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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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(Mark One)



|x | ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended December 31, 2005; OR
|- | ------------------------------------------------------------------------------------------------------------------------------



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
 TO
|- | ---------------------------------------------------------------------------------------------------------------------

AXESSTEL, INC.

(name of small business issuer as specified in its charter)



|                       |  |                        |  |                                   
|---------------------- |  | ---------------------- |  | ----------------------------------
|Nevada                 |  | 001-32160              |  | 91-1982205                        
|State of Incorporation |  | Commission File Number |  | IRS Employer Identification Number



|                                                     |  |  |  |           
|---------------------------------------------------- |  |  |  | ----------
|6815 Flanders Drive, Suite 210,San Diego, California |  |  |  | 92121     
|(address of principal executive offices)             |  |  |  | (Zip Code)

(Issuers telephone number, including area code): (858) 625-2100

Securities Registered under Section 12(b) of the Act:





|                           |  |                                                                 
|-------------------------- |  | ----------------------------------------------------------------
|Title of classCommon Stock |  | Name of each exchange on which registeredAmerican Stock Exchange
|                           |  |                                                                 

Securities Registered under Section 12(g) of the Act:

None



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(Title of class)

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(Title of class)



Check whether the issuer is
not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ̈

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

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

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

State issuers revenues for its most recent fiscal year: $94,665,711.

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) As of March 21, 2006, approximately $38.0 million.

As of March 21, 2006, there were 22,593,589 shares of our common stock issued and outstanding.

Transitional Small Business Disclosure format (check one):

 ̈Yes x No



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##### Table of Contents

TABLE OF CONTENTS



|         |  |                                                                                                                  |  |    
|-------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ---
|         |  |                                                                                                                 
|Part I   |  |                                                                                                                  |  | 1  
|         |  |                                                                                                                 
|Item 1.  |  | Description of Business                                                                                          |  | 1  
|         |  |                                                                                                                 
|Item 2.  |  | Description of Property                                                                                          |  | 25 
|         |  |                                                                                                                 
|Item 3.  |  | Legal Proceedings                                                                                                |  | 25 
|         |  |                                                                                                                 
|Item 4.  |  | Submission of Matters to a Vote of Stockholders                                                                  |  | 25 
|         |  |                                                                                                                 
|Part II  |  |                                                                                                                  |  | 26 
|         |  |                                                                                                                 
|Item 5.  |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuers Purchases of Equity Securities |  | 26 
|         |  |                                                                                                                 
|Item 6.  |  | Managements Discussion and Analysis                                                                             |  | 27 
|         |  |                                                                                                                 
|Item 7.  |  | Financial Statements and Supplementary Data                                                                      |  | F-1
|         |  |                                                                                                                 
|Item 8A. |  | Controls and Procedures                                                                                          |  | 39 
|         |  |                                                                                                                 
|Item 8B. |  | Other Information                                                                                                |  | 39 
|         |  |                                                                                                                 
|Part III |  |                                                                                                                  |  | 40 
|         |  |                                                                                                                 
|Item 9.  |  | Directors and Executive Officers of Axesstel                                                                     |  | 40 
|         |  |                                                                                                                 
|Item 10. |  | Executive Compensation                                                                                           |  | 45 
|         |  |                                                                                                                 
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                   |  | 52 
|         |  |                                                                                                                 
|Item 12. |  | Certain Relationships and Related Transactions                                                                   |  | 54 
|         |  |                                                                                                                 
|Item 13. |  | Exhibits                                                                                                         |  | 55 
|         |  |                                                                                                                 
|Item 14. |  | Principal Accountant Fees and Services                                                                           |  | 59 

Except where the context otherwise requires, all references in this Annual Report on Form 10-KSB to (a) the
Registrant, the Company, Axesstel, we or our refer to Axesstel, Inc., a Nevada corporation, and (b) the Web refer to the World Wide Web.



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##### Table of Contents

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Special Note Regarding Forward-Looking Statements

This report, including the sections entitled Description of Business and Managements Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements. These statements relate to future events, our future financial performance, growth of our target market and growth of the worldwide telecommunications markets, future
demand for our products, the acceptance and growth of CDMA-based wireless systems and similar expectations. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity,
performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. You can identify forward-looking statements by terminology such as
may, will, should, expects, intends, plans, anticipates, believes, estimates, predicts, potential,
continues or the negative of these terms or other comparable terminology. These risks and other factors include those listed under Risk Factors Relating to Our Business and elsewhere in this report. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on any forward-looking statements as they reflect
our managements view only as of the date of this report. We will not update any forward-looking statements to reflect events or circumstances that occur after the date on which such statement is made.

Overview

We design, develop, market and manufacture fixed wireless
voice and broadband data products for the worldwide telecommunications market. Our product portfolio includes fixed wireless desktop phones, public call office phones, voice/data terminals and broadband modems for access to voice calling and
high-speed data services. Our products have similar functionality to phones and modems that use the traditional landline telecommunications network; however, they are wireless desktop devices and can be substituted for wired phones and modems. All
products that we have sold to date have been based on CDMA (3G Code Division Multiple Access) technology developed by Qualcomm Incorporated. In 2005, we started development of new products based on GSM (Global System for Mobile Communications) and
GPRS (General Packet Radio Service) technologies and expect these products to generate revenues in 2006.

We currently sell our products to
telecommunications operators in developing countries where large segments of the population do not have telephone service and demand for telephone services has grown substantially in recent years. At present, our principal customers are Tata
Teleservices Limited in India, TeleCard Limited in Pakistan, Telefonica Moviles, S.A. in Latin America, and Telecommunications Movilnet C.A., in Latin America. We believe there are over 70 CDMA-based telecommunications service providers worldwide
that have deployed or plan to deploy fixed wireless solutions.

Industry Overview

The worldwide telecommunications market is estimated to be $1.1 trillion in 2005. Despite the size of this market, telephone penetration is less than 5% of the worldwide population outside of Europe and North America.
Three and one-half billion people reside in developing countries throughout the world. The governments of these countries recognize that their populations need access to reliable basic voice services in order to improve socioeconomic conditions.
Furthermore, organizations such as the World Bank have sponsored initiatives to accelerate the implementation of telephone service within developing areas. As a result, we expect the demand for voice and data services to increase.



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Telecommunications Services in Developing Areas

Developing countries within Asia, Africa, Eastern Europe and Latin America, such as India, Indonesia, Philippines, China, Brazil, Pakistan and Russia are among the
worlds fastest growing emerging telecommunications markets. Within these areas, landline telecommunications networks typically are limited to densely populated urban areas because the cost of deploying landline telecommunications networks in
developing areas has proven economically unfeasible. As a result, people living outside of urban areas or in unwired regions within urban areas generally do not have access to telephone service. Moreover, until recently, deployment of wireless
telecommunications networks in these regions has proven to be expensive and therefore limited to the wealthiest portions of the population.

Recent changes
in the worldwide telecommunications industry, and specifically in the wireless sector of the industry, have substantially increased the economic feasibility of deploying wireless telecommunications services to developing areas.

These changes include:



| |  |  | industry deregulation and privatization, which have resulted in higher telecommunications services penetration, increased service revenues, greater operating efficiencies and
improved quality of service;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advances in wireless technology and manufacturing, which have reduced infrastructure costs for network operators and equipment costs for consumers and increased the subscriber
capacity on wireless networks;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | emergence of creative subscriber plans, such as pre-paid phone plans, which have driven rapid subscriber growth; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | reduced government tariffs and increased government subsidies, which have encouraged the growth of telecommunications networks.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

As a result of these factors, the geographic reach of wireless networks has expanded.

Emergence of Fixed Wireless Voice and Data Products

Fixed
wireless products are stationary telephones, data terminals and broadband modems that connect to wireless networks. Although fixed wireless voice and data products are not a substitute in all cases for landline connections or mobile handsets, fixed
wireless products offer advantages that make such products well-suited for use in developing areas.

Fixed Wireless as Compared to
Landline

In many areas, landline telecommunications service is not available due to lack of infrastructure. In these regions, fixed wireless may be the
only option available to the end user. Fixed wireless systems can be deployed more quickly than landline systems because there are no trenches to dig, poles to install or copper wires to lay; therefore, service providers can more rapidly rollout
wireless service and begin earning revenue. We believe that even where landline service exists; fixed wireless systems offer the following key advantages over landline systems:



| |  |  | Network Deployment. Landline deployment is cumbersome and costly due to the significant amount of construction and installation required. By comparison, fixed wireless
deployment is more rapid and less expensive as there is significantly less construction and no installation by the end user is required.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Scalability. Adding a subscriber to a landline network requires that the network be expanded to accommodate the additional subscriber and in many cases
requires professional installation. By
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | comparison, adding an additional subscriber to a fixed wireless network requires only that a nearby base station can accommodate the additional subscriber
and that the subscriber has a fixed wireless phone terminal.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Value-Added Services. Telecommunications service providers are limited in their ability to offer value-added services using their existing landline infrastructure. By
comparison, fixed wireless networks enable these providers to further monetize their network by offering value-added services such as text-messaging and downloadable ring tones.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fixed Wireless as Compared to Mobile Handsets

As
wireless networks expand into developing areas, consumers can connect to these networks by using mobile handsets or fixed wireless products. However, we believe fixed wireless products offer the following key advantages over mobile handsets:



| |  |  | Tariffs. Governments in developing areas are encouraging the adoption of fixed wireless systems through initiatives such as reduced tariffs and spectrum licensing costs.
In addition, some governments have allocated or re-licensed mobile wireless spectrum specifically for fixed wireless applications. We believe that tariffs on fixed wireless spectrum will remain lower than that of mobile wireless spectrum, benefiting
both the service provider and the end user.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reception. Fixed wireless products normally receive substantially better reception than mobile handsets because they have more sensitive antennas and have the ability to
be connected to external antennas to increase reception in remote areas.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Scalability. Due to the fixed location of the terminals, fixed wireless networks enable more efficient network utilization than mobile networks due to the strategic
placement of wireless base stations.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Power Supply. Fixed wireless products generally are plugged into electrical outlets; therefore, they do not require frequent charging like a mobile handset.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Multiple Users. Unlike a mobile handset which is generally limited to use by one individual, a fixed wireless telephone allows multiple users, such as the members of a
family or a group of employees in a business, to share a single telephone.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We believe that the following table compares the characteristics of fixed wireless, mobile and landline
telecommunications services from the perspective of end users and telecommunications service providers.



|                                      |  |                                                            |  |                                                                      |  |                                                                                     
|------------------------------------- |  | ---------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------
|End Users:                            |  | Fixed Wireless                                             |  | Mobile Wireless                                                      |  | Landline                                                                            
|                                      |  |                                                            | 
|Tariffs                               |  | Less expensive than mobile wireless                        |  | Most expensive                                                       |  | Less expensive than mobile wireless and generally less expensive than fixed wireless
|                                      |  |                                                            | 
|Subscription Costs                    |  | Less expensive than mobile wireless                        |  | Most expensive                                                       |  | Least expensive                                                                     
|                                      |  |                                                            | 
|Reception                             |  | Better reception than mobile wireless                      |  | Reception is inconsistent                                            |  | Best reception                                                                      
|                                      |  |                                                            | 
|Data Connectivity                     |  | No external modem needed                                   |  | Limited data connection capabilities                                 |  | Requires external modem                                                             
|                                      |  |                                                            | 
|Mobility                              |  | Limited                                                    |  | Unlimited                                                            |  | Limited                                                                             
|                                      |  |                                                            | 
|Power Supply                          |  | Not dependent on a battery                                 |  | Batteries required                                                   |  | Not dependent on a battery                                                          
|                                     
|Telecommunications Service Providers:
|                                      |  |                                                            | 
|Network Deployment and Scalability    |  | Rapid and less expensive than landline and mobile wireless |  | Rapid and less expensive than landline; requires contiguous coverage |  | Cumbersome and costly                                                               
|                                      |  |                                                            | 
|Network Capacity                      |  | Requires fewer base stations than mobile wireless          |  | Requires more base stations than fixed wireless                      |  | Requires additional construction                                                    
|                                      |  |                                                            | 
|Maintenance /Operation                |  | Only required for base stations                            |  | Only required for base stations                                      |  | Required for entire infrastructure                                                  
|                                      |  |                                                            | 
|Value Added Services                  |  | Requires software upgrade                                  |  | Requires software upgrade                                            |  | Requires infrastructure upgrade                                                     

CDMA and other Wireless Transmission Standards

Qualcomms CDMA technology has emerged as a leading standard for wireless networks. CDMA works by converting speech into digital information, which is transmitted in
the form of a radio signal over the network. Unlike competing technologies, such as GSM, CDMA is a spread spectrum technology, which allows many users to occupy the same time and frequency allocations in a given band by assigning unique
codes to each communication to differentiate it from others in the same spectrum. Given the finite wireless spectrum resources available, CDMA allows more efficient sharing of the airwaves among multiple users than alternative technologies.

Newer versions of CDMA technologies, popularly known as 3G, include CDMA2000 1xEV-DO (Evolution Data Optimized). This technology improves the ability to
deliver high-speed data access to wireless devices and has been designed to provide wireless access speeds comparable to digital subscriber line, or DSL, and cable modems. Subscribers can attain wireless access to data at maximum speeds of up to 2.4
Mbps on CDMA2000 1xEV-DO networks. Telecommunications service providers first began rolling out the CDMA2000 1xEV-DO standard on their networks in the last few years, and as of the date of this report, less than half of telecommunications service
providers using CDMA technologies have commenced implementation of the CDMA2000 1xEV-DO standard.



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Data Applications for Fixed Wireless

Telecommunications service providers continually are seeking high-margin, high-growth opportunities to complement their voice-based product offerings. Providing high-speed data access to existing voice customers
enables telecommunications service providers to increase their revenue by leveraging their current infrastructure and customer base. Historically, high-speed data access was limited to businesses that could afford to purchase expensive hardware and
pay the usage charges. As network costs have declined and technology and manufacturing advancements have developed, high-speed data access has increasingly become available for residential customers. In order to implement objectives to rollout
high-speed data access, telecommunications service providers are seeking cost-effective technologies to allow users without existing landlines, DSL or cable connections to receive high-speed data transmissions.

In areas that are inaccessible to DSL and cable, CDMA2000 1xEV-DO is an attractive option for telecommunications service providers to deploy. Even in markets where DSL
and cable modems are offered, CDMA2000 1xEV-DO is a cost-effective means to rollout high-speed data services to users. Utilizing the latest CDMA transmission standards, these areas can quickly be provided high-speed internet access and other data
applications.

Our Solution

We are a provider of
CDMA-based desktop phones, public call office phones, voice/data terminals and broadband modems. We are in the process of developing GSM based products and plan a roll-out in 2006. Our products are designed to enable telecommunication service
providers to provide carrier- class, subscriber-based voice and high-speed data solutions to developing countries where large segments of the populations do not have basic telephone service. We believe that our solution provides the following
benefits to our customers:



| |  |  | High-quality products at affordable prices. We offer telecommunications service providers high-quality, reliable products at competitive prices. Our products are
designed and engineered around a single platform that uses a common set of components to help maintain low cost.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reliable delivery of products with short lead-times.We have designed our products and structured our third-party manufacturing relationship to enable us to fulfill
high-volume orders with short lead times. Our third party manufacturer has implemented comprehensive quality assurance procedures that are designed to ensure that our products are manufactured and shipped with minimal defects.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ease of deployment, installation and use. Our products are frequently tested for interoperability with the systems of most major CDMA-based wireless infrastructure
providers, such as Ericsson, Lucent, Motorola and Nortel. In addition, we have tested our products with telecommunications service providers in over 30 markets worldwide. For telecommunications service providers with existing networks in place,
our products do not require any installation or rollout of additional networking infrastructure, unlike competing fixed wireless solutions that rely upon proprietary systems. We have designed our products with simple setup procedures and easy to
understand user interfaces, which minimize customer support requirements of service providers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Full range of voice and data products and features.Our products provide a full range of voice and data functionality, from wireless desktop phone and data terminals to
our most sophisticated high-speed data modem. Our engineering expertise and product design enables us to modify our products to meet specific customer requirements. Furthermore, we can easily add enhanced features to our products, which enable
service providers to drive subscription revenue.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Products

We offer CDMA-based desktop phones, public call office phones, voice/data terminals and broadband modems used for voice calling and high-speed data services in homes, retail locations, businesses, and public
transportation and emergency response environments. Key features of our products include standard phone



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quality capability, high-quality liquid crystal displays, 3-way calling, call waiting, hands-free dialing, fax capabilities and 2-way text-messaging, or SMS.
We expect to roll-out products based on GSM and next generation EV-DO Rev A technology in 2006.

Fixed Wireless Desktop Phones

Our fixed wireless desktop phones are designed for voice and data usage in homes, businesses and retail locations. Our phones are offered in standard,
enhanced, public call office, and durable low cost models. Currently, we offer phones that operate in each of three frequency bands: 450 MHz, 800 MHz, and 1900 MHz. Our GSM phone will be offered in two dual band frequencies: 850/1900 MHz and
900/1800 MHz. The following table lists some of the features included in our standard and enhanced models.



|                                        |  |             |  |                |   | 
|--------------------------------------- |  | ----------- |  | -------------- | - | 
|Feature                                 |  | Basic Model |  | Enhanced Model
|Signal Strength and Voicemail Indicator |  | ü           |  |                | ü | 
|3-Line LCD                              |  | ü           |  |                | ü | 
|Call Waiting                            |  | ü           |  |                | ü | 
|Call Forwarding                         |  | ü           |  |                | ü | 
|Call Transfer                           |  | ü           |  |                | ü | 
|3-Way Calling                           |  | ü           |  |                | ü | 
|Caller ID                               |  | ü           |  |                | ü | 
|SMS                                     |  | ü           |  |                | ü | 
|Packet Data (up to 153.6 Kbps)          |  |             |  |                | ü | 
|Backlit Keys and Display                |  |             |  |                | ü | 
|RS-232C and USB Data Ports              |  |             |  |                | ü | 
|Speakerphone                            |  |             |  |                | ü | 
|Circuit Data (up to 14.4 Kbps)          |  |             |  |                | ü | 
|Personal Computer Fax                   |  |             |  |                | ü | 

Fixed Wireless Public Call Office Phones

We have two fixed wireless public call office (PCO) phones that enable telecommunications service providers to offer telephone service for public locations that are not
serviced by landline networks. Our attended PCO phone couples proprietary metering technology with our fixed wireless desktop phones, which displays in real-time the calling units used by the caller. Our unattended PCO phone converts a landline
coin- or card-operated payphone into a wireless payphone by embedding our fixed wireless phone into the payphone itself.

Fixed Wireless
Voice/Data Terminals

Our fixed wireless terminal offers an affordable voice and high-speed data alternative to dial-up modems for areas not covered by
a landline network. Users can plug their computers into the terminal for Internet access at data rates up to 153.6 Kbps. In addition, users can plug any telephone into the terminal for voice service and any analog facsimile machine into the terminal
for receiving and sending facsimiles.

Fixed Wireless Broadband Modems

We have three fixed wireless broadband modem models. Our first generation fixed wireless broadband modem offers EV-DO data only. The MV200 Series is our second generation fixed wireless broadband modem that includes
EV-DO data, CDMA 1X voice, and fax capability. Our third generation broadband modem, the MV300 Series, provides EV-DO data, WiFi, CDMA 1X voice, fax and a four port Ethernet router for a complete desktop networking solution. Our first and second
generation broadband modems are based on Qualcomms MSM 6500 chipset and the CDMA2000 1xEV-DO standard. The modems can support data rates up to 2.4 Mbps. They have been designed as a plug-and-play solution, with a convenient network connection
and USB connection module embedded in the modem, which enables many users in developing countries that have multi-user, networked



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environments to connect to the Internet. A convenient network connection is desirable as it does not require the installation of any drivers and can support
routed networks with ease. The modem can support single-user connections as well as local area networks providing high-speed Internet access to both small businesses and residential users. The MV300 Series third generation broadband modems will
leverage Qualcomms MSM 6500 and MSM 6800 next generation chipsets. The upgrade to the MSM6800 chipsets is expected to significantly increase data rates up to 3.1 Mbps.

Our Strategy

Our objective is to be the leading provider of fixed wireless voice and data products in our target
markets. Key elements of our strategy include:



| |  |  | Increasing market share with existing customers. We believe telecommunications service providers will increasingly adopt fixed wireless as a cost-effective,
easily-deployed voice and data solution in developing regions. We intend to continue to expand our relationships with our existing customers, by promoting the broad rollout of our existing products and our next generation products, including our
next generation fixed wireless broadband modem utilizing CDMA2000 1xEV-DO and the roll-out of our GSM products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Acquiring new customers. We intend to establish relationships with other telecommunications service providers throughout the world in order to expand our sales. We are
currently targeting international and domestic service providers throughout the world that we believe are potential customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to aggressively manage the costs of developing and manufacturing our products. We intend to achieve and maintain pricing advantages over our competitors. As
we increase our production volume, we intend to continue to reduce our costs through volume purchase discounts. In addition, our platform design allows us to engineer our products with manufacturing efficiencies, such as reduced component counts and
design for ease in assembly, which lead to cost reductions. We recently moved manufacturing locations from Taiwan to mainland China where labor costs are low, and a competitive supply chain is available. We believe these initiatives will provide us
with significant advantage over our competitors and create barriers to entry for new competitors.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to develop innovative products. We intend to continue to leverage our research and development expertise to develop customizable next generation product
solutions that will integrate advanced wireless technologies, voice-over-Internet protocol, or VoIP, and other carrier-grade standards. Recently, we launched our second fixed wireless broadband modem based on the CDMA2000 1xEV-DO standard. We
believe that the continued introduction of new products will enable us to increase penetration with existing customers, establish relationships with new customers and increase our profit margins.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establishing and expanding strategic relationships. We intend to augment our internal sales efforts by establishing strategic relationships and expanding our current
relationships with wireless infrastructure providers to incorporate our products into their bids for potential contracts to build new wireless systems that include our fixed wireless products. We believe our emphasis on product quality, technical
performance, customer responsiveness, on-time delivery and cost competitiveness will help us to maintain and develop new strategic relationships.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Penetrating developed markets through the rollout of data products. We intend to offer high-speed wireless data products in developed markets as a more cost-effective
alternative to wired broadband solutions, such as DSL and cable modems. We recently launched our second CDMA2000 1xEV-DO fixed wireless broadband modem. We are in discussions with telecommunications service providers in the United States who are
deploying mobile wireless data solutions or who we believe may begin to deploy fixed wireless data solutions in 2006 and 2007. In addition, current customers of CDMA-based voice products in developing markets are now sourcing our broadband data
modems.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Customers

We sell a
majority of our products to telecommunications service providers that provide wireless voice or data services in developing markets. With the introduction of our next generation broadband modems, we plan to diversify our customer base and expand our
addressable market to developed regions. Our principal customers currently are Tata Teleservices Limited in India, TeleCard Limited in Pakistan, Telefonica Moviles, S.A., the wireless affiliate of Telefonica, S.A. in Latin America and an affiliate
of a major telecommunications service provider in Venezuela. The following is a description of our principal customers:



| |  |  | TeleCard Limited. In November 2003, we entered into two supply agreements in the amounts of $6.8 million and $10.8 million with TeleCard, pursuant to which TeleCard may
order products from us. TeleCard is the leading private sector telecommunications service provider in Pakistan with coverage reaching 85 million people. We continue to receive subsequent purchase orders from TeleCard with deliveries continuing
into 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Telefonica Moviles, S.A. In March 2004, we executed a one-year supply agreement with BellSouth International, Inc., under which its affiliates in Argentina, Chile,
Colombia, Ecuador, Guatemala, Nicaragua, Panama, Peru, Uruguay and Venezuela could purchase a custom-configured version of our basic fixed wireless phone. In January 2005, BellSouth completed the sale of its ownership interests in ten wireless
telecommunications service providers in Latin American to Telefonica Moviles, S.A. In connection with these sales, our contract was assigned to Telefonica Moviles, S.A. Telefonica is the worlds leading communications service provider in
Spanish and Portuguese-speaking markets, with a potential market of more than 100 million customers. We continue to receive subsequent purchase orders from Telefonica subsidiaries with deliveries continuing into 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tata Teleservices Limited. We entered into a Product Purchase Agreement effective June 2004 with Tata Teleservices Limited and Tata Teleservices (Maharashtra) Limited,
pursuant to which we received a $45.2 million purchase order in July 2004 to supply custom-configured models of our fixed wireless phones. These shipments for Tata were completed in the fourth quarter of 2004. Pursuant to this agreement, we received
an additional purchase order for delivery through April 2005. Tata is the leading telecommunications service provider in India with over 2 million customers. We continue to receive subsequent purchase orders from Tata with deliveries continuing
into 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Venezuelan Affiliate.In August 2004, we received initial purchase orders from an affiliate of a major U.S. telecommunications service provider to purchase our fixed
wireless phone. In January 2005, we received additional purchase orders from this provider for our CDMA2000 1x EV-DO based products. This customer is the leading Venezuelan telecommunications service provider with approximately 2.9 million
access lines in service, 2.8 million cellular subscribers and 282,000 Internet subscribers. We continue to receive subsequent purchase orders from this Venezuelan affiliate with deliveries continuing into 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We believe that there are over 70 CDMA-based telecommunications service providers worldwide that have deployed or plan to deploy fixed wireless solutions. In general, we
sell our products on a negotiated fixed price-per-unit purchase order basis. To minimize our collection risk, we typically have our customers provide us a letter of credit confirmed by a major international bank or offer open terms secured by credit
insurance.

Sales and Marketing

We manage and conduct
the majority of our sales directly to telecommunications service providers worldwide. As of December 31, 2005, our sales and marketing team consisted of nine individuals who are located in our offices in San Diego, Miami, China and South Korea.
We supplement our presence in Africa, Asia, Eastern Europe, Latin America and the Middle East through the hiring of local sales representatives or agents.



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We have established and seek to establish strategic relationships with telecommunications infrastructure providers in
order to promote our products. Our products are regularly included in bids by such service providers, which provides greater exposure for our products and brand. We also intend to enter into cooperative marketing relationships to facilitate market
penetration.

Manufacturing

At present, we use
Winstron NeWeb Corporation (WNC) to manufacture the majority of our products. WNC provides us with services, including component procurement, product manufacturing, final assembly, testing, quality control, fulfillment and delivery services. WNC
generally holds all raw materials, work-in-process and finished good inventory for our products. We believe outsourcing through WNC provides us with flexibility and allows us to:



| |  |  | focus on research and development, design, sales and marketing;
| | - |  | ---------------------------------------------------------------



| |  |  | realize economies of scale;
| | - |  | ---------------------------



| |  |  | access high-quality manufacturing resources and personnel;
| | - |  | ----------------------------------------------------------



| |  |  | scale production rapidly; and
| | - |  | -----------------------------



| |  |  | reduce working capital investment
| | - |  | ---------------------------------



| |  |  | reduce capital equipment costs and equipment obsolescence risk.
| | - |  | ---------------------------------------------------------------

We
commenced large-scale product manufacturing with WNC at the beginning of 2004. Our manufacturing arrangement with WNC is designed to allow us to fulfill high-volume orders with short lead-times. We manage our relationship with WNC to focus on
improvements in design-for-manufacturing, test procedures, quality, cost optimization and production scheduling. In the third quarter of 2005, WNC transitioned our production lines from Taiwan to mainland China to take advantage of lower production
costs and better access to the China supply chain. WNC presently has three high speed production lines dedicated to high volume production, and the ability to add additional lines to match future capacity needs. We work with WNC in sourcing
components for our products in an effort to reduce costs, ensure the quality of the components we purchase and mitigate against the risk that components are not available at the time we need the components to fulfill our customer orders. We believe
WNC provides flexibility and scalability to our manufacturing operations.

In the third quarter of 2005, we opened our own production facility in Korea to
manufacture more complex products through this facility, such as our broadband modems; and to have a dedicated facility focused on the introduction of new products and the cost reduction of our existing products. We have two production lines in
Korea dedicated to these activities. However, our overall strategy remains to have WNC manufacture the majority of our product in their high volume production facility.

We may enter into manufacturing relationships with other manufacturing partners in low labor cost regions, such as China and India. We believe this would allow us to increase our manufacturing capacity and lower our
unit costs.

Research and Development

We focus on
developing innovative CDMA-based fixed wireless high-speed solutions to address opportunities presented by next generation wireless networks. As of December 31, 2005, we had 43 engineers, 33 of which are located in our South Korean research and
development center and 10 of which are based in our San Diego facility. Our engineers are categorized into the following groups: hardware, mechanical, software, platform, production and quality. For the year ended December 31, 2005, our
research and development expenses were $5.5 million. For the year ended December 31, 2004, our research and development expenses were $4.2 million.



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Intellectual Property

We protect our intellectual property through a combination of patents, trademarks, trade secrets, licenses, non-disclosure agreements and contractual provisions. Generally, we enter into non-disclosure and confidentiality agreements with
our employees, consultants and third parties that have access to our proprietary technology.

We have entered into a license agreement with Qualcomm under
which we were granted a worldwide, nonexclusive, royalty-bearing license to Qualcomms CDMA technology to make, sell and lease fixed wireless terminal CDMA-based products. The license agreement may be terminated by Qualcomm upon an uncured
material breach of the license agreement by us. We have also entered into various software agreements with Qualcomm to license its software to use with our products that incorporate Qualcomms CDMA technology. These agreements are effective as
long as the license agreement is effective. We intend to purchase additional software from Qualcomm that would be required for our newly proposed products.

