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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-27031
 FULLNET COMMUNICATIONS, INC.
 (Name of small business issuer in its Charter)
 OKLAHOMA
    
    73-1473361(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 201 Robert S. Kerr Avenue, Suite 210
Oklahoma City, Oklahoma 73102
(Address of principal executive offices)
 (405) 236-8200
(Issuers telephone number)
 Securities registered under Section 12(b) of the Act: None
 Securities registered under to Section 12(g) of the Act:
 Title of class
  o
 þ o
 þ
 o þ
   o þ




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##### 



FULLNET COMMUNICATIONS, INC.
FORM 10-KSB
  TABLE OF CONTENTS
 PART I.Item 1. Description Of Business
    
    
    4Item 2. Description of Property
    
    
    13Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14PART II.Item 5. Market for Common Equity and Related Stockholder Matters
    
    
    15Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    16Item 7. Financial Statements
    
    
    21Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    21Item 8A. Controls and Procedures
    
    
    22Item 8B. Other Information
    
    
    22PART III.Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of
the Exchange Act
    
    
    23Item 10. Executive Compensation
    
    
    24Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    26Item 12. Certain Relationships and Related Transactions; and Director Independence
    
    
    27Item 13. Exhibits
    
    
    28Item 14. Principal Accountant Fees and Services
    
    
    31SIGNATURES
    
    
    32Certification Pursuant to Rule 13a-14(a)/15d-14(a)Certification Pursuant to Rule 13a-14(a)/15d-14(a)Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
   
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PART I
 
 Item 1. Description Of Business
            4




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o
    
    Potential revenue and subscriber growth;o
    
    Low subscriber turnover or churn rates;o
    
    Density in the market as defined by a high ratio of subscribers to points of presence (POPs);o
    
    Favorable competitive environment;o
    
    Low density network platforms that can be integrated readily into our backbone network; ando
    
    Favorable consolidation savings.
       5




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Fast and Reliable Internet Access
 6




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Cost-Effective Access
 Superior Customer Support
           7




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8




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9




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·
 ·
 ·
  10




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11




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12




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Item 2. Description of Property
  
 Item 3. Legal Proceedings
  13




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Item 4. Submission of Matters to a Vote of Security Holders
  14




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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  Common StockClosing Sale PricesHigh
    
    Low2006 Calendar Quarter Ended:March 31
    
    $
    .08
    
    
    $
    .08June 30
    
    
    .06
    
    
    
    .06September 30
    
    
    .04
    
    
    
    .04December 31
    
    
    .03
    
    
    
    .032005 Calendar Quarter Ended:March 31
    
    $
    .07
    
    
    $
    .07June 30
    
    
    .07
    
    
    
    .07September 30
    
    
    .05
    
    
    
    .05December 31
    
    
    .09
    
    
    
    .09
       Number ofSecuritiesWeighted-
    
    
    RemainingNumber of
    
    
    Average
    
    
    Available forShares
    
    
    Exercise Price
    
    
    FutureUnderlying
    
    
    of
    
    
    Issuance underUnexercised
    
    
    Outstanding
    
    
    EquityOptions
    
    
    Options and
    
    
    CompensationPlan Category
    
    and Warrants
    
    
    Warrants
    
    
    Plans(1)Equity compensation plans approved by our shareholders:None
    
    Not Applicable
    
    Not Applicable
    
    Not ApplicableEquity compensation plans not approved by our shareholders:Stock option grants to non-employee directors
    
    
    
    
    
    $
    
    
    
    
    Stock options granted to employees
    
    
    3,122,034
    
    
    $
    .42
    
    
    
    Warrants and certain stock options issued to non-employees
    
    
    402,000
    
    
    $
    .39
    
    
    
    Total
    
    
    3,524,034
    
    
    $
    .42
    
    
    
    
 15




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Item 6. Managements Discussion and Analysis or Plan of Operation
        16




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For the Years Ended December 31,2006
    
    
    2005Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of revenues
    
    
    Amount
    
    
    of revenuesRevenues:Access service revenues
    
    $
    741,017
    
    
    
    41.9
    %
    
    $
    874,560
    
    
    
    36.8
    %Co-location and other revenues
    
    
    1,028,054
    
    
    
    58.1
    
    
    
    1,504,245
    
    
    
    63.2Total revenues
    
    
    1,769,071
    
    
    
    100.0
    
    
    
    2,378,805
    
    
    
    100.0Cost of access service revenues
    
    
    244,093
    
    
    
    13.8
    
    
    
    276,427
    
    
    
    11.6Cost of co-location and other revenues
    
    
    238,776
    
    
    
    13.5
    
    
    
    192,253
    
    
    
    8.1Selling, general and administrative expenses
    
    
    1,369,228
    
    
    
    77.4
    
    
    
    1,320,215
    
    
    
    55.5Depreciation and amortization
    
    
    309,893
    
    
    
    17.5
    
    
    
    431,315
    
    
    
    18.1Total operating costs and expenses
    
    
    2,161,990
    
    
    
    122.2
    
    
    
    2,220,210
    
    
    
    93.3Income (loss) from operations
    
    
    (392,919
    )
    
    
    (22.2
    )
    
    
    158,595
    
    
    
    6.7Gain on debt forgiveness
    
    
    19,925
    
    
    
    1.1
    
    
    
    16,634
    
    
    
    0.7Gain on bad debt recovery, net
    
    
    
    
    
    
    
    
    
    
    17,500
    
    
    
    0.7Interest expense
    
    
    (106,309
    )
    
    
    (6.0
    )
    
    
    (118,401
    )
    
    
    (5.0
    )Income (loss) before income taxes
    
    
    (479,303
    )
    
    
    (27.1
    )
    
    
    74,328
    
    
    
    3.1Income tax expense (benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    (479,303
    )
    
    
    (27.1)
    %
    
    $
    74,328
    
    
    
    3.1
    %
        17




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Goodwill and Intangible Assets
   Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainAccounts payable
    
