,000 shares of common stock
      at
      the lower of $2.75 per share on the sales price of the common stock in the
      subsequent offerings by the Company valued at $54,109. The warrants were valued
      by utilizing the Black-Scholes option-pricing model with the following
      assumptions: 50% volatility, seven-year expected life, risk-free interest rate
      ranging from 2.93% to 3.66% and a dividend yield ratio of 0%. On April 1,
      2003, all the notes that had due dates of March 31, 2003 were extended to
      September 30, 2004 and in exchange, the note holders received 112,500
      warrants to purchase common stock exercisable at the lower of $2.75 per share
      or
      the sales price of the common stock in subsequent offerings. The warrants were
      valued at $126,657 using the Black-Scholes option-pricing model with the
      following assumptions: 50% volatility, seven-year expected life, risk-free
      interest rate of 3.51% and a dividend yield ratio of 0%. The value of the
      warrants was amortized over the extension period as additional interest expense.
      As of December 31, 2003, the total accrued interest on all the outstanding
      notes amounted to $117,032.





F-14
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


Between
      January and June, 2004, the Company raised additional debt financing from third
      parties comprised of:




(i)
            Proceeds
                of$181,000
                in 9% convertible promissory notes that were originally scheduled
                to
                mature on September 30, 2004 and seven-year warrants to purchase
                85,500 shares of common stock at an exercise price of $4.00 per share.
                The
                fair value of the warrants was $62,857, utilizing the Black-Scholes
                option-pricing model with the following assumptions: 50% volatility,
                seven
                year expected life, risk-free interest rate ranging from 3.52% to
                3.68%
                and a dividend yield ratio of 0%. The proceeds were allocated to
                the value
                of the warrants of $46,655 as debt discount, which, along with the
                value
                of the beneficial conversion feature (based on a $1.25 value per
                common
                share) of $46,655, was being amortized over the life of the convertible
                notes as additional interest expense. Unamortized debt discount and
                unamortized beneficial conversion at the closing of the merger was
                written
                off to interest expense, and




(ii)
            Proceeds
                of $1,325,000 in 10% convertible interim notes that were originally
                scheduled to mature on December 31, 2004. Terms of the convertible
                promissory notes provided that the notes would automatically convert
                into
                shares of a publicly traded company on the date that the contemplated
                reverse merger closed (see Note A). In addition, when the reverse
                merger
                closed, each 10% convertible interim note holder received a premium
                equal
                to either 10% of the face amount of his note in additional public
                company
                stock or warrants to purchase additional public company stock equal
                to 10%
                of the face amount of their note at $1.50 per share,
                and





(iii)
            Proceeds
                of $500,000 in 10% convertible interim notes that were originally
                scheduled to mature on December 31, 2004. Initial individual
                investors purchasing notes, in the aggregate, received seven-year
                warrants
                to purchase 250,000 shares of common stock at an exercise price of
                $4.00
                per share. The fair value of the warrants was $174,524, utilizing
                the
                Black-Scholes option-pricing model with the following assumptions:
                50%
                volatility, seven year expected life, risk-free interest rate ranging
                from
                3.73% to 3.90% and a dividend yield ratio of 0%. The proceeds were
                allocated to the value of the warrants of $129,368 as debt discount,
                which, along with the value of the beneficial conversion feature
                (based on
                a $1.25 value per common share) of $129,367, was being amortized
                over the
                life of the convertible notes as additional interest expense. Terms
                of the
                convertible promissory notes provide that the notes would automatically
                convert into shares of a publicly-traded company on the date that
                the
                contemplated reverse merger (see note A) closed. Unamortized debt
                discount
                and unamortized beneficial conversion at the closing of the merger
                was
                written off to interest expense. In addition, when the reverse merger
                closed, each 10% convertible promissory note holder received a premium
                equal to either 10% of the face amount of his note in additional
                public
                company stock or warrants to purchase additional public company stock
                equal to 10% of the face amount of their note at $1.50 per
                share.





F-15
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


An
      additional premium of 58,000 shares of common stock and warrants to purchase
      88,000 shares of common stock at $1.50 per share were issued to the note holders
      in connection with the interim notes in (ii) and (iii) above.





**Note
      G - Non-Convertible Notes Payable - Stockholder**




During
      2003, the Company received $1,700,000 of proceeds from the issuance of
      promissory notes to a stockholder/director. The notes accrued interest ranging
      from 12% to 15% per annum, and the due dates ranged from March 31, 2003 to
      September 30, 2004. At issuance of the notes, the Company also issued
      warrants to the note holder to purchase an aggregate amount of 542,000 shares
      of
      common stock, exercisable at the lower of $2.75 per share or the sales price
      of
      the common stock in subsequent offerings. The fair value of the warrants was
      $290,731, utilizing the Black-Scholes option-pricing model with the following
      assumptions: 50% volatility, seven-year expected life, risk-free interest rate
      ranging from 2.9% to 4.04% and a dividend yield ratio of 0%. The value of the
      warrants was charged as interest expense over the life of the notes. The
      warrants expire upon the earlier of five years after an initial public offering
      or seven years from the date of issuance. As of December 31, 2003, the
      total accrued interest on these notes amounted to $11,723. Upon the conversion
      of the notes prior to maturity into common stock in July 2004, the unamortized
      value of the warrants was recognized as additional interest expense in the
      amount of $217,830.