We cannot be certain that any patent application we may file will result in the issuance of a patent. From time to time, we may encounter disputes over rights and obligations concerning intellectual property. While we believe that our
product and service offerings do not infringe the intellectual property rights of any third party, we cannot assure you that we will prevail in any intellectual property dispute.

Competition

The market for fixed wireless products is highly competitive and we expect competition to increase. We
primarily compete against established companies such as LG Electronics, Inc., Huawei Technologies Co., Ltd., ZTE Corporation, Westech Korea, Inc. and Telular Corporation. In addition, there is always potential for new competition to enter our target
markets.

We believe that we compete principally on the basis of functionality, reliability, quality, price and ease of deployment, installation and use.
We believe that we compete favorably with our competitors based on these factors. Some of our competitors offer bundled end-to-end packages, which may be more appealing to potential customers seeking to use a single supplier of phones and
infrastructure.

Many of our current and future competitors, and all of the competitors named above, may have significantly greater financial, technical
and marketing resources as well as greater purchasing power than we do. These greater resources may allow these competitors to obtain better manufacturing prices and efficiencies than we have. Although we believe we have both a technological
advantage and a superior business model over many of our existing competitors, maintaining this advantage will require substantial investments by us to continue to develop innovative products and reduce the costs of our products. However, we cannot
guarantee that we will be able to compete successfully against current and future competitors.

Employees

As of December 31, 2005, we had a total of 97 full-time employees. Of the 97 employees, 34 are located in the United States, 62 are located in South Korea, and one
is located in China. In the United States, 10 are involved in product development, four are involved in operations, eight are involved in sales and marketing, and 12 are involved in finance and administration, including our executive team. In South
Korea, 33 of our employees are involved in product design and development of software and hardware, 21 are involved in operations, seven are involved in administration, and one is involved in sales and marketing. In China, our one employee is
involved in sales and marketing. We intend to hire additional employees as needed at each of our facilities. We have never had a work stoppage, and none of our employees are represented by a labor organization or under any collective bargaining
arrangements. We believe our relationships with our employees are good.



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Governmental Regulation

Our products are incorporated into commercial wireless communications systems that are subject to regulation domestically by the Federal Communications Commission and internationally by other government agencies. Although the equipment
operators are usually responsible for compliance with these regulations, regulatory changes, including changes in the allocation of available frequency spectrum, could negatively affect our business by restricting development efforts by our
customers, making current products obsolete or increasing the opportunity for additional competition. In addition, the increasing demand for wireless telecommunications has exerted pressure on regulatory bodies worldwide to adopt new standards for
these products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused and may in the future cause the cancellation, postponement
or rescheduling of the installation of communications systems by our customers.

RISK FACTORS

Our ability to implement our business strategy and achieve the intended operating results is subject to a number of risk and uncertainties, including
the ones identified below, and additional risks not currently known to us or that we currently believe are immaterial.

We rely on a small number of
customers for substantially all of our revenues and the loss of one or more of these customers would seriously harm our business.

For
the year ended December 31, 2005, two of our 31 customers and their affiliates accounted for approximately 80% of our revenues, of which one customer comprised approximately 59% and the other customer comprised approximately 21%. For the year
ended December 31, 2004, two of our seven customers and their affiliates accounted for approximately 86% of our revenues, of which one customer comprised approximately 71% and the other customer comprised approximately 15%. We expect that our
dependence on a small number of customers will continue into the foreseeable future. At present, these customers generally purchase products from us on a purchase order basis. Orders covered by firm purchase orders are generally not cancelable;
however, customers may decide to delay or cancel orders. In the event that we experience any delays or cancellations, we would have difficulty enforcing the provisions of the purchase order and our revenues could decline substantially. Any such
decline could result in us incurring net losses, increasing our accumulated deficit and needing to raise additional capital to fund our operations.

If
we cannot sustain profitable operations, we may need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment.

We incurred significant operating losses after we changed our business model at the beginning of 2004. We incurred a net loss of $10.2M for the year ended
December 31, 2005, and a net loss of $8.3 million for the year ended December 31, 2004. At December 31, 2005, we had an accumulated deficit of $22.0 million. Achieving profitability will require us to increase our revenues, reduce our
manufacturing costs and manage our operating and administrative expenses. We cannot guarantee that we will be successful in achieving profitability and eliminating our accumulated deficit. If we are unable to generate sufficient revenues to pay our
expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations. These funds may not be available on favorable terms, or at all.
Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing
stockholders. If we are unsuccessful in achieving profitability and reducing our accumulated deficit, and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our
operations, which could result in the loss of all of your investment in our stock.



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We depend in substantial part on the adoption and acceptance of fixed wireless telecommunications in developing
countries and regions to create demand for our products.

Our target customers are large telecommunications service providers who are
developing wireless services in developing countries and regions where demand for basic telephone service has grown substantially in recent years and where the cost of building a wireless telecommunications infrastructure is preferable to a
traditional wire line infrastructure. We sell our products to these service providers, who in turn resell our products to their customers, the end users, to use over the services providers telecommunications networks. The economies in many of
these countries are fragile and are subject to significant change based on world events. This results in unpredictable demand for our products. If demand for wireless infrastructure in these countries does not continue to increase, if the service
providers elect to develop traditional landline infrastructure instead of fixed wireless infrastructure in these countries or if the service providers are unable to finance network expansion and fixed wireless products, demand for our products will
not develop. Even if these service providers elect to develop fixed wireless infrastructure, demand for our products will not develop if the service providers are unable to sell their services and our products to the end users at affordable prices.
In some instances, service providers purchase our products from us and resell the products to their end users at reduced prices in order to establish a service relationship with those users. If telecommunications service providers do not continue to
subsidize the purchase of our products, our revenues may decline if end users cannot afford our products on their own.

We expect our operating results
to fluctuate on a quarterly and annual basis, which could cause our stock price to fluctuate or decline.

We believe that our operating
results may fluctuate substantially from quarter-to-quarter and year-to-year for a variety of reasons, many of which are beyond our control. Factors that could affect our quarterly and annual operating results include those listed below as well as
others listed in this Risk Factors section:



| |  |  | changes in our pricing policies or those of our competitors;
| | - |  | ------------------------------------------------------------



| |  |  | the introduction of new products or product enhancements by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | changes in the terms of our arrangements with customers or suppliers;
| | - |  | ---------------------------------------------------------------------



| |  |  | our current reliance on large-volume orders from only a few customers;
| | - |  | ----------------------------------------------------------------------



| |  |  | the receipt and shipment of large orders or reductions in these orders;
| | - |  | -----------------------------------------------------------------------



| |  |  | variability between customer and product mix;
| | - |  | ---------------------------------------------



| |  |  | ability of our customers to accurately forecast demand for our products by their end users;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | general economic conditions in developing countries which are in our target markets;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the timing of final product approvals from any major customer;
| | - |  | --------------------------------------------------------------



| |  |  | delays or failures to fulfill orders for our products on a timely basis;
| | - |  | ------------------------------------------------------------------------



| |  |  | the ability of our customers to obtain letters of credit that are satisfactory to us and our ability to confirm them in a timely manner;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to forecast our manufacturing needs;
| | - |  | --------------------------------------------------



| |  |  | delays in the introduction of new or enhanced products by us or market acceptance of these products;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | change in the financial position of our manufacturer;
| | - |  | -----------------------------------------------------



| |  |  | the availability and cost of raw materials and components for our products;
| | - |  | ---------------------------------------------------------------------------



| |  |  | limited use of our net operating loss carryforwards;
| | - |  | ----------------------------------------------------



| |  |  | an increase in product warranty returns or in our allowance for doubtful accounts; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | operational disruptions, such as transportation delays or failures of our order processing system.
| | - |  | --------------------------------------------------------------------------------------------------



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A substantial portion of our sales in a given quarter may depend on obtaining orders for products to be
manufactured and shipped in the same quarter in which those orders are received. As a result of these factors, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them as an indication of our
future performance. In addition, our operating results may fall below the expectations of public market analysts or investors. In this event, our stock price could decline significantly.

Our growth strategy is dependent on the widespread adoption of third generation CDMA technology by telecommunications service providers.

Although we have historically generated substantially all of our revenues from sales of our voice and data desktop phones and terminals, our future growth
strategy is predicated on deriving a substantial and increasing portion of our revenues from sales of our broadband data products. Our existing broadband data products are based, and we anticipate that our future broadband data products will be
based, on the CDMA2000 1xEV-DO standard, which is third generation, or 3G, CDMA technology used for high-speed data and voice communications. To date, there are only a limited number of telecommunications service providers whose networks are
compatible with our CDMA2000 1xEV-DO broadband modem. Although we believe this standard will eventually be adopted by the majority of telecommunications service providers currently using CDMA technology, there can be no assurance that they will
adopt the standard or if they do, how rapidly and widely the standard will be implemented. If the CDMA2000 1xEV-DO standard is not widely implemented, the market for our broadband data products will be limited, and we will not be able to execute our
growth strategy unless we change our products to operate on a competing standard which is more widely deployed. Changing our products to a different standard would require significant investment and place us at a distinct disadvantage in getting our
products to market in a competitive manner.

We must expand our customer base in order to grow our business.

To grow our business, we must fulfill orders from our existing customers, obtain additional orders from our existing customers, develop relationships with
new customers and obtain and fulfill orders from new customers. We cannot guarantee that we will be able to develop relationships with additional telecommunications service providers and obtain purchase orders from those service providers. Further,
even if we do obtain purchase orders from additional telecommunications service providers, there is no guarantee that those orders will be for product quantities or at product prices that will enable us to recover our costs in acquiring those
customers and fulfilling the orders. Whether we will be able to obtain additional orders for our products will depend on a number of factors, including:



| |  |  | the continued acceptance of fixed wireless products;
| | - |  | ----------------------------------------------------



| |  |  | the growth in our target markets of fixed wireless infrastructure that support CDMA standards;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | whether any of our customers require us to grant exclusivity or other restrictions on our ability to market our products to other carriers at competitive prices;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to manufacture reliable products at competitive prices that have the features that are required by our customers and the end users of those products; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to expand relationships with existing customers and to develop relationships with new customers that will lead to additional orders for our products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect to experience competitive pricing pressure for our products, which may impair our revenue growth, gross margins and ability to
achieve profitability.

Pricing for fixed wireless phones has been declining along with pricing in general for telecommunications
equipment and other technology products. We believe that these pricing trends will continue in the future and perhaps accelerate, particularly if large companies with greater purchasing power enter the market or other



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competitors enter the market with lesser quality products or improper license rights. Accordingly, as we reduce our selling prices, our results of operations
will be adversely affected unless we can generate equivalent cost reductions in our cost of goods and otherwise.

We depend on a single third-party
manufacturer to produce a majority of our products.

We currently rely on WNC to manufacture a majority of our products. Mr. Haydn
Hsieh, a member of our board of directors, is the President and Chief Executive Officer of WNC. We expect to continue to rely primarily on a limited number of third-party manufacturers to produce our products. Our reliance on others for our
manufacturing exposes us to a number of risks which are outside our control, including:



| |  |  | unexpected increases in manufacturing costs;
| | - |  | --------------------------------------------



| |  |  | interruptions in shipments if a third-party manufacturer is unable to complete production in a timely manner;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | interruptions in shipments for an extended period of time due to acts of God, war, terrorism, earthquakes, tsunamis, typhoons, damaging winds or floods or a recurrence of sudden
acute respiratory syndrome or similar widespread pandemic;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | interruptions in manufacturing and shipments for an extended period of time due to shortages of electricity or water;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | inability to control quality of finished products;
| | - |  | --------------------------------------------------



| |  |  | inability to control delivery schedules;
| | - |  | ----------------------------------------



| |  |  | inability to control production levels and to meet minimum volume commitments to our customers;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | inability to control manufacturing yield;
| | - |  | -----------------------------------------



| |  |  | inability to maintain adequate manufacturing capacity;
| | - |  | ------------------------------------------------------



| |  |  | inability to secure adequate volumes of components in a timely fashion or at expected prices;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | unwillingness of our current or future manufacturing suppliers to provide sufficient credit to support our sales;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | manufacturing delays due to lack of financing, availability of parts, labor stoppages, disruptions or political instability in the region; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | scarcity of shipping containers.
| | - |  | --------------------------------

In addition, we
currently purchase all of our products from WNC on a purchase order basis. WNC is not obligated to accept any purchase order we submit and therefore may elect not to supply products to us on the terms we request, including terms related to specific
quantities, pricing or timing of deliveries. If WNC were to refuse to fulfill our purchase orders on terms that we request or on terms that would enable us to recover our expenses and make a profit, we may lose sales or experience reduced margins,
either of which would adversely affect our results of operation. Further, if WNC were to cease manufacturing our products on acceptable terms, we might not be able to identify and secure the services of a new third-party manufacturer in a timely
manner or on commercially reasonable terms.

Given that we rely primarily on WNC to manufacture our products, we are subject to risks
affecting WNCs business, including delays in its manufacturing process, availability of components, disruptions in its workforce or manufacturing capabilities, capacity constraints, quality control problems and compliance by WNC with import
and export restrictions of the United States and foreign countries. In particular, in order to meet our projected demand, WNC may need to make additional capital expenditures, which it may choose not to do. Any



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of these risks could result in a delay of quality products being shipped to our customers, which could negatively impact our revenues, our reputation and our
competitive position in our industry.

We may experience delays in manufacturing and our costs may increase if we are unable to accurately forecast of
our needs.

We utilize a rolling forecast of demand, which we and WNC use to determine our component requirements. Lead times for
ordering components vary significantly and depend on various factors, such as the specific supplier, contract terms and demand for and availability of a component at a given time. If our forecasts are less than our actual requirements, we, WNC or
any other third-party manufacturer that we use in the future, may not be able to manufacture products in a timely manner or may build excess inventory. Furthermore, if we cannot produce our products in a timely manner, the liquidated damages
provisions in some of our contracts with our customers may result in our selling our products at a loss. If our forecasts are too high, we and our manufacturer will be unable to use the components that were purchased based on our forecasts. The cost
of the components used in our products tends to drop rapidly as volumes increase and technologies mature. Therefore, if we or WNC are unable to use components purchased based on our forecasts, our cost of producing products may be higher than our
competitors due to an oversupply of higher priced components. Excess components or inventory will tie up working capital and cause us to incur storage and other carrying costs, which may cause us to borrow additional funds that may not be available
on commercially reasonable terms. Further, excess components or inventory not used or sold in a timely manner may become obsolete causing writeoffs or writedowns, which could seriously harm our results of operations.

If we do not obtain letters of credit or other forms of payment guarantee from our customers or if we choose to extend open credit terms to our customers, we may need
to maintain greater working capital in the future, which may harm our ability to accept high-volume purchase orders and may create difficulties in the collection of our accounts receivable.

We have arrangements with most of our customers pursuant to which we accept customer orders based on letters of credit that our customers place with us.
This generally enables us to maintain a low level of working capital because we are able to quickly collect payment for the products that we deliver and pay our third-party vendors. If there are any discrepancies with the documents presented by the
manufacturers, the freight forwarder or us, it may cause the letters of credit to be invalid or payment to be delayed. If a letter of credit is issued late or we experience problems collecting on letters of credit, shipments will be delayed, which
may cause us to miss our quarterly financial projections. If we are unable to continue to obtain letters of credit from our customers, we may be required to maintain a greater level of working capital or borrow money in order to pay our manufacturer
and third-party vendors or offer open terms to customers and obtain assurance of payment via other financial methods such as credit insurance. We were required to borrow money in August 2004 to pay our operating expenses until delays in collecting
on letters of credit were resolved, and we may be required to do so in the future. It is possible that current or future customers may not be able or may be unwilling to establish letters of credit acceptable to us, which could result in a need for
us to have greater working capital in order to fulfill such customers orders. In such an event, we would be subject to greater collections risks and might be precluded from accepting large orders from these customers due to limitations on our
working capital. Any inability to accept orders could harm our ability to meet our projections and reduce our revenues. We have begun extending open credit terms to certain of our customers and may continue to do so in the future on an increasing
basis. If we are unable to collect on our customer accounts, we may be required to recognize bad debt expense, which would harm our results of operations.

We may decide or be forced to stock inventory of components or finished product.

We have begun stocking inventory of
components in order to manufacture our own products and to meet customer needs. In addition, for competitive reasons or because of delays in the supply chain, we may be forced to stock additional components or finished product. This may require
substantial working capital, which would be costly and might be unavailable, or may cause us to incur storage and other carrying costs. The inventory we stock might become obsolete, requiring us to write it off and sustain a loss, which could be
substantial.



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We rely upon a license and chipsets from Qualcomm Incorporated for CDMA technology that is critical to our products.

All of our current products are based on proprietary CDMA technology that we license from Qualcomm. Our non-exclusive license from
Qualcomm does not have a specified term and may be terminated by us or by Qualcomm for cause or upon the occurrence of specified events. If we were to lose access to this licensed technology, we would be forced to acquire rights to, or otherwise
develop, other non-infringing technology, which would likely require us to adopt a wireless protocol other than CDMA, such as GSM and WCDMA. We might be unsuccessful in acquiring rights to, or otherwise developing, products based on these
alternative technologies, and even if we are successful, the costs of acquiring or developing products based on an alternative technology and adapting our products to incorporate such technology might be so great that it would preclude us from being
able to sell our products at competitive prices in the market.

We also depend upon Qualcomm to provide the chipsets critical for the
manufacture of our products. We purchase these chipsets from Qualcomm on a purchase order basis, and we cannot be certain that we will receive chipsets from Qualcomm on terms, including pricing, quality and timing, that allow us to deliver our
products to our customers on a timely basis, or at all. From time to time, we may experience delays in receiving chipsets from Qualcomm because of increased demand in the market for these chipsets. Further, as Qualcomm modifies its chipsets, we must
ensure that our products and the networks upon which our products function are compatible with the modified chipsets in accordance with the requirements of our customers.

Even if there is a second source for these chipsets, establishing a relationship with that source may be time consuming and expensive, which could adversely affect our ability to manufacture our product on a timely
basis and at a price that will enable us to sell our products at a price above our cost of sales.

If we experience any delay in the
delivery of chipsets, if we are unable to obtain chipsets on terms that are consistent with our expectations or if our products are not compatible with the modified chipsets, our ability to timely deliver our products to our customers and at prices
that will enable us to make a profit might be harmed, which could negatively impact our gross margins, our reputation and our competitive position in the marketplace.

We rely on limited or sole sources for many of our components.

In addition to Qualcomm, we rely on
third-party vendors to supply components for the manufacture of our products. Our components are purchased on a purchase order basis. Any shortage or delay in the supply of key components may harm our ability to meet scheduled product deliveries. It
is not always possible to maintain multiple qualified suppliers for all of our components and subassemblies. As a result, some key components are purchased only from a single supplier or a limited number of suppliers. If demand for a specific
component increases, we may not be able to obtain an adequate supply of that component in a timely manner. In addition, if our suppliers experience financial or other difficulties, the availability of these components could be limited. We have
experienced, and may experience in the future, problems in obtaining or delays in receiving adequate and reliable quantities of various components from certain key suppliers. It could be difficult, costly and time-consuming to obtain alternative
sources for these components or to change product designs to make use of alternative components. If we are unable to obtain a sufficient supply of components, if we experience any interruption in the supply of components or if the cost of our
components increases, our ability to meet scheduled product deliveries could be harmed, which could result in lost orders, harm to our reputation and reduced revenues.

We may experience long sales cycles for our products, as a result of a variety of factors.

Our sales
cycle depends on the length of time required for adoption of new technologies in our target markets. In addition, the period between our initial contact with a potential customer and its decision to purchase our products is relatively long. The
evaluation, testing, acceptance, proposal, contract negotiation, funding and implementation process can extend over many months. Based on our limited operating history, it generally takes us between three and six months to complete a sale to a
customer; however, in certain instances that the sales cycle may be substantially longer. As a result, we may not be successful in forecasting with certainty the sales that we will make in a given period.



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If our sales cycle unexpectedly lengthens in general or for one or more large orders, the timing of our
revenues and results of operations could be harmed, which in turn could reduce our revenues in any quarter. Therefore, period-to-period comparisons of our results of operations may not necessarily be meaningful, and these comparisons should not be
relied upon as indications of future performance. Further, sales cycles that are longer than we expect likely will harm our ability to generate sufficient cash to cover our working capital requirements for a given period.

If we do not compete effectively in the fixed wireless telecommunications market, our revenues and market share will decline.

The markets for fixed wireless products are highly competitive, and we expect competition to increase. Many of our competitors, including LG Electronics
Inc., Huawei Technologies Co., Ltd., ZTE Corporation, Westech Korea, Inc. and Telular Corporation, have significantly greater financial, technical and marketing resources than we do. These competitors may be able to:



| |  |  | select more accurately the new or emerging technologies desired by the market;
| | - |  | ------------------------------------------------------------------------------



| |  |  | respond more rapidly than we can to new or emerging technologies;
| | - |  | -----------------------------------------------------------------



| |  |  | respond more rapidly than we can to changes in customer requirements;
| | - |  | ---------------------------------------------------------------------



| |  |  | devote greater resources than we do to sales or research and development efforts;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | offer vendor financing for their products;
| | - |  | ------------------------------------------



| |  |  | promote their products more effectively, including selling their products at a loss in order to obtain market share or bundling their products with other products that we do not
offer in order to promote an end-to-end solution for their customers that we cannot match; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | obtain components and manufacture and sell products at lower prices as a result of efficiencies of scale or purchasing power, thereby rendering our products non-competitive or
forcing us to sell our products at reduced or negative gross margins.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We currently partner with large wireless
infrastructure providers who could decide to compete with us in the future. In addition, other companies that are not current competitors may enter our field rapidly, either by developing products on their own or by partnering with our competitors
that already have products in existence. If we are not successful in continuing to win competitive bids, in enhancing our products and customer relationships and in managing our cost structure so that we can provide competitive prices, we may
experience reduced sales and our market share may decline.

We will need to develop new products and features to meet the needs of our customers in
order to be successful.

The fixed wireless telecommunications market is characterized by rapid technological advances, evolving
industry standards, changing customer needs and frequent new product introductions and enhancements. To maintain and increase our revenues, we must develop and market new products and enhancements to existing products that keep pace with advancing
technological developments and industry standards and that address the needs of our customers and their end users. The process of developing new technology and products is complex, uncertain and expensive, and success depends on a number of factors,
including:



| |  |  | proper product definition;
| | - |  | --------------------------



| |  |  | component cost;
| | - |  | ---------------



| |  |  | resolving technical hurdles and obtaining appropriate product certifications as required by our customers;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | timely completion and introduction to the market;
| | - |  | -------------------------------------------------



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| |  |  | differentiation from the products of our competitors; and
| | - |  | ---------------------------------------------------------



| |  |  | market acceptance of our products.
| | - |  | ----------------------------------

We must commit
significant resources for research and development of new products, in many instances, before knowing whether our investments will result in products the fixed wireless telecommunications market will accept. Further, we may be required to purchase
licenses from third parties in connection with the development of new products and these licenses may not be available on commercially reasonable terms, or at all. Even if we successfully introduce new products and technologies, our products may not
be accepted by the market or we may be unable to sell our products at prices that are sufficient to recover our investment in developing those new products. In particular, many of the end users in our target markets have low incomes and rely on
subsidies from telecommunications service providers in order to purchase our products. If we fail to introduce new products at prices that are competitive and allow us to generate a profit, we will lose customers and market share and the value of
our company will decline.

We may have difficulty managing further growth that we might experience.

Our business has grown at a significant rate, and at this time, we have only limited management resources to manage this growth. If we continue to
experience growth in our operations, our management team and our operational, financial and accounting systems, procedures and controls will need to be expanded, which will result in increased expenses and could distract us from our business plan.
Our future success will depend substantially on our ability to manage growth effectively. These challenges may include:



| |  |  | attracting and hiring additional management employees;
| | - |  | ------------------------------------------------------



| |  |  | maintaining our cost structure at an appropriate level based on the net sales we generate;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | managing manufacturing expansion projects;
| | - |  | ------------------------------------------



| |  |  | implementing and improving our operational, financial and accounting systems, procedures and controls;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | higher after sales service level requirements from operators or end users;
| | - |  | --------------------------------------------------------------------------



| |  |  | managing operations in multiple locations and multiple time zones;
| | - |  | ------------------------------------------------------------------



| |  |  | reducing our operating expenses as a percentage of revenues; and
| | - |  | ----------------------------------------------------------------



| |  |  | managing global customer base.
| | - |  | ------------------------------

Any failure to maintain sales through
agents and other third-party resellers, distributors and manufacturers of complementary technologies could harm our business.

To date,
we have sold our products to our customers through our direct sales force with significant involvement from senior management and, when desirable or required by the laws of a particular jurisdiction or a prospective customer, through local agents
and a network of other third parties, such as resellers, distributors and manufacturers of complementary technologies. We rely on these agents and third parties to assist us in providing customer contacts and marketing our products directly to our
potential customers. When working with agents, we may enter into exclusive arrangements that preclude us from using another agent or make sales directly in a particular territory, which could harm our ability to develop new customer relationships.
Certain agents and other third parties are not obligated to continue selling our products, and they may terminate their arrangements with us at any time. Our ability to increase our revenues in the future will depend in large part on our success in
developing and maintaining relationships with these agents and other third parties. Any failure to develop or maintain our relationships with these third parties and any failure of these third parties to effectively market our products could harm
our business, financial condition and results of operations.



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We depend upon the fixed wireless telecommunications industry, and any downturn in the industry may reduce our sales.

All of our sales are derived from the fixed wireless telecommunications industry, and a substantial portion of our sales are derived
from customers in developing countries. In general, the global wireless telecommunications industry, particularly in developing countries, is subject to economic cycles and has experienced in the past, and is likely to experience in the future,
periods of slowdown. Intense competition, relatively short product cycles and significant fluctuations in product demand characterize the industry as a whole. The wireless telecommunications industry generally is subject to rapid technological
change and product obsolescence. Fluctuations in demand for our products as a result of periods of slowdown in the wireless telecommunications market or discontinuation of products or modifications developed in connection with standards or next
generation products could reduce our sales.

Our products are complex and may contain errors or defects, which may cause us to incur significant
unexpected expenses and lose sales.

Our products are complex and must meet stringent customer and end user requirements. Although our
products are examined and tested prior to release, these tests cannot uncover all problems that may occur once our products are widely deployed to end users. We have been selling our products for a relatively short period of time. As a result, we
have limited experience as to the long-term performance attributes of our products and whether they will develop errors in the future. If errors are discovered and we are unable to promptly correct those errors, we could experience the following,
any of which would harm our business:



| |  |  | costs associated with testing, verification and the remediation of any problems;
| | - |  | --------------------------------------------------------------------------------



| |  |  | costs associated with design modifications;
| | - |  | -------------------------------------------



| |  |  | loss of or delay in sales;
| | - |  | --------------------------



| |  |  | loss of customers;
| | - |  | ------------------



| |  |  | failure to achieve market acceptance or loss of market share;
| | - |  | -------------------------------------------------------------



| |  |  | increased service and warranty costs;
| | - |  | -------------------------------------



| |  |  | liabilities and damages to our customers and end users; and
| | - |  | -----------------------------------------------------------



| |  |  | increased insurance costs.
| | - |  | --------------------------

Our international sales and operations
subject us to various risks associated with, among other things, foreign laws, policies, economies and exchange rate fluctuations.

Our
primary target markets include India, Indonesia, Pakistan, Philippines, China, Russia, and Latin America. Much of our research and development operations are in South Korea. In addition, we have begun manufacturing some of our products in South
Korea with our own manufacturing operations. Our international sales and operations are subject to inherent risks, all of which could have a material adverse effect on our financial condition or results of operations. These risks affecting our
international sales and operations include:



| |  |  | changes in a specific countrys or regions political or economic conditions, particularly in emerging markets, where substantially all of our customers are located;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in complying with foreign regulatory requirements applicable to our operations and products;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | difficulties in obtaining domestic and foreign export, import and other governmental approvals, permits and licenses and compliance with foreign laws, including employment laws;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | difficulties in staffing and managing foreign operations, including work stoppages or strikes and cultural differences in the conduct of business, labor and other workforce
requirements and inadequate local infrastructure;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | trade restrictions or higher tariffs, quotas, taxes and other market barriers;
| | - |  | ------------------------------------------------------------------------------



| |  |  | transportation delays and difficulties of managing international distribution channels;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | longer payment cycles for, and greater difficulty collecting, accounts receivable;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | public health emergencies such as SARS and avian bird flu.
| | - |  | ----------------------------------------------------------

These international risks make our ability to meet the demand for wireless products unpredictable. In addition, because all of our sales are denominated in U.S. dollars, changes in foreign currency exchange rates affect the market price for
our products in countries in which they are sold. If the currency of a particular country weakens against the U.S. dollar, the cost of our products in that country may increase to the service provider and end user, which may result in the service
provider or end user choosing to purchase the products of one of our competitors instead of our products.

If we are unable to retain our key personnel
necessary to operate our business, our ability to develop and market our products successfully could be harmed.