    $
    21,380
    
    
    $
    1,455
    
    
    $
    19,925
  Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainAccounts payable
    
    $
    27,634
    
    
    $
    11,000
    
    
    $
    16,634
         18




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For the Years Ended December 31,2006
    
    
    2005Net cash flows provided by operations
    
    $
    185,551
    
    
    $
    460,818Net cash flows used in investing activities
    
    
    (91,915
    )
    
    
    (258,305
    )Net cash flows used in financing activities
    
    
    (92,603
    )
    
    
    (199,765
    )
    
    
    mergers and acquisitions and
    
    further development of operations support systems and other automated back office systems
     19




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Accounting for
Contingencies,
  Share-Based Payment Accounting for Stock-Based Compensation Accounting Principles Board Accounting for Stock Issued to Employees
 Accounting for Certain Hybrid Financial
Instruments
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes.
 Fair Value Measurements.
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans
 20




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The Fair Value Option for Financial Assets
and Financial Liabilities
 
 Item 7. Financial Statements
  
 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
   21




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Item 8A. Controls and Procedures
    
 Item 8B. Other Information
  22




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PART III.
 
 Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section
16(a) of the Exchange Act
  Name
    
    Age
    
    PositionTimothy J.Kilkenny
    
    
    48
    
    
    Chairman of the Board of Directors and CEORoger P. Baresel
    
    
    51
    
    
    Director, President, Chief Financial Officer and SecretaryJason C. Ayers
    
    
    32
    
    
    Vice President of OperationsPatricia R. Shurley
    
    
    50
    
    
    Vice President of FinanceMichael D. Tomas
    
    
    34
    
    
    Vice President of Technology
        
    
    understanding of generally accepted accounting principles and financial statements;
    
    ability to assess the general application of generally accepted accounting principles in
connection with the accounting for estimates, accruals and reserves;
 23




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
    
    experience preparing, auditing, analyzing or evaluating financial statements that
present the breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably be expected to be
raised by our financial statements, or experience actively supervising one or more persons
engaged in such activities;
    
    understanding of internal controls and procedures for financial reporting; and
    
    understanding of audit committee functions.
       
 Item 10. Executive Compensation
  Long-TermAnnual Compensation
    
    
    CompensationSecuritiesUnderlyingOptions andFiscal
    
    
    
    
    
    
    Other
    
    
    WarrantsName and Principal Position
    
    Year
    
    
    Salary
    
    
    Compensation
    
    
    (#) (1)Timothy J. Kilkenny
    
    
    2006
    
    
    $
    103,516
    (2)
    
    $
    21,954
    (5)
    
    
    Chairman and CEO
    
    
    2005
    
    
    $
    117,125
    (3)
    
    $
    21,954
    (6)
    
    
    2004
    
    
    $
    81,413
    (4)
    
    $
    17,130
    (7)
    
    
    
 
 (1)
    
    Options are granted with an exercise price equal to the fair market value of our common stock on the date of the grant.(2)
    
    Includes $32,948 of deferred compensation.(3)
    
    Includes $40,075 of deferred compensation.(4)
    
    Includes $20,833 of deferred compensation.(5)
    
    Represents $7,700 of expense reimbursement for business use of Mr. Kilkennys automobile, $1,649 of expense
reimbursement for Mr. Kilkennys Internet connection and cell phone, and $9,781 of insurance premiums paid by us for
the benefit of Mr. Kilkenny. 24




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(6)
    
    Represents $8,400 of expense reimbursement for business
use of Mr. Kilkennys automobile, $1,909 of expense
reimbursement for Mr. Kilkennys Internet connection and
cell phone, and $11,645 of insurance premiums paid by us
for the benefit of Mr. Kilkenny.(7)
    
    Represents $8,400 of expense reimbursement for business
use of Mr. Kilkennys automobile, $1,995 of expense
reimbursement for Mr. Kilkennys Internet connection and
cell phone, and $6,735 of insurance premiums paid by us
for the benefit of Mr. Kilkenny.      Number of Unexercised
    
    
    Value of Unexercised In-the-Options at
    
    
    Money Options atDecember 31, 2006
    
    
    December 31, 2006 (1)Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableTimothy J. Kilkenny
    
    
    714,000
    
    
    
    
    
    
    $
    
    
    
    $
    Chairman and CEO
 
 (1)
    
    Based on the December 31, 2006 estimated fair value of our common stock of $.03 per share.   Outstanding Equity Awards at December 31, 2006Stock Option AwardsNumber of Common Stock
    
    
    Option
    
    
    OptionUnderlying Options
    
    
    Exercise
    
    
    ExpirationName
    
    Exercisable
    
    
    Unexercisable
    
    
    Price(1)
    
    
    DateTimothy J. Kilkenny
    
    
    120,000
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/13Chairman and CEO
    
    
    150,000
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/13182,000
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/1380,000
    
    
    
    
    
    
    $
    .05
    
    
    
    03/18/1232,000
    
    
    
    
    
    
    $
    .11
    
    
    
    11/16/1150,000
    
    
    
    
    
    
    $
    .70
    
    
    
    07/18/11100,000
    
    
    
    
    
    
    $
    1.00
    
    
    
    12/08/10
 
 (1)
    
    The closing sale price of our common stock as reported on the OTC Bulletin Board on
December 31, 2006 was $0.03.   25




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Item 11. Security Ownership of Certain Beneficial Owners and Management
   Common StockNumber of
    
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    
    Class (1)Generation Capital Associates (2)
    
    
    707,608
    
    
    
    9.9
    %Rupinder Sidu (3)
    
    
    344,018
    
    
    
    5.2
    %Karen Gustafson & Greg Kusnick(4)
    
    
    410,231
    
    
    
    5.9
    %Greg Lowney & Maryanne Snyder (5)
    
    
    410,231
    
    
    
    5.9
    %Laura L. Kilkenny (6)
    
    
    465,000
    
    
    
    6.9
    %
 
 (1)
    