**Note
      H - Related Party Transactions**




On
      September 30, 2003, a stockholder/director opened a one year, irrevocable
      standby letter of credit on behalf of the Company in the amount of $300,000,
      as
      required by an agreement with a software publisher to guarantee the payment
      of
      any license fees due the publisher. As compensation to the stockholder/director,
      the Company issued a warrant to purchase 150,000 shares of common stock
      exercisable at the lower of $2.75 per share or the sales price of common stock
      in subsequent offerings. The fair value of the warrant was $77,321, utilizing
      the Black-Scholes option-pricing model with the following assumptions: 50%
      volatility, seven-year expected life, risk-free interest rate of 3.63% and
      dividend yield ratio of 0%. The warrant was originally scheduled to expire
      on
      September 30, 2010 but was converted into approximately 27,413 shares of common
      stock in connection with the reverse merger on July 22, 2004. The fair value
      of
      the warrant was recorded as a deferred finance cost and was amortized, on a
      straight-line basis, over the one year term of the letter of credit. This letter
      of credit was canceled during September 2004 due to the termination of the
      publisher agreement and was never drawn upon.





On
      October 14, 2003, the same stockholder/director opened an irrevocable standby
      letter of credit on behalf of the Company as required by an equipment lease
      agreement, for the entire term of the lease obligation, in the amount of
      $1,040,000. As compensation, the Company issued a warrant to purchase 520,000
      shares of common stock exercisable at the lower of $2.75 per share or the sales
      price of common stock in subsequent offerings. The fair value of the warrant
      was
      $269,470 utilizing the Black-Scholes option-pricing model with the following
      assumptions: 50% volatility, seven-year expected life, risk-free interest rate
      of 3.86% and dividend yield of 0%. The warrant was originally scheduled to
      expire on October 14, 2010, but was converted into approximately 95,047 shares
      of common stock in connection with the reverse merger on July 22, 2004. The
      fair
      value of the warrant has been recorded as a deferred lease cost and is being
      amortized, on a straight-line basis, over the term of the lease obligation,
      which terminates April 1, 2007. In November 2005, the letter of credit was
      reduced to $750,462. The Company is contingently liable for the amounts of
      the
      letter of credit in the event the stockholder/director is obligated to make
      payments thereunder as a result of noncompliance with the terms of the lease
      agreement.





Pursuant
      to an agreement entered into prior to becoming a stockholder or director,
      another stockholder of the Company was paid $57,515 at closing of the reverse
      merger by the Company for advisory services rendered in connection with the
      reverse merger transaction. Subsequent to this transaction he was appointed
      to
      the board of directors.





See
      Note
      L for related party information in connection with an operating lease of the
      Company.




F-16
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Note
      I - Stock Option Plans**


On
        March 24, 2000, the Company adopted a stock plan for the issuance of up to
        3,000,000 shares of common stock to employees, directors and consultants
        (the
“2000 Plan”). The 2000 Plan provides that the exercise price per share of all
        incentive stock options granted shall not be less than 100% of the fair value
        of
        the stock and for non-incentive options shall not be less than 85% of their
        fair
        value of the stock on the date of grant. Options become exercisable at such
        time
        or times as determined by the Compensation Committee of the Board (the
        "Committee"). Outstanding options must generally be exercised within ten
        years
        from the date of grant. The Committee may at any time cause the Company to
        offer
        to buy out an option previously granted, based on such terms and conditions
        set
        forth by the Committee. In addition, the 2000 Plan provides for the grant
        of
        stock appreciation rights and stock awards subject to such terms and conditions
        as shall be determined at the time of grant. Through December 31, 2004, no
        stock appreciation rights or shares of stock have been awarded under the
        2000
        Plan.
  Upon
        the
        closing of the reverse merger, the board of directors of the Company adopted
        the
        2004 Stock Option Plan (the “2004 Plan”) under which a total of 1,000,000 shares
        of common stock were reserved for issuance, subject to approval by stockholders
        at the Company’s 2005 annual meeting of stockholders. In November 2004, the
        Board of Directors increased the number of shares available under the plan
        to
        2,000,000 and, in March 2005, the Board of Directors authorized a further
        increase to 4,500,000 shares. As of December 31, 2005, options to purchase
        4,142,988 shares of common stock have been granted and remain outstanding
        pursuant to the 2004 Plan including 1,950,000 options to directors, with
        exercise prices ranging between $.33 and $1.35 per share. Non-employee director
        options vest monthly or quarterly over a one-year period and are exercisable
        over either five or ten year periods. Most employee options vest annually
        or
        quarterly over a three-year period, and are exercisable over either five
        or ten
        year periods. Stock options granted pursuant to the 2004 Plan were ratified
        during the Company’s annual stockholder meeting held on May 18, 2005. Since the
        Company’s stock price was $.89 on May 18, 2005, there was no intrinsic value of
        the options on the date of ratification and accordingly there was no charge
        against earnings.