We depend substantially
on our current executive officers and management, including Mike H.P. Kwon, our Chief Executive Officer. We maintain a key man life insurance policy in the amount of $5.0 million for Mike H.P. Kwon However, this amount may not adequately
compensate us in the event we lose his services. The loss of any key employee or the inability to attract or retain qualified personnel, including engineering, finance, accounting, sales and marketing personnel, could delay the development and
introduction of, and harm our ability to sell, our products and damage the markets perception of us. Our success also may depend on our ability to identify, attract and retain additional qualified management, engineering and sales and
marketing personnel. In particular, we have experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled engineers with appropriate qualifications. Competition for qualified engineers is intense, especially
in San Diego, California, where our headquarters are located, and in Seoul, South Korea, where our research and development center is located. If we lose the services of a significant number of our engineers and cannot hire and integrate additional
engineers, our ability to develop our products and implement our business strategy could be harmed.

Our competitive position will be seriously damaged
if we cannot protect intellectual property rights in our technology.

Our success, in part, depends on our ability to obtain and enforce
intellectual property protection for our technology. We rely on a combination of contracts and trademark and trade secret laws to establish and protect our proprietary rights in our technology. However, we may not be able to prevent misappropriation
of our intellectual property, and the agreements we enter into may not be enforceable. In addition, effective trademark and trade secret protection may be unavailable or limited in some foreign countries.

There is no guarantee any patent will issue on any patent application that we have filed or may file. We do not believe patents on our existing
applications, if issued, will enhance our competitive position. Further, any patent that we may obtain will expire, and it is possible that it may be challenged, invalidated or circumvented. If we do not secure and maintain patent protection for our
technology and products, our competitive position will be significantly harmed because it will be much easier for competitors to sell products similar to ours. Alternatively, a competitor may independently develop or patent technologies that are
substantially equivalent to or superior to our technology. If this happens, any patent that we may obtain may not provide protection and our competitive position could be significantly harmed.



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As we expand our product line or develop new uses for our products, these products or uses may be outside
the protection provided by our current patent applications and other intellectual property rights. In addition, if we develop new products or enhancements to existing products, there is no guarantee that we will be able to obtain patents to protect
them. Even if we do receive patents for our existing or new products, these patents may not provide meaningful protection. In some countries outside of the United States, patent protection is not available. Moreover, some countries that do allow
registration of patents do not provide meaningful redress for violations of patents. As a result, protecting intellectual property in these countries is difficult and our competitors may successfully sell products in those countries that have
functions and features that infringe on our intellectual property.

We may initiate claims or litigation against third parties in the
future for infringement of our proprietary rights or to determine the scope and validity of our proprietary rights or the proprietary rights of competitors. These claims could result in costly litigation and divert the efforts of our technical and
management personnel. As a result, our operating results could suffer and our financial condition could be harmed.

Our competitive position will be
seriously damaged if we become party to lawsuits alleging that our products infringe the intellectual property rights of others.

Other
companies, including our competitors, may currently own or obtain patents or other proprietary rights that might prevent, limit or interfere with our ability to make, use or sell our products. As a result, our products may be found to infringe the
intellectual property rights of others. In the event of a successful claim of infringement against us and if we are unable to license the infringed technology or our current licenses do not contain adequate indemnification or warranties to cover the
claim, our business and operating results could be adversely affected, resulting in reduced or negative gross margins, harm to our reputation if we are unable to provide remedies to our customers and general harm to our competitive position in the
marketplace.

Any litigation or claims, whether or not valid, could result in substantial costs and diversion of our resources. An adverse
result from intellectual property litigation could force us to do one or more of the following:



| |  |  | cease selling, incorporating or using products that incorporate the challenged intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign products that incorporate the disputed technology.
| | - |  | -----------------------------------------------------------

If we are forced to take any of the foregoing actions, we could face substantial costs and shipment delays and our business could be seriously harmed. Although we carry general liability insurance, our insurance may not cover potential
claims of this type or be adequate to indemnify us for all liability that may be imposed.

In addition, it is possible that our customers
or end users may seek indemnity from us in the event that our products are found or alleged to infringe the intellectual property rights of others. Any such claim for indemnity could result in substantial expenses to us that could harm our operating
results.

A third party has notified us of its intention to assert a claim for indemnification under an agreement we have with that party.
Under the agreement, we may continue to be required to obtain a license to certain patented technologies at our expense and for the benefit of the third party. If the third party is sued for patent infringement, we may be required to defend the
third party at our expense. In either case, we may incur costs that may impair our financial forecasts and competitive position.

We have
also been asked to obtain a license from a third party in connection with that partys portfolio of patents directed to wireless data communication technologies. If we fail to purchase this license, we may be sued for patent infringement. If we
cannot negotiate favorable terms for the license, our financial position may be harmed.



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Failure to adequately protect our trademark rights could cause us to lose market share and cause our sales to decline.

We sell our products under our brand name, Axesstel. We use our brand name to compete in the fixed wireless telecommunications market.
We have expended significant resources promoting our brand name, and we have applied for a registered trademark in the United States for our brand name. However, registration of our brand name trademark could be denied, and if granted, such
registration will not necessarily deter or prevent unauthorized use by others. If other companies, including our competitors, use our brand name, consumers may not recognize us as the source of our products. This would reduce the value of goodwill
associated with our brand name. This consumer confusion and the resulting reduction in goodwill could cause us to lose market share and cause our sales to decline.

We may face litigation that could significantly damage our business and financial condition.

In the telecommunications
equipment industry, litigation increasingly has been used as a competitive tactic by both established companies seeking to protect their position in the market and by emerging companies attempting to gain access to the market. In this type of
litigation, complaints may be filed on various grounds, such as antitrust, breach of contract, trade secret, copyright or patent infringement, patent or copyright invalidity, and unfair business practices. If we are required to defend ourselves
against one or more of these claims, whether or not they have any merit, we are likely to incur substantial expense and managements attention will be diverted from operations. This type of litigation also may cause confusion in the market and
make our licensees and distributors reluctant to commit resources to our products. Any of these effects could harm our business and result in a decline in the value of your investment in our stock.

Our exclusive arrangements with some customers may limit our ability to sell our products to other potential customers in our target markets.

We have agreed with some of our customers not to sell products to competitors of our customers within specific geographic regions for specified periods of
time. As a result of these exclusive arrangements, the number of service providers to which we can sell products is reduced in those geographic regions. We expect that our existing customers may continue to require, and new customers may require, us
to agree to these exclusive arrangements, which could further limit our potential customer base. If we are required to continue to enter into these arrangements or we cannot obtain waivers of the exclusivity provisions of our existing arrangements,
our ability to develop new customer relationships may be limited, which could harm our ability to develop new customer relationships and generate more revenues.

Changes in stock option accounting rules may adversely affect our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our efforts in recruiting additional employees.

Technology companies in general, and our company in particular, have a history of depending upon and using broad based employee stock
option programs to hire, provide incentives and retain employees in a competitive marketplace. Currently, we do not recognize compensation expense for stock options issued to employees or directors, except in limited cases involving modifications of
stock options, and we instead disclose in the notes to our financial statements information about what such charges would be if they were expensed. An accounting standard setting body has recently adopted a new accounting standard that will require
us to record equity-based compensation expense for stock options and employee stock purchase plan rights granted to employees based on the fair value of the equity instrument at the time of grant. We will be required to record these expenses
beginning with the first quarter of the year ending December 31, 2006. To lessen the impact of this change to future reportable earnings, in December 2005, we elected to accelerate the vesting period of all unvested stock options. Future option
grants will lead to a decrease of reported earnings, and may negatively impact our future stock price. At this time, we cannot estimate the impact to 2006 reported earnings, since we have not concluded how the adoption of this rule will effect our
decision to issue future option grants. In



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addition, the change in accounting rules could impact our decision making to utilize broad based employee stock plans as a means to reward employees and
could result in a competitive disadvantage to us in the employee marketplace.

In the event we are unable to address problems with our disclosure
controls and procedures and our internal controls, our business could suffer.

In connection with the audit of our financial statements
for the year ended December 31, 2003, our independent registered public accounting firm identified several matters relating to significant deficiencies in the design or operation of our internal controls, some of which were characterized as
material weaknesses. A material weakness constitutes a greater deficiency than a significant deficiency. For the year ended December 31, 2003, and for each of the quarters within that year, these items had the potential to impair our ability to
record, process, summarize and report financial data consistent with the assertions of our management in our financial statements. The material weaknesses identified involved our ability to classify costs by expense category and project,
specifically in the areas of research and development, product development and engineering services. The significant deficiencies included a lack of formal month-end closings and financial reporting and analysis procedures for our San Diego,
California operations.

In addition, these significant deficiencies contributed to a determination by our Audit Committee, in consultation
with our independent auditors and our executive officers, to restate our financial statements from January 1, 2000 to June 30, 2004. This restatement included material changes to our consolidated balance sheets, consolidated statements of
operations, stockholders equity and cash flows for the financial statements mentioned above. In the past, stockholders of other companies that have restated their financial statements sometimes have brought securities class action litigation
against those companies. If we are required to defend ourselves against one or more lawsuits brought by our stockholders, whether or not they have any merit, we are likely to incur substantial expense and managements attention will be diverted
from operations. We believe that we have addressed the matters identified by our registered public accounting firm, but similar problems, or other deficiencies in our internal controls over financial reporting, could arise in the future.

We are subject to increased costs as a result of newly adopted accounting and SEC regulations.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management will be required by the end of 2007 to perform an evaluation of our
internal controls over financial reporting and have our independent auditor attest to that evaluation. Compliance with these requirements is expected to be expensive and time consuming. If we fail to timely complete this evaluation, or if our
independent auditors cannot timely attest to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls.

In designing and evaluating our internal controls over financial reporting, we recognize that any internal control or procedure, no matter how well designed and operated, can provide only reasonable assurance of
achieving desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. No system of internal controls can be designed to provide absolute assurance of
effectiveness and any material failure of internal controls over financial reporting could materially impact our reported financial results and the market price of our stock could significantly decline. In addition, adverse publicity related to a
material failure of internal controls over financial reporting would have a negative impact on our reputation and business.

Our Chief Executive Officer
beneficially owns approximately 15% of our outstanding common stock, ComVentures beneficially owns approximately 17% of our outstanding common stock, and Stephens Investment Management beneficially owns approximately 10% of our outstanding common
stock; and each will be able to exert substantial influence over us and our major corporate decisions.

As of December 31, 2005,
our Chief Executive Officer, Mike H.P. Kwon, beneficially owns approximately 15% of our outstanding common stock, ComVentures beneficially owns approximately 17% of our outstanding



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common stock, and Stephens Investment Management beneficially owns approximately 10% of our outstanding common stock. As a result of their respective
ownership interests, Mr. Kwon, ComVentures, and Stephens Investment Management each will have substantial influence over who is elected to our board of directors each year as well as whether we enter into any significant corporate transaction
that requires stockholder approval.

This concentration of ownership may discourage, delay or prevent a change of control of our company,
which could deprive our other stockholders of an opportunity to receive a premium for their stock as part of a sale of our company, could harm the market price of our common stock and could impede the growth of our company. In addition,
Mr. Kwons employment agreement entitles him to be included on the recommended slate of directors nominated for election at our annual stockholder meetings so long as Mr. Kwon remains our Chief Executive Officer.

We may not address successfully the problems encountered in connection with any potential future acquisitions.

We expect to continue to consider opportunities to acquire or make investments in other technologies, products and businesses that could enhance our
capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring other businesses and technologies. Potential and completed acquisitions and strategic investments involve
numerous risks, including:



| |  |  | problems assimilating the purchased technologies, products or business operations;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | problems maintaining uniform standards, procedures, controls and policies;
| | - |  | --------------------------------------------------------------------------



| |  |  | unanticipated costs associated with the acquisition;
| | - |  | ----------------------------------------------------



| |  |  | diversion of managements attention from our core business;
| | - |  | -----------------------------------------------------------



| |  |  | adverse effects on existing business relationships with suppliers and customers;
| | - |  | --------------------------------------------------------------------------------



| |  |  | risks associated with entering new markets in which we have no or limited prior experience;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | potential loss of key employees of acquired businesses; and
| | - |  | -----------------------------------------------------------



| |  |  | increased legal and accounting costs as a result of the newly adopted rules and regulations related to the Sarbanes-Oxley Act of 2002.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

If we fail to properly evaluate and execute acquisitions and strategic investments, our management team may be distracted from our day-to-day operations,
our business may be disrupted and our operating results may suffer. In addition, if we finance acquisitions by issuing equity or convertible debt securities, our stockholders would be diluted.

Nevada law and provisions in our charter documents may delay or prevent a potential takeover bid that would be beneficial to common stockholders.

Our articles of incorporation and our bylaws contain provisions that may enable our board of directors to discourage, delay or prevent a change in our
ownership or in our management. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. These provisions include the following:



| |  |  | Our board of directors may fill vacancies on the board of directors;
| | - |  | --------------------------------------------------------------------



| |  |  | Our stockholders are permitted to remove members of our board of directors only upon the vote of at least two-thirds of the outstanding shares of stock entitled to vote at a meeting
called for such purpose;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | stockholder proposals and nominations for directors to be brought before an annual meeting of our stockholders must comply with advance notice procedures, which require that all
such proposals and nominations must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | a staggered board;
| | - |  | ------------------



| |  |  | a special meeting of stockholders may be called only by our Chief Executive Officer, president or secretary, or by resolution of our board of directors; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our board of directors is expressly authorized to make, alter or repeal our bylaws.
| | - |  | -----------------------------------------------------------------------------------

In addition, provisions of the Nevada Revised Statutes provide that a person acquiring a controlling interest in an issuing corporation, and those acting in association with such person, obtain only such voting rights
in the control shares as are conferred by stockholders (excluding such acquiring and associated persons) holding a majority of the voting power of the issuing corporation. For purposes of these provisions, issuing corporation means a
corporation organized in Nevada which has 200 or more stockholders of record, at least 100 of whom have addresses in Nevada on the corporations stock ledger, and does business in Nevada directly or through an affiliate, and controlling
interest means the ownership of outstanding voting shares enabling the acquiring person to exercise (either directly or in association with others) one-fifth or more but less than one-third, one-third but less than a majority, or a majority or
more of the voting power of the issuing corporation in the election of directors. Accordingly, the provisions could require multiple votes with respect to voting rights in share acquisitions effected in separate stages, and the effect of these
provisions may be to discourage, delay or prevent a change in control of our company.

ITEM 2. DESCRIPTION OF PROPERTY.

We own no real property. Our corporate headquarters is located in San Diego, California, where
we lease approximately 17,000 square feet of office space pursuant to a lease that expires in February 2011. The monthly lease payment is approximately $29,000. We have secured our lease obligations under this lease with a letter of credit. We also
lease approximately 5,500 square feet in San Diego for approximately $10,000 per month pursuant to a lease that expires in November 2006. We sublease this facility for $6,000 per month. Our principal research and development facility is located in
the Gyeonggi Province of South Korea, where we lease approximately 18,000 square feet of office space pursuant to a ten-year lease that expires in August 2015. For the years 2005 and 2006, annual rent is approximately $224,000. Annual rent after
2006 is subject to adjustment, based on market conditions. In August 2005, we entered into a lease agreement for a manufacturing facility in the Gyeonggi Province of South Korea where we lease approximately 29,000 square feet. The monthly lease
payment is approximately $26,000 per month over two years and expires in June 2007, with a provision for a one-year extension. We additionally lease a sales office in Nanjing China for approximately $400 per month.

Each of our facilities is covered by insurance and we believe them to be suitable for their respective uses and adequate for our present needs. We believe that suitable
additional or substitute space will be available to accommodate the foreseeable expansion of our operations.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we may be involved in litigation relating to claims arising out of our operations
in the normal course of business, including claims of alleged infringement, misuse or misappropriation of intellectual property rights of third parties. As of the date of this report, we are not a party to any such litigation which we believe would
have a material adverse effect on us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.

None.



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PART II



|ITEM 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUERS PURCHASES OF EQUITY SECURITIES.
|------- | -----------------------------------------------------------------------------------------------------------------

Since May 20, 2004, our common stock has been listed on the American Stock Exchange under the symbol AFT. Prior to May 20, 2004, our common stock
was quoted on the OTC Bulletin Board under the symbol AXES. The following table sets forth, for our common stock for the periods indicated, the high and low sales prices as reported by the American Stock Exchange for the period from
May 20, 2004 to December 31, 2004 and the high and low bid prices as quoted on the OTC Bulletin Board from January 1, 2004 to May 20, 2004.



|                             |  |      |      |     |   |     
|---------------------------- |  | ---- | ---- | --- | - | ----
|                             |  | High |      | Low
|Year Ended December 31, 2004 |  |      |      |     |   |     
|First Quarter                |  | $    | 3.05 |     | $ | 1.75
|Second Quarter               |  |      | 5.95 |     |   | 3.00
|Third Quarter                |  |      | 5.00 |     |   | 2.10
|Fourth Quarter               |  |      | 4.50 |     |   | 2.99
|Year Ended December 31, 2005 |  |      |      |     |   |     
|First Quarter                |  | $    | 4.90 |     | $ | 2.89
|Second Quarter               |  |      | 4.36 |     |   | 3.06
|Third Quarter                |  |      | 3.60 |     |   | 2.44
|Fourth Quarter               |  |      | 3.00 |     |   | .83 

On March 21, 2006, the shareholders list for the Companys common shares showed approximately
1,110 registered shareholders and 22,593,589 shares issued and outstanding.

We have never declared or paid cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the growth and development of our business. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results
of operations, capital requirements and such other factors as the board of directors deems relevant.



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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS

Forward-Looking Statements

Statements in the following discussion and throughout this report that are not historical in nature are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify forward-looking statements by the use of words such as the words expect,
anticipate, estimate, may, will, should, intend, believe, and similar expressions. Although we believe the expectations reflected in these forward-looking statements
are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which
are beyond our control. These factors include, without limitation, those described below under the heading Risk Factors. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the
date of this report or to reflect actual outcomes.

The following discussion should be read in conjunction with our consolidated financial statements and
the related notes included elsewhere in this report.

Overview

We design, develop market and manufacture fixed wireless voice and broadband data products for the worldwide telecommunications market. Our product portfolio includes fixed wireless desktop phones, public call office (PCO) phones,
voice/data terminals and broadband modems for access to voice calling and high-speed data services. Our products have similar functionality to phones and modems that use the traditional landline telecommunications network; however, they are wireless
desktop devices and can be substituted for wired phones and modems. All products that we have sold to date have been based on CDMA (3G Code Division Multiple Access) technology developed by Qualcomm Incorporated. In the second quarter of 2005, we
started development of new products based on GSM (Global System for Mobile Communications) and GPRS (General Packet Radio Service) technologies. These new products are scheduled to be released in 2006.

We currently sell our products to telecommunications operators in developing countries where large segments of the population do not have telephone service and demand
for telephone services has grown substantially in recent years. At present, our principal customers are Tata Teleservices Limited in India, TeleCard Limited in Pakistan, Telefonica Moviles, S.A. in Latin America, and Telecommunications Movilnet
C.A., in Latin America. We believe there are over 70 CDMA-based telecommunications service providers worldwide that have deployed or plan to deploy fixed wireless solutions.

History

We were founded in July 2000 as Axesstel,
Inc., a California corporation, which we refer to as Axesstel California. In August 2002, we were acquired by Miracom Industries, Inc., a Nevada corporation, the stock of which was quoted on the OTC Bulletin Board in a transaction that was accounted
for as a reverse merger. Immediately following the closing of the transaction, Miracom changed its name to Axesstel, Inc. and adopted our business plan as its exclusive business. In late 2002 and 2003, we began performing original design
manufacturing and product engineering and development for major international telecommunications companies. In December 2002, we acquired Entatel, Ltd., a South Korean company, in order to meet the engineering requirements of these projects, and
changed its name to Axesstel R & D Center Co., Ltd. This name was later changed to Axesstel Korea Inc.

Our primary business in 2003 was focused on
contract research and development and we engaged in only limited manufacturing and product sales on behalf of third parties. In late 2003 and early 2004, we believed that changing market factors would result in increasing demand for fixed wireless
phones. In response, we refocused our business to concentrate exclusively on developing, manufacturing and selling our own branded and co-branded CDMA-based fixed wireless products.



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In the first quarter of 2004, we commenced large scale product manufacturing with our Taiwan-based manufacturing
partner, Wistron NeWeb Corporation, or WNC. In the third quarter of 2005, WNC transitioned our production lines from Taiwan to mainland China to take advantage of lower production costs and better access to the China supply chain. WNC presently has
three high speed production lines dedicated to high volume production, and the ability to add additional lines to match future capacity needs. We work with WNC in sourcing components for our products in an effort to reduce costs, ensure the quality
of the components we purchase and mitigate against the risk that components are not available at the time we need the components to fulfill our customer orders. We believe WNC provides flexibility and scalability to our manufacturing operations.

Recent Developments

All of the
products we have sold through 2004 have been used primarily for their voice capabilities; however, in the first quarter of 2005, we initiated sales of a broadband modem product which is based on the CDMA2000 1xEV-DO standard, a newer version of the
CDMA standard used for high-speed data communications. Telecommunications service providers began rolling out the CDMA2000 1xEV-DO standard on their networks in the last few years, and as of the date of this report, we believe less than half of
telecommunications service providers using CDMA technologies have commenced testing and implementation of the CDMA2000 1xEV-DO standard. We expect more service providers will implement the CDMA2000 1xEV-DO standard and that an increasing portion of
our sales will be from broadband modem products in the future. In the second quarter of 2005, we had our first sales of a voice/data terminal product that combines voice and fax services.

In the third quarter of 2005, we opened our own production facility in Korea to manufacture more complex products through this facility, such as our broadband modems;
and to have a dedicated facility focused on the introduction of new products and the cost reduction efforts of our existing products. We have two production lines in Korea dedicated to these activities. However, our overall strategy remains to have
WNC manufacture the majority of our product in their high volume production facility.

Revenues

Our product portfolio consists of fixed wireless products in four categories: desktop phones, PCO phones, voice/data terminals and broadband modems. We have shipped the
desktop phones and the PCO phones since 2004. We received initial orders and began product shipments for our fixed wireless CDMA2000 1xEV-DO modems and our voice/data terminals in the first and second quarters of 2005. We expect fixed wireless
phones will continue to represent a major portion of our revenues for the foreseeable future. However, we believe that an increasing portion of our anticipated growth will come from sales of our next generation data products, such as our fixed
wireless broadband modem and voice/data terminals, into developing and industrialized countries as demand grows for broadband data services. In 2005, we started development of new products based on GSM (Global System for Mobile Communications) and
GPRS (General Packet Radio Service) technologies and expect these products to generate revenues in 2006.

We sell our products to telecommunications
service providers on a fixed price-per-unit basis. Our customers in turn resell our products to end users as part of the end users service activation. For the year ended December 31, 2005, approximately 80% of our revenues were derived
from two customers, with one customer representing approximately 59% and the other customer representing approximately 21%. All of our sales are based on purchase orders or other short-term arrangements. We negotiate the pricing of our products
based on the quantity and the length of the time for which deliveries are to be made. For orders involving a significant number of units, or which involve deliveries over a long period of time, we typically receive rolling forecasts or a
predetermined quantity for a fixed period of time from our customers, which in turn allows us to forecast internal volume and component requirements for manufacturing. In order to minimize our collection risks, we generally have sold to our
international customers under guaranteed letters of credit or open terms secured by credit insurance, subject to a 5% deductible. To date, substantially all of our product sales have been to customers outside of the United States. In order to
minimize foreign exchange risk, we have made all sales to date in U.S. dollars.



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We supply WNC with rolling forecasts. In addition, we receive forecasts from our customers, and in turn, place orders
with WNC for near-term production. Based upon our purchase orders and forecasts, WNC procures components in amounts intended to meet the near-term demand. Additionally, we provide Qualcomm Incorporated, the manufacturer of our chipsets, with rolling
forecasts for chipsets. WNC places the chipset orders and pays Qualcomm. Following receipt of our orders, WNC generally manufactures our products and delivers the finished goods to the customers freight forwarder in China, transferring title
at that point. We generally recognize revenue upon the transfer of title to the freight forwarder. The freight forwarder and WNC supply us with the shipping documents, which we in turn present to the negotiating bank under the letter of credit for
payment. Upon receipt of payment, we generally pay WNC within 45 days after delivering to the freight forwarder. We generally arrange for WNC to manufacture our products based on the delivery needs of our customers, and therefore we do not maintain
a significant inventory of products or components. As a result of the security offered by the letters of credit, WNC extends us credit terms which minimize our working capital requirements.

Cost of Goods Sold

Cost of goods sold consists of
direct materials, manufacturing expense, warranty expense and royalty fees. We believe our success and growth will depend on our ability to reduce cost of goods sold. We continue to reduce our cost of goods sold through the following initiatives:
increasing our purchasing power through increased volume; ordering standardized parts used across our product lines; looking for additional manufacturing partners in regions where labor costs are low, such as China or India; reengineering our
products with new technologies and expertise to decrease the number of components; relying more on applications processing than hardware; and improving our manufacturing processes. We are also considering outsourcing our supply chain to major
distributors to competitively bid our component and hardware requirements while extending our credit terms, automating the buying process and obtaining volume rebates.

Research and Development

Research and development expenses consist primarily of salaries and related expenses for
engineering personnel, facility expenses, employee travel, fees for outside service providers, test fees and depreciation of developmental test equipment. The majority of this activity is for software, mechanical and hardware product development. We
expense these costs as they are incurred.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of salaries and related expenses for management, finance, legal, sales and marketing, program management
and administrative personnel. Other costs include facility expenses, employee travel, bank fees, insurance, legal expense, commissions, accounting, professional service providers, board of director expense, stockholder relations, amortization of
intangible assets, and depreciation expense of software and other fixed assets.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
In consultation with our board of directors, we have identified the following accounting policies that we believe are key to an understanding of our financial statements. These accounting policies require managements most difficult, subjective
judgments.

Revenue Recognition and Warranty Reserve

Revenues from product sales are recognized when the risks of ownership and title pass to the customer as specified in the respective sales agreements and other revenue recognition criterion as prescribed by Staff



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Accounting Bulletin, or SAB, No. 101 Revenue Recognition in Financial Statements, as amended by SAB No. 104. Generally, the risks of
ownership and title pass when product is received by the customers freight forwarder. If and when products are returned, we normally exchange them or provide credits to the customer. The returned products in turn are shipped back to the
manufacturer and we are issued a credit or exchange from the manufacturer. We have not established a sales return allowance as returns have been insignificant to date and no significant returns are anticipated.

On certain contracts, we provide a warranty replacement unit at one percent of total units shipped. The cost related to the standard warranty replacement unit is
included in the cost of goods sold and recorded when revenue is recognized. On one of our significant contracts, we do not provide warranty replacement units. In this case, we provide third party service centers to the customer for any warranty
performance. Costs for these service centers are recorded to cost of sales. During the year ended December 31, 2005, warranty costs amounted to approximately $516,000 and, as of December 31, 2005, the Company has established a warranty
reserve of $558,000 to cover additional service costs over the life of the warranty. All products are tested by quality inspection prior to shipment and we have historically experienced a minimum level of defective units. Management believes that no
additional warranty reserve is needed other than as discussed above.

Accounts Receivable Allowance

Collections from product sales for foreign customers are generally received via letter of credit arrangements or secured by credit insurance, subject to a 5% deductible.
As such, collections on trade accounts receivable for foreign customers are reasonably assured. We generally do not receive security for domestic customer obligations. At times, we extend credit based on evaluation of the customers financial
condition. At December 31, 2005, one customer with credit terms was significantly late in providing payment. Based on our risk assessment of this late paying customer, we established an account receivable allowance of $500,000 representing
approximately 50% of the receivable. Significant management judgment is required to determine the allowance for doubtful accounts. We will make every effort to collect the entire amount, but we may be required to record a further adjustment in 2006
if we are unsuccessful.

Capitalized Software Costs

Software development costs for products sold, which consist primarily of firmware embedded in our products, incurred after technological feasibility is established are capitalized in accordance with Statement of
Financial Accounting Standards, or SFAS, No. 86 Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Amortization of these costs begins when the products are ready for sale. SFAS No. 86 and
other authoritative literature, interpretations and industry practices prescribe that technological feasibility is reached when both the software and other components of the products research and development activities are completed. We begin
capitalizing software development costs upon attainment of both requirements. Our engineering processes demonstrate that the research and development activities of our products are completed simultaneously with the commencement of the manufacturing
process. As such, we expense all research and development activities performed up to the commencement of the manufacturing process.

Valuation of Long-Lived Assets, Intangible Assets and Goodwill

We assess the impairment of long-lived assets, intangible assets and
goodwill at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include:



| |  |  | significant underperformance relative to expected historical or projected future operating results;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | significant negative industry or economic trends.
| | - |  | -------------------------------------------------



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When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based
upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

Our intangible assets consist mainly
of our license from Qualcomm Incorporated, which we amortize over a five-year life.

Deferred Tax Assets

We periodically and at least annually evaluate the realizability of the net deferred tax assets, taking into consideration prior earnings history, actual revenue and
operations, projected operating results and the reversal of temporary differences. Based on our analysis in the third quarter of 2005, we determined not to retain our deferred tax asset which was established in 2003. Due to our current operating
results in the third quarter, it was uncertain whether we could utilize this asset in future periods. Therefore, we have established a full reserve against this asset as of the third quarter of 2005.