    Percent of class for any stockholder listed is calculated without regard to shares of common stock issuable to others
upon exercise of outstanding stock options. Any shares a stockholder is deemed to own by having the right to acquire
by exercise of an option or warrant are considered to be outstanding solely for the purpose of calculating that
stockholders ownership percentage. We computed the percentage ownership amounts in accordance with the provisions of
Rule 13d-3(d), which includes as beneficially owned all shares of common stock which the person or group has the
right to acquire within the next 60 days, based upon 6,741,135 outstanding shares of common stock as of March 30,
2007.(2)
    
    Generation Capital Associates address is 1085 Riverside Trace, Atlanta, GA 30328. Generation Capital Associates
holds 267,608 shares of our common stock. The number of shares includes 440,000 shares of our common stock that are
subject to currently exercisable common stock purchase warrants. Amounts shown do not include 125,000 shares of our
common stock that are subject to common stock purchase warrants that are not currently exercisable because they
contain a provision prohibiting their exercise to the extent that they would increase Generation Capital Associates
percentage ownership beyond 9.9% of our outstanding shares of common stock. We are in default on an operating lease
and an interim loan with Generation Capital (see Item. 12 Certain Relationships and Related Party Transactions).(3)
    
    Rupinder Sidus address is 10229 Tavistock Road, Orlando, FL 32827. Mr. Sidu holds 344,018 shares of our common stock.(4)
    
    Karen Gustafson & Greg Kusnicks address is P.O. Box 22443, Seattle, WA 98112. Ms. Gustafson & Mr. Kusnick hold
155,129 shares of our common stock. The number of shares includes 255,102 shares of our common stock that are subject
to a currently convertible promissory note.(5)
    
    Greg Lowney & Maryanne Snyders address is 15207 N.E. 68th Street, Redmond, WA 98052. Mr. Lowney
& Ms. Snyder hold 155,129 shares of our common stock. The number of shares includes 255,102 shares of our common
stock that are subject to a currently convertible promissory note.(6)
    
    Laura L. Kilkennys address is 3160 Long Dr., Newcastle, OK 73065. Ms. Kilkenny is the ex-wife of Timothy J.
Kilkenny, our Chairman of the Board and Chief Executive Officer. Ms. Kilkenny holds 415,000 shares of our common
stock. The number of shares includes 50,000 shares of our common stock that are subject to currently exercisable
common stock purchase options. 26




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Common StockBeneficially OwnedNumber of
    
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    
    Class (1)Timothy J. Kilkenny* (2)(3)
    
    
    1,729,000
    
    
    
    23.2
    %Roger P. Baresel* (2)(4)
    
    
    587,862
    
    
    
    8.1
    %Jason C. Ayers (2)(5)
    
    
    405,795
    
    
    
    5.7
    %Patricia R. Shurley (2)(6)
    
    
    292,000
    
    
    
    4.2
    %Michael D. Tomas (2)(7)
    
    
    260,000
    
    
    
    3.8
    %All executive officers and directors as a group (5 persons)
    
    
    3,274,657
    
    
    
    45.1
    %
 
 *
    
    Director(1)
    
    Percent of class for any stockholder listed is calculated without regard to shares
of common stock issuable to others upon exercise of outstanding stock options. Any
shares a stockholder is deemed to own by having the right to acquire by exercise
of an option or warrant are considered to be outstanding solely for the purpose of
calculating that stockholders ownership percentage. We computed the percentage
ownership amounts in accordance with the provisions of Rule 13d-3(d), which
includes as beneficially owned all shares of common stock which the person or
group has the right to acquire within the next 60 days, based upon 6,741,135
shares being outstanding at March 30, 2007.(2)
    
    Address is c/o 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102.(3)
    
    Timothy J. Kilkenny and Barbara J. Kilkenny, husband and wife, hold 915,000 and
100,000 shares of our common stock, respectively. The number of shares includes
714,000 shares of our common stock that are subject to currently exercisable stock
options held by Mr. Kilkenny.(4)
    
    Roger P. Baresel and Judith A. Baresel, husband and wife, hold 34,408 and 92,659
shares of our common stock, respectively. They hold 31,250 shares of our common
stock as joint tenants. The number of shares includes 198,745 shares of our common
stock subject to currently exercisable stock options held by Mr. Baresel, and
218,300 shares of our common stock subject to currently exercisable stock options
held by Mrs. Baresel.(5)
    
    Jason C. Ayers holds 25,865 shares of our common stock. The number of shares
includes 379,930 shares of our common stock that are subject to currently
exercisable common stock options held by Mr. Ayers.(6)
    
    The number of shares includes 292,000 shares of our common stock that are subject
to currently exercisable common stock purchase options held by Ms. Shurley.(7)
    
    The number of shares includes 260,000 shares of our common stock that are subject
to currently exercisable common stock purchase options held by Mr. Tomas. 
 Item 12. Certain Relationships and Related Transactions
   27




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Item 13. Exhibits
  ExhibitNumber
    
    Exhibit3.1
    
    Certificate of Incorporation, as amended (filed as
Exhibit 2.1 to Registrants Registration Statement on
Form 10-SB, file number 000-27031 and incorporated
herein by reference).
    
    #3.2
    
    Bylaws (filed as Exhibit 2.2 to Registrants
Registration Statement on Form 10-SB, file number
000-27031 and incorporated herein by reference)
    
    #4.1
    
    Specimen Certificate of Registrants Common Stock
(filed as Exhibit 4.1 to the Companys Form 10-KSB
for the fiscal year ended December 31, 1999, and
incorporated herein by reference).
    
    #4.2
    
    Certificate of Correction to the Amended Certificate of Incorporation and the Ninth
Section of the Certificate of Incorporation (filed as Exhibit 2.1 to Registrants
Registration Statement on form 10-SB, file number 000-27031 and incorporated by
reference).
    
    #4.3
    
    Certificate of Correction to Articles II and V of Registrants Bylaws (filed as Exhibit
2.1 to Registrants Registration Statement on Form 10-SB, file number 000-27031 and
incorporated herein by reference).
    