Option
      transactions are summarized as follows:




**2000
                Plan**
            
            **2004
                Plan****2005**
            
            **2004**
            
            **2005**
            
            **2004****Weighted**
            
            
            
            **Weighted**
            
            
            
            **Weighted**
            
            
            
            **Weighted****Average**
            
            
            
            **Average**
            
            
            
            **Average**
            
            
            
            **Average****Exercise**
            
            
            
            **Exercise**
            
            
            
            **Exercise**
            
            
            
            **Exercise****#
                Shares**
            
            **Price**
            
            **#
                Shares**
            
            **Price**
            
            **#
                Shares**
            
            **Price**
            
            **#
                Shares**
            
            **Price**Outstanding
                at beginning of year
            
            
            2,951,922
            
            $
            1.74
            
            
            3,292,775
            
            $
            1.89
            
            
            1,034,750
            
            $
            1.25
            
            
            0Granted
            
            
            
            
            
            
            
            
            24,147
            
            
            1.25
            
            
            6,417,427
            
            
            .76
            
            
            1,108,000
            
            $
            1.25Exercised
            
            
            --
            
            
            
            
            
            
            
            
            
            
            
            --
            
            
            
            
            
            --Forfeited
            
            
            (414,137
            )
            
            2.34
            
            
            (365,000
            )
            
            2.83
            
            
            (3,309,189
            )
            
            .97
            
            
            (73,250
            )
            
            1.25Outstanding
                at end of year
            
            
            2,537,785
            
            
            1.64
            
            
            2,951,922
            
            
            1.74
            
            
            4,142,988
            
            
            .71
            
            
            1,034,750
            
            
            1.25Exercisable
                at end of year
            
            
            2,537,785
            
            
            1.64
            
            
            2,951,922
            
            
            1.74
            
            
            1,203,081
            
            
            1.05
            
            
            --




The
      following summarizes information about stock options at December 31,
      2005:





**Options
                Exercisable****Range**
            
            **Weighted**
            
            **Weighted**
            
            
            
            **Weighted****of**
            
            **Average**
            
            **Remaining**
            
            
            
            **Average****Number**
            
            **Exercise**
            
            **Exercise**
            
            **Life**
            
            **Number**
            
            **Exercise****Outstanding**
            
            **Price**
            
            **Price**
            
            **in
                Years**
            
            **Exercisable**
            
            **Price**2,417,000
            
            $
            .33
                - $.49
            
            $
            .33
            
            
            9.85
            
            
            216,667
            
            $
            .33225,000
            
            
            .50
                - .99
            
            
            .852
            
            
            7.31
            
            
            175,000
            
            
            .8413,112,801
            
            
            1.00-1.49
            
            
            1.245
            
            
            4.63
            
            
            2,423,228
            
            
            1.223364,071
            
            
            1.50-1.99
            
            
            1.875
            
            
            1.94
            
            
            364,071
            
            
            1.875561,901
            
            
            2.00-2.75
            
            
            2.75
            
            
            .82
            
            
            561,901
            
            
            2.756,680,773
            
            
            
            
            $
            1.06
            
            
            
            
            
            3,740,867
            
            $
            1.446





F-17
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Note
      J - Income Taxes**




The
      tax
      effects of temporary differences that give rise to deferred tax assets at
      December 31, 2005 and 2004 are presented below.




**2005**
              
              **2004**Deferred
                  tax assets:Net
                  operating loss carryforward
              
              $
              10,828,000
              
              $
              8,677,000Depreciation
                  and amortization
              
              
              104,000
              
              
              84,000Accrued
                  compensation
              
              
              410,000
              
              
              318,000Total
                  deferred tax asset
              
              
              11,342,000
              
              
              9,079,000Less
                  valuation allowance
              
              
              11,342,000
              
              
              9,079,000Net
                  deferred tax assets
              
              $
              0
              
              $
              0
 
 As
        of
        December 31, 2005, and 2004, the Company had net operating loss
        carryforwards of approximately $27,000,000 and $21,779,000, which will expire
        from 2011 through 2025. The ability of the Company to utilize its operating
        loss
        carryforward in future years is subject to annual limitations in accordance
        with
        provisions of Section 382 of the Internal Revenue Code. In addition as the
        Company has not achieved profitable operations, its achievement of future
        taxable income is uncertain. The Company has not recorded a benefit from
        its
        deferred tax asset because realization of the benefit is uncertain. Accordingly,
        a valuation allowance which increased by approximately $2,263,000
        and $1,710,000 during 2005 and 2004, respectively, has been provided for
        the
        full amount of the deferred tax asset.