Stock-Based Compensation

SFAS No. 123,
Accounting for Stock-Based Compensation, establishes the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value stock-based compensation
determined as of the date of grant and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the intrinsic value accounting method specified in Accounting
Principles Bulletin Opinion No. 25, Accounting for Stock Issued to Employees, to account for stock-based compensation issued to employees. Through December 31, 2004, we have elected to use the intrinsic value based method and
have disclosed the pro forma effect of using the fair value based method to account for our stock-based compensation. We plan to continue using the intrinsic value based method and providing disclosure for the pro forma effect of using the fair
value based method to account for our stock-based compensation through December 31, 2005.

As a result of the recent adoption by the
Financial Accounting Standards Board of SFAS No. 123 (revised 2004) Share-Based Payment, or SFAS No. 123(R), we will be required, beginning in the quarter ending March 31, 2006, to apply the fair value method as prescribed
in SFAS No. 123(R). To lessen the impact of this change to future reportable earnings, in December 2005, we elected to accelerate the vesting period of all unvested stock options. Future option grants will lead to a decrease of reported
earnings, and may negatively impact our future stock price. At this time, we cannot estimate the impact to 2006 reported earnings, since we have not concluded how the adoption of this rule will effect our decision to issue future option grants In
addition, the change in accounting rules could impact our decision making to utilize broad based employee stock plans as a means to reward employees and could result in a competitive disadvantage to us in the employee marketplace. See Recent
Accounting Pronouncements elsewhere in this report.



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Results of Operations

Fiscal Year Ended December 31, 2004 Compared to Fiscal Year Ended December 31, 2005

The following table sets forth, as a
percentage of total revenues, our consolidated statements of operations data for the years ended December 31, 2004 and 2005.



|                                    |  |                                                                 |    |  |       |   
|----------------------------------- |  | --------------------------------------------------------------- | -- |  | ----- | --
|                                    |  | Results as Percentage ofRevenues for the YearEnded December 31, |   
|                                    |  | 2004                                                            |    |  | 2005  |   
|Revenues                            |  | 100.0                                                           |    |  | 100.0 |   
|Cost of goods sold                  |  | 89.3                                                            |    |  | 89.2  |   
|                                    |  |                                                                 |    |  |       |   
|Gross margin                        |  | 10.7                                                            |    |  | 10.8  |   
|                                    |  |                                                                 |    |  |       |   
|Operating expenses:                 |  |                                                                 |    |  |       |   
|Research and development            |  | 6.8                                                             |    |  | 5.8   |   
|Selling, general and administrative |  | 13.4                                                            |    |  | 13.1  |   
|Litigation settlement               |  | 2.8                                                             |    |  | 0.0   |   
|                                    |  |                                                                 |    |  |       |   
|Total operating expenses            |  | 23.0                                                            |    |  | 18.9  |   
|                                    |  |                                                                 |    |  |       |   
|Operating loss                      |  | (12.3                                                           | )  |  | (8.1  | ) 
|Other expense                       |  | (1.4                                                            | )  |  | (0.5  | ) 
|                                    |  |                                                                 |    |  |       |   
|Loss before income taxes            |  | (13.7                                                           | )  |  | (8.6  | ) 
|Income tax provision (benefit)      |  | (0.5                                                            | )  |  | 2.2   |   
|                                    |  |                                                                 |    |  |       |   
|Net loss                            |  | (13.2                                                           | )% |  | (10.8 | )%
|                                    |  |                                                                 |    |  |       |   

General.

We
established record revenues in 2005 of $94.7M continuing the momentum created in 2004 with the change in our business focus to establish our own Axesstel branded fixed wireless products. In the year ended December 31, 2004, we had significantly
increased our revenue in each of the four quarters as follows: Q1 $429,000, Q2 $7.9M, Q3 $26.1M, and Q4 $28.2M. In the year ended December 31, 2005, we had record revenues in the first two quarters as follows: Q1 $29.0 and Q2 $37.0. However,
due to multiple factors outlined in the Revenues section below, the third and fourth quarter revenues decreased to $16.9M and $11.8M. We believe we have since resolved these factors and will return to continued growth in 2006. Factors
that may cause our results of operations to fluctuate include those discussed in the Risk Factors section of this report.

Revenues.

For the year ended December 31, 2005, revenues were $94.7 million compared to $62.6 million for the year ended December 31, 2004,
representing a 51% increase. In 2005, our revenues were derived principally from two customers and three products, which two customers together represented 80% in 2005. In 2004, our revenues were derived principally from two customers and one
product, which two customers together represented 86% of revenues in 2004. These customers individually represented 59 % and 21% of revenues, respectively, in 2005, and 71% and 15% of revenues, respectively, in 2004. Our revenues for the year
ended December 31, 2005 consisted of 92% for our phone products and 8% for our terminal and broadband modem products. For the year ended December 31, 2004, all revenues were derived from our phone products. Revenues increased substantially
during 2005, however we did experience declines in the second half of the year. The decline in 2005 resulted from a few issues that caused a slowdown in orders. First, homologation and testing by our largest customer of two newly introduced products
were delayed in part due to the devastating weather conditions that affected India in early August; second, a customer in Pakistan renegotiated its payment terms for its new nationwide license and slowed orders during that process; and third, a
Latin American carrier has delayed orders in anticipation of our



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new GSM product launch. We are expecting orders from our Indian and Pakistani customers to return to increased levels in 2006 from the second half of 2005.
We also expect to release our GSM product in 2006. Beyond these issues, our objective is to expand our customer base to reach new customers and new regions. We continue to expect that most of our sales will be to foreign customers or for products to
be used in foreign countries. As we grow, we will become less dependent on a limited concentration of customers.

Cost of Goods Sold.

For the year ended December 31, 2005, cost of goods sold was $84.4 million compared to $55.8 million for the year ended December 31, 2004, an increase of 51%.
The increase tracked similar to the associated increase in revenues. We are looking to reduce manufacturing costs on a unit basis. Our cost of goods sold declined on a per unit basis in 2005, as we were able to re-engineer some of the components
within our products to take advantage of cost efficient alternate parts, and reduce prices with our suppliers based on increasing purchasing power. Most of our products were manufactured by one vendor in 2004 and in 2005. We continue to work toward
reduced manufacturing costs on a unit basis. We anticipate that our vendor will be able to further decrease its costs to us due to their transition from Taiwan to China, and as our purchase volume increases. Additionally, in the third quarter of
2005, we opened our own manufacturing facility in South Korea. In an effort to increase our ability to lower the unit cost of our product by expanding our abilities to redesign costs savings in our product, and granting us increased internal supply
chain capabilities in the long term. However, in the second half of 2005, we recorded $1.4M of expense related to start-up of the Korean factory and unabsorbed overhead expenses due to the reduced revenue volume experienced in the second half of
2005. We are evaluating additional manufacturing vendors and other vendors to produce specific hardware and other components used in the manufacturing process in an effort to further reduce cost of goods sold.

Gross Margin.

For the years ended December 31, 2005 and 2004,
gross margin as a percentage of revenues was 11%. We had previously expected gross margins to increase from 11% in 2004 to 12% in 2005 as we introduced higher margin data products. However, margins were affected in the second half of 2005 by the
$1.4M expense recorded for start-up costs and unabsorbed overhead associated with our Korean manufacturing facility. We expect margins to increase for the full year 2006 compared to margins experienced in the second half of 2005, but margins may
fluctuate due to customer and product mix, as well as other factors.

Research and Development.

For the year ended December 31, 2005, research and development expenses were $5.5 million compared to $4.2 million for the year ended December 31, 2004, an
increase of 30%. As a percentage of revenue, research and development for 2005 decreased to 6% from 7% in 2004. Two new product lines were released during 2005 and are currently available for sale. We are presently spending much of our research and
development funds on our new line of data products and GSM products. In addition, significant modifications to current products are required for each customer and each geographical location where the end user is located. Our research and development
expenditures are expected to increase in absolute terms and decrease as a percentage of revenues in 2005.

Selling, General and Administrative.

For the year ended December 31, 2005 selling, general and administrative expenses were $12.4 million compared to $8.4 million for the year ended
December 31, 2004, an increase of 47 percent. This increase is primarily attributed to an increase in wages and benefits of $2.3 million including severance pay of $500,000, depreciation and amortization of approximately $700,000, allowance for
doubtful accounts of $500,000, and other operating expenses of approximately $500,000. Our selling, general and administrative expenses increased substantially during the year as we continued to grow and build our infrastructure. However, as a
percentage of revenues,



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selling, general and administrative expenses in 2005 remained at 13% as compared to 2004. As our revenues increase, we expect our selling, general and
administrative expenses to increase as we continue to grow and build our infrastructure, but decrease as a percentage of revenues.

Litigation
Settlement.

In October 2004, we entered into a settlement agreement with Axess Telecom Co., Ltd. Pursuant to the agreement, we paid Axess Telecom
$900,000 (of which $870,000 related to the settlement agreement and $30,000 relates to the currency exchange rates) in December 2004. Under the settlement agreement, Axess Telecom agreed to dismiss its lawsuit against the Companys wholly-owned
subsidiary, Axesstel California. We in turn agreed on behalf of our subsidiary, Axesstel R&D Center Co., Ltd., not to enforce a court order prohibiting Axess Telecom from using certain trade names related to a trademark owned by Axesstel R&D
Center, provided Axess Telecom stops all use within six months from the date of the settlement agreement. The parties agreed that the former agreements to which Axess Telecom and Axesstel California were parties are terminated, that neither
partys current or prior products infringe on the other partys intellectual property rights, and that the parties are free to compete with each other.

We also entered into a memorandum of understanding with Axess Telecom pursuant to which we agreed to purchase KRW 1 billion (approximately $870,000 based on currency exchange rates at the time of settlement) convertible bonds of Axess
Telecom by January 31, 2005. Due to the requirements to make this purchase and uncertainty as to the recoupment of our investment in Axess Telecom, if any, we charged the additional $870,000 as litigation settlement during the quarter ended
September 30, 2004. Furthermore, we have recorded charges of $88,000 in the fourth quarter of 2004 and $17,000 in the first quarter of 2005 to reflect the payment at the current currency exchange rate. The purchase of the convertible bonds was
since completed in the first quarter of 2005.

Other Income (Expense).

For the year ended December 31, 2005, other income (expense) was a net expense of $477,000. This amount included interest and other income of $420,000, offset by $897,000 of expense associated from debt and
financing activities. This expense included prepayment penalties of $230,000 and the expensing of $493,000 for finder fees, note payable discounts, and interest. For the year ended December 31, 2004, other income (expense) was a net expense of
$883,000, which expense was predominantly debt related.

Provision (Benefit) for Income Taxes.

For the year ended December 31, 2005, an income tax provision of $2.0 million was recorded compared to an income tax benefit of approximately $303,000 for the year
ended December 31, 2004. The $2.0 million provision was recorded in Q3 2005 to increase the income tax valuation reserve against our previously recorded deferred tax asset. This asset was established in 2003 in recognition of an anticipated tax
benefit associated with our net operating losses. We expected to benefit from this asset in the current year; however, due to the current operating results from the third quarter of 2005, we cannot determine if it is probable that we will be able to
utilize the tax benefit. Accordingly, we have established a full reserve against the asset.

In addition, according to Internal Revenue Code regulations,
we were deemed in October 2004 and March 2005 to have experienced two 50% changes in ownership during the past three years. These changes in ownership limit the use of our net operating loss carryforward to a specific amount each year. We may in the
future experience further ownership change events, which would similarly limit use of any net operating loss carryforwards that might otherwise be available subsequent to the date of the most recent 50% ownership changes.



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Quarterly Results of Operations

The following table sets forth our quarterly consolidated statements of operations data for the eight quarters ended December 31, 2005. The information for each quarter is unaudited and we have prepared it on the
same basis as the audited consolidated financial statements appearing elsewhere in this report. This information includes all adjustments that management considers necessary for the fair presentation of such data. The quarterly data should be read
together with our consolidated financial statements and related notes appearing elsewhere in this report. The results of operations for any one quarter are not necessarily indicative of results for any future period.



|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------------------------- | ------ | - | ------------- | - | ------ | -------------- |  | - | ------------- | - |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------------- | - |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Three Months Ended                    |       
|                                                             |  | Mar. 31, 2004                         |        |   | June 30, 2004 |   |        | Sept. 30, 2004 |  |   | Dec. 31, 2004 |   |  | Mar. 31, 2005 |        |   | June 30, 2005 |   |        | Sept. 30,2005 |  |   | Dec. 31, 2005 |  
|                                                             |  | (in thousands, except per share data) |       
|Revenues                                                     |  | $                                     | 429    |   |               | $ | 7,875  |                |  | $ | 26,068        |   |  | $             | 28,193 |   |               | $ | 29,010 |               |  | $ | 36,970        |   |  | $ | 16,899 |   |  | $ | 11,787 |  
|Cost of goods sold                                           |  |                                       | 346    |   |               |   | 6,898  |                |  |   | 22,785        |   |  |               | 25,822 |   |               |   | 25,443 |               |  |   | 32,458        |   |  |   | 15,432 |   |  |   | 11,082 |  
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Gross margin                                                 |  |                                       | 83     |   |               |   | 977    |                |  |   | 3,283         |   |  |               | 2,371  |   |               |   | 3,567  |               |  |   | 4,512         |   |  |   | 1,467  |   |  |   | 705    |  
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Operating Expenses:                                          |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Research and development                                     |  |                                       | 962    |   |               |   | 867    |                |  |   | 1,042         |   |  |               | 1,374  |   |               |   | 1,355  |               |  |   | 1,377         |   |  |   | 1,441  |   |  |   | 1,339  |  
|Selling, general and administrative                          |  |                                       | 1,698  |   |               |   | 1,726  |                |  |   | 2,619         |   |  |               | 2,377  |   |               |   | 2,825  |               |  |   | 2,969         |   |  |   | 2,620  |   |  |   | 4,001  |  
|Litigation settlement                                        |  |                                       |       |   |               |   |       |                |  |   | 1,740         |   |  |               |       |   |               |   |       |               |  |   |              |   |  |   |       |   |  |   |       |  
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Total operating expenses                                     |  |                                       | 2,660  |   |               |   | 2,593  |                |  |   | 5,401         |   |  |               | 3,751  |   |               |   | 4,180  |               |  |   | 4,346         |   |  |   | 4,061  |   |  |   | 5,340  |  
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Operating income (loss)                                      |  |                                       | (2,577 | ) |               |   | (1,616 | )              |  |   | (2,118        | ) |  |               | (1,380 | ) |               |   | (613   | )             |  |   | 166           |   |  |   | (2,594 | ) |  |   | (4,635 | )
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Other income (expense):                                      |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Interest income and other income                             |  |                                       | 5      |   |               |   | 2      |                |  |   | 1             |   |  |               | 3      |   |               |   | 17     |               |  |   | 196           |   |  |   | 128    |   |  |   | 79     |  
|Interest expense and other expense                           |  |                                       | (85    | ) |               |   | (127   | )              |  |   | (271          | ) |  |               | (411   | ) |               |   | (784   | )             |  |   | (14           | ) |  |   | (15    | ) |  |   | (84    | )
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Total other income (expense)                                 |  |                                       | (80    | ) |               |   | (125   | )              |  |   | (270          | ) |  |               | (408   | ) |               |   | (767   | )             |  |   | 182           |   |  |   | 113    |   |  |   | (5     | )
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                            |  |                                       | (2,657 | ) |               |   | (1,741 | )              |  |   | (2,388        | ) |  |               | (1,788 | ) |               |   | (1,380 | )             |  |   | 348           |   |  |   | (2,481 | ) |  |   | (4,640 | )
|Provision or reduction of benefit (benefit) for income taxes |  |                                       | (1,063 | ) |               |   | (696   | )              |  |   |              |   |  |               | 1,456  |   |               |   | 9      |               |  |   | 20            |   |  |   | 2,017  |   |  |   | 2      |  
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Net income (loss)                                            |  | $                                     | (1,594 | ) |               | $ | (1,045 | )              |  | $ | (2,388        | ) |  | $             | (3,244 | ) |               | $ | (1,389 | )             |  | $ | 328           |   |  | $ | (4,498 | ) |  | $ | (4,642 | )
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Earnings (loss) per share:                                   |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Basic                                                        |  | $                                     | (0.20  | ) |               | $ | (0.13  | )              |  | $ | (0.26         | ) |  | $             | (0.30  | ) |               | $ | (0.10  | )             |  | $ | 0.01          |   |  | $ | (0.20  | ) |  | $ | (0.21  | )
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  
|Diluted                                                      |  | $                                     | (0.20  | ) |               | $ | (0.13  | )              |  | $ | (0.26         | ) |  | $             | (0.30  | ) |               | $ | (0.10  | )             |  | $ | 0.01          |   |  | $ | (0.20  | ) |  | $ | (0.21  | )
|                                                             |  |                                       |        |   |               |   |        |                |  |   |               |   |  |               |        |   |               |   |        |               |  |   |               |   |  |   |        |   |  |   |        |  

Our customer mix, product mix and other components of our results of operations have fluctuated significantly and
are likely to do so again in the future. Therefore, we believe that period-to-period comparison of our results of operations should not be relied on as an indication of future performance. Factors that may cause our net sales and operating results
to fluctuate include those discussed in the Risk Factors section of this report.

Liquidity and Capital Resources

At December 31, 2005, our principal sources of liquidity included cash and cash equivalents of $9.2 million compared to $7.5 million at December 31, 2004. In
addition, at December 31, 2005, accounts receivable were $13.7 million, compared to $8.8 million at December 31, 2004. The majority of our accounts receivable are



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covered by letters of credit or are insured. At December 31, 2005, we had working capital of approximately $9.3 million compared to negative working
capital of approximately $392,000 at December 31, 2004. For the year ended December 31, 2005, we used $20.7 million of cash in operations versus $573,000 of cash in operations for the year ended December 31, 2004. The
$20.7 million cash used from operations in 2005 included the net loss of $5.2 million (net loss offset by non-cash adjustments for the write-off of deferred tax assets, and depreciation and amortization) and changes in operating assets and
liabilities of $15.5 million. Investment activities used $3.0 million of cash during the year ended December 31, 2005, including the purchase of $1.9 million of manufacturing equipment from TBK Electronics Corporation used in the establishment
of our factory in South Korea. In the year ended December 31, 2004, we used approximately $1.1 million for software and equipment purchases.

During the year ended December 31, 2005, we completed a public offering, two private placements, and received additional funds from warrant and employee stock option exercises, for aggregate net proceeds of $19.3 million. With these
proceeds, we paid off all our existing long-term principal debt obligations with cash payments of $1.3 million. In December 2005, we entered into short term bank financings, secured by accounts receivables for the amount of $7.2 million. Combined,
we generated $25.2 million of net cash from these financing activities in 2005. Of this amount, we paid $975,000 to eliminate the liability as part of the settlement agreement with Axess Telecom. At December 31, 2005, we expect the remaining
proceeds, together with cash flow from operations, will allow us the necessary working capital to fund our operations for at least the next 12 months. Changes in our operating plans, lower than anticipated revenues, increased expenses or other
events, including those described in Risk Factors, may cause us to seek additional debt or equity financing in the future. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could
negatively impact our growth plans and our financial condition and results of operations.

During the year ended December 31, 2004, we funded our
operations from cash generated from operations and from private sales of equity and debt securities. At December 31, 2004, cash of $7.5 million represented an increase of approximately $7.1 million compared to December 31, 2003. We used
$573,000 of cash in operations and approximately $1.3 million cash for investment activities. Cash used for investment activities consisted primarily of the purchase of computer software for product development. Cash used in operations reflected our
net loss of $8.3 million, offset by increases in accounts payable, depreciation and non-cash consulting payments. We also used $975,000 in deferred offering costs related to a planned public offering. To fund our cash deficits from operations and
investment activities, we raised approximately $4.9 million from the sale of common stock and borrowed approximately $6.2 million during 2004.

During the
year ended December 31, 2004, we received $11.1 million in proceeds from the sale of common stock and the issuance of convertible term notes. With these proceeds, we paid off a note payable of $1.9 million and capital leases for equipment of
$221,000. Combined, we provided $9.0 million of net cash from these financing activities during 2004.

As indicated above, to finance the cash needs for
our business requirements during the year ended December 31, 2005, we have raised capital in two private placement transactions, a public offering in Q1 2005, and short-term bank financings. In Q1 2005, we additionally paid off all our
long-term debt obligations and purchased a convertible bond from Axess Telecom. These transactions are described below.

ComVentures. In February
2005, we sold 270,271 shares of our common stock in a private placement to three private equity funds managed by ComVentures of Palo Alto, California, which we refer to collectively as ComVentures. The purchase price was $3.70 per share, resulting
in cash proceeds to us of approximately $1,000,000. In March 2005, we sold an additional 500,000 shares of our common stock in a private placement to ComVentures. The purchase price was $4.00 per share, resulting in cash proceeds to us of
approximately $2,000,000.

Secondary Public Offering. On March 2, 2005, we closed an underwritten public offering of our common stock resulting
in proceeds, after underwriting discounts but before expenses, of $15.0 million to us and $16.7 million



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to the selling stockholders. On March 22, 2005, the underwriters of our public offering exercised their option to purchase an additional 1,069,432
shares of our common stock to cover over-allotments, resulting in additional proceeds, after underwriting discounts but before expenses, of $2.7 million to us and $1.3 million to a selling stockholder.

Debt Repayments

Laurus Master Fund, Ltd.On March 30,
2005, we issued and sold 750,000 shares of our common stock at the conversion price of $3.16 per share to Laurus Master Fund, Ltd. in connection with the conversion of $2.37 million of principal due under the convertible term note issued to Laurus
in March 2004, which we refer to as the March 2004 note. Immediately following this conversion, on March 31, 2005, we redeemed the remaining balance of the March 2004 note, as well as the remaining balance due under other convertible term note
issued to Laurus in August 2004, which we refer to as the August 2004 note, for an aggregate cash payment of approximately $1.5 million. This amount represented 115% of the remaining principal on the March 2004 note and 120% of the remaining
principal on the August 2004 note plus accrued interest on both notes through March 30, 2005.

Convertible Bond

Purchase of Convertible Bond from Axess Telecom.On February 16, 2005, we entered into a Convertible Bond Sale and Purchase Agreement with Axess Telecom Co.,
Ltd., a Korean corporation, for the purchase of a convertible bond, par value KRW 1,000,000,000 (approximately US $975,000). Our purchase of the convertible bond satisfied our obligations under the Memorandum of Understanding entered into between us
and Axess Telecom on October 14, 2004 in connection with the settlement of a lawsuit Axess Telecom filed against us in Korea. Due to the uncertainty of the value from this convertible bond at the time of settlement, we did not record it as an
asset in our accounting records.

The convertible bond has a three-year maturity, accrues interest at the rate of 8% per annum, pays interest
quarterly, and provides that all payments are made in Korean won (KRW). The convertible bond may be prepaid without penalty and is secured by all the assets of Axess Telecom. After one year the convertible bond may be converted, at our election,
into shares of common stock of Axess Telecom at the conversion rate of KRW 2,550 per share (as adjusted for stock splits, stock dividends and certain stock issuances). The common stock of Axess Telecom is quoted on the Korean KOSDAQ stock
market.

Silicon Valley Bank. In December 2005, we borrowed $7.2 million from Silicon Valley Bank (SVB), secured by accounts receivable in
approximately the same amount. The loan was repaid in the first quarter of 2006. The outstanding principal balance of the loan bore interest at SVBs then current LIBOR rate plus 2.5%. Payments of principal were immediately due and payable to
SVB in the amount of each payment that we received under the pledged receivables.

Contractual Obligations and Commitments

As of December 31, 2005, we had no off-balance sheet arrangements. The following summarizes our contractual obligations at December 31, 2005 and the effect
those obligations are expected to have on our liquidity and cash flow in future periods (in thousands):



|                              |  |                        |        |                 |   |             |  |             |       |                  |   |       |  |   |      
|----------------------------- |  | ---------------------- | ------ | --------------- | - | ----------- |  | ----------- | ----- | ---------------- | - | ----- |  | - | -----
|                              |  | Payments Due by Period
|Contractual Obligations       |  | Total                  |        | Less than1 year |   | 2 to 3years |  | 4 to 5years |       | More than5 years
|Short-term bank financing     |  | $                      | 7,239  |                 | $ | 7,239       |  | $           |      |                  | $ |      |  | $ |     
|Long-term liabilities         |  |                        | 2,500  |                 |   |            |  |             | 2,500 |                  |   |      |  |   |     
|Operating leases (facilities) |  |                        | 4,571  |                 |   | 925         |  |             | 1,305 |                  |   | 1,226 |  |   | 1,115
|                              |  |                        |        |                 |   |             |  |             |       |                  |   |       |  |   |      
|Total                         |  | $                      | 14,310 |                 | $ | 8,164       |  | $           | 3,805 |                  | $ | 1,226 |  | $ | 1,115
|                              |  |                        |        |                 |   |             |  |             |       |                  |   |       |  |   |      



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We entered into a non-cancelable operating lease for approximately 17,000 square feet of office space for our corporate
headquarters and United States operations, which lease is secured by a letter of credit. The lease term is 67 months that expires in February 2011 with a 5-year option to renew. The basic monthly rent ranges from $27,000 to $34,000 during the
remainder of the 67-month period. We have an additional lease commitment at our former location in San Diego, California. This facility has been subleased as of August 2004 for the remainder term of our lease until November 2006. The difference
between our lease payments for this facility versus our sub-lease is approximately $4,000 per month.

Our principal research and development facility is
located in the Gyeonggi Province of South Korea, where we lease approximately 18,000 square feet of office space pursuant to a ten-year lease that expires in August 2015. For the years 2005 and 2006, annual rent is approximately $224,000. Annual
rent after 2006 is subject to adjustment, based on market conditions. In August 2005, we entered into a lease agreement for a manufacturing facility in the Gyeonggi Province of South Korea where we lease approximately 29,000 square feet. The monthly
lease payment is approximately $26,000 per month over two years and expires in June 2007, with a provision for a one-year extension. We additionally lease a sales office in Nanjing China for approximately $400 per month.

Recent Accounting Pronouncements

In December 2004,
the FASB issued SFAS No. 123 (revised 2004) Share-Based Payment, or SFAS No. 123(R). SFAS No. 123(R) revises FASB Statement No. 123 Accounting for Stock-Based Compensation, and supersedes APB Opinion
No. 25, and its related implementation guidance. This Statement eliminates the ability to account for share-based compensation using the intrinsic value method under APB Opinion No. 25. SFAS No. 123(R) focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, known as the requisite service period, which is
usually the vesting period. SFAS No. 123(R) is effective for companies filing under Regulation S-B as of the beginning of the first interim or annual reporting period that begins after December 15, 2005, which for us will be our first
quarter of the year ending December 31, 2006. We anticipate adopting SFAS No. 123(R) beginning in the quarter ending March 31, 2006. Accordingly, the provisions of SFAS No. 123(R) will apply to new awards and to awards modified,
repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date must be recognized as
the requisite service is rendered on or after the required effective date. These new accounting rules will lead to a decrease in reported earnings. To lessen the impact of this change to future reportable earnings, in December 2005, we elected to
accelerate the vesting period of all unvested stock options. Future option grants will lead to a decrease of reported earnings, and may negatively impact our future stock price. At this time, we cannot estimate the impact to 2006 reported earnings,
since we have not concluded how the adoption of this rule will effect our decision to issue future option grants In addition, the change in accounting rules could impact our decision making to utilize broad based employee stock plans as a means to
reward employees and could result in a competitive disadvantage to us in the employee marketplace.



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ITEM 8A. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. Disclosure controls and
procedures are controls and other procedures that are designed to ensure that the information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that a company
files or submits under the Exchange Act is accumulated and communicated to the companys management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

We maintain disclosure controls and procedures designed to ensure that material information related to our company is
recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.

Under the supervision of our
principal executive officer and our principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our
principal executive officer and principal financial officer concluded that as of December 31, 2005, the design and operation of such disclosure controls and procedures were effective.

(b) Changes In Internal Controls Over Financial Reporting. No changes were made in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent fiscal quarter that has materially affected, or is likely to materially affect, our internal control over financial reporting.

(c) Limitations On Disclosure Controls And Procedures. Our management, including our principal executive officer and principal financial officer,
does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over
time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

ITEM 8B. OTHER INFORMATION

None.



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PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF AXESSTEL

The following table provides information regarding our directors and
executive officers as of December 31, 2005:



|                          |  |     |  |                                                             
|------------------------- |  | --- |  | ------------------------------------------------------------
|Name                      |  | Age |  | Position                                                    
|Mike H.P. Kwon(3)         |  | 41  |  | Chairman of the Board (Director) and Chief Executive Officer
|Lixin Cheng               |  | 39  |  | Chief Sales Officer                                         
|H. Clark Hickock          |  | 50  |  | Chief Operating Officer                                     
|Patrick Gray              |  | 44  |  | Senior Vice President Finance and Controller                
|Jai Bhagat(1)(2)(3)(4)(5) |  | 58  |  | Director                                                    
|Scott Fox(1)(4)           |  | 49  |  | Director                                                    
|Osmo A. Hautanen          |  | 51  |  | Director                                                    
|Haydn Hsieh               |  | 51  |  | Director                                                    
|Bryan B. Min              |  | 42  |  | Director                                                    
|Åke Persson(1)(3)(4)(5)   |  | 61  |  | Director                                                    
|Roland A. Van der Meer(4) |  | 45  |  | Director                                                    
|Seung Taik Yang(2)        |  | 64  |  | Director                                                    

---

|(1) | Member of the Audit Committee
|--- | -----------------------------

|(2) | Member of the Compensation Committee
|--- | ------------------------------------

|(3) | Member of the Executive Committee
|--- | ---------------------------------

|(4) | Member of the Merger and Acquisition Committee
|--- | ----------------------------------------------

|(5) | Member of the Nominating and Governance Committee
|--- | -------------------------------------------------

Mike H.P. Kwonfounded Axesstel California in July 2000, and has served as our Chief Executive Officer and Chairman of the Board since August 2002, when Axesstel California became our subsidiary. From 1998 to 2000, Mr. Kwon was the Vice President of Sales
at Neopoint, Inc., a developer and manufacturer of wireless application protocol-enabled handsets. Mr. Kwon holds a B.A. in Business Administration from Rutgers University.