    #4.4
    
    Form of Warrant Agreement for Interim Financing in the amount of $505,000 (filed as
Exhibit 4.1 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March
31, 2000 and incorporated herein by reference).
    
    #4.5
    
    Form of Warrant Certificate for Florida Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.2 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.6
    
    Form of Promissory Note for Florida Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.3 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.7
    
    Form of Warrant Certificate for Georgia Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.4 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.8
    
    Form of Promissory Note for Georgia Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.5 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.9
    
    Form of Warrant Certificate for Illinois Investors for Interim Financing in the amount
of $505,000 (filed as Exhibit 4.6 to Registrants Quarterly Report on Form 10-QSB for
the Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.10
    
    Form of Promissory Note for Illinois Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.7 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.11
    
    Form of Warrant Agreement for Interim Financing in the amount of $500,000 (filed as
Exhibit 4.8 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March
31, 2000 and incorporated herein by reference).
    
    #4.12
    
    Form of Warrant Certificate for Interim Financing in the amount of $500,000 (filed as
Exhibit 4.9 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March
31, 2000 and incorporated herein by reference).
    
    #4.13
    
    Form of Promissory Note for Interim Financing in the amount of $500,000 (filed as
Exhibit 4.10 to Registrants
Quarterly Report on Form 10-QSB for the Quarter ended March
31, 2000 and incorporated herein by reference).
    
    #4.14
    
    Form of Convertible Promissory Note for September 29, 2000, private placement (filed as
Exhibit 4.13 to Registrants Form
10-KSB for the fiscal year ended December 31, 2000 and incorporated herein by reference).
    
    #4.15
    
    Form of Warrant Agreement for September 29, 2000, private placement (filed as Exhibit
4.13 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000 and
incorporated herein by reference).
    
    #4.16
    
    Form of 2001 Exchange Warrant Agreement (filed as Exhibit 4.16 to Registrants Form
10-QSB for the quarter ended June 30, 2001 and incorporated herein by reference)
    
    #4.17
    
    Form of 2001 Exchange Warrant Certificate (filed as Exhibit 4.17 to Registrants Form
10-QSB for the quarter ended June 30, 2001 and incorporated herein by reference)
    
    #
 28




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ExhibitNumber
    
    Exhibit10.1
    
    Financial Advisory Services Agreement
between the Company and National
Securities Corporation, dated September
17, 1999 (filed as Exhibit 10.1 to
Registrants Form 10-KSB for the fiscal
year ended December 31, 1999, and
incorporated herein by reference).
    
    #10.2
    
    Lease Agreement between the Company and
BOK Plaza Associates, LLC, dated December
2, 1999 (filed as Exhibit 10.2 to
Registrants Form 10-KSB for the fiscal
year ended December 31, 1999, and
incorporated herein by reference).
    
    #10.3
    
    Interconnection agreement between
Registrant and Southwestern Bell dated
March 19, 1999 (filed as Exhibit 6.1 to
Registrants Registration Statement on
Form 10-SB, file number 000-27031 and
incorporated herein by reference).
    
    #10.4
    
    Stock Purchase Agreement between the
Company and Animus Communications, Inc.
(filed as Exhibit 6.2 to Registrants
Registration Statement on Form 10-SB, file
number 000-27031 and incorporated herein
by reference).
    
    #10.5
    
    Registrar Accreditation Agreement
effective February 8, 2000, by and between
Internet Corporation for Assigned Names
and Numbers and FullWeb, Inc. d/b/a
FullNic f/k/a Animus Communications, Inc.
(filed as Exhibit 10.1 to Registrants
Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #10.6
    
    Master License Agreement For KMC Telecom
V, Inc., dated June
20, 2000, by and
between FullNet Communications, Inc. and
KMC Telecom V, Inc. (filed as Exhibit 10.1
to the Registrants Quarterly Report on
Form 10-QSB for the Quarter ended June 30,
2000 and incorporated herein by
reference).
    
    #10.7
    
    Domain Registrar Project Completion
Agreement, dated May 10, 2000, by and
between FullNet Communications, Inc.,
FullWeb, Inc. d/b/a FullNic and Think
Capital (filed as Exhibit 10.2 to
Registrants Quarterly Report on Form
10-QSB for the Quarter ended June 30, 2000
and incorporated herein by reference).
    
    #10.8
    
    Amendment to Financial Advisory Services
Agreement between Registrant and National
Securities Corporation, dated April 21,
2000 (filed as Exhibit 10.3 to
Registrants Quarterly Report on Form
10-QSB for the Quarter ended June 30, 2000
and incorporated herein by reference).
    
    #10.9
    
    Asset Purchase Agreement dated June 2,
2000, by and between FullNet of Nowata and
FullNet Communications, Inc. (filed as
Exhibit 99.1 to Registrants Form 8-K
filed on June 20, 2000 and incorporated
herein by reference).
    
    #10.10
    
    Asset Purchase Agreement dated February 4,
2000, by and between FullNet of
Bartlesville and FullNet Communications,
Inc. (filed as Exhibit 2.1 to Registrants
Form 8-K filed on February 18, 2000 and
incorporated herein by reference).
    
    #10.11
    
    Agreement and Plan of Merger Among FullNet
Communications, Inc., FullNet, Inc. and
Harvest Communications, Inc. dated
February 29, 2000 (filed as Exhibit 2.1 to
Registrants Form 8-K filed on March 10,
2000 and incorporated herein by
reference).
    
    #10.12
    
    Asset Purchase Agreement dated January 25,
2000, by and between FullNet of Tahlequah,
and FullNet Communications, Inc. (filed as
Exhibit 2.1 to Registrants Form 8-K filed
on February 9, 2000 and incorporated
herein by reference).
    
    #10.13
    
    Promissory Note dated August 2, 2000,
issued to Timothy J. Kilkenny (filed as
Exhibit 10.13 to Registrants Form 10-KSB
for the fiscal year ended December 31,
2000).
    