**Rate**Reconciliation
                  of income tax rate:
              
              
              **2005**
              
              
              **2004**Federal
                  statutory tax rate
              
              
              34
              %
              
              34
              %State
                  taxes
              
              
              5.84
              %
              
              4Permanent
                  Differences and other
              
              
              
              
              
              (13
              )Valuation
                  allowance
              
              
              (39.84
              )
              
              (25
              )Effective
                  tax rate
              
              
              0
              %
              
              0
              %


**Note
      K - Operating Lease Obligations**




The
      Company is obligated, under an operating lease for its facility (through a
      related party). The lease expired on January 31, 2006. The
      Company is currently renting the facility on a month-to-month basis while
      negotiating with the landlord for a lease extension on approximately 5,000
      square feet. Rent
      expense was $ 118,547 and $114,388 for the years ended December 31, 2005 and
      2004, respectively and the required minimum lease payment for 2006 is
      $9,912.





**Note
      L - Capitalized Lease Obligations**




The
      Company has two capital leases to finance the acquisition of computer equipment.
      At December 31, 2005 the future
      minimum payments required under such leases are summarized as
      follows:





**Year
                Ended December 31, 2005**
            
            **Lease
                (1)**
            
            **Lease
                (2)**
            
            **Total**2006
            
            $
            92,596
            
            $
            247,200
            
            $
            339,7962007
            
            
            20,430
            
            
            247,200
            
            
            267,6302008
            
            
            0
            
            
            226,600
            
            
            226,600Total
                minimum lease payments
            
            
            113,026
            
            
            721,000
            
            
            834,026Less
                amounts representing interest
            
            
            0
            
            
            73,574
            
            
            73,574Present
                value of minimum lease payment
            
            
            113,026
            
            
            647,426
            
            
            760,452Less
                current portion of capital lease obligations
            
            
            92,596
            
            
            206,629
            
            
            299,225Long-term
                portion of capital lease obligations
            
            $
            20,430
            
            $
            440,797
            
            $
            461,227




F-18
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


(1)
            The
                  lease is secured by the underlying equipment, and bears no interest
                  based
                  on renegotiated terms in 2004, and is payable monthly through March
                  2007.
                  Pursuant to an agreement with the lessor, in connection with the
                  debt
                  restructuring, no interest expense will be recorded on future minimum
                  payments and the Companyrecorded a gain on forgiveness of debt
                  in the
                  amount of $36,290 in 2004.





(2)
            The
                lease is secured by the underlying equipment and by an irrevocable
                standby
                letter of credit opened by a stockholder/director in the Company’s behalf
                as required by the Company’s equipment lease agreement, which is to be
                retained for the entire term of the lease obligation. The terms of
                the
                lease were renegotiated in 2005. Pursuant to the terms of the
                renegotiation, the lease buyout amount of $50,000 was added to the
                principal balance of the lease and the payment period was extended
                by two
                years. The new lease agreement has an interest rate of 7.32% and
                is
                payable monthly through November 2008 (see Note
                I).





**Note
      M - Other Notes Payable, Long-Term**





On
      July 22, 2004, in connection with the reverse merger, $494,038 of accrued
      interest on convertible notes payable was converted into new promissory notes,
      bearing interest at 4% per annum. All principal and accrued interest on the
      notes shall be due and payable in full on July 22, 2007. The holders have a
      right to convert all or any portion of the outstanding principal balance and/or
      accrued interest of the notes into shares of common stock in the Company’s next
      round of equity financing subsequent to July 22, 2004, on the same terms and
      conditions as applicable to all other purchasers of such equity securities.
      As
      of December 31, 2005, the total accrued interest on the notes payable amounted
      to $28,483.





**Note
      N - Discontinued Operations**





Effective
      June 30, 2004, the Company discontinued the operations of its wholly owned
      subsidiary Precision Type, Inc. Accordingly, Precision Type’s assets and
      liabilities have been segregated from the assets and liabilities of continuing
      operations in the consolidated balance sheets at December 31, 2005 and 2004
      and
      its operating results have been segregated from continuing operations and are
      reported as discontinued operations in the consolidated statements of operations
      and cash flows for each of the years ended December 31, 2005 and
      2004.