Lixin Chengjoined us in January 2004 as President of Axesstel California. Mr. Cheng now serves as our Chief Sales Officer and oversees product management, marketing and sales. He served as a member of our
board from November 2004 until June 2005. From 2001 to 2004, Mr. Cheng was Director of Business Management at Ericsson Wireless Communications Inc., a San Diego-based affiliate of Telefon AB Ericsson LM (Nasdaq: ERICY) and global provider of
mobile wireless handsets, where he was responsible for developing and managing Ericsson CDMA business activities in various markets in Japan, South Korea, Europe, Middle East, Central Asia and Africa. Mr. Cheng holds an M.B.A. in International
Business Management from the International University of America in San Francisco and a B.S. in Information and Electronics Engineering from Zhejiang University in China.

H. Clark Hickock joined us as an employee in April 2005, and assumed the position of our Chief Operating Officer in May 2005. From June 2004 to April 2005, Mr. Hickock served as Executive Vice President
Global Operations for Cherokee International Corporation (Nasdaq: CHRK), a designer and manufacturer of power sources. Previously, he served as Executive Vice President Global Operations for REMEC, Inc. (Nasdaq: REMC), a telecommunications equipment
company, from 1994 to 2004. Mr. Hickock holds a B.A. in Economics from University of Texas, Dallas.

Patrick Gray joined us in March 2004 as
our Vice President, Controller and was appointed Senior Vice President Finance and Controller in December 2005. From 1996 to 2004, he held various finance and accounting positions,



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including serving as VP-Corporate Controller and VP-Controller of Global Operation at REMEC, Inc. Mr. Gray holds an M.B.A. from Pepperdine University
and a B.S. in Business Administration with a concentration in accounting from California State University, Northridge.

Jai Bhagat has served as one
of our directors since August 2003. In 2000, he founded AIR2LAN, a broadband service provider, and currently serves as its Chairman of the Board of Directors. Prior to founding AIR2LAN, Mr. Bhagat co-founded SkyTel Communications, Inc., a
wireless messaging services company, and served as its Vice Chairman and Chief Executive Officer prior to its acquisition by WorldCom in 1999. He currently serves on the board of directors of JP Mobile, a Texas-based company that designs and markets
advanced messaging software and solutions for handheld devices and wireless communications devices. Mr. Bhagat holds an M.S. in Electrical Engineering from Howard University and a B.S. in Electrical Engineering from Bits Pilani in India.

Scott Foxhas served as one of our directors since December 2005. Mr. Fox has served as Chairman and Chief Executive Officer of Global View
Partners, Inc., a privately-held mergers and acquisitions, investment, and strategic consulting company, which specializes in the global wireless and venture capital industries since 2004. In 2002, he co-founded Digital Orchid, Inc., a U.S.-based
innovator in the development, management and distribution of exclusive branded wireless content and applications in the areas of entertainment, sports and gaming. From 2000 to 2002, Mr. Fox was chairman of the GSM Association, which is the
worlds leading wireless-industry body consisting of 680 second and third generation mobile operators and more than 160 key manufacturers and suppliers. He was Group President - Wireless Facilities, Inc. (Nadsaq WFII) a global leader in
wireless telecommunications design, deployment and outsourcing from 1999 to 2002. Mr. Fox holds a Bachelor of Science in Electrical Engineering from the University of Florida and has completed executive business and strategy courses at the
Wharton School of Business.

Osmo A. Hautanenhas been one of our directors since November 2005. Mr. Hautanen has served as Chief Executive
Officer of Magnolia Broadband, Inc., a fabless semiconductor-design company for the cellular communications industry, since 2004. From 2002 to 2003, he served as Chief Executive Officer of Fenix LLC, the holding company for Union Pacific
Corporations extensive portfolio of technology assets. From 2000 to 2001, Mr. Hautanen was president of Americas for Philips Consumer Communications group. He is currently a member of the board of directors of Datrek Miller International,
Inc., (OTC BB: DMLL.OB) a supplier of products and services to the golf industry. Hautanen holds a Bachelor of Science in Control Engineering from Technical College of Varkaus (Finland), as well as a MBA in international business from Georgia State
University. He is fluent in Finnish, German and English.

Haydn Hsieh has served as one of our directors since April 2004. Mr. Hsieh is
currently the President and Chief Executive Officer of Wistron NeWeb Corporation. He formerly served as the Chairman of Acer Enrich Technology Corp, a subsidiary of Acer Group, a Taiwanese information-technology company. Previously, he held various
positions within the Acer Group, since 1981. Mr. Hsieh attended an M.B.A. program from National ChengChi University and holds a B.E.E. from Ta-Tung Institute of Technology in Taiwan.

Bryan B. Minhas been one of our directors since November 2005. Since founding Epsilon Systems Solutions, Inc. in 1998, Mr. Min, has served as Epsilons
President and Chief Executive Officer. He is a certified nuclear engineer, served active duty in the U.S. nuclear submarine force from 1986 to 1992 and continues to serve the U.S. as a naval reserve officer. Mr. Min currently serves on the
Board of Councilors for the School of Engineering for the University of Southern California and is a board member for the San Diego Countys Greater Regional Chamber of Commerce. He holds a Bachelor of Science from the University of Southern
California and a Master of Science from Virginia Polytechnic and State University. Additionally, he is a graduate of the Owner/Presidents Management Program at Harvard Business School and has completed business executive courses at the Wharton
School of Business and the Defense Systems Management College.

Åke Persson has served as one of our directors since November 2004. From 1999
until his retirement in February 2004, Mr. Persson was the President of Ericssons CDMA Systems Business Unit and President of Ericsson



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Wireless Communications Inc. in San Diego. Between 1970 and 1999, he held various other executive marketing and sales positions with the global Ericsson
organization. Mr. Persson holds a B.S. in Theoretical Physics and Mathematics from the University of Uppsala, Sweden.

Roland Van der Meer has
been one of our directors since December 2005. Mr. Van der Meer has served since 1997 as a partner with ComVentures, which invests in technologies and early stage communications companies. Before co-founding ComVentures, he served as a partner
with Partech International, co-founded Communications Ventures, and spent several years with Hambrecht & Quist Venture Partners. Mr. Van der Meer holds a BSEE from the University of Pennsylvania and a BSE from the Wharton School.

Seung Taik Yang, Ph.D.has served as one of our directors since August 2003. Dr. Yang is currently the President of Tongmyong University of
Information Technology in Busan, South Korea. From 2001 to 2002, Dr. Yang served as the Minister of Information and Communications for the Republic of Korea. Prior to serving as the Minister of Information and Communications, Dr. Yang was
a chair professor at Kwangwoon University and at the Information and Communications University. Dr. Yang holds a Ph.D. in Electrical Engineering from the Polytechnic Institute of Brooklyn, an M.S. in Electrical Engineering from Virginia
Polytechnic Institute and a B.S. in Electrical Engineering from Seoul National University in South Korea.

Board Committees

Our board of directors has an audit committee, a compensation committee, an executive committee, a merger and acquisition committee and a nominating and governance
committee. Our board of directors may also establish in the future any other committees that it deems necessary or advisable.

Audit
Committee. The members of our audit committee are Scott Fox, Jai Bhagat and Åke Persson, each of whom qualifies as an independent director under the current American Stock Exchange and SEC rules and regulations. Mr. Fox chairs
the audit committee and qualifies as an audit committee financial expert, as contemplated by Item 401(e) of Regulation S-B. Our audit committee, among other things:



| |  |  | selects the independent auditors, considering independence and effectiveness;
| | - |  | -----------------------------------------------------------------------------



| |  |  | discusses the scope and results of the audit with the independent auditors and reviews with management and the independent auditors our interim and year-end operating results;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | considers the adequacy of our internal accounting controls and audit proceeds;
| | - |  | ------------------------------------------------------------------------------



| |  |  | reviews and approves all audit and non-audit services to be performed by the independent auditors; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | administers the whistleblower policy.
| | - |  | -------------------------------------

The audit committee has the sole
and direct responsibility for appointing, evaluating and retaining our independent auditors and for overseeing their work.

Compensation
Committee. The members of our compensation committee are Seung Taik Yang and Jai Bhagat, each of whom qualifies as an independent director under the current American Stock Exchange and SEC rules and regulations. Dr. Yang chairs the
compensation committee. Our compensation committee, among other things:



| |  |  | reviews and approves performance goals and objectives for executive officers, and recommends to the board of directors the compensation level of the executive officers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reviews and makes recommendations to our board of directors with respect to our equity incentive plans;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | administers and makes grants under our 2004 Equity Incentive Plan; and
| | - |  | ----------------------------------------------------------------------



| |  |  | establishes and reviews general policies relating to compensation and benefits of our employees.
| | - |  | ------------------------------------------------------------------------------------------------



42



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##### Table of Contents

Executive Committee.The members of our executive committee are Mike H. P. Kwon, Jai Bhagat and Åke Persson.
Mr. Kwon chairs the executive committee. Our executive committee, among other things:



| |  |  | acts, only when necessary, in place of the Board during the intervals between Board meetings when a telephonic meeting of the full the full Board to decide matters at hand is
impractical;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | has the full authority and power of the Board in management of the Company, however, it does not have the power (i) to take any actions which have been specifically delegated
to any other committee of the Board, or (ii) to take actions with respect to:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the declaration of dividends or the making of any other distribution to the stockholders of the Company;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the issuance of stock, bonds, debentures or the borrowing of moneys except within limits expressly approved by the Board;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the amendment of the Companys Articles of Incorporation (except to the extent of filing a Certificate of Designation in connection with the establishment of a series or class
of Preferred Stock or a Certificate of Change in connection with a change to the Companys resident agent or registered office);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | amending, repealing or otherwise modifying the Bylaws, this Charter or any resolution or resolutions of the Board designating the Committee;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | filling vacancies and newly created directorships on the Board;
| | - |  | ---------------------------------------------------------------



| |  |  | removing directors from the Board;
| | - |  | ----------------------------------



| |  |  | mergers and consolidations;
| | - |  | ---------------------------



| |  |  | the sale, lease or exchange of all or substantially all of the assets of the Company;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | the dissolution of the Company; or
| | - |  | ----------------------------------



| |  |  | any action requiring the approval of stockholders.
| | - |  | --------------------------------------------------

Merger and
Acquisition Committee.The members of our merger and acquisition committee are Roland Van der Meer, Jai Bhagat, Scott Fox and Åke Persson, each of whom qualifies as an independent director under the current American Stock Exchange and SEC
rules and regulations. Mr. Van der Meer chairs the merger and acquisition committee. Our merger and acquisition committee, among other things:



| |  |  | provides guidance to the Company in matters related to potential strategic transactions.
| | - |  | ----------------------------------------------------------------------------------------

Nominating and Governance Committee. The members of our nominating and governance committee are Jai Bhagat and Ake Persson, each of whom qualifies as an independent director under the current American
Stock Exchange and SEC rules and regulations. Mr. Bhagat chairs the nominating and governance committee. Our nominating and governance committee, among other things:



| |  |  | identifies, evaluates and recommends nominees to our board of directors and committees of our board of directors;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | conducts searches for appropriate directors;
| | - |  | --------------------------------------------



| |  |  | evaluates the performance of our board of directors and of individual directors;
| | - |  | --------------------------------------------------------------------------------



| |  |  | reviews developments in corporate governance practices;
| | - |  | -------------------------------------------------------



| |  |  | evaluates the adequacy of our corporate governance practices and reporting; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | makes recommendations to the board concerning corporate governance matters.
| | - |  | ---------------------------------------------------------------------------



43



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##### Table of Contents

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time been one of our officers or employees. None of our executive officers currently serves, or in the past
year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Code of Ethics

We have adopted a Code of Ethics for Directors,
Officers and Employees, a code of ethics that applies to all employees, including our executive officers. A copy of our Code of Ethics for Directors, Officers and Employees has previously been filed with the Commission and is incorporated by
reference to this annual report. In the event that we make any amendments to, or grant any waivers of, a provision of the Code of Ethics for Directors, Officers and Employees that applies to the principal executive officer, principal financial
officer, or principal accounting officer that requires disclosure under applicable SEC rules, we intend to disclose such amendment or waiver and the reasons therefore on a Form 8-K or on our next periodic report.

Section 16(a) Beneficial Ownership Reporting Compliance

Section
16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and persons who own more than ten percent of a registered class of our securities, to file with the SEC reports of ownership of our securities and changes in reported
ownership. Officers, directors and greater than ten percent stockholders are required by SEC rules to furnish us with copies of all Section 16(a) reports they file.

Based solely on a review of the reports furnished to us, or written representations from reporting persons that all reportable transaction were reported, we believe that during the fiscal year ended December 31,
2005, our officers, directors and greater than ten percent owners timely filed all reports they were required to file under Section 16(a), except that one report, covering one transaction, was filed late by Mike H.P. Kwon.



44



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##### Table of Contents

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by, or paid to our
named executive officers during the fiscal years ended December 31, 2005, 2004 and 2003. Individuals we refer to as our named executive officers include our Chief Executive Officer and the four other most highly compensated
executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2005.

Summary Compensation Table



|                                                                    |  |              |  |                     |                       |           |                             |                              |  |     |                                       |           |  |               
|------------------------------------------------------------------- |  | ------------ |  | ------------------- | --------------------- | --------- | --------------------------- | ---------------------------- |  | --- | ------------------------------------- | --------- |  | --------------
|                                                                    |  |              |  | Annual Compensation |                       |           | Long-TermCompensationAwards
|Name and Principal Position                                         |  | FiscalYear   |  | Salary ($)          |                       | Bonus ($) |                             | Other AnnualCompensation ($) |  |     | SecuritiesUnderlyingOptions /Warrants
|Mike H.P. KwonChairman and Chief Executive Officer                  |  | 200520042003 |  | $$$                 | 330,150265,000243,000 |           | $$$                         | 60,000                     |  | $$$ | 3,912,18817,77815,709                 | (4)(5)(5) |  | 300,000     
|                                                                    |  |              |  |                     |                      
|H. Clark Hickock(1)Chief Operating Officer                          |  | 2005         |  | $                   | 160,064               |           | $                           | 38,000                       |  | $   | 7,000                                 | (5)       |  | 270,000       
|                                                                    |  |              |  |                     |                      
|David L. Morash(2)President and Chief Financial Officer    (former) |  | 20052004     |  | $$                  | 235,269178,000        |           | $$                          |                            |  | $$  | 53,1209,000                           | (6)(5)    |  | 100,000500,000
|                                                                    |  |              |  |                     |                      
|Lixin ChengChief Sales Officer                                      |  | 20052004     |  | $$                  | 224,018160,042        |           | $$                          | 64,500                      |  | $$  | 9,7255,633                            | (5)(5)    |  | 250,000      
|                                                                    |  |              |  |                     |                      
|Patrick Gray(3)Senior Vice President and Controller                 |  | 20052004     |  | $$                  | 165,000103,278        |           | $$                          | 1,575                       |  | $$  |                                     |           |  | 100,000      

---

|(1) | Mr. Hickock commenced employment in April 2005.
|--- | -----------------------------------------------

|(2) | Mr. Morash commenced employment as our President and Chief Financial Officer in November 2004 and resigned effective December 5, 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(3) | Mr. Gray commenced employment in February 2004.
|--- | -----------------------------------------------

|(4) | Other compensation consists of an automobile allowance of $17,940, stock warrant and stock option exercises of $3,878,078, and life insurance coverage of $16,170.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Other compensation consists of an automobile allowance.
|--- | -------------------------------------------------------

|(6) | Other compensation consists of an automobile allowance of $11,500, and life insurance coverage of $41,620.
|--- | ----------------------------------------------------------------------------------------------------------



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##### Table of Contents

Options and Warrants

The following table shows all stock options granted during fiscal year 2005 to the executive officers named in the Summary Compensation Table. These options were granted under our 2004 Equity Incentive Plan.

Option Grants in Last Fiscal Year



|                 |  |                                                |  |                                                                                                 |    |  |                       |      |                |         |  |   |         |  |   |          
|---------------- |  | ---------------------------------------------- |  | ----------------------------------------------------------------------------------------------- | -- |  | --------------------- | ---- | -------------- | ------- |  | - | ------- |  | - | ---------
|                 |  | Individual Grants                              |  | Potential Realizable Value at Assumed Annual Rates
ofStock Price Appreciationfor Option Term(3)
|Name             |  | Number ofSecuritiesUnderlyingOptionsGranted(1) |  | Percent ofTotal OptionsGranted toEmployees inFiscal Year(2)                                     |    |  | ExercisePricePerShare |      | ExpirationDate |        
|                 |  |                                                |  |                                                                                                 | 5% |  | 10%                  
|Mike H.P. Kwon   |  | 300,000                                        |  | 27                                                                                              | %  |  | $                     | 3.41 |                | 6/16/15 |  | $ | 642,000 |  | $ | 1,629,000
|David L. Morash  |  | 100,000                                        |  | 9                                                                                               | %  |  | $                     | 3.41 |                | 6/16/15 |  | $ | 214,000 |  | $ | 543,000  
|Lixin Cheng      |  |                                               |  |                                                                                                |    |  |                       |     |                |        |  |   |        |  |   |         
|H. Clark Hickock |  | 270,000                                        |  | 24                                                                                              | %  |  | $                     | 3.35 |                | 4/28/15 |  | $ | 569,700 |  | $ | 1,441,800
|Patrick Gray     |  |                                               |  |                                                                                                |    |  |                       |     |                |        |  |   |        |  |   |         

---

|(1) | Effective December 29, 2005, we accelerated the vesting schedules for all stock options outstanding as of that date. The exercise price of each option shown in the table was
the fair market value on the date of grant, and all options have ten-year terms.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In fiscal year 2005, we granted options to purchase a total of 1,120,500 shares to employees, directors and consultants under all of our stock option plans.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The potential realizable value is calculated based on the original option term and the assumption that the market value of the underlying stock increases at the stated values,
compounded annually over the term of the option. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise. These assumed rates of appreciation do not represent our
estimate or projection of the appreciation of our common stock, and actual gains will depend on the future performance of our common stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table sets forth information concerning options exercised and unexercised warrants and options held by our executive officers as of December 31, 2005.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values



|                 |  |                               |  |                    |           |                                                                 |         |                                                          |   |               |   |         |  |  
|---------------- |  | ----------------------------- |  | ------------------ | --------- | --------------------------------------------------------------- | ------- | -------------------------------------------------------- | - | ------------- | - | ------- |  | -
|                 |  | SharesAcquiredor Exercised(#) |  | Value Realized ($) |           | Number of Securities Underlying Unexercised Options at
12/31/05 |         | Value of Unexercised in the Money Options at 12/31/05(2)
|Name             |  |                               |  | Exercisable        |           | Unexercisable                                                   |         | Exercisable                                              |   | Unexercisable
|Mike H.P. Kwon   |  | 1,056,697                     |  | $                  | 3,878,078 |                                                                 | 518,151 |                                                          |  |               | $ | 166,796 |  | 
|David L. Morash  |  |                              |  |                    |          |                                                                 | 516,667 |                                                          |  |               |   |        |  | 
|Lixin Cheng      |  |                              |  |                    |          |                                                                 | 250,000 |                                                          |  |               |   |        |  | 
|H. Clark Hickock |  |                              |  |                    |          |                                                                 | 270,000 |                                                          |  |               |   |        |  | 
|Patrick Gray     |  |                              |  |                    |          |                                                                 | 100,000 |                                                          |  |               |   |        |  | 

---

|(1) | Effective December 29, 2005, we accelerated the vesting schedules for all stock options outstanding as of that date.
|--- | --------------------------------------------------------------------------------------------------------------------

|(2) | Based on a fair market value of $1.13 per share on December 30, 2005, the last reported sale price of our common stock, as reported on Amex, on that date.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Director Compensation

Until March 2005, we compensated our non-employee directors in the amount of $2,500 per calendar quarter; and beginning in March 2005, we began compensating our non-employee directors in the amount of $7,500 per calendar quarter. It has
been our policy to reimburse our directors for their reasonable out-of-pocket expenditures.

In addition, each non-employee director who joined our board
prior to August 2004 was granted 30,000 restricted shares of our common stock when such director first joined our board. These grants vested as to one-third of the shares on the date of the first board meeting the director attended, and an
additional one-third of the shares on each of the first and second anniversaries following the directors first board meeting attended. Since August 2004, new non-employee directors have been entitled to 45,000 restricted shares of our common
stock on the date of the appointment or election of such director to the board or upon a later date of acceptance. One-third of these shares vest immediately, and an additional one-third vests on each of the first and second anniversaries of the
date of grant. In addition, on the third anniversary of joining the board and each subsequent anniversary, each then-serving non-employee director will receive a fully vested option to purchase 15,000 shares of common stock with an exercise price
equal to the fair market value of the common stock on the date of grant and expiring ten years after the date of grant, subject to earlier termination as provided in the 2004 Equity Incentive Plan, but will vest as if they were granted on the date
of the appointment or election of such director to the board or the later date of acceptance, if applicable. In November 2004, Messrs. Bhagat, Yang and Hsieh each received an additional 15,000 restricted shares of common stock vesting immediately as
to one-third of the shares and as to one-third of the shares on each of the first and second anniversaries of the date of each such director joined our board. These shares were issued upon the effective date of the approval of our stockholders of
our 2004 Equity Incentive Plan in accordance with our policies adopted in August 2004. The restricted shares of common stock granted to each of our outside directors who joined our board in or after August 2004 were issued in November 2004 upon the
effective date of the approval of our stockholders of our 2004 Equity Incentive Plan. All of the shares so granted are being treated for vesting purposes as if they had been granted on the date each such director first joined our board. See the
description of our 2004 Equity Incentive Plan in Stock Incentive Plans below.

Mr. Van der Meer has elected not to receive stock or cash
compensation for his services as a director.

On March 18, 2005, our board approved an arrangement with Mr. Åke Persson, a director and
then member of our audit committee and compensation committee, under which Mr. Persson provided consulting services to our company for which he received additional compensatory fees totaling $60,000. These services were not rendered by
Mr. Persson in his capacity as a member of the audit committee, the board, or any committee of the board.

Employment Contracts, Termination of
Employment Arrangements and Change of Control Agreements

Mike H.P. Kwon. In November 2004, we entered into an employment agreement with
Mike H.P. Kwon under which Mr. Kwon is employed as our Chief Executive Officer. The agreement provides for a base salary of $265,000, which was subsequently increased to $360,000. Under the agreement, Mr. Kwon is eligible for an annual
performance bonus under the terms of our incentive compensation plans that may be adopted from time to time. Mr. Kwon is also entitled to a vehicle allowance of $1,490 per month, and we are obligated to obtain and maintain one or more life
insurance policies for Mr. Kwon, payable to his designated beneficiaries, with an aggregate death benefit of $5,000,000. The agreement also includes a termination provision stating that if we terminate Mr. Kwons employment without
cause, or if Mr. Kwon terminates his employment for good reason, we will be obligated to pay to Mr. Kwon a severance benefit equivalent to 18 months base salary in one lump-sum payment, and all of his outstanding stock options and any
other equity awards we may grant to him in the future will immediately vest in full. The agreement also provides that Mr. Kwon will be included on the recommended slate of directors nominated for election at our annual stockholder meetings so
long as Mr. Kwon serves as our Chief Executive Officer.



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##### Table of Contents

H. Clark Hickock.We entered into a letter agreement, dated as of April 27, 2005, with Mr. H. Clark
Hickock pursuant to which Mr. Hickock joined us as an employee in April 2005, and assumed full duties as our Chief Operating Officer in May 2005. The agreement provided for a base salary of $250,000 and the grant of options to purchase 270,000
shares of our common stock and a restricted stock award of 30,000 shares of our common of which 10,000 shares were granted on May 23, 2005. Mr. Hickock also receives a vehicle allowance of $1,000 per month. The agreement includes a termination
provision stating that if we terminate Mr. Hickocks employment without cause, we will be obligated to pay Mr. Hickock a severance benefit equivalent to 12 months base salary.

Lixin Cheng. We entered into a letter agreement, dated as of December 22, 2003, with Mr. Cheng under which Mr. Cheng became our Executive Vice President beginning in January 2004. The letter
agreement originally provided for a base salary of $167,000, the grant of 30,000 shares of our common stock and the grant of an option to purchase 200,000 shares of our common stock. In December 2004, the compensation committee voted to increase
Mr. Chengs current annual base salary to $192,000 as of December 31, 2004, and the committee granted to Mr. Cheng an additional option to purchase 50,000 shares of our common stock. In June 2005, we entered into a subsequent
letter agreement with Mr. Cheng pursuant to which he assumed the title of Chief Sales Officer and President of the fixed wireless group. Under the agreement, which superseded Mr. Chengs previous employment arrangement, he receives an annual
salary of $250,000 and is eligible to receive an executive level bonus in accordance with our Incentive Bonus Plan, as determined by the board of directors and chief executive officer, and receives a vehicle allowance of $1,000 per month.
Additionally, if we terminate Mr. Chengs employment without cause, he will receive 12 months of his then-current salary in a lump-sum payment and vesting of his prior stock option grants to purchase common stock will automatically vest with
respect to all shares up to an aggregate of 250,000 shares.

Patrick Gray. We entered into a letter agreement, dated as of February 11,
2004, with Mr. Gray under which Mr. Gray is employed as Vice President, Controller. The letter agreement originally provided for a base salary of $130,000 and the grant of an option to purchase 50,000 shares of our common stock. In
December 2004, the compensation committee voted to increase Mr. Grays current annual base salary to $165,000 as of December 31, 2004, and the committee granted to Mr. Gray an additional option to purchase 50,000 shares of our
common stock. In December 2005, Mr. Gray assumed the position of Senior Vice President Finance and Corporate Controller, and the compensation committee approved an increase of Mr. Grays annual base salary to $190,000 and payment of a monthly
vehicle allowance of $1,000.

Effective March 31, 2006, we adopted the Axesstel, Inc. 2006 Change in Control Plan. The Change in Control
Plan is administered by the compensation committee and provides certain severance benefits to plan participants in the event that we, or any successor entity, terminate the participants employment, or the participant resigns For
Cause, within one year following a sale, merger or other transaction that results in a change in control of Axesstel. The severance benefits include: (i) a lump sum severance payment equal to one years base salary, (ii) reimbursement of
COBRA healthcare costs for up to one year, (iii) continued vesting and an extension of the term of any stock options granted under any equity compensation plans for a period of one year, and (iv) the retention of personal computers, cell phones and
personal digital assistants. Benefits granted under the Change in Control Plan are in lieu of, and not in addition to, any other severance agreements that participants may currently have with us. Participation in the Change in Control Plan is
limited to key management employees designated by the compensation committee. Messrs. Hickock, Cheng and Gray are currently participants in the Change in Control Plan.

Incentive Bonus Plan

Our board of directors adopted and approved the Incentive Bonus Plan for Employees of Axesstel,
Inc. in August 2004, which we refer to as our Incentive Bonus Plan. Under the Incentive Bonus Plan, all of our employees who work for us for at least 180 consecutive days and are employed at the date of the bonus payment will be eligible for a
yearly cash bonus. For each fiscal year, a bonus pool can be determined by our compensation committee using a formula pre-approved by our board of directors. No bonuses have paid from the Incentive Bonus Plan in 2005. The compensation committee has
not established bonus targets for 2006.



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##### Table of Contents

Stock Incentive Plans

As of December 31, 2005, we had an aggregate of 893,754 shares of common stock available for issuance under our stock incentive plans. In addition, we assumed stock options and compensatory stock warrants exercisable for an aggregate
of 4,382,565 shares in connection with our acquisition of Axesstel California, 145,784 of which were outstanding as of December 31, 2005. The following is a description of our plans.

Equity Incentive Plan

The 2004 Equity Incentive
Plan, which we refer to as our 2004 Equity Plan, was adopted by our board of directors in September 2004 and by our stockholders in November 2004. As of December 31, 2005, 325,000 restricted shares of common stock and options to purchase
1,467,500 shares of our common stock have been granted pursuant to the 2004 Equity Plan.