    #10.14
    
    Warrant Agreement dated August 2, 2000,
issued to Timothy J. Kilkenny (filed as
Exhibit 10.14 to Registrants Form 10-KSB
for the fiscal year ended December 31,
2000).
    
    #10.15
    
    Warrant Certificate dated August 2, 2000
issued to Timothy J. Kilkenny (filed as
Exhibit 10.15 to Registrants Form 10-KSB
for the fiscal year ended December 31,
2000).
    
    #10.16
    
    Stock Option Agreement dated December 8,
2000, issued to Timothy J. Kilkenny (filed
as Exhibit 10.16 to Registrants Form
10-KSB for the fiscal year ended December
31, 2000).
    
    #
 29




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.17
    
    Warrant Agreement dated November 9, 2000, issued to Roger P. Baresel (filed
as Exhibit 10.17 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000).
    
    #10.18
    
    Warrant Agreement dated December 29, 2000, issued to Roger P. Baresel
(filed as Exhibit 10.18 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.19
    
    Stock Option Agreement dated February 29, 2000, issued to Wallace L Walcher
(filed as Exhibit 10.19 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.20
    
    Stock Option Agreement dated February 17, 1999, issued to Timothy J.
Kilkenny (filed as Exhibit 3.1 to Registrants Registration Statement on
Form 10-SB, file number 000-27031 and incorporated herein by reference).
    
    #10.21
    
    Stock Option Agreement dated October 19, 1999, issued to Wesdon C. Peacock
(filed as Exhibit 10.21 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.22
    
    Stock Option Agreement dated April 14, 2000, issued to Jason C. Ayers
(filed as Exhibit 10.22 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.23
    
    Stock Option Agreement dated May 1, 2000, issued to B. Don Turner (filed as
Exhibit 10.23 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000).
    
    #10.24
    
    Form of Stock Option Agreement dated December 8, 2000, issued to Jason C.
Ayers, Wesdon C. Peacock, B. Don Turner and Wallace L. Walcher (filed as
Exhibit 10.24 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000).
    
    #10.25
    
    Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel
(filed as Exhibit 10.25 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.26
    
    Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel
(filed as Exhibit 10.26 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.27
    
    Warrant Certificate Dated December 29, 2000, issued to Roger P. Baresel
(filed as Exhibit 10.27 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.28
    
    Stock Option Agreement dated October 13, 2000, issued to Roger P. Baresel
(filed as Exhibit 10.28 to Registrants Form 10-KSB for the fiscal year
ended December 31, 2000).
    
    #10.29
    
    Stock Option Agreement dated October 12, 1999, issued to Travis Lane (filed
as Exhibit 10.29 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000).
    
    #10.30
    
    Promissory Note dated January 5, 2001, issued to Generation Capital
Associates (filed as Exhibit 10.30 to Registrants Form 10-KSB for the
fiscal year ended December 31, 2000).
    
    #10.31
    
    Placement Agency Agreement dated November 8, 2000 between FullNet
Communications, Inc. and National Securities Corporation (filed as Exhibit
10.31 to Registrants Form 10-KSB for the fiscal year ended December 31,
2000).
    
    #10.32
    
    Promissory Note dated January 25, 2000, issued to Fullnet of Tahlequah, Inc.
    
    #10.33
    
    Promissory Note dated February 7, 2000, issued to David Looper
    
    #10.34
    
    Promissory Note dated February 29, 2000, issued to Wallace L. Walcher
    
    #10.35
    
    Promissory Note dated June 2, 2000, issued to Lary Smith
    
    #10.36
    
    Promissory Note dated June 15, 2001, issued to higganbotham.com L.L.C.
    
    #10.37
    
    Promissory Note dated November 19, 2001, issued to Northeast Rural Services
    
    #10.38
    
    Promissory Note dated November 19, 2001, issued to Northeast Rural Services
    
    #
 30




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.39
    
    Form of Convertible Promissory Note dated September 6, 2002
    
    #10.40
    
    Employment Agreement with Timothy J. Kilkenny dated July 31, 2002
    
    #10.41
    
    Employment Agreement with Roger P. Baresel dated July 31, 2002
    
    #21.1
    
    Subsidiaries of the Registrant
    
    #31.1
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Timothy J. Kilkenny
    
    *31.2
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Roger P. Baresel
    
    *32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Timothy J. Kilkenny
    
    *32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Roger P. Baresel
    
    *
 
 #
    
    Incorporated by reference.*
    
    Filed herewith. 
 Item 14. Principal Accountant Fees and Services
    2006
    
    
    2005Audit Fees  Murrell, Hall, McIntosh & Co., PLLP
    
    $
    34,000
    
    
    $
    28,000Audit Fees  Evans, Gaither & Associates, PLLC
    
    
    
    
    
    $
    5,565Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
  31




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##### Table of Contents



REGISTRANT:
FULLNET COMMUNICATIONS, INC.
 Date: April 2, 2007
    
    
    
    By:
    
    /s/ TIMOTHY J. KILKENNY

Timothy J. KilkennyChief Executive OfficerDate: April 2, 2007
    
    
    
    By:
    
    /s/ ROGER P. BARESEL

Roger P. BareselPresident and Chief Financial and Accounting OfficerPursuant to the requirements of 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.Date: April 2, 2007
    
    
    
    By:
    
    /s/ TIMOTHY J. KILKENNY

Timothy J. Kilkenny,Chairman of the Board and DirectorDate: April 2, 2007
    
    
    
    By:
    
    /s/ ROGER P. BARESEL

Roger P. Baresel, Director
 32




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
       F-1




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  December 31,2006
    
    
    2005ASSETSCURRENT ASSETSCash
    
    $
    16,007
    
    
    $
    14,974Accounts receivable, net
    
    
    24,407
    
    
    
    122,616Prepaid expenses and other current assets
    
    
    95,452
    
    
    
    108,631Total current assets
    
    
    135,866
    
    
    