**Year
                Ended December 31**Statements
                of Operations:
            
            **2005**
            
            **2004**Net
                sales - font software products
            
            $
            0
            
            $
            41,942Cost
                of sales
            
            
            0
            
            
            18,636Gross
                profit
            
            
            0
            
            
            23,306General,
                selling and administrative expenses
            
            
            0
            
            
            14,859Net
                income from discontinued operations
            
            $
            0
            
            $
            8,447




Summarized
                financial information of discontinued operations is as
                follows:
            
            **December
                31,**Balance
                Sheets:
            
            **2005**
            
            **2004**Accounts
                payable and accrued expenses
            
            
            179,047
            
            
            195,708Notes
                payable, current
            
            
            28,305
            
            
            28,755Total
                current liabilities of discontinued operations
            
            
            207,352
            
            
            224,463Notes
                payable, non-current
            
            
            56,610
            
            
            64,138Total
                liabilities of discontinued operations
            
            
            263,962
            
            
            288,601Net
                liabilities of discontinued operations
            
            $
            263,962
            
            $
            288,601





F-19
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Note
      O - Deferred Officers’ Compensation**





On
      July
      31, 2002, the Company entered into the Salary Adjustment Agreement (the
“Agreement”) with its President and certain of its vice-presidents (the
“Officers/Stockholders”). The Agreement, which was authorized by the Company’s
      Board of Directors, provided that the Officers/Stockholders (i) voluntarily
      accept a 25% reduction in salary for the period commencing August 1, 2002 and
      (ii) agree to defer the receipt of $1,376,240 in accrued but unpaid salaries
      (this amount was reduced to $811,137 after deducting authorized payments of
      $565,103), until the Company achieves positive cash flow, in exchange for (a)
      the immediate grant of an aggregate total of 777,167 five-year stock options
      with an exercise price at $1.25 per share, (b) the monthly grant of an aggregate
      of 24,147 five-year stock options at an exercise price of $1.25 per share
      commencing August 2002, which aggregated 434,646 stock options between August
      2002 and January 2004, (c) the automatic 100% vesting of 766,570 unvested
      previously held stock options and (d) an exercise period of five years from
      the
      date of the Agreement for any previously held stock options. This arrangement
      would cease upon the return of the executives to their previous salaries.
      Conditions for reinstatement of salaries were either (i) raising a minimum
      of
      $1,500,000 in gross proceeds in a fund raising (excluding any funding from
      the
      Company’s largest shareholder) or (ii) the Company achieving positive cash flow
      in excess of $75,000 in any quarter from operations. As of January 31, 2004,
      the
      Company had raised capital in excess of $1,500,000 in defined gross proceeds,
      and consequently restored the officers to their prior salaries and ceased the
      monthly issuance of stock options. The deferred salaries were charged to expense
      as earned and are included in accrued salaries on the accompanying balance
      sheets. In connection with the reverse merger consummated July 22, 2004, two
      of
      the Officers/Stockholders each converted $100,000 of amounts due them for
      accrued salaries into 80,000 shares of common stock of the Company at $1.25
      per
      share. At December 31, 2004, accrued but unpaid salaries totaled $1,529,555
      (this amount was reduced to $587,407 after deducting authorized payments of
      $942,148).




Pursuant
        to the June 10, 2005 resignation and consulting agreement with the Company’s
        former President and Chief Executive Officer, accrued salaries were reduced
        by
        $669,506 ($111,125 net of authorized payments of $558,381). In October 2005,
        $75,906 of accrued but unpaid salary of one of the participants was converted
        to
        a note as per the terms of the Salary Adjustment Agreement. The note is payable
        in four equal quarterly installments beginning January 2007. At December
        31,
        2005, accrued but unpaid salaries totaled $736,541 (this amount was reduced
        to
        $394,272 after deducting authorized payments of $342,269).





The
      stock
      option grants and modifications were accounted for in accordance with APB
      Opinion No 25 and FASB Interpretation 44 *Accounting
      for Certain Transactions Involving Stock Compensation-An Interpretation of
      APB
      Opinion No 25.*





**Note
      P - Deferred Sales Fee**




On
        November 29, 2002, as amended on June 15, 2004, the Company and its major
        customer entered into an Electronic Software and Distribution and Site Location
        Agreement (Software Agreement), which expires June 14, 2008, as amended.
        As part
        of the Software Agreement, on June 15, 2004, the Company granted the customer
        a
        warrant to purchase 1,456,124 shares of common stock at $.01 per share in
        recognition of the sales benefit of the Software Agreement to the Company.
        Upon
        consummation of the private placement and reverse merger, in accordance with
        the
        terms of the Software Agreement, this warrant was automatically exchanged
        for
        the right to acquire 266,154 shares of Company common stock. These shares
        were
        issuable, 66,540 shares upon consummation of the reverse merger, and 66,540
        shares on each of the two years subsequent to the anniversary date of the
        agreement and, assuming the agreement remains in effect on each date, 66,534
        on
        the final anniversary date.