Share Reserve. Under the 2004 Equity Plan, we have
initially reserved for issuance an aggregate of 4,093,842 shares. The Prior Plans discussed below will no longer be available for new grants, and the initial share reserve under the 2004 Equity Plan will adjust downward to the extent that shares are
issued upon exercise of options under the Prior Plans. Subject to a maximum of 11,593,842 shares that can be subject to the 2004 Equity Plan in the aggregate, the number of shares subject to the 2004 Equity Plan will increase each year by the least
of:



| |  |  | three percent of our then outstanding shares;
| | - |  | ---------------------------------------------



| |  |  | 750,000 shares; or
| | - |  | ------------------



| |  |  | a number of shares determined by the board.
| | - |  | -------------------------------------------

Administration. The 2004 Equity Plan may be administered by the board or a committee of the board. In the case of awards intended to qualify as performance-based-compensation within the meaning of Section 162(m)
of the Internal Revenue Code of 1986, or the Code, the committee will consist of two or more outside directors within the meaning of Section 162(m) of the Code. The administrator has the power to determine the terms of the awards, including the
exercise price, the number of shares subject to each award, the exercisability of the awards and the form of consideration payable upon exercise. The administrator also has the power to implement an award transfer program, whereby awards may be
transferred to a financial institution or other person or entity selected by the administrator, and an exchange program whereby outstanding awards are surrendered or cancelled in exchange for awards of the same type, which may have lower exercise
prices and different terms. Our board has delegated administration of the 2004 Equity Plan to our compensation committee.

Eligibility. Awards
under the 2004 Equity Plan may be granted to any of our employees, directors or consultants or those of our affiliates.

Options. With respect
to nonstatutory stock options intended to qualify as performance-based compensation within the meaning of Section 162(m) of the Code and incentive stock options, the exercise price must be at least equal to the fair market value of
our common stock on the date of grant. In addition, the exercise price for any incentive stock option granted to any employee owning more than 10% of our common stock may not be less than 110% of the fair market value of our common stock on the date
of grant. The term of any stock option may not exceed ten years, except that with respect to any participant who owns 10% or more of the voting power of all classes of our outstanding capital stock, the term for incentive stock options must not
exceed five years.

Stock Awards. The administrator may determine the number of shares to be granted and impose whatever conditions to vesting
it determines to be appropriate, including performance criteria. The criteria may be based on financial performance, personal performance evaluations and/or completion of service by the participant. The administrator will determine the level of
achievement of performance criteria. Unless the administrator determines otherwise, shares that do not vest typically will be subject to forfeiture or to our right of repurchase, which we may exercise upon the voluntary or involuntary termination of
the participants service with us for any reason, including death or disability.



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##### Table of Contents

Stock Appreciation Rights. We may pay the appreciation either in cash, shares of our common stock with
equivalent value, other property or some combination of the foregoing, as determined by the administrator.

Cash Awards. The administrator will
establish the performance criteria and level of achievement versus these criteria, which will determine the target and the minimum and maximum amount payable under a cash award. The criteria may be based on financial performance and/or personal
performance evaluations.

Adjustments upon Merger or Change in Control. The 2004 Equity Plan provides that in the event of a merger with or
into another corporation or a change in control, including the sale of all or substantially all of our assets, and certain other events, our board (or a committee of the board) may, in its discretion, provide for some or all of:



| |  |  | assumption or substitution of, or adjustment to, each outstanding award;
| | - |  | ------------------------------------------------------------------------



| |  |  | acceleration of the vesting of options and stock appreciation rights;
| | - |  | ---------------------------------------------------------------------



| |  |  | termination of any restrictions on stock awards or cash awards; or
| | - |  | ------------------------------------------------------------------



| |  |  | cancellation of awards in exchange for a cash payment to the participant.
| | - |  | -------------------------------------------------------------------------

Amendment and Termination. The administrator has the authority to amend, alter or discontinue the 2004 Equity Plan, subject to the approval of the stockholders, but no amendment will impair the rights of any award, unless
mutually agreed to between the participant and the administrator.

Other Plans

Prior Plans

Prior to the adoption of the 2004 Equity
Plan, our board adopted three stock option plans reserving a total of 2,893,842 shares, which we refer to as the Prior Plans. The Prior Plans were adopted on September 16, 2002 (911,671 shares), March 5, 2003 (982,171 shares) and
September 29, 2003 (1,000,000 shares). Options with respect to 1,465,391 shares are outstanding under the Prior Plans as of December 31, 2005. Each of these plans provides for the issuance of non-statutory stock options to our employees,
directors and consultants, with an exercise price equal to the fair market value of our common stock on the date of grant. All options granted under the Prior Plans vested quarterly over three years. Our board delegated authority to grant options
under the Prior Plans to a special stock option committee consisting of one director, Mike H.P. Kwon. Mr. Kwon did not however have authority to grant options to himself. In late 2002 and early 2003, the stock option committee issued options
for 164,000 shares to certain employees at a price below fair market value to satisfy promises made to such employees. These grants were subsequently ratified by the full board of directors. No additional options may be granted under the Prior
Plans.

Assumed Options and Warrants

In connection with our acquisition of Axesstel California, we assumed stock options and warrants granted to employees, directors and consultants for an aggregate of 4,382,565 shares. As of December 31, 2005, 145,784 of these options
and warrants remain outstanding. The board of directors determined to accelerate the vesting of all outstanding options upon our assumption of those options.

Limitation of Liability and Indemnification of Directors and Officers

As permitted by Section 78.7502 of the Nevada Revised Statutes,
which we refer to as the NRS, our articles of incorporation provide that we must indemnify each person who is or was or who had agreed to become one of our directors or officers to the full extent permitted by the NRS or any other applicable laws.
Consequently, our directors and officers generally will not be personally liable to us or our stockholders for monetary damages unless:



| |  |  | the directors or officers act or failure to act constitutes a breach of his fiduciary duties as a director or officer, and his breach of those duties involves
intentional misconduct, fraud or a knowing violation of law; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | the director or officer does not act in good faith and in a manner which he reasonably believes to be in or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, the director or officer had no reasonable cause to believe his conduct was unlawful.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our articles of
incorporation also provide that no amendment or repeal of the articles of incorporation will apply to or have any effect on the right to indemnification for acts or omissions occurring in whole or in part before the effective date of such amendment
or repeal.

Our bylaws provide that we must indemnify to the fullest extent authorized by law any person made or threatened to be made a party to an action
or a proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person or such persons legal representative was or is one of our (or any of our predecessors) directors or officers or serves or served
any other enterprise as a director or officer at our or our predecessors request. Our bylaws also provide that we must pay the expenses that any of our officers or directors incur in defending a civil or criminal action, suit or proceeding as
they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent
jurisdiction that he is not entitled to indemnification by us. Our bylaws also provide that we may enter into one or more agreements with any person which provides for indemnification greater or different than that provided in such articles of
incorporation.

We have entered into and expect to continue to enter into indemnification agreements with certain of our directors and officers. Generally,
these agreements attempt to provide the maximum protection permitted by law with respect to indemnification. The indemnification agreements provide that we will maintain directors and officers liability insurance in reasonable amounts
from established insurers, subject to certain limitations. The indemnification agreements also provide for partial indemnification for a portion of expenses incurred by a director or officer even if the director or officer is not entitled to
indemnification for the total amount. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.

We currently maintain insurance on behalf of any person who is a director or officer against any loss arising from any claim asserted against him and incurred by him in
any such capacity, subject to certain exclusions. At present, we are not aware of any pending litigation or proceeding involving any person who is or was a director, officer, employee or other agent of our company or is or was serving at our request
as a director, officer, employee or agent of another entity regarding which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and persons controlling us pursuant to the foregoing
provisions, we have been informed that in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.



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##### Table of Contents

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table
presents information concerning the beneficial ownership of the shares of our common stock as of March 21, 2006 by:



| |  |  | each person we know to beneficially own 5% or more of our common stock;
| | - |  | -----------------------------------------------------------------------



| |  |  | each of our named executive officers and current directors; and
| | - |  | ---------------------------------------------------------------



| |  |  | all of our current executive officers and directors as a group.
| | - |  | ---------------------------------------------------------------

Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe
that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder.

Percentage of beneficial ownership is based on 22,593,589 shares outstanding on March 21, 2006. Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days
of March 21, 2006 are considered outstanding and beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.



|                                                                                                                       |  |                                  |  |                    |  
|---------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- |  | ------------------ | -
|Name and Address:(1)                                                                                                   |  | Number ofSharesBeneficiallyOwned |  | Percent ofClass(2) |  
|5% or Greater Stockholders:                                                                                            |  |                                  |  |                    |  
|Entities affiliated with ComVentures(2) 305 Lytton Avenue Palo Alto, CA 94301                                          |  | 3,817,105                        |  | 16.9               | %
|Entities affiliated with Stephens Investment Management, LLC(3) One Sansome Street, Suite 2900 San Francisco, CA 94104 |  | 2,353,600                        |  | 10.4               | %
|Entities affiliated with Weiss, Peck & Greer Investments(3) 909 Third Avenue New York, NY 10022                        |  | 1,673,697                        |  | 7.4                | %
|Entities affiliated with Potomac Capital Management(3) 825 Third Avenue, 33rd Floor New York, New York 10022           |  | 1,383,100                        |  | 6.1                | %
|Directors and Executive Officers:                                                                                      |  |                                  |  |                    |  
|Mike H.P. Kwon(4)                                                                                                      |  | 3,540,885                        |  | 15.3               | %
|David Morash(5)                                                                                                        |  | 610,000                          |  | 2.6                | %
|H. Clark Hickock(6)                                                                                                    |  | 280,000                          |  | 1.2                | %
|Lixin Cheng(7)                                                                                                         |  | 280,000                          |  | 1.2                | %
|Patrick Gray(8)                                                                                                        |  | 100,000                          |  | *                  |  
|Jai Bhagat(9)                                                                                                          |  | 45,000                           |  | *                  |  
|Scott Fox(9)                                                                                                           |  | 45,000                           |  | *                  |  
|Osmo A. Hautanen(9)                                                                                                    |  | 45,000                           |  | *                  |  
|Haydn Hsieh(10)                                                                                                        |  | 645,000                          |  | 2.8                | %
|Bryan B. Min(9)                                                                                                        |  | 45,000                           |  | *                  |  
|Åke Persson                                                                                                            |  | 45,000                           |  | *                  |  
|Seung Taik Yang(9)                                                                                                     |  | 45,000                           |  | *                  |  
|All current executive officers and directors as a group (12 persons)(11)                                               |  | 5,725,885                        |  | 23.5               | %



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##### Table of Contents

---

|* | Less than one percent.
|- | ----------------------

|(1) | Except as otherwise indicated, the address for each beneficial owner is 6815 Flanders Drive, Suite 210, San Diego, California 92121.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(2) | Includes 3,580,468 shares held by ComVentures V, L.P.; 221,987 shares held by ComVentures V-B CEO Fund, L.P.; and 14,650 shares held by ComVentures V Entrepreneurs Fund, L.P.
ComVen V, LLC is the general partner of each of the foregoing entities. Roland Van der Meer, a partner with Com Ventures, serves as a director of the company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based solely upon Schedule 13D filings made with the SEC by Stephens Investment Management LLC; Weiss, Peck & Greer Investments; and Potomac Capital Management on January
13, 2006, February 15, 2006 and December 8, 2005, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Shares of common stock beneficially owned include 518,151 shares subject to options and warrants exercisable within 60 days of March 21, 2006. Mr. Kwon is our Chairman and
Chief Executive Officer.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Shares of common stock beneficially owned include 516,667 shares subject to options exercisable within 60 days of March 21, 2006. Mr. Morash served as our former
President, and Chief Financial Officer.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Shares of common stock beneficially owned include 270,000 shares subject to options exercisable within 60 days of March 21, 2006. Mr. Hickock is our Chief Operating
Officer.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Shares of common stock beneficially owned include 250,000 shares subject to options exercisable within 60 days of March 21, 2006. Mr. Cheng is our Chief Sales Officer.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Shares of common stock beneficially owned include 100,000 shares subject to options exercisable within 60 days of March 21, 2006. Mr. Gray is our Senior Vice President
Finance and Corporate, Controller.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Serves as a director of the company.
|--- | ------------------------------------

|(10) | Shares of common stock beneficially owned for Mr. Hsieh include 100,000 shares subject to warrants exercisable within 60 days of March 21, 2006.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Shares beneficially owned include 1,238,151 shares subject to options and warrants exercisable within 60 days of March 21, 2006. The aggregate number of shares of common stock
owned by all current officers and directors excludes the shares beneficially owned by entities affiliated with Com Ventures.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Equity
Compensation Plans

The following table describes our equity compensation plans as of December 31, 2005:



|                                                       |  |                                                                                         |     |  |                                                                              |      |                                                                                                                                       |        
|------------------------------------------------------ |  | --------------------------------------------------------------------------------------- | --- |  | ---------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                          |  | Number of Shares tobe Issued UponExercise
ofOutstanding Options,Warrants and Rights (a) |     |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights (b) |      | Number of SharesRemaining Availablefor Future Issuanceunder EquityCompensation Plans(excluding securitiesreferenced incolumn (a)) (c)
|Equity compensation plans approved by our stockholders |  | 3,484,976                                                                               | (1) |  | $                                                                            | 2.54 |                                                                                                                                       | 893,754

---

|(1) | Includes (i) options to purchase 145,784 shares of common stock with a weighted average exercise price of $0.26 per share, all of which options were granted pursuant to the
2001 Stock Option Plan of Axesstel California and assumed by us in connection with the Corporate Combination Agreement between Miracom and Axesstel California; (ii) options to purchase 1,465,391 shares of common stock granted pursuant to our
stock option plans established by the Board of Directors in September 2002, March 2003 and September 2003 with a weighted average exercise price of $1.88 per share; (iii) options to purchase 1,338,500 shares of common stock granted
pursuant to our 2004 stock option plan established by the Board of Directors with a weighted average exercise price of $3.39 per share; (iv) 220,000 shares of common stock subject to warrants issued to various consultants in 2002 and 2003 with
a weighted average exercise price of $2.86 per share; (v) 315,301 shares of common stock subject to warrants issued with an average exercise price of $2.87 per share to finders and investors of the 2004 financings.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Relationship with Wistron NeWeb Corporation

We use Wistron NeWeb Corporation as our contract manufacturer. During 2005, we received $75.5 million of product from WNC. During this period, we paid $81.6 million to
WNC, and the amount payable at December 31, 2005 was $7.5 million. As of December 31, 2005, WNC owned 2.4% of our outstanding common stock. In addition, Mr. Haydn Hsieh, one of our directors, is also the President and Chief Executive
Officer of WNC. In October 2004, WNC sold 500,000 shares of common stock to private equity funds managed by ComVentures.

Relationship with ComVentures

In October 2004, we sold 833,334 shares of our common stock to ComVentures at a purchase price of $3.60 per share and, together with concurrent
purchases by ComVentures of an additional 1,200,000 shares from existing stockholders; ComVentures became the beneficial owner of approximately 20% of our common stock at that time. In February 2005, we entered into an agreement to sell 270,271
shares of our common stock to ComVentures. The agreement provided for a purchase price of $3.70 per share, which resulted in cash proceeds of $1.0 million. ComVentures and affiliates purchased additional shares in 2005, and as of December 31,
2005, beneficially own 3,817,105 shares of our common stock, or 16.9% of our outstanding common stock. In December 2005, Roland Van der Meer, a partner with Com Ventures, was named a director of the Company

Agreements with Officers and Directors

We have entered and expect to
continue to enter into indemnification agreements with our directors and officers. Generally, these agreements attempt to provide the maximum protection permitted by law with respect to indemnification. See Executive
CompensationLimitation of Liability and Indemnification of Directors and Officers.



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##### Table of Contents

ITEM 13. EXHIBITS

(a) Exhibits:



|            |  |                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Document Description                                                                                                                                            
|            | 
|3.1         |  | Articles of Incorporation of the registrant, as amended(18)                                                                                                     
|            | 
|3.2         |  | Amended and Restated Bylaws of the registrant(18)                                                                                                               
|            | 
|4.1         |  | Specimen Common Stock Certificate(16)                                                                                                                           
|            | 
|10.1        |  | Form of Common Stock Purchase Warrant, exercise price $1.00, dated January 8, 2004(7)                                                                           
|            | 
|10.2        |  | Form of Common Stock Purchase Warrant, exercise price $2.00 subject to adjustment, dated January 8, 2004(7)                                                     
|            | 
|10.3        |  | Common Stock Purchase Warrant issued March 16, 2004, by the registrant to Laurus Master Fund, Ltd(7)                                                            
|            | 
|10.4        |  | Registration Rights Agreement dated March 11, 2004, by and among the registrant and Laurus Master Fund, Ltd(7)                                                  
|            | 
|10.5        |  | Letter Agreement with North America Venture Fund II, L.P., dated April 15, 2004(1)                                                                              
|            | 
|10.6        |  | Lease Agreement for Office Space by and between Axesstel California and Smith Trust dated October 15, 2001(9)                                                   
|            | 
|10.7        |  | Centerpark Plaza Office Lease with Mullrock Umbrella, LLC, dated May 28, 2004(8)                                                                                
|            | 
|10.8        |  | Centerpark Plaza Office Lease with R&D Portfolio Holdings, LLC, dated June 2, 2005(18)                                                                          
|            | 
|10.9        |  | Lease Agreement between TBK Electronics Corp. and registrant, dated July 13, 2005(19)                                                                           
|            | 
|10.11       |  | Lease between Axesstel Korea, Inc. and Seongnam Industry Promotion Foundation, dated August 29, 2005(18)                                                        
|            | 
|10.12       |  | Form of Indemnity Agreement for directors and executive officers of the registrant(5)                                                                           
|            | 
|10.13       |  | Subscriber Unit License Agreement between Axesstel California and Qualcomm Incorporated dated November 14, 2000, as amended+(10)                                
|            | 
|10.14       |  | Supply Agreement by and between TeleCard Limited and the registrant dated November 2003+(10)                                                                    
|            | 
|10.15       |  | Supply Agreement by and between TeleCard Limited and the registrant dated November 2003+(10)                                                                    
|            | 
|10.16       |  | Purchase order with Tata Teleservices (Maharashtra) Limited, dated April 20, 2004+(1)                                                                           
|            | 
|10.17       |  | Purchase order with Tata Teleservices, Ltd., dated April 26, 2004+(1)                                                                                           
|            | 
|10.18       |  | Supply Agreement between BellSouth International, Inc. and Axesstel-California, dated March 18, 2004+(11)                                                       
|            | 
|10.19       |  | Form of Common Stock Purchase Warrant issued to finder and its assignees, dated March 11, 2004, in connection with the March 2004 Convertible Note Financing(11)
|            | 
|10.20       |  | Offer Letter for Patrick Gray, dated February 11, 2004*(11)                                                                                                     
|            | 
|10.21       |  | Offer Letter for Lixin Cheng, dated December 22, 2003*(11)                                                                                                      
|            | 
|10.22       |  | Letter Agreement with Lixin Cheng dated June 16, 2005*(17)                                                                                                      
|            | 
|10.23       |  | Component Supply Agreement between QUALCOMM CDMA Technologies Asia-Pacific PTE LTD. and Axesstel-California, dated February 28, 2001, as amended+(16)           
|            | 
|10.24       |  | DMSS5100 Software Agreement between QUALCOMM Incorporated and Axesstel-California, dated December 5, 2002, as amended+(16)                                      
|            | 
|10.25       |  | DMSS5010 Software Agreement between QUALCOMM Incorporated and Axesstel-California, dated November 26, 2003+(16)                                                 



55



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##### Table of Contents

|      |  |                                                                                                                                             
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.26 |  | AMSS6500 Software Agreement between QUALCOMM Incorporated and Axesstel-California, dated April 11, 2004+(16)                                
|      | 
|10.27 |  | Securities Purchase Agreement dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                            
|      | 
|10.28 |  | Common Stock Purchase Warrant dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                            
|      | 
|10.29 |  | Security Agreement dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                                       
|      | 
|10.30 |  | Registration Rights Agreement dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                            
|      | 
|10.31 |  | Convertible Term Note dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                                    
|      | 
|10.32 |  | Stock Purchase Agreement dated October 12, 2004 between the registrant and certain investors affiliated with ComVentures(4)                 
|      | 
|10.33 |  | 2001 Stock Option Plan*(5)                                                                                                                  
|      | 
|10.34 |  | Form Notice of Grant of Stock Option (2001 Stock Option Plan)*(5)                                                                           
|      | 
|10.35 |  | Form Stock Option Agreement (2001 Stock Option Plan)*(5)                                                                                    
|      | 
|10.36 |  | Form Notice of Grant of Stock Option (September 2002, March 2003 and September 2003 Option Pools)*(5)                                       
|      | 
|10.37 |  | Form Stock Option Agreement (September 2002, March 2003 and September 2003 Option Pools)*(5)                                                
|      | 
|10.38 |  | Table of Stock Option Grants under 2001 Stock Option Plan And Prior Plans*(16)                                                              
|      | 
|10.39 |  | 2004 Equity Incentive Plan*(5)                                                                                                              
|      | 
|10.40 |  | Form of Stock Option Agreement (2004 Equity Incentive Plan)* (14)                                                                           
|      | 
|10.41 |  | Form of Stock Award Agreement (2004 Equity Incentive Plan)*(14)                                                                             
|      | 
|10.42 |  | Form of Subscription Agreement dated February 2003(3)                                                                                       
|      | 
|10.43 |  | Promissory Note, as amended, dated August 17, 2004, between the registrant and Wells Fargo HSBC Trade Bank, National Association(3)         
|      | 
|10.44 |  | Security Agreement: Rights to Payment dated August 17, 2004, between the registrant and Wells Fargo HSBC Trade Bank, National Association(3)
|      | 
|10.46 |  | Warrant to Purchase Common Stock dated September 1, 2002 issued to The Search for Value, Inc.(16)                                           
|      | 
|10.47 |  | Separation Agreement and General Release, dated December 13, 2005, between Axesstel, Inc. and David L. Morash*(20)                          
|      | 
|10.48 |  | Warrant to Purchase Common Stock dated September 1, 2002 issued to Newport Capital Consultants(16)                                          
|      | 
|10.49 |  | Warrant to Purchase Common Stock dated October 1, 2003 issued to The Search for Value, Inc.(16)                                             
|      | 
|10.50 |  | Warrant to Purchase Common Stock dated October 1, 2003 issued to Newport Capital Consultants(16)                                            
|      | 
|10.51 |  | Executive Employment Agreement dated November 9, 2004 between the registrant and Mike H.P. Kwon*(3)                                         
|      | 
|10.52 |  | Form of Release Agreement dated November 4, 2004(6)                                                                                         
|      | 
|10.53 |  | Settlement Agreement and General Release of All Claims dated November 15, 2004*(13)                                                         
|      | 
|10.54 |  | USB Driver Software Tools Limited Use Agreement between the registrant and QUALCOMM Incorporated dated October 21, 2004(16)                 



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##### Table of Contents

|      |  |                                                                                                                                    
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.55 |  | Product Purchase Agreement dated as of June 15, 2004 with Data Teleservices Limited and Data Teleservices (Maharashtia) Limited(15)
|      | 
|10.56 |  | Stock Purchase Agreement dated February 2, 2005 between the registrant and certain investors affiliated with ComVentures(16)       
|      | 
|10.57 |  | Form of Warrant Agreement to Mike H.P. Kwon and Saton Yukie(5)                                                                     
|      | 
|10.58 |  | 2006 Change in Control Plan and Summary Plan Description*                                                                          
|      | 
|14.1  |  | Code of Ethics for Directors, Officers and Employees(10)                                                                           
|      | 
|21.1  |  | Subsidiaries of the registrant                                                                                                     
|      | 
|23.1  |  | Consent of Gumbiner Savett Inc.                                                                                                    
|      | 
|24.1  |  | Power of Attorney (included on signature page)                                                                                     
|      | 
|31.1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                 
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                 
|      | 
|32.1  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     

---

|(1) | Incorporated by reference to exhibits to Registrants Form 10-QSB/A for the period ending June 30, 2004, filed on September 7, 2004
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to exhibits to Registrants Form 8-K filed on August 20, 2004
|--- | ---------------------------------------------------------------------------------------

|(3) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending September 30, 2004, filed on November 15, 2004
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to exhibits to Registrants Form 8-K filed on October 15, 2004.
|--- | -----------------------------------------------------------------------------------------

|(5) | Incorporated by reference to exhibits to Registrants Form SB-2/A filed on October 29, 2004.
|--- | --------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to exhibits to Registrants Form 8-K filed on November 10, 2004.
|--- | ------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending March 31, 2003, filed on May 24, 2004
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending June 30, 2003 filed on August 16, 2004
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to exhibits to Registrants Form 10-KSB/A for the period ending December 31, 2003, filed on April 19, 2004
|--- | ------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to exhibits to Registrants Form 10-KSB/A for the period ending December 31, 2003, filed on August 16, 2004
|---- | -------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to exhibits to Registrants Form 10-QSB/A for the period ending March 31, 2004, filed on September 7, 2004
|---- | ------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to exhibits to Registrants Form 10-QSB/A for the period ending June 30, 2004, filed on September 7, 2004
|---- | -----------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to exhibits to Registrants Form 8-K filed on November 19, 2004.
|---- | ------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to exhibits to Registrants Form 8-K filed on January 12, 2005.
|---- | -----------------------------------------------------------------------------------------

|(15) | Incorporated by reference to exhibits to Registrants Form 8-K/A filed on February 1, 2005.
|---- | -------------------------------------------------------------------------------------------

|(16) | Incorporated by reference to exhibits to Registrants Form SB-2 filed on February 4, 2005
|---- | -----------------------------------------------------------------------------------------

|(17) | Incorporated by reference to exhibits to Registrants Form 8-K filed on June 22, 2005.
|---- | --------------------------------------------------------------------------------------

|(18) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending July 1, 2005, filed on August 15, 2005.
|---- | -------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(19) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending September 30, 2005, filed on November 14, 2005.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|(20) | Incorporated by reference to exhibits to Registrants Form 8-K filed on January 12, 2006.
|---- | -----------------------------------------------------------------------------------------



|+ | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission
and are marked by an asterisk.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Management contract, or compensatory plan or arrangement.
|- | ---------------------------------------------------------



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##### Table of Contents

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Principal Accountant Audit Fees and Services Fees

The following tables describe fees for professional audit services and fees for other services rendered by Kenny H. Lee CPA Group, Inc., our principal accountant from
January 1, 2003 to September 2003, and by Gumbiner Savett, Inc. (Gumbiner), our principal accountant from September 2003 to December 31 2005.

The following table sets forth the aggregate fees paid from January 1, 2004 to December 31, 2004 by Kenny H. Lee CPA Group, Inc:



|                   |  |   |       
|------------------ |  | - | ------
|Audit Fees         |  | $ | 21,500
|Audit Related Fees |  | $ |      
|Tax Fees           |  | $ |      
|All Other Fees     |  | $ |      
|                   |  |   |       
|Total              |  | $ | 21,500
|                   |  |   |       

The following table sets forth the aggregate fees paid from January 1, 2004
to December 31, 2004 by Gumbiner:



|                   |  |   |        
|------------------ |  | - | -------
|Audit Fees         |  | $ | 258,625
|Audit Related Fees |  | $ |       
|Tax Fees           |  | $ | 45,000 
|All Other Fees     |  | $ |       
|                   |  |   |        
|Total              |  | $ | 303,625
|                   |  |   |        

The following table sets forth the aggregate fees paid from January 1, 2005
to December 31, 2005 by Gumbiner:



|                   |  |   |        
|------------------ |  | - | -------
|Audit Fees         |  | $ | 323,955
|Audit Related Fees |  | $ |       
|Tax Fees           |  | $ | 89,300 
|All Other Fees     |  | $ |       
|                   |  |   |        
|Total              |  | $ | 413,255
|                   |  |   |        

Audit Committee Pre-Approval Policies and Procedures

Our Audit Committees policy is to pre-approve all audit and permissible non-audit services provided by our independent auditors. These services may include audit
services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent auditor and management
are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval. The chair of the Audit Committee is also authorized, pursuant to delegated
authority, to pre-approve additional services of up to $25,000 per engagement on a case-by-case basis, and such approvals are communicated to the full Audit Committee at its next meeting.



59



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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



AXESSTEL, INC.By:

/S/    MIKE H.P.
KWONMike H.P. KwonChairman and Chief Executive Officer(Principal Executive Officer)Date: March 31, 2006


KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
severally constitutes and appoints Mike H.P. Kwon and Patrick Gray, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorney-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or necessary fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each said attorneys-in-fact and agents or any of them
or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

In accordance with the Securities Exchange
Act of 1934, this report has been signed below by the following persons on behalf of registrant in the capacities and on the dates indicated.

|                                         |  |                                                                              |  |               
|---------------------------------------- |  | ---------------------------------------------------------------------------- |  | --------------
|Signature                                |  | Title                                                                        |  | Date          
|                                         |  |                                                                             
|/S/    MIKE H.P.
KWON Mike H.P. Kwon     |  | Chairman, Chief Executive Officer and Director (Principal Executive Officer) |  | March 31, 2006
|                                         |  |                                                                             
|/S/    JAI
BHAGAT Jai Bhagat             |  | Director                                                                     |  | March 31, 2006
|                                         |  |                                                                             
|/S/    SCOTT
FOX Scott Fox               |  | Director                                                                     |  | March 31, 2006
|                                         |  |                                                                             
|/S/    OSMO A.
HAUTANEN Osmo A. Hautanen |  | Director                                                                     |  | March 31, 2006
|                                         |  |                                                                             
|/S/    HAYDN
HSIEH Haydn Hsieh           |  | Director                                                                     |  | March 31, 2006
|                                         |  |                                                                             
|/S/    BRYAN B.
MIN Bryan B. Min         |  | Director                                                                     |  | March 31, 2006
|                                         |  |                                                                             
|/S/    ÅKE
PERSSON Åke Persson           |  | Director                                                                     |  | March 31, 2006



60



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##### Table of Contents

|                                                     |  |          |  |               
|---------------------------------------------------- |  | -------- |  | --------------
|Signature                                            |  | Title    |  | Date          
|                                                     |  |         
|/S/    ROLAND A. VAN DER
MEER Roland A. Van der Meer |  | Director |  | March 31, 2006
|                                                     |  |         
|/S/    SEUNG TAIK
YANG Seung Taik Yang               |  | Director |  | March 31, 2006



61



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Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                |  |     
|------------------------------------------------------------------------------- |  | ----
|                                                                                |  | Page
|Consolidated Financial Statements For The Fiscal Year Ended December 31, 2005   |  |     
|Report of Independent Registered Public Accounting Firm of Gumbiner Savett Inc. |  | F-2 
|Consolidated Balance Sheets                                                     |  | F-3 
|Condensed Consolidated Statements of Operations and Comprehensive Loss          |  | F-4 
|Consolidated Statements of Stockholders Equity                                 |  | F-5 
|Consolidated Statements of Cash Flows                                           |  | F-6 
|Notes to Consolidated Financial Statements                                      |  | F-8 



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders

of Axesstel, Inc.