    246,221PROPERTY AND EQUIPMENT, net
    
    
    699,128
    
    
    
    888,957INTANGIBLE ASSETS, net
    
    
    47,725
    
    
    
    75,874OTHER ASSETS
    
    
    18,282
    
    
    
    18,282TOTAL
    
    $
    901,001
    
    
    $
    1,229,334LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable  trade
    
    $
    185,949
    
    
    $
    160,998Accounts payable  related party
    
    
    270,142
    
    
    
    218,982Accrued and other current liabilities
    
    
    848,783
    
    
    
    709,999Accrued interest  related party
    
    
    184,197
    
    
    
    152,197Notes payable, current portion
    
    
    592,933
    
    
    
    594,804Notes payable  related party
    
    
    320,000
    
    
    
    320,000Deferred revenue
    
    
    108,437
    
    
    
    120,784Total current liabilities
    
    
    2,510,441
    
    
    
    2,277,764NOTES PAYABLE, less current portion
    
    
    
    
    
    
    90,912OTHER LIABILITIES
    
    
    67,927
    
    
    
    80,827STOCKHOLDERS DEFICITCommon stock  $.00001 par value; authorized, 10,000,000
shares; issued and outstanding,
6,670,878 and 6,652,878 shares in 2006 and 2005, respectively
    
    
    68
    
    
    
    66Common stock issuable, 70,257 shares in 2006 and 2005
    
    
    57,596
    
    
    
    57,596Additional paid-in capital
    
    
    8,350,107
    
    
    
    8,328,004Accumulated deficit
    
    
    (10,085,138
    )
    
    
    (9,605,835
    )Total stockholders deficit
    
    
    (1,677,367
    )
    
    
    (1,220,169
    )TOTAL
    
    $
    901,001
    
    
    $
    1,229,334
  F-2




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2006
    
    
    2005REVENUESAccess service revenues
    
    $
    741,017
    
    
    $
    874,560Co-location and other revenues
    
    
    1,028,054
    
    
    
    1,504,245Total revenues
    
    
    1,769,071
    
    
    
    2,378,805OPERATING COSTS AND EXPENSESCost of access service revenues
    
    
    244,093
    
    
    
    276,427Cost of co-location and other revenues
    
    
    238,776
    
    
    
    192,253Selling, general and administrative expenses
    
    
    1,369,228
    
    
    
    1,320,215Depreciation and amortization
    
    
    309,893
    
    
    
    431,315Total operating costs and expenses
    
    
    2,161,990
    
    
    
    2,220,210INCOME (LOSS) FROM OPERATIONS
    
    
    (392,919
    )
    
    
    158,595GAIN ON DEBT FORGIVENESS
    
    
    19,925
    
    
    
    16,634GAIN ON BAD DEBT RECOVERY, net
    
    
    
    
    
    
    17,500INTEREST EXPENSE
    
    
    (106,309
    )
    
    
    (118,401
    )INCOME (LOSS) before income taxes
    
    
    (479,303
    )
    
    
    74,328Income tax expense (benefit)
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    (479,303
    )
    
    $
    74,328Net income (loss) per common shareBasic
    
    $
    (.07
    )
    
    $
    .01Assuming dilution
    
    $
    (.07
    )
    
    $
    .01Weighted average number of common shares outstandingBasic
    
    
    6,740,985
    
    
    
    6,723,135Assuming dilution
    
    
    6,740,985
    
    
    
    8,284,956
  F-3




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
   CommonCommon stock
    
    
    stock
    
    
    Additional
    
    
    AccumulatedShares
    
    
    Amount
    
    
    issuable
    
    
    paid-in capital
    
    
    deficit
    
    
    TotalBalance at January 1, 2005
    
    
    6,652,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,328,004
    
    
    $
    (9,680,163
    )
    
    $
    (1,294,497
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,328
    
    
    
    74,328Balance at December 31, 2005
    
    
    6,652,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,328,004
    
    
    $
    (9,605,835
    )
    
    $
    (1,220,169
    )Warrant exercise
    
    
    18,000
    
    
    
    2
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    180Warrant extension granted in
settlement of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,900
    
    
    
    
    
    
    
    21,900Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (479,303
    )
    
    
    (479,303
    )Balance at December 31, 2006
    
    
    6,670,878
    
    
    $
    68
    
    
    $
    57,596
    
    
    $
    8,350,107
    
    
    $
    (10,085,138
    )
    
    $
    (1,677,367
    )
  F-4




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    (479,303
    )
    
    $
    74,328Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    309,893
    
    
    
    431,315Gain on bad debt recovery
    
    
    
    
    
    
    (17,500
    )Gain on debt forgiveness
    
    
    (19,925
    )
    
    
    (16,634
    )Stock compensation
    
    
    25
    
    
    
    Provision for uncollectible accounts receivable
    
    
    19,628
    
    
    
    23,695Net (increase) decrease inAccounts receivable
    
    
    78,581
    
    
    
    (69,599
    )Prepaid expenses and other current assets
    
    
    13,179
    
    
    
    (26,822
    )Net increase (decrease) inAccounts payable  trade
    
    
    44,876
    
    
    
    6,175Accounts payable  related party
    
    
    73,060
    
    
    
    73,061Accrued and other liabilities
    
    
    125,884
    
    
    
    17,209Accrued interest  related party
    
    
    32,000
    
    
    
    32,000Deferred revenue
    
    
    (12,347
    )
    
    
    (66,410
    )Net cash provided by operating activities
    
    
    185,551
    
    
    
    460,818CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (76,412
    )
    
    
    (185,387
    )Acquisition of assets
    
    
    (15,503
    )
    
    
    (72,918
    )Net cash used in investing activities
    
    
    (91,915
    )
    
    
    (258,305
    )CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on borrowings under notes payable
    
    
    (92,783
    )
    
    
    (151,890
    )Principal payments on note payable to related party
    
    
    
    
    
    
    (16,289
    )Principal payments on capital lease obligations
    
    
    