These
      shares have been valued at $1.25 per share totaling $332,693 and have been
      recorded as a “Deferred Sales Fee” and reflected as a reduction to equity, to be
      amortized over the term of the Software Agreement. For the year ended December
      31, 2005, $83,160 has been amortized as a selling expense.





**Note
      Q - 2005 Private Offerings**





In
      June
      2005, the Company entered into a series of securities purchase agreements with
      a
      limited number of investors in a private placement. In connection with the
      private placement, the Company sold 1,986,302 shares of common stock at $.73
      per
      share, and issued warrants to purchase up to 993,151 shares of our common stock,
      for an aggregate of $1,450,000 ($1,335,570 net of finder’s fee and various other
      expenses).





F-20
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


The
      June
      Warrants (the “June Warrants”) had an exercise price of $1.00 per share of
      common stock, are exercisable immediately and expire on the third year
      anniversary of the initial warrant date. The exercise price of the June Warrants
      is subject to adjustment in the event of specified dilutive or accretive events,
      such as stock splits and stock combinations. The exercise price, as well as
      the
      per share price of the common stock sold in the private placement is subject
      to
      further adjustment if the Company issues any shares of common stock or
      securities convertible or exercisable into common stock (subject to customary
      exceptions such as securities issued pursuant to equity incentive plans) through
      June 2006 at a price per share less than the per share price of the common
      stock
      and/or the exercise price of the June Warrants, in which case the per share
      price and/or the exercise price, as applicable, will be adjusted to equal the
      price of the securities in the new issuance. The adjustment in the share price
      would result in the issuance of additional shares of common stock to the
      holders. Due to the private offerings entered into in September and December
      2005 (see below), the Company issued an additional 9,341,824 shares of common
      stock to the June investors and adjusted the June Warrants’ exercise price to
      $.128 per share pursuant to the anti-dilution provisions of the June 2005
      securities purchase agreements.




In
        September 2005, the Company entered into a securities purchase agreement
        with an
        investor in a private placement . In connection with the private placement,
        the
        Company sold 2,380,952 shares of the common stock at $.336 per share, and
        warrants (the “ September Warrants”) to purchase up to 2,380,952 shares of the
        Company’s common
        stock, for an aggregate of $800,000 ($715,260 net of finder’s fee and various
        other expenses).





The
      September Warrants had an exercise price of $.50 per share of common stock,
      are
      exercisable immediately and expire on the third year anniversary of the initial
      warrant date. The exercise price of the September Warrants is subject to
      adjustment in the event of specified dilutive or accretive events, such as
      stock
      splits and stock combinations. The exercise price, as well as the per share
      price of the common stock sold in the private placement is subject to further
      adjustment if the Company issues any shares of common stock or securities
      convertible or exercisable into common stock (subject to customary exceptions
      such as securities issued pursuant to equity incentive plans) through September
      2006 at a price per share less than the per share price of the common stock
      and/or the exercise price of the September Warrants, in which case the per
      share
      price and/or the exercise price, as applicable, will be adjusted to equal the
      price of the securities in the new issuance. The adjustment in the share price
      would result in the issuance of additional shares of common stock to the
      holders. Due to the private offerings entered into during December 2005 (see
      below) , the Company issued an additional 3,869,048 shares of common stock
      to
      the September investor and adjusted the September Warrants’ exercise price to
      $.128 per share pursuant to the anti-dilution provisions of the September 2005
      securities purchase agreement.


In
        December 2005, the Company entered into a series of securities purchase
        agreements with investors. In connection with the private placements, the
        Company sold 3,441,314 shares of common stock, at prices ranging from $.173
        to
        $.128, and warrants (the “December Warrants”) to purchase up to 1,720,657 shares
        of common stock, for an aggregate of $550,000 ($495,000 net of finder’s fee and
        various other expenses).
  The
        December Warrants had an exercise price of $.50 per share of common stock,
        are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the December Warrants is subject to
        adjustment in the event of specified dilutive or accretive events, such as
        stock
        splits and stock combinations. The exercise price, as well as the per share
        price of the common stock sold in the private placement is subject to further
        adjustment if the Company issues any shares of common stock or securities
        convertible or exercisable into common stock (subject to customary exceptions
        such as securities issued pursuant to equity incentive plans) through December
        2006 at a price per share less than the per share price of the common stock
        and/or the exercise price of the December Warrants, in which case the per
        share
        price and/or the exercise price, as applicable, will be adjusted to equal
        the
        price of the securities in the new issuance. The adjustment in the per share
        price would result in the issuance of additional shares of common stock to
        the
        holders. Due to the private offering of December 30, 2005, the Company issued
        an
        additional 855,561 shares of common stock to the December investors and adjusted
        1,330,032 of the December Warrants’ exercise price to $.128 per share pursuant
        to the anti-dilution provisions of the December 2005 securities purchase
        agreements.