We have
audited the consolidated balance sheets of Axesstel, Inc. (a Nevada corporation) and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations and comprehensive loss, stockholders equity, and
cash flows for each of 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 standards of the Public 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Axesstel, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years then ended in conformity with U.S. generally accepted accounting principles.

Gumbiner Savett Inc.

March 24, 2006

Santa Monica, California



F-2



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##### Table of Contents

AXESSTEL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                   |  | December 31, |            
|                                                                                                                                                                   |  | 2005         |             |   | 2004 |  
|ASSETS                                                                                                                                                             |  |              |             |   |      |   |             |  
|Current assets:                                                                                                                                                    |  |              |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                          |  | $            | 9,161,502   |   |      | $ | 7,525,259   |  
|Accounts receivable, less allowance for doubtful account of $500,000 at December 31, 2005                                                                          |  |              | 13,696,081  |   |      |   | 8,776,340   |  
|Inventory                                                                                                                                                          |  |              | 3,314,019   |   |      |   |            |  
|Deferred tax assets                                                                                                                                                |  |              |            |   |      |   | 640,000     |  
|Deferred offering costs                                                                                                                                            |  |              |            |   |      |   | 974,833     |  
|Prepayments and other current assets                                                                                                                               |  |              | 1,749,139   |   |      |   | 929,712     |  
|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Total current assets                                                                                                                                               |  |              | 27,920,741  |   |      |   | 18,846,144  |  
|                                                                                                                                                                   |  |             
|Property and equipment, net                                                                                                                                        |  |              | 3,709,351   |   |      |   | 1,878,831   |  
|                                                                                                                                                                   |  |             
|Other assets:                                                                                                                                                      |  |              |             |   |      |   |             |  
|Deferred tax assets                                                                                                                                                |  |              |            |   |      |   | 1,260,000   |  
|License, net                                                                                                                                                       |  |              | 3,674,592   |   |      |   | 1,971,121   |  
|Goodwill                                                                                                                                                           |  |              | 385,564     |   |      |   | 385,564     |  
|Other, net                                                                                                                                                         |  |              | 860,520     |   |      |   | 648,932     |  
|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Total other assets                                                                                                                                                 |  |              | 4,920,676   |   |      |   | 4,265,617   |  
|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Total assets                                                                                                                                                       |  | $            | 36,550,768  |   |      | $ | 24,990,592  |  
|                                                                                                                                                                   |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |              |             |   |      |   |             |  
|Current liabilities:                                                                                                                                               |  |              |             |   |      |   |             |  
|Accounts payable                                                                                                                                                   |  | $            | 1,127,280   |   |      | $ | 599,095     |  
|Due to Wistron NeWeb, related party                                                                                                                                |  |              | 7,483,342   |   |      |   | 13,623,474  |  
|Bank financing                                                                                                                                                     |  |              | 7,239,000   |   |      |   |            |  
|Current portion of long-term debt                                                                                                                                  |  |              |            |   |      |   | 1,140,000   |  
|Customer advances                                                                                                                                                  |  |              |            |   |      |   | 135,300     |  
|Accrued litigation settlement                                                                                                                                      |  |              |            |   |      |   | 958,000     |  
|Accrued royalties                                                                                                                                                  |  |              | 569,561     |   |      |   | 1,364,246   |  
|Accrued warranties                                                                                                                                                 |  |              | 558,400     |   |      |   | 183,000     |  
|Accrued expenses and other current liabilities                                                                                                                     |  |              | 1,611,910   |   |      |   | 1,234,951   |  
|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Total current liabilities                                                                                                                                          |  |              | 18,589,493  |   |      |   | 19,238,066  |  
|                                                                                                                                                                   |  |             
|Long-term liabilities:                                                                                                                                             |  |              |             |   |      |   |             |  
|Note payable                                                                                                                                                       |  |              |            |   |      |   | 250,000     |  
|Long-term debt                                                                                                                                                     |  |              |            |   |      |   | 2,379,000   |  
|Other long-term liability                                                                                                                                          |  |              | 2,500,000   |   |      |   |            |  
|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Total long-term liabilities                                                                                                                                        |  |              | 2,500,000   |   |      |   | 2,629,000   |  
|                                                                                                                                                                   |  |             
|Stockholders equity:                                                                                                                                              |  |              |             |   |      |   |             |  
|Common stock, par value $0.0001; Authorized 50,000,000 shares; 22,543,589 and 11,253,466 shares issued and outstanding at December 31,
2005 and 2004, respectively |  |              | 2,253       |   |      |   | 1,125       |  
|Additional paid-in capital                                                                                                                                         |  |              | 37,898,941  |   |      |   | 15,757,532  |  
|Accumulated other comprehensive income (loss)                                                                                                                      |  |              | 63,802      |   |      |   | (45,614     | )
|Unearned compensation                                                                                                                                              |  |              | (492,513    | ) |      |   | (779,483    | )
|Accumulated deficit                                                                                                                                                |  |              | (22,011,208 | ) |      |   | (11,810,034 | )
|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Total stockholders equity                                                                                                                                         |  |              | 15,461,275  |   |      |   | 3,123,526   |  
|                                                                                                                                                                   |  |              |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                                                                         |  | $            | 36,550,768  |   |      | $ | 24,990,592  |  
|                                                                                                                                                                   |  |              |             |   |      |   |             |  

The accompanying notes are an integral part of these consolidated financial statements.



F-3



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##### Table of Contents

AXESSTEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS



|                                           |  |                                 |             |   |      |   |            |  
|------------------------------------------ |  | ------------------------------- | ----------- | - | ---- | - | ---------- | -
|                                           |  | For the Year Ended December 31, |            
|                                           |  | 2005                            |             |   | 2004 |  
|Revenues                                   |  |                                 | 94,665,711  |   |      |   | 62,564,602 |  
|Cost of goods sold                         |  |                                 | 84,414,640  |   |      |   | 55,849,162 |  
|                                           |  |                                 |             |   |      |   |            |  
|Total gross margin                         |  |                                 | 10,251,071  |   |      |   | 6,715,440  |  
|                                           |  |                                 |             |   |      |   |            |  
|Operating expenses                         |  |                                 |             |   |      |   |            |  
|Research and development                   |  |                                 | 5,511,719   |   |      |   | 4,245,278  |  
|Selling, general and administrative        |  |                                 | 12,415,808  |   |      |   | 8,420,422  |  
|Litigation settlement                      |  |                                 |            |   |      |   | 1,740,000  |  
|                                           |  |                                 |             |   |      |   |            |  
|Total operating expenses                   |  |                                 | 17,927,527  |   |      |   | 14,405,700 |  
|                                           |  |                                 |             |   |      |   |            |  
|Operating loss                             |  |                                 | (7,676,456  | ) |      |   | (7,690,260 | )
|                                           |  |                                
|Other income (expense)                     |  |                                 |             |   |      |   |            |  
|Interest income and other income           |  |                                 | 420,409     |   |      |   | 11,379     |  
|Interest expense and other expense         |  |                                 | (896,945    | ) |      |   | (894,171   | )
|                                           |  |                                 |             |   |      |   |            |  
|Total other income (expense)               |  |                                 | (476,536    | ) |      |   | (882,792   | )
|                                           |  |                                 |             |   |      |   |            |  
|Loss before income tax provision (benefit) |  |                                 | (8,152,992  | ) |      |   | (8,573,052 | )
|Income tax provision (benefit)             |  |                                 | 2,048,182   |   |      |   | (302,694   | )
|                                           |  |                                 |             |   |      |   |            |  
|Net loss                                   |  |                                 | (10,201,174 | ) |      |   | (8,270,358 | )
|                                           |  |                                
|Other comprehensive income (loss)          |  |                                 |             |   |      |   |            |  
|Foreign currency translation adjustment    |  |                                 | 109,416     |   |      |   | (7,920     | )
|                                           |  |                                 |             |   |      |   |            |  
|Comprehensive loss                         |  | $                               | (10,091,758 | ) |      | $ | (8,278,278 | )
|                                           |  |                                 |             |   |      |   |            |  
|Loss per share                             |  |                                 |             |   |      |   |            |  
|Basic                                      |  | $                               | (0.51       | ) |      | $ | (0.91      | )
|Diluted                                    |  | $                               | (0.51       | ) |      | $ | (0.91      | )
|Weighted average shares outstanding        |  |                                 |             |   |      |   |            |  
|Basic                                      |  |                                 | 20,182,856  |   |      |   | 9,123,084  |  
|                                           |  |                                 |             |   |      |   |            |  
|Diluted                                    |  |                                 | 20,182,856  |   |      |   | 9,123,084  |  
|                                           |  |                                 |             |   |      |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



F-4



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##### Table of Contents

AXESSTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the Years Ended December 31,



|                                                       |  |              |   |  |                          |       |   |                      |   |            |                                            |  |   |                    |   |  |                          |         |   |  |   |             |   |  |   |             |  
|------------------------------------------------------ |  | ------------ | - |  | ------------------------ | ----- | - | -------------------- | - | ---------- | ------------------------------------------ |  | - | ------------------ | - |  | ------------------------ | ------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                       |  | Common Stock |   |  | AdditionalPaid InCapital |       |   | UnearnedCompensation |   |            | AccumulatedOtherComprehensiveIncome (Loss) |  |   | AccumulatedDeficit |   |  | TotalStockholdersEquity |        
|                                                       |  | Shares       |   |  | Amount                   |       |   |                      |   |            |                                           
|Balances at December 31, 2003                          |  | 6,709,842    |   |  |                          | 671   |   |                      |   | 6,726,603  |                                            |  |   | (406,250           | ) |  |                          | (37,694 | ) |  |   | (3,539,676  | ) |  |   | 2,743,654   |  
|Stock issued for services                              |  | 50,000       |   |  |                          | 5     |   |                      |   | 112,495    |                                            |  |   |                    |   |  |                          |        |   |  |   |            |   |  |   | 112,500     |  
|Stock issued for cash                                  |  | 2,193,334    |   |  |                          | 219   |   |                      |   | 5,719,783  |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 5,720,002   |  
|Offering costs                                         |  |             |   |  |                          |      |   |                      |   | (323,850   | )                                          |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | (323,850    | )
|Stock issued for exercise of warrants and options      |  | 1,243,333    |   |  |                          | 124   |   |                      |   | 1,146,209  |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 1,146,333   |  
|Cashless exercise of stock warrants to equity investor |  | 382,352      |   |  |                          | 38    |   |                      |   | (38        | )                                          |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   |            |  
|Stock issued for employee compensation                 |  | 35,300       |   |  |                          | 4     |   |                      |   | 79,601     |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 79,605      |  
|Stock issued to Board of Directors                     |  | 210,000      |   |  |                          | 22    |   |                      |   | 720,728    |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 720,750     |  
|Debts converted into common stock                      |  | 375,000      |   |  |                          | 36    |   |                      |   | 749,964    |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 750,000     |  
|Stock warrants granted for consulting services         |  |             |   |  |                          |      |   |                      |   | 147,419    |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 147,419     |  
|Stock issued for payment of debts                      |  | 84,305       |   |  |                          | 9     |   |                      |   | 266,395    |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 266,404     |  
|Warrants issued in connection with financings          |  |             |   |  |                          |      |   |                      |   | 494,720    |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 494,720     |  
|Cancellation of stock issued for services              |  | (30,000      | ) |  |                          | (3    | ) |                      |   | (82,497    | )                                          |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | (82,500     | )
|Unearned compensation                                  |  |             |   |  |                          |      |   |                      |   |           |                                            |  |   | (373,233           | ) |  |                          |        |   |  |   |            |   |  |   | (373,233    | )
|Cumulative translation adjustment                      |  |             |   |  |                          |      |   |                      |   |           |                                            |  |   |                   |   |  |                          | (7,920  | ) |  |   |            |   |  |   | (7,920      | )
|Net loss                                               |  |             |   |  |                          |      |   |                      |   |           |                                            |  |   |                   |   |  |                          |        |   |  |   | (8,270,358  | ) |  |   | (8,270,358  | )
|                                                       |  |              |   |  |                          |       |   |                      |   |            |                                            |  |   |                    |   |  |                          |         |   |  |   |             |   |  |   |             |  
|Balances at December 31, 2004                          |  | 11,253,466   |   |  | $                        | 1,125 |   |                      | $ | 15,757,532 |                                            |  | $ | (779,483           | ) |  | $                        | (45,614 | ) |  | $ | (11,810,034 | ) |  | $ | 3,123,526   |  
|                                                       |  |              |   |  |                          |       |   |                      |   |            |                                            |  |   |                    |   |  |                          |         |   |  |   |             |   |  |   |             |  
|Balances at December 31, 2004                          |  | 11,253,466   |   |  | $                        | 1,125 |   |                      | $ | 15,757,532 |                                            |  | $ | (779,483           | ) |  | $                        | (45,614 | ) |  | $ | (11,810,034 | ) |  | $ | 3,123,526   |  
|Stock issued for cash                                  |  | 5,484,979    |   |  |                          | 549   |   |                      |   | 20,632,463 |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 20,633,012  |  
|Offering costs                                         |  |             |   |  |                          |      |   |                      |   | (2,665,220 | )                                          |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | (2,665,220  | )
|Stock issued for exercise of warrants and options      |  | 4,807,992    |   |  |                          | 480   |   |                      |   | 1,304,967  |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 1,305,447   |  
|Stock issued for employee compensation                 |  | 10,000       |   |  |                          | 1     |   |                      |   | 37,999     |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 38,000      |  
|Stock issued to Board of Directors                     |  | 90,000       |   |  |                          | 8     |   |                      |   | 141,290    |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 141,298     |  
|Debts converted into common stock                      |  | 897,152      |   |  |                          | 90    |   |                      |   | 2,689,910  |                                            |  |   |                   |   |  |                          |        |   |  |   |            |   |  |   | 2,690,000   |  
|Unearned compensation                                  |  |             |   |  |                          |      |   |                      |   |           |                                            |  |   | 286,970            |   |  |                          |        |   |  |   |            |   |  |   | 286,970     |  
|Cumulative translation adjustment                      |  |             |   |  |                          |      |   |                      |   |           |                                            |  |   |                   |   |  |                          | 109,416 |   |  |   |            |   |  |   | 109,416     |  
|Net loss                                               |  |             |   |  |                          |      |   |                      |   |           |                                            |  |   |                   |   |  |                          |        |   |  |   | (10,201,174 | ) |  |   | (10,201,174 | )
|                                                       |  |              |   |  |                          |       |   |                      |   |            |                                            |  |   |                    |   |  |                          |         |   |  |   |             |   |  |   |             |  
|Balances at December 31, 2005                          |  | 22,543,589   |   |  | $                        | 2,253 |   |                      | $ | 37,898,941 |                                            |  | $ | (492,513           | ) |  | $                        | 63,802  |   |  | $ | (22,011,208 | ) |  | $ | 15,461,275  |  
|                                                       |  |              |   |  |                          |       |   |                      |   |            |                                            |  |   |                    |   |  |                          |         |   |  |   |             |   |  |   |             |  

The accompanying notes are an integral part of these consolidated financial statements.



F-5



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##### Table of Contents

AXESSTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                            |  |                                 |             |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                            |  | For the Year Ended December 31, |            
|                                                                            |  | 2005                            |             |   | 2004 |  
|Cash flows from operating activities:                                       |  |                                 |             |   |      |   |            |  
|Net loss                                                                    |  | $                               | (10,201,174 | ) |      | $ | (8,270,358 | )
|                                                                            |  |                                 |             |   |      |   |            |  
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |             |   |      |   |            |  
|Depreciation and amortization                                               |  |                                 | 3,094,826   |   |      |   | 1,873,309  |  
|Issuance of stock for services                                              |  |                                 |            |   |      |   | 301,421    |  
|Issuance of stock for employee compensation                                 |  |                                 | 38,000      |   |      |   | 79,605     |  
|Provision for losses on accounts receivable                                 |  |                                 | 500,000     |   |      |   |           |  
|Stock warrants granted for consulting services                              |  |                                 |            |   |      |   | 30,500     |  
|Deferred tax assets                                                         |  |                                 | 1,900,000   |   |      |   | (385,000   | )
|(Increase) decrease in:                                                     |  |                                 |             |   |      |   |            |  
|Accounts receivable                                                         |  |                                 | (5,419,741  | ) |      |   | (7,367,452 | )
|Inventory                                                                   |  |                                 | (3,314,019  | ) |      |   |           |  
|Prepayments and other current assets                                        |  |                                 | 155,406     |   |      |   | (1,311,283 | )
|Other assets                                                                |  |                                 | (673,286    | ) |      |   | (31,955    | )
|Increase (decrease) in:                                                     |  |                                 |             |   |      |   |            |  
|Accounts payable, including related party payables                          |  |                                 | (5,611,947  | ) |      |   | 12,807,349 |  
|Accrued expenses and other liabilities                                      |  |                                 | (1,135,626  | ) |      |   | 1,700,727  |  
|                                                                            |  |                                 |             |   |      |   |            |  
|Total adjustments                                                           |  |                                 | (10,466,387 | ) |      |   | 7,697,221  |  
|                                                                            |  |                                 |             |   |      |   |            |  
|Net cash used in operating activities                                       |  |                                 | (20,667,561 | ) |      |   | (573,137   | )
|                                                                            |  |                                 |             |   |      |   |            |  
|Cash flows from investing activities:                                       |  |                                 |             |   |      |   |            |  
|Acquisition of property and equipment                                       |  |                                 | (2,987,849  | ) |      |   | (1,302,915 | )
|                                                                            |  |                                 |             |   |      |   |            |  
|Net cash used in investing activities                                       |  |                                 | (2,987,849  | ) |      |   | (1,302,915 | )
|                                                                            |  |                                 |             |   |      |   |            |  
|Cash flows from financing activities:                                       |  |                                 |             |   |      |   |            |  
|Proceeds from issuance of common stock, net of costs                        |  |                                 | 19,273,237  |   |      |   | 4,893,360  |  
|Proceeds from issuance of notes payable, net of costs                       |  |                                 |            |   |      |   | 6,210,575  |  
|Proceeds from bank financing                                                |  |                                 | 7,239,000   |   |      |   |           |  
|Repayment of notes payable                                                  |  |                                 | (1,330,000  | ) |      |   | (1,850,000 | )
|Repayments under capital lease obligations                                  |  |                                 |            |   |      |   | (221,040   | )
|                                                                            |  |                                 |             |   |      |   |            |  
|Net cash provided by financing activities                                   |  |                                 | 25,182,237  |   |      |   | 9,032,895  |  
|                                                                            |  |                                 |             |   |      |   |            |  
|Cumulative translation adjustment                                           |  |                                 | 109,416     |   |      |   | (7,920     | )
|                                                                            |  |                                 |             |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                        |  |                                 | 1,636,243   |   |      |   | 7,148,923  |  
|                                                                            |  |                                 |             |   |      |   |            |  
|Cash and cash equivalents at beginning of year                              |  |                                 | 7,525,259   |   |      |   | 376,336    |  
|                                                                            |  |                                 |             |   |      |   |            |  
|Cash and cash equivalents at end of year                                    |  | $                               | 9,161,502   |   |      | $ | 7,525,259  |  
|                                                                            |  |                                 |             |   |      |   |            |  
|Supplemental disclosure of cash flow information:                           |  |                                 |             |   |      |   |            |  
|Cash paid during the period for:                                            |  |                                 |             |   |      |   |            |  
|Interest                                                                    |  | $                               | 333,824     |   |      | $ | 232,481    |  
|Income tax                                                                  |  | $                               | 213,063     |   |      | $ | 55,143     |  



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Supplemental disclosures of noncash investing and financing activities:

During 2005, the Company entered into the following transactions:



| |  |  | The Company issued 125,000 shares of common stock to North America Venture Fund II, L.P. and 772,152 shares of common stock to Laurus Master Fund, Ltd. in repayment for notes
payable of $2,690,000 in the aggregate.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company recorded capitalized license costs and a long-term liability associated with its expanded CDMA license of $2,500,000. The liability is contingent on the achievement of
certain milestones being achieved. Once these milestones are achieved, the Company will be required to pay the licensor installment payments over a two year period. The Company expects to achieve the milestones within one to two years. No cash is
due in the current year for this obligation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued 135,000 shares of common stock to members of the Companys Board of Directors and cancelled 45,000 shares. Combined, these shares are valued at $141,300.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During 2004, the Company entered into the following transactions:



| |  |  | The Company issued 50,000 shares of common stock valued at $112,500 in exchange for finders fees of $41,625 and offering costs of $70,875 in connection with the Companys
January 2004 financing.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company recorded a discount of $125,000 on its January financing and $108,000 on its August financing due to the presence of a beneficial conversion feature.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued warrants valued at $204,092 to purchase 100,000 shares of common stock to a lender recorded as a discount in connection with its $3,000,000 March financing.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued warrants valued at $57,628 to purchase 33,334 shares of common stock to a lender recorded as a discount in connection with its $1,000,000 August financing.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company issued warrants valued at $97,922 to purchase 47,468 shares of common stock in exchange for finders fees in connection with the Companys March 2004
financing, and issued warrants valued at $18,997 to purchase 15,822 shares of common stock in exchange for finders fees with the Companys August financing.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company agreed to issue 210,000 shares of common stock to members of the Companys Board of Directors and cancelled 30,000 shares (20,000 of which were forfeited and 10,000
of which were repurchased for $3.15 per share) that were issued to a previous Board Member. Combined, these shares are valued at $665,750.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fund raising advances of $1,720,000 were transferred to equity upon issuance of common stock.
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | The Company issued 375,000 shares of common stock to North America Venture Fund II, L.P. and 84,305 shares of common stock to Laurus Master Fund, Ltd. in repayment for notes payable
of $980,000.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

AXESSTEL, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2005

1. THE COMPANY AND ITS
SIGNIFICANT ACCOUNTING POLICIES

The Company

Axesstel, Inc. (Axesstel or the Company) designs, develops, markets and manufactures fixed wireless voice and broadband data products for worldwide telecommunications. The Company sells its products to
telecommunications service providers in developing countries. The product portfolio includes fixed wireless desktop phones, payphones, voice/data terminals and broadband modems for access to voice calling and high-speed data services.

Axesstel was originally formed in July 2000 as a California corporation (Axesstel California). On July 16, 2002, Axesstel California
entered into a Corporate Combination Agreement with Miracom Industries, Inc., a Nevada corporation (Miracom), which was amended on August 22, 2002 (the Combination Agreement). Pursuant to the Combination Agreement, on
August 31, 2002, Miracom acquired through a tender offer 98% of the outstanding common stock of Axesstel California and Axesstel California became a subsidiary of Miracom. Miracom then changed its name to Axesstel, Inc., the former directors
and officers of Miracom resigned, and the directors and officers of Axesstel California became the directors and officers of the Company. Following the acquisition, the former shareholders of Axesstel California held approximately 95% of the
outstanding common stock of the Company on a fully-diluted basis. The acquisition was accounted for as a reverse acquisition because the former shareholders of Axesstel California owned a majority of the Companys outstanding stock subsequent
to the acquisition.

In December 2002, the Company acquired Entatel, Ltd. (Entatel), a Korea-based company, mainly engaged in
developing, manufacturing and selling telecommunication products. The Company acquired one hundred percent of the issued and outstanding capital stock of Entatel, in exchange for 300,000 shares of the Companys common stock. The acquisition was
consummated in 2003 and was accounted for under the purchase method of accounting, pursuant to SFAS No. 141, Business Combinations. In April 2003, Entatel was re-named Axesstel R&D Center Co., Ltd.

Estimates

In preparing financial statements in
conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The Companys consolidated financial statements include the assets, liabilities and
operating results of Axesstel and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The Company maintains its cash and cash equivalents with various commercial banks. These bank accounts are generally guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At
times, cash balances at any single bank may be in excess of the FDIC insurance limit. The deposits are made with reputable financial institutions and the Company does not anticipate realizing any losses from these deposits.



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##### Table of Contents

Inventory

Inventories are stated at the lower of cost (average) or market. The Company reviews the components of the inventory on a regular basis for excess or obsolete inventory based on estimated future usage and sales. Management concluded that no
inventory reserve was needed as of December 31, 2005 or December 31, 2004.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the following estimated useful lives of the
respective assets, as follows:



|                               |  |                                         
|------------------------------ |  | ----------------------------------------
|Machinery and equipment        |  | 3 to 7 years                            
|Office furniture and equipment |  | 3 to 7 years                            
|Software                       |  | 3 years                                 
|Leasehold improvements         |  | Life of lease, or useful life if shorter

License

License includes the costs of a non-exclusive worldwide software technology license which allows the Company to manufacture both fixed wireless and mobile CDMA based products and to sell and/or distribute them
worldwide. The license has no fixed termination date. License costs are amortized on a straight-line basis over the estimated economic life of the license, which is approximately five years.

Patents and Trademarks

Patents and trademarks are
recorded at cost. Amortization is provided using the straight-line method over the estimated useful life of the asset, which is approximately four years.

Software Development Costs

Software development costs for products sold (primarily firmware embedded in the Companys
products) incurred after technological feasibility is established are capitalized in accordance with Statement of Financial Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed.
Significant management judgment is required in determining when technological feasibility has been achieved for a particular product. Capitalized software development costs are amortized when products are available for general release to customers,
using the greater of (a) the ratio that current gross revenues for the products bear to the total current and anticipated future gross revenues for the products or (b) the straight-line method over the estimated useful life of the
products.

There were no capitalized software costs as of December 31, 2005 and December 31, 2004 because technological
feasibility was not reached for the Companys products until the manufacturing process began.

Impairment of Long-Lived Assets

The Company accounts for the impairment of long-lived assets, such as fixed assets, licenses, patents and trademarks, under the provisions of SFAS
No. 144, Accounting for the Impairment of Long-Lived Assets. SFAS No. 144 establishes the accounting for impairment of long-lived tangible and intangible assets other than goodwill and for the disposal of a business. Pursuant
to SFAS No. 144, the Company periodically evaluates, at least annually, whether facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may not be recoverable. If such circumstances are determined
to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the
loss is



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measured based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an impairment cost as a
charge to operations at the time it is recognized.

The Company determined there was no impairment of long-lived assets at
December 31, 2005 or December 31, 2004.

Fair Value of Financial Instruments

The Company measures its financial assets and liabilities in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of
Financial Instruments. The carrying values of accounts receivable, accounts payable, note payable, bank financing, accrued expenses and other liabilities approximate fair value due to the short-term maturities of these instruments. The fair
value of long-term debt cannot be determined because the obligation is contingent upon events to occur in the future. The fair value of the due to Wistron NeWeb account can not be determined because of its related party nature.

Revenue Recognition and Warranty Costs

Revenues from
product sales are recognized when the risks of ownership and title pass to the customer, as specified in (1) the respective sales agreements and (2) other revenue recognition criterion as prescribed by Staff Accounting Bulletin
No. 101 (SAB 101), Revenue Recognition in Financial Statements, as amended by SAB No. 104. Generally, the risk of ownership and title pass when product is received by the customers freight forwarder. If and when defective
products are returned, the Company normally exchanges them or provides credits to the customer. The returned products are shipped back to the supplier and the Company is allowed a credit or exchange from the supplier. The Company provides allowances
for potential sales returns when necessary. Management concluded that no allowance was needed as of December 31, 2005 and December 31, 2004.

On certain contracts, the Company provides for a warranty replacement unit at one percent of total units shipped. The cost related to the standard warranty replacement unit is included in the cost of goods sold and
recorded when revenue is recognized. All products are tested for quality inspection prior to shipment and the Company has historically experienced a minimal level of defective units. On one of the Companys significant contracts, the Company
does not provide a warranty replacement unit of one percent of total units shipped. In this case, the Company provides third party service centers to the customer for any warranty performance. Costs for these service centers are recorded to cost of
sales when revenue is recognized. During the year ended December 31, 2005, warranty costs amounted to approximately $516,000 and, as of December 31, 2005, the Company has established a warranty reserve of $558,000 to cover additional
service costs over the life of the warranties. During the year ended December 31, 2004, warranty costs amounted to approximately $220,000 and, as of December 31, 2004, the Company has established a warranty reserve of $183,000 to cover
additional service costs over the life of the warranties. Management believes that no additional warranty reserve is needed other than as discussed above.