    
    
    
    (31,586
    )Proceeds from exercise of warrants
    
    
    180
    
    
    
    Net cash used in financing activities
    
    
    (92,603
    )
    
    
    (199,765
    )NET INCREASE IN CASH
    
    
    1,033
    
    
    
    2,748Cash at beginning of year
    
    
    14,974
    
    
    
    12,226Cash at end of year
    
    $
    16,007
    
    
    $
    14,974SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    19,375
    
    
    $
    36,267Warrant extension granted in settlement of liabilities
    
    
    21,900
    
    
    
    
  F-5




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
     
    
    Dial-up and direct high-speed connectivity to the Internet through the FullNet brand name;
    
    Backbone services to private label Internet services providers (ISPs) and businesses;
    
    Carrier-neutral telecommunications premise co-location;
    
    Web page hosting;
    
    Equipment co-location; and
    
    Traditional telephone services.
     F-6




---



##### Table of Contents



Consolidation
  Revenue Recognition
 Revenue Recognition
  F-7




---



##### Table of Contents



Accounts Receivable
  2006
    
    
    2005Accounts receivable
    
    $
    212,061
    
    
    $
    231,785Less allowance for doubtful accounts
    
    
    (187,654
    )
    
    
    (109,169
    )$
    24,407
    
    
    $
    122,616
  1  29 days
    
    
    1.5
    %30  59 days
    
    
    30
    %60  89 days
    
    
    50
    %> 90 days
    
    
    100
    %
 Property and Equipment
  Software
    
    3 yearsComputers and equipment
    
    5 yearsFurniture and fixtures
    
    7 yearsLeasehold improvements
    
    Shorter of estimated life of improvement or the lease term
 Intangible Assets
 Goodwill and Intangible Assets
 Long-Lived Assets
 Accounting for the Impairment or Disposal of
Long-lived Assets
 F-8




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##### Table of Contents



Accrued and Other Current Liabilities
  2006
    
    
    2005Accrued interest
    
    $
    294,995
    
    
    $
    237,165Accrued deferred compensation
    
    
    435,669
    
    
    
    353,917Accrued other liabilities
    
    
    118,119
    
    
    
    118,917$
    848,783
    
    
    $
    709,999
  Accrued in:2006
    
    $
    81,7522005
    
    
    48,8312004
    
    
    43,5712000-2003
    
    
    261,515$
    435,669
   Income Taxes
  Income (loss) per share
  2006
    
    
    2005Numerator:Net income (loss)
    
    $
    (479,303
    )
    
    $
    74,328Denominator:Weighted average shares outstanding  basic
    
    
    6,740,985
    
    
    
    6,723,135Effect of dilutive stock options
    
    
    
    
    
    
    733,579Effect of dilutive warrants
    
    
    
    
    
    
    828,242Weighted average shares outstanding  assuming dilution
    
    
    6,740,985
    
    
    
    8,284,956Net income (loss) per share  basic
    
    $
    (.07
    )
    
    $
    .01Net income (loss) per share  assuming dilution
    
    $
    (.07
    )
    
    $
    .01
   F-9




---



##### Table of Contents



Stock Options and Warrants
 Share-Based Payment Accounting for Stock-Based Compensation Accounting Principles Board Accounting for Stock Issued to Employees
  2005Net incomeAs reported
    
    $
    74,328Pro forma
    
    $
    53,281Basic income per shareAs reported
    
    $
    .01Pro forma
    
    $
    .01Diluted income per shareAs reported
    
    $
    .01Pro forma
    
    $
    .01
   2005Risk free interest rate
    
    
    4.4
    %Expected lives (in years)
    
    
    5Expected volatility
    
    
    118
    %Dividend yield
    
    
    0
    %
 F-10




---



##### Table of Contents



Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average2006
    
    
    Exercise Price
    
    
    2005
    
    
    Exercise PriceOptions outstanding, beginning of year
    
    
    3,083,034
    
    
    $
    .45
    
    
    
    3,014,700
    
    
    $
    .45Options granted during the year
    
    
    39,000
    
    
    
    .09
    
    
    
    111,000
    
    
    
    .08Options exercised during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled during the year
    
    
    
    
    
    
    
    
    
    
    (42,666
    )
    
    
    .07Options outstanding, end of year
    
    
    3,122,034
    
    
    $
    .42
    
    
    
    3,083,034
    
    
    $
    .43Options exercisable at end of year
    
    
    3,083,034
    
    
    $
    .43
    
    
    
    3,083,034
    
    
    $
    .43Weighted average fair value of options
granted during the year
    
    
    
    
    
    $
    .07
    
    
    
    
    
    
    $
    .07
  Options outstanding
    
    Options exercisableWeighted-average
    
    Weighted-
    
    
    
    
    
    Weighted-Range of
    
    Number
    
    remaining
    
    average exercise
    
    Number
    
    average exerciseexercise prices
    
    outstanding
    
    contractual life
    
    price
    
    exercisable at
    
    price$0.01-$0.70
    
    
    2,326,611
    
    
    6.40 years
    
    $
    0.12
    
    
    
    2,287,911
    
    
    $
    0.12$1.00-$1.50
    
    
    671,290
    
    
    3.85 years
    
    $
    1.07
    
    
    
    671,290
    
    
    $
    1.07$1.81-$3.00
    
    
    124,133
    
    
    3.32 years
    
    $
    2.62
    
    
    
    124,133
    
    
    $
    2.623,122,034
    
    
    5.73 years
    
    $
    0.42
    
    
    
    3,083,334
    
    
    $
    0.43
 Common Stock Warrants and Certain Stock Options
      Number
    
    Exercise
    
    Expirationof shares
    
    price
    
    year6,000
    
    
    .12
    
    
    
    200720,000
    
    
    .05
    
    
    
    200750,000
    
    
    .01
    
    
    
    2008275,000
    
    
    1.00
    
    
    
    200970,000
    
    
    .13
    
    
    