F-21
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


The
      finder who assisted the Company with these financings received a warrant to
      purchase 20% of the shares issuable upon exercise of the warrants issued to
      each
      investor the finder brought into the private placement. Each warrant contained
      the same anti dilution provisions and exercise price as those issued to the
      respective investors.





**Note
      R - Commitments**





Upon
      the
      consummation of the merger, the board of directors of the Company approved
      a
      five-year employment agreement with the President and Chief Executive Officer
      (the “former President/CEO”), providing for a base annual compensation of
      $195,000, certain fringe benefits, and bonus compensation and/or stock options
      as determined by the board of directors.


The
        former President/CEO resigned on June 10, 2005 and entered into a consulting
        agreement which provides for a monthly consulting fee of $16,250 and
        reimbursement of expenses as may be agreed upon for specific projects. The
        agreement also contains covenants (a) restricting the former President/CEO
        from
        competing with the Company or soliciting our customers or employees during
        the
        term of his agreement and one year thereafter, and (b) prohibiting him from
        disclosure of confidential information regarding the Company. The former
        President/CEO agreed to forego deferred salary owed to him and we agreed
        to
        forgive loans and advances made to him..The former President/CEO’s’s employment
        agreement was terminated and the former President/CEO is not entitled to
        receive
        any of the severance payments mentioned in the agreement .
        The
        Company incurred a net expense of $132,625 in June 2005 in connection with
        the
        resignation and consulting agreement. Effective September 9, 2005, the former
        President/CEO rejoined the board of directors..


**Note
      S - Litigation**


Upon
        his
        termination from employment, the former CEO Mark Benedikt (see Recent Management
        Changes) asserted monetary claims under his Employment Agreement with us,
        and by
        demand dated October 19, 2005, sought arbitration of those claims which for
        purposes of the arbitration demand he had valued at $366,979. The Company
        settled with Mr. Benedikt on January 23, 2006. The terms of the settlement
        require us to make periodic cash payments to Mr. Benedikt totaling $100,000
        and
        issue Mr. Benedikt a warrant to purchase 240,000 shares of common stock at
        an
        exercise price of $1.06 per share with registration rights. The Company has
        accrued $100,000 due to Mr Benedikt as of December 31, 2005.
  On
        August
        23, 2005, First Providence Financial Group, LLC filed a Demand for Arbitration
        against us with the American Arbitration Association. The Demand alleges
        that we
        breached a January 2000 placement agency agreement with First Providence.
        The
        Demand seeks $5 million in damages, plus fees and costs. The Demand alleges
        that
        First Providence had a right of first refusal and that we disregarded it.
        First
        Providence was not then in business, incapable of performing and failed to
        do so
        when requested to perform. The Company reached a settlement agreement with
        First
        Providence on January 31, 2006. The Company issued First Providence 1,000,000
        shares of common stock and reimbursed First Providence $8,000 for out of
        pocket
        costs. The value of these shares of $140,000 was recorded in December 2005.
        First Providence withdrew the arbitration request.
  The
        case
        of Code Ventures LLC v. Protocall Software Delivery Systems, Inc., et al.
        was
        filed in the Superior Court of the State of California, San Diego Judicial
        District, on or about August 31, 2005. The Complaint asserts claims for:
        (i)
        breach of a software development agreement between the parties dated October
        13,1999; (ii) quantum merit; and (iii) goods sold, and seeks damages of at
        least
        $200,000, plus interest, attorneys’ fees, and cost. The plaintiff also seeks a
        judgment declaring that it is entitled to exercise certain options for stock
        in
        Protocall Software Delivery Systems, Inc. . Management believes it is likely
        the
        Company will prevail and accordingly, has not recorded any charges for any
        potential settlement.


**Note
      T - Significant Customers**





For
      the
      year ended December 31, 2005, two customers accounted for 85.0% and 13.0% of
      net
      sales respectively. For the year ended December 31, 2004 the same two customers
      accounted for 60.3% and 39.7% of net sales, respectively.





F-22
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


**Note
      U- Subsequent Events**





In
      January 2006, the Company entered into a securities purchase agreement with
      an
      investor in a private placement.. In connection with the private placement,
      the
      Company sold 2,222,222 shares of common stock, at $.135 per share, and warrants
      (the “Warrants”) to purchase up to 1,111,111 shares of the Company’s Common
      Stock, for an aggregate of $300,000.