Research and Development

Costs incurred in research and development activities are expensed as incurred.

Stock-Based Compensation

SFAS No. 123,
Accounting for Stock-Based Compensation, establishes the use of the fair value based method of accounting for stock-based compensation arrangements under which compensation cost is determined using the fair value of the stock as of the
date of grant and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the intrinsic value accounting method specified in Accounting Principles Bulletin Opinion
No. 25, or APB Opinion No. 25, Accounting for Stock Issued to Employees, to account for stock-based compensation issued to employees. The



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Company has elected to use the intrinsic value based method and to disclose the pro forma effect of using the fair value based method to account for its
stock-based compensation. As a result of the recent adoption by the Financial Accounting Standards Board of SFAS No. 123 (revised 2004) Share-Based Payment, or SFAS No. 123(R), the Company will be required, beginning in the
quarter ending March 31, 2006, to apply the fair value method as prescribed in SFAS No. 123(R). See Recent Accounting Pronouncements below.

To lessen the impact of this change to future reportable earnings, in December 2005, the Company elected to accelerate the vesting period of all unvested stock options. The impact of this acceleration increased the
pro-forma loss indicated below by $1.5 million.

The Company has adopted the disclosure only provisions of SFAS No. 148, which is an
amendment to SFAS No. 123. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans and generally does not recognize compensation expense for its
stock-based compensation plans, as all options granted under those plans are intended to have an exercise price equal to or greater than the market value of the underlying common stock at the date of grant.

If the Company had elected to recognize compensation expense based upon the fair value of the share price (determined by the approximate market price at
the time of grant) at the grant date for stock option awards consistent with the methodology prescribed by SFAS No. 123, the Companys net loss and loss per share would be adjusted to the pro forma amounts indicated below:



|                                                                                                                                            |  |                        |             |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ----------- | - | ---- | - | ---------- | -
|                                                                                                                                            |  | Year Ended December 31 |            
|                                                                                                                                            |  | 2005                   |             |   | 2004 |  
|Net loss, as reported                                                                                                                       |  | $                      | (10,201,174 | ) |      | $ | (8,270,358 | )
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                        | (2,797,675  | ) |      |   | (644,375   | )
|                                                                                                                                            |  |                        |             |   |      |   |            |  
|Pro forma net loss                                                                                                                          |  | $                      | (12,998,849 | ) |      | $ | (8,914,733 | )
|                                                                                                                                            |  |                        |             |   |      |   |            |  
|Loss per share:                                                                                                                             |  |                        |             |   |      |   |            |  
|Basicas reported                                                                                                                           |  | $                      | (0.51       | ) |      | $ | (0.91      | )
|Basicpro forma                                                                                                                             |  | $                      | (0.64       | ) |      | $ | (0.98      | )
|Dilutedas reported                                                                                                                         |  | $                      | (0.51       | ) |      | $ | (0.91      | )
|Dilutedpro forma                                                                                                                           |  | $                      | (0.64       | ) |      | $ | (0.98      | )

For purposes of computing the pro forma disclosures required by SFAS No. 123, the fair value
of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended December 31, 2005 and 2004: risk-free interest rates of 6.0%,
dividend yields of 0%, expected volatility factors in the market price of Axesstels common stock of 62% and 100% respectively, and expected option life of six years.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock price volatility. Because the Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the
subjective assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Income Taxes

The Company accounts for income taxes
in accordance with SFAS No. 109 Accounting for Income Taxes. As such, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial
reported amounts at each period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect



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taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period, if any, and the change during the period in deferred tax assets and liabilities.

Earnings
(loss) per Share

The Company utilizes SFAS No. 128, Earnings per Share. Basic earnings (loss) per share are computed
by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is
increased to include additional common shares available upon exercise of stock options and warrants using the treasury stock method, except for periods of operating loss for which no common shares equivalents are included because their effect would
be anti-dilutive. For the years ended December 31, 2005 and December 31, 2004, 3,484,976 and 6,982,882 potentially dilutive securities are excluded from the computation because they are anti-dilutive.



|                                                                          |  |                          |             |   |      |   |            |  
|------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ---------- | -
|                                                                          |  | Years Ended December 31, |            
|                                                                          |  | 2005                     |             |   | 2004 |  
|Numerator:                                                                |  |                          |             |   |      |   |            |  
|Net loss attributable to common stockholders                              |  | $                        | (10,201,174 | ) |      | $ | (8,270,358 | )
|Denominator:                                                              |  |                          |             |   |      |   |            |  
|Denominator for basic net income per shareweighted average shares        |  |                          | 20,182,856  |   |      |   | 9,123,084  |  
|Effect of dilutive securities:                                            |  |                          |             |   |      |   |            |  
|Stock options and warrants                                                |  |                          |            |   |      |   |           |  
|                                                                          |  |                          |             |   |      |   |            |  
|Dilutive potential common stock                                           |  |                          |            |   |      |   |           |  
|                                                                          |  |                          |             |   |      |   |            |  
|Denominator for diluted income per shareadjusted weighted average shares |  |                          | 20,182,856  |   |      |   | 9,123,084  |  
|Basic loss per share                                                      |  | $                        | (0.51       | ) |      | $ | (0.91      | )
|                                                                          |  |                          |             |   |      |   |            |  
|Diluted loss per share                                                    |  | $                        | (0.51       | ) |      | $ | (0.91      | )
|                                                                          |  |                          |             |   |      |   |            |  

Foreign Currency Exchange Gains and Losses

The reporting currency for the Company is the U.S. dollar. The functional currency of the Companys foreign subsidiary is the Korean won. The
subsidiarys assets and liabilities are translated into United States dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated at the weighted average rate of exchange prevailing during the period.
The resulting cumulative translation adjustments are disclosed as a component of cumulative other comprehensive income (loss) in stockholders equity. Foreign currency transaction gains and losses are recorded in the statements of operations
and comprehensive income (loss) as a component of selling, general and administrative expenses.

Comprehensive Income

The Company adopted SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from transactions and other events and circumstances from non-owner sources. Examples of items to be included
in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities.

Certain Risks and Concentrations

Generally, the obligations for the Companys foreign customers are secured
either by letters of credit or by credit insurance, subject to a 5% deductible. The Company generally does not receive security for domestic customer



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##### Table of Contents

obligations. At December 31, 2005, one customer with credit terms was significantly late in providing payment. Based on the Companys risk
assessment of this late paying customer, the Company established an account receivable allowance of $500,000 representing approximately 50% of the receivable. Significant management judgment is required to determine the allowance for doubtful
accounts. The Company will make every effort to collect the entire amount, but may be required to record a further adjustment in 2006 if it is unsuccessful. At December 31, 2004, management concluded that no allowance was required.

The Companys products include components subject to rapid technological change. Significant technological change could adversely affect the
Companys operating results and subject the Company to product obsolescence. The Company has return privileges with many of its suppliers and other ongoing programs to minimize the adverse effects of technological change.

During 2005, 80% of the Companys revenues were from two customers, comprised of 59%, and 21%. At December 31, 2005, the amounts due from such
customers were $6.7 million and $4.5 million, respectively, which were included in accounts receivable. During 2005, the Company purchased the majority of its products from one manufacturer. At December 31, 2005, the amount due to this
manufacturer was $7.5 million.

During 2004, 86% of the Companys revenues were from two customers, comprised of 71%, and 15%. At
December 31, 2004, the amounts due from such customers were $8.1 million and $148,000, respectively, which were included in accounts receivable. During 2004, the Company purchased the majority of its products from one manufacturer. At
December 31, 2004, the amount due to this manufacturer was $13.6 million.

As of December 31, 2005, the Company maintained assets
of approximately $7.3 million at its location in South Korea. Although this country is considered politically and economically stable, it is possible that unanticipated events in this foreign country could disrupt the Companys operations.

Reclassifications

Certain
reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation.

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, or FIN No. 46, Consolidation of Variable Interest Entities. This
interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. This interpretation required existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party
holds an interest or combination of interest that effectively recombines risks that were previously dispersed. This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN No. 46 did not have a material impact on the Companys financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, or SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within the scope of SFAS No. 150 as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the Company beginning October 1,
2003. The adoption of SFAS No. 150 did not have an impact on the Companys financial position or results of operations.



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##### Table of Contents

In December 2004, the FASB issued SFAS No. 123 (revised 2004) Share-Based Payment, or
SFAS No. 123(R). SFAS No. 123(R) revises FASB Statement No. 123 Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, and its related implementation guidance. This Statement eliminates the
ability to account for share-based compensation using the intrinsic value method under APB Opinion No. 25. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide service in exchange for the award, known as the requisite service period, which is usually the vesting period. SFAS No. 123(R) is effective for companies filing under
Regulation SB as of the beginning of the first interim or annual reporting period that begins after December 15, 2005, which for us will be our first quarter of the year ending December 31, 2006. The Company anticipates adopting SFAS
No. 123(R) beginning in the quarter ending March 31, 2006. Accordingly, the provisions of SFAS No. 123(R) will apply to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally,
compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date must be recognized as the requisite service is rendered on or after the required effective date.
To lessen the impact of this change to future reportable earnings, in December 2005, Management elected to accelerate the vesting period of all unvested stock options. Future option grants will lead to a decrease of reported earnings. At this time,
Management cannot estimate the impact to 2006 reported earnings, since it has not concluded how the adoption of this rule will effect its decision for future option grants. In addition, the change in accounting rules could impact the Companys
decision making to utilize broad based employee stock plans as a means to reward employees and could result in a competitive disadvantage to the Company in the employee marketplace.

2. PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consisted of the
following:



|                                      |  |                   |           |                   |   |        
|------------------------------------- |  | ----------------- | --------- | ----------------- | - | -------
|                                      |  | December 31, 2005 |           | December 31, 2004
|Prepaid taxes                         |  | $                 | 512,116   |                   | $ | 265,779
|Prepaid insurance                     |  |                   | 185,380   |                   |   | 84,000 
|Prepaid tooling                       |  |                   | 174,248   |                   |   | 243,573
|Due from Wistron NeWeb, related party |  |                   |          |                   |   | 90,000 
|Supplier advances                     |  |                   | 425,978   |                   |   | 143,761
|Restricted cash                       |  |                   | 262,016   |                   |   |       
|Other                                 |  |                   | 189,401   |                   |   | 102,599
|                                      |  |                   |           |                   |   |        
|                                      |  | $                 | 1,749,139 |                   | $ | 929,712
|                                      |  |                   |           |                   |   |        

3. INVENTORY

Inventory consisted of the following:



|                |  |                   |           |                   |   |  
|--------------- |  | ----------------- | --------- | ----------------- | - | -
|                |  | December 31, 2005 |           | December 31, 2004
|Raw materials   |  | $                 | 3,048,875 |                   | $ | 
|Work in process |  |                   | 50,085    |                   |   | 
|Finished goods  |  |                   | 215,059   |                   |   | 
|                |  |                   |           |                   |   |  
|                |  | $                 | 3,314,019 |                   | $ | 
|                |  |                   |           |                   |   |  



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4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:



|                               |  |                   |            |   |                   |   |            |  
|------------------------------ |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                               |  | December 31, 2005 |            |   | December 31, 2004 |  
|Machinery and equipment        |  | $                 | 3,076,981  |   |                   | $ | 977,532    |  
|Office furniture and equipment |  |                   | 668,199    |   |                   |   | 467,317    |  
|Software                       |  |                   | 1,799,770  |   |                   |   | 1,580,540  |  
|Leasehold improvements         |  |                   | 529,237    |   |                   |   | 60,949     |  
|                               |  |                   |            |   |                   |   |            |  
|                               |  |                   | 6,074,187  |   |                   |   | 3,086,338  |  
|Accumulated depreciation       |  |                   | (2,364,836 | ) |                   |   | (1,207,507 | )
|                               |  |                   |            |   |                   |   |            |  
|                               |  | $                 | 3,709,351  |   |                   | $ | 1,878,831  |  
|                               |  |                   |            |   |                   |   |            |  

5. OTHER ASSETS

Other assets consisted of the following:



|                       |  |                   |         |                   |   |        
|---------------------- |  | ----------------- | ------- | ----------------- | - | -------
|                       |  | December 31, 2005 |         | December 31, 2004
|Deposits               |  | $                 | 443,911 |                   | $ | 192,614
|Patents and trademarks |  |                   | 416,609 |                   |   | 17,184 
|Prepaid finders fee    |  |                   |        |                   |   | 218,000
|Prepaid loan costs     |  |                   |        |                   |   | 120,000
|Other                  |  |                   |        |                   |   | 101,134
|                       |  |                   |         |                   |   |        
|                       |  | $                 | 860,250 |                   | $ | 648,932
|                       |  |                   |         |                   |   |        

6. LICENSE

In November 2000, the Company entered into a Subscriber Unit License Agreement (the Agreement) pursuant to which it obtained a non-exclusive license of CDMA (Code Division Multiple Access) technology,
which has enabled the Company to manufacture and sell certain fixed wireless CDMA based products and to purchase certain components and equipment from time to time.

In February 2005, the Company entered into an amendment to the Agreement to expand the scope of the license and to allow the Company to make, use and sell certain mobile CDMA based products in addition to fixed
wireless CDMA based products currently offered. The cost associated with the amendment to this Agreement was $2,500,000.

The Agreement, as
amended, allows the Company to manufacture both fixed wireless and mobile CDMA based products and to sell and/or distribute them worldwide. The Agreement, as amended, has no fixed termination date and the Company has assigned an estimated life of 5
years for the license. As of December 31, 2005 and December 31, 2004, the license consisted of the following:



|                         |  |                   |            |   |                   |   |            |  
|------------------------ |  | ----------------- | ---------- | - | ----------------- | - | ---------- | -
|                         |  | December 31, 2005 |            |   | December 31, 2004 |  
|License                  |  | $                 | 5,500,000  |   |                   | $ | 3,000,000  |  
|Accumulated amortization |  |                   | (1,825,408 | ) |                   |   | (1,028,879 | )
|                         |  |                   |            |   |                   |   |            |  
|                         |  | $                 | 3,674,592  |   |                   | $ | 1,971,121  |  
|                         |  |                   |            |   |                   |   |            |  

Amortization expense related to this license amounted to $796,529 and $258,423 for the years ended
December 31, 2005 and 2004, respectively.



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7. GOODWILL AND OTHER INTANGIBLES

The Company adopted SFAS No. 142 Goodwill and Other Intangible Assets as of January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of amortization of goodwill and
other indefinite lived assets. In addition, the standard requires the reassessment of the useful lives of existing recognized intangibles and the testing for impairment of goodwill and other intangibles. The Company has elected to test annually for
impairment. These tests will be performed more frequently if there are triggering events. The Company has completed its testing for the year ended December 31, 2005 using the method discussed in SFAS No. 142 and determined that there was
no impairment for the year ended December 31, 2005. Impairment costs, when recognized, are recorded as a charge to operations. As of December 31, 2005 and December 31, 2004, goodwill amounted to $385,564.

8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following:



|                                    |  |                   |           |                   |   |          
|----------------------------------- |  | ----------------- | --------- | ----------------- | - | ---------
|                                    |  | December 31, 2005 |           | December 31, 2004
|Lease liability                     |  | $                 | 152,638   |                   | $ | 150,000  
|Accrued severance                   |  |                   | 493,719   |                   |   |         
|Accrued commissions                 |  |                   | 28,624    |                   |   |         
|Accrued taxes                       |  |                   | 32,591    |                   |   | 30,730   
|Accrued legal and professional fees |  |                   | 365,000   |                   |   | 526,000  
|Accrued operating expenses          |  |                   | 539,338   |                   |   | 528,221  
|                                    |  |                   |           |                   |   |          
|                                    |  | $                 | 1,611,910 |                   | $ | 1,234,951
|                                    |  |                   |           |                   |   |          

9. LONG-TERM LIABILITIES

In consideration of the expanded license fee agreement detailed in Note 6, the Company has agreed to pay the licensor $2.5 million contingent on certain milestones being achieved. Once these milestones are reached,
the Company will be required to pay the licensor installment payments over a two year period. At this time, the Company expects to achieve the milestones within 1 to 2 years, triggering the two year installment period.

10. NOTES PAYABLE AND BANK FINANCING

In December
2005, the Company borrowed approximately $7.2 million from Silicon Valley Bank, secured by accounts receivable from two customers in approximately the same amount. The loans were repaid by February 2006. The outstanding principal balance of the
loans bore interest at LIBOR rate plus 1.5%.

In January 2004, the Company completed the sale and issuance of an unsecured convertible term
note in the original principal amount of $1.0 million to North America Venture Fund II, L.P., which note was amended pursuant to a letter agreement dated April 15, 2004. Interest accrued on the note at the rate of 3% above prime and was payable
monthly in cash. The principal due under the note was convertible by North America at any time into shares of the Companys common stock at a conversion price of $2.00 per share. North America converted 25% of the original principal amount due
under the note in each of May 2004, September 2004, November 2004 and January 2005. As of December 31, 2004, the remaining note payable balance was $250,000. The final installment of the note was converted into common stock in January
2005.

In August 2004, the Company borrowed approximately $1.65 million from Wells Fargo HSBC Trade Bank, National Association, secured by
accounts receivable from one customer in approximately the same amount. The loan was repaid in October 2004. The outstanding principal balance of the loan bore interest at Wells Fargos prime rate, which is a variable rate.



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##### Table of Contents

11. LONG-TERM DEBT

In March 2004, the Company completed the sale and issuance of a $3.0 million secured convertible promissory note to Laurus Master Fund, Ltd. In August 2004, the Company completed the sale and issuance of an additional
$1.0 million secured convertible promissory note to Laurus. Interest accrued on both notes at a rate of 3% above prime, subject to certain adjustments.

Under the terms of each note, the Company was obligated to make monthly payments of principal and interest. The Company had the option to pay these monthly payments in cash or in shares of its common stock (so long as
the closing price of the common stock was greater than $3.38 for ten trading days preceding the payment date). If the Company elected to pay in stock, it was required to issue Laurus an amount of shares equivalent to the amount of the monthly
payment due divided by $3.16. If the Company elected to pay in cash, it was required to pay 102% of the amount of the monthly payment due. The Company had the option to convert all or a portion of the outstanding principal of each note into shares
of its common stock at $3.16 per share if the closing price of the common stock was greater than $3.70 for ten consecutive trading days. However, the number of shares issued upon conversion of either note could not exceed 30% of the aggregate dollar
trading volume of the common stock for the 22 trading days immediately preceding the payment date. Laurus had the option, at any time, to convert all or a portion of each note into shares of common stock at $3.16 per share. The Company also had the
option to repay the notes in cash. If the Company elected to repay the principal balance in cash, it was required to pay 120% of the outstanding principal if paid during the first year subsequent to the closing date, 115% of the outstanding
principal if paid during the second year subsequent to the closing date and 110% of the outstanding principal if paid during the third year subsequent to the closing date.

As of December 31, 2004, long-term debt consisted of the following:



|                     |  |                 |           |   |                  |   |           |       |  |   |           |  
|-------------------- |  | --------------- | --------- | - | ---------------- | - | --------- | ----- |  | - | --------- | -
|                     |  | March 2004 Note |           |   | August 2004 Note |   |           | Total | 
|Original notes       |  | $               | 3,000,000 |   |                  | $ | 1,000,000 |       |  | $ | 4,000,000 |  
|Payments             |  |                 | 210,000   |   |                  |   | 20,000    |       |  |   | 230,000   |  
|                     |  |                 |           |   |                  |   |           |       |  |   |           |  
|Note balance (gross) |  |                 | 2,790,000 |   |                  |   | 980,000   |       |  |   | 3,770,000 |  
|Note discount        |  |                 | (118,000  | ) |                  |   | (133,000  | )     |  |   | (251,000  | )
|                     |  |                 |           |   |                  |   |           |       |  |   |           |  
|Note balance (net)   |  |                 | 2,672,000 |   |                  |   | 847,000   |       |  |   | 3,519,000 |  
|Current portion      |  |                 | 977,000   |   |                  |   | 163,000   |       |  |   | 1,140,000 |  
|                     |  |                 |           |   |                  |   |           |       |  |   |           |  
|                     |  | $               | 1,695,000 |   |                  | $ | 684,000   |       |  | $ | 2,379,000 |  
|                     |  |                 |           |   |                  |   |           |       |  |   |           |  

In February 2005, the Company issued 22,152 shares of Axesstels common stock at a conversion
price of $3.16 per share to Laurus in connection with the conversion of $70,000 due under the convertible term notes issued to Laurus in March 2004 and August 2004. In March 2005, the Company issued 750,000 shares of Axesstels common stock at
the conversion price of $3.16 per share to Laurus in connection with the conversion of $2.37 million of principal due under the convertible term note issued to Laurus in March 2004. In addition, the remaining balance of the convertible term notes
for both the March 2004 and August 2004 portions was paid off in March 2005 for an aggregate cash payment of approximately $1.5 million. This amount represents 115% of the remaining principal on the March 2004 note and 120% of the remaining
principal on the August 2004 note plus accrued interest on both notes through March 30, 2005. No further amounts are due under these notes.



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##### Table of Contents

12. INCOME TAXES

The following table presents the current and deferred income tax provision (benefit) for federal, state and foreign income taxes:



|                                            |  |      |            |   |      |   |            |  
|------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                            |  | 2005 |            |   | 2004 |  
|Current tax provision (benefit):            |  |      |            |   |      |   |            |  
|Federal                                     |  | $    | 141,805    |   |      | $ |           |  
|State                                       |  |      | 6,377      |   |      |   |           |  
|Foreign                                     |  |      |           |   |      |   | 82,306     |  
|                                            |  |      |            |   |      |   |            |  
|                                            |  | $    | 148,182    |   |      | $ | 82,306     |  
|                                            |  |      |            |   |      |   |            |  
|Deferred tax provision (benefit):           |  |      |            |   |      |   |            |  
|Federal                                     |  |      | (2,189,000 | ) |      |   | (2,647,000 | )
|State                                       |  |      | (395,000   | ) |      |   | (316,000   | )
|Valuation allowance                         |  |      | 4,484,000  |   |      |   | 2,578,000  |  
|                                            |  |      |            |   |      |   |            |  
|                                            |  |      | 1,900,000  |   |      |   | (385,000   | )
|                                            |  |      |            |   |      |   |            |  
|Total provision (benefit) for income taxes: |  | $    | 2,048,182  |   |      | $ | (302,694   | )
|                                            |  |      |            |   |      |   |            |  

Current income taxes (benefits) are based upon the years income taxable for federal, state
and foreign tax reporting purposes. Deferred income taxes (benefits) are provided for certain income and expenses, which are recognized in different periods for tax and financial reporting purposes.

Deferred tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income.

The Companys policy is not to record deferred income taxes on the undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations.

Significant components of the Companys net deferred tax asset or liability at December 31, 2005 and 2004
are as follows:



|                                 |  |      |            |   |      |   |            |  
|-------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                 |  | 2005 |            |   | 2004 |  
|Net operating loss carryforwards |  | $    | 6,007,000  |   |      | $ | 3,478,000  |  
|Amortization                     |  |      | 307,000    |   |      |   | 358,000    |  
|Accrued expenses                 |  |      | 126,000    |   |      |   | 642,000    |  
|Credits                          |  |      | 203,000    |   |      |   |           |  
|Bad debt                         |  |      | 183,000    |   |      |   |           |  
|Other                            |  |      | 220,000    |   |      |   |           |  
|                                 |  |      |            |   |      |   |            |  
|Total deferred tax assets        |  |      | 7,046,000  |   |      |   | 4,478,000  |  
|Valuation allowance              |  |      | (7,046,000 | ) |      |   | (2,578,000 | )
|                                 |  |      |            |   |      |   |            |  
|Net deferred taxes               |  | $    |           |   |      | $ | 1,900,000  |  
|                                 |  |      |            |   |      |   |            |  

In assessing the realizability of deferred tax assets of zero and $1,900,000 at December 31,
2005 and 2004, respectively, management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this
assessment. Based on the Companys analysis in 2005, management concluded not to retain a deferred tax asset since it is uncertain whether the Company can utilize this asset in future periods. Therefore, the Company has established a full
reserve against this asset as of 2005. The valuation allowance increased to $7,046,000 in 2005 from $2,578,000 at December 31, 2004.



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A reconciliation of the expected tax computed at the U.S. statutory federal income tax rate to the total
benefit for income taxes at December 31, 2005 and 2004 follows:



|                                     |  |      |            |   |      |   |            |  
|------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                     |  | 2005 |            |   | 2004 |  
|Expected tax at 34%                  |  | $    | (2,308,289 | ) |      | $ | (2,914,000 | )
|Change in valuation allowance        |  |      | 4,484,000  |   |      |   | 2,578,000  |  
|Difference in rate of foreign tax    |  |      |           |   |      |   | (21,000    | )
|State income tax, net of federal tax |  |      | (301,039   | ) |      |   | (211,000   | )
|Non-deductible expenses              |  |      | 131,033    |   |      |   | 176,000    |  
|Other                                |  |      | 41,759     |   |      |   | 89,000     |  
|                                     |  |      |            |   |      |   |            |  
|Benefit for income taxes             |  | $    | 2,047,464  |   |      | $ | (303,000   | )
|                                     |  |      |            |   |      |   |            |  

At December 31, 2005, the Company had net operating loss carryforwards of approximately
$16,451,000 for federal tax purposes, expiring through 2023. In addition, the Company had net operating loss carryforwards of approximately $7,103,000 for state tax purposes, which begin to expire in 2013.

Internal Revenue Code Section 382 restricts the ability of a corporation to utilize existing net operating losses in the event of an ownership
change. A portion of the Companys net operating losses is limited due to a change in ownership which occurred in 2004. The Company believes the utilization of its net operating losses is limited to approximately $1,400,000 per year to
offset future taxable income under likely operating conditions.

13. STOCKHOLDERS EQUITY

Common Stock - 2005 Activity

In January 2005, stock
warrants and employee stock options for 939,710 shares of the Companys stock were exercised at prices ranging from $.07 to $.26 per share resulting in proceeds of approximately $160,000.

In January 2005, the Company issued 125,000 shares of its common stock at the conversion price of $2.00 per share to North America Ventures Fund II, L.P.
in connection with the conversion of 25% of the investors convertible term note of $1,000,000, funded in January 2004.

In February
2005, the Company issued to a finder 50,000 shares of the Companys common stock for services rendered in connection with the Companys January 2004 financing. Pursuant to an advisor agreement, the Company agreed to issue to the finder a
total of 150,000 shares of common stock on the following schedule: 50,000 shares in January 2004 upon the closing of the financing, and an additional 50,000 shares in each of January 2005 and January 2006.

In February 2005, the Company issued 22,152 shares of its common stock at the conversion price of $3.16 per share to Laurus Master Fund, Ltd.
(Laurus) in connection with the payment of a portion of the principal related to the investors convertible term note of $3,000,000, funded in March 2004, and payment of a portion of the principal related to the investors
convertible term note of $1,000,000, funded in August 2004.

In February 2005, the Company issued 270,271 shares of the Companys
common stock to three private equity funds managed by ComVentures, a venture capital firm based in Palo Alto, California, at a price of $3.70 per share for aggregate proceeds of $1.0 million.



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##### Table of Contents

In February 2005, stock warrants for 3,323 shares of the Companys stock were exercised at a price
of $3.16 per share resulting in proceeds of approximately $11,000.

In March 2005, the Company issued 4,714,708 shares of its common stock
in an underwritten public offering, and issued and sold an additional 3,285,561 shares of common stock upon the exercise of warrants and employee stock options. The public offering price was $4.00 per share and less underwriter discounts and
commissions of $.26 per share, resulted in net proceeds of $3.74 per share to the Company. Net proceeds for this offering, less legal and other transaction costs, was approximately $15.9 million.

In March 2005, the Company issued 500,000 shares of the Companys common stock to three private equity funds managed by ComVentures, a venture
capital firm based in Palo Alto, California, at a price of $4.00 per share for aggregate proceeds of $2.0 million.

In March 2005, employee
stock options for 101,801 shares of the Companys common stock were exercised at prices ranging from $.07 to $.26 per share resulting in proceeds of approximately $17,000.

In March 2005, the Company issued 750,000 shares of its common stock at the conversion price of $3.16 per share to Laurus in connection with the payment
of a portion of the principal related to the investors convertible term note of $3,000,000, funded in March 2004, resulting in proceeds of $2.4 million.

In April 2005, employee stock options for 18,920 shares of the Companys common stock were exercised at prices ranging from $.26 to $.60 per share resulting in proceeds of approximately $11,000.

In May 2005, the Company issued 10,000 shares of the Companys common stock at its fair market value of $3.80 per share to an employee.

In May 2005, employee stock options for 20,356 shares of the Companys common stock were exercised at prices ranging from $.26 to $.60 per share
resulting in proceeds of approximately $10,000.

In June 2005, the Company cancelled 30,000 shares of its restricted common stock valued at
$3.10 per share issued to a former member of the board of directors.

In June 2005, stock warrants and employee stock options for 135,868
shares of the Companys stock were exercised at prices ranging from $.07 to $2.00 per share resulting in proceeds of approximately $122,000.

In July 2005, employee stock options