    2009220,000
    
    
    .01
    
    
    
    200914,000
    
    
    .10
    
    
    
    201212,000
    
    
    .08
    
    
    
    2012667,000
 F-11




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##### Table of Contents



Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average2006
    
    
    Exercise Price
    
    
    2005
    
    
    Exercise PriceWarrants and certain stock options outstanding, beginning
of year
    
    
    1,479,306
    
    
    $
    .82
    
    
    
    2,119,306
    
    
    $
    .62Warrants and certain stock options issued during the year
    
    
    
    
    
    
    .09
    
    
    
    
    
    
    
    Warrants and certain stock options exercised during the
year
    
    
    (18,000
    )
    
    
    .01
    
    
    
    
    
    
    
    Warrants and certain stock options expired during the year
    
    
    (794,306
    )
    
    
    1.16
    
    
    
    (640,000
    )
    
    
    .16Warrants and certain stock options outstanding, end of
year
    
    
    667,000
    
    
    $
    .44
    
    
    
    1,479,306
    
    
    $
    .82
 Advertising
  Use of Estimates
  Recently Issued Accounting Standards
 Accounting for Certain Hybrid Financial
Instruments
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes.
 Fair Value Measurement
 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans
 F-12




---



##### Table of Contents



The Fair Value Option for Financial Assets and
Financial Liabilities
 F-13




---



##### Table of Contents



Reclassifications
    2006
    
    
    2005Computers and equipment
    
    $
    1,340,246
    
    
    $
    1,296,856Leasehold improvements
    
    
    962,861
    
    
    
    940,032Software
    
    
    57,337
    
    
    
    56,512Furniture and fixtures
    
    
    28,521
    
    
    
    19,1532,388,965
    
    
    
    2,312,553Less accumulated depreciation
    
    
    (1,689,837
    )
    
    
    (1,423,596
    )$
    699,128
    
    
    $
    888,957
    December 31,2006
    
    
    2005InterCorp acquisition
    
    $
    4,119
    
    
    $
    Talihina acquisition
    
    
    20,107
    
    
    
    12,813CWIS acquisition
    
    
    105,638
    
    
    
    101,548LAWTONNET acquisition
    
    
    65,000
    
    
    
    65,000SONET acquisition
    
    
    42,547
    
    
    
    42,547IPDatacom acquisition
    
    
    137,849
    
    
    
    137,849FOT acquisition
    
    
    93,649
    
    
    
    93,649FOB acquisition
    
    
    194,780
    
    
    
    194,780FON acquisition
    
    
    139,650
    
    
    
    139,650Harvest merger
    
    
    2,009,858
    
    
    
    2,009,858Animus acquisition
    
    
    318,597
    
    
    
    318,597Tulsa acquisition
    
    
    70,000
    
    
    
    70,0003,201,794
    
    
    
    3,186,291Less accumulated amortization
    
    
    (3,154,069
    )
    
    
    (3,110,417
    )$
    47,725
    
    
    $
    75,874
  F-14




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##### Table of Contents



December 31,
    
    
    December 31,2006
    
    
    2005Notes payable to a bank, payable
in monthly installments of $8,768,
including interest of 9.5%, maturing
September 2008; collateralized by
property and equipment, accounts
receivable and Company common stock
owned by the founder and CEO of the
Company; guaranteed by the founder and
CEO of the Company; partially
guaranteed by the Small Business
Administration
    
    $
    77,297
    
    
    $
    170,080Interim loan from a related party,
interest at 10%, requires payments
equal to 50% of the net proceeds
received by the Company from its
private placement of convertible
promissory notes, matured December
2001; unsecured (1)
    
    
    320,000
    
    
    
    320,000Convertible promissory notes; interest
at 12.5% of face amount, payable
quarterly; these notes are unsecured
and are matured at December 31, 2005
(convertible into approximately
1,003,659 shares at December 31, 2006
and December 31, 2005) (2)
    
    
    510,636
    
    
    
    510,636Other notes payable
    
    
    5,000
    
    
    
    5,000912,933
    
    
    
    1,005,716Less current portion
    
    
    912,933
    
    
    
    914,804$
    
    
    
    $
    90,912
 F-15




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##### Table of Contents



Year ending December 312007
    
    $
    912,9332008 and thereafter
    
    
    $
    912,933
 F-16




---



##### Table of Contents



Year ending December 312007
    
    $
    183,3302008
    
    
    189,8532009
    
    
    196,3762010
    
    
    $
    569,559
     2006
    
    
    2005Income taxes at federal statutory rate
    
    $
    (163,000
    )
    
    $
    25,000State income taxes
    
    
    (22,000
    )
    
    
    3,000Change in valuation allowance
    
    
    202,000
    
    
    
    (30,000
    )Nondeductible expenses
    
    
    2,000
    
    
    
    2,000Other
    
    
    (19,000
    )
    
    
    Total tax expense
    
    $
    
    
    
    $
    
  2006
    
    
    2005Deferred income tax assetsBasis difference in property and equipment and intangible assets
    
    $
    302,000
    
    
    $
    301,000Deferred revenue
    
    
    42,000
    
    
    
    46,000Net operating loss
    
    
    1,037,000
    
    
    
    894,000Deferred compensation and other
    
    
    375,000
    
    
    
    313,000Valuation allowance
    
    
    (1,756,000
    )
    
    
    (1,554,000
    )Net deferred income tax asset
    
    
    
    
    
    
    Change in valuation allowance
    
    $
    202,000
    
    
    $
    (30,000
    )
  F-17




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##### Table of Contents



Common Stock
        Carrying Value
    
    
    Settlement Amount
    
    
    GainAccounts payable
    
    $
    21,380
    
    
    $
    1,455
    
    
    $
    19,925
 F-18




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##### Table of Contents



Carrying Value
    
    
    Settlement Amount
    
    
    GainAccounts payable
    
    $
    27,634
    
    
    $
    11,000
    
    
    $
    16,634
      F-19