The
      January Warrants have an exercise price of $.50 per share of common stock,
      are
      exercisable immediately and expire on the third year anniversary of the initial
      warrant date. The exercise price of the January Warrants is subject to
      adjustment in the event of specified dilutive or accretive events, such as
      stock
      splits and stock combinations. The exercise price, as well as the per share
      price of the common stock sold in the private placement is subject to further
      adjustment if the Company issues any shares of common stock or securities
      convertible or exercisable into common stock (subject to customary exceptions
      such as securities issued pursuant to equity incentive plans) through January
      2007 at a price per share less than the per share price of the common stock
      and/or the exercise price of the January Warrants, in which case the per share
      price and/or the exercise price, as applicable, will be adjusted to equal the
      price of the securities in the new issuance. The adjustment in the per share
      price would result in the issuance of additional shares of common stock to
      the
      holder. Due to the private offering entered into in February 2006 (see below)
      ,
      the Company issued an additional 121,528 shares of common stock and adjusted
      the
      January Warrants’ exercise price to $.128 per share pursuant to the
      anti-dilution provisions of the January 2006 securities purchase
      agreement.




In
        February 2006, the Company entered into a securities purchase agreement with
        an
        investor in a private placement. In connection with the private placement,
        the
        Company sold 390,625 shares of common stock, at $.128 per share, and warrants
        (the “Warrants”) to purchase up to 585,938 shares of the Company’s common
        stock, for an aggregate of $50,000.


The
      February Warrants have an exercise price of $.128 per share of common stock,
      are
      exercisable immediately and expire on the third year anniversary of the initial
      warrant date. The exercise price of the February Warrants is subject to
      adjustment in the event of specified dilutive or accretive events, such as
      stock
      splits and stock combinations. The exercise price, as well as the per share
      price of the common stock sold in the private placement is subject to further
      adjustment if the Company issues any shares of common stock or securities
      convertible or exercisable into common stock (subject to customary exceptions
      such as securities issued pursuant to equity incentive plans) through February
      2007 at a price per share less than the per share price of the common stock
      and/or the exercise price of the February Warrants, in which case the per share
      price and/or the exercise price, as applicable, will be adjusted to equal the
      price of the securities in the new issuance. The adjustment in the per share
      price would result in the issuance of additional shares of Common Stock to
      the
      holder.


In
        April
        2006, the Company entered into a securities purchase agreement with investors
        in
        a private placement. In connection with the private placement, the Company
        sold
        an aggregate of 1,819,363 shares of common stock, at $.162 per share, and
        warrants (the “Warrants”) to purchase up to 1,218,324 shares of the Company’s
        common stock, for an aggregate of $300,000.


The
        April
        Warrants have an exercise price of $.20 per share of common stock, are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the April Warrants is subject to adjustment
        in the event of specified dilutive or accretive events, such as stock splits
        and
        stock combinations. The exercise price, as well as the per share price of
        the
        common stock sold in the private placement is subject to further adjustment
        if
        the Company issues any shares of common stock or securities convertible or
        exercisable into common stock (subject to customary exceptions such as
        securities issued pursuant to equity incentive plans) through April 2007
        at a
        price per share less than the per share price of the common stock and/or
        the
        exercise price of the April Warrants, in which case the per share price and/or
        the exercise price, as applicable, will be adjusted to equal the price of
        the
        securities in the new issuance. The adjustment in the per share price would
        result in the issuance of additional shares of common stock to the holder.
  In
        May
        2006, the Company entered into a securities purchase agreement with investors
        in
        a private placement. In connection with the private placement, the Company
        sold
        an aggregate of 1,079,136 shares of common stock, at $.139 per share, and
        warrants (the “Warrants”) to purchase up to 539,568 shares of common stock, for
        an aggregate of $150,000.


F-23
 
 PROTOCALL
          TECHNOLOGIES INCORPORATED AND SUBSIDIARIES


The
        May
        Warrants have an exercise price of $.20 per share of common stock, are
        exercisable immediately and expire on the third year anniversary of the initial
        warrant date. The exercise price of the May Warrants is subject to adjustment
        in
        the event of specified dilutive or accretive events, such as stock splits
        and
        stock combinations. The exercise price, as well as the per share price of
        the
        common stock sold in the private placement is subject to further adjustment
        if
        the Company issues any shares of common stock or securities convertible or
        exercisable into common stock (subject to customary exceptions such as
        securities issued pursuant to equity incentive plans) through May 2007 at
        a
        price per share less than the per share price of the common stock and/or
        the
        exercise price of the May Warrants, in which case the per share price and/or
        the
        exercise price, as applicable, will be adjusted to equal the price of the
        securities in the new issuance. The adjustment in the per share price would
        result in the issuance of additional shares of common stock to the holder.
  On
        February 24, 2006, the Company entered into a consulting agreement with a
        third
        party for public relations services. The Company agreed to pay the third
        party a
        non refundable retainer fee of 1,153,846 shares of restricted stock at $.13
        per
        share. 50% of the shares were issued three days after executing the agreement,
        and 115,385 shares are to be issued the first day of each month through July
        2006.





F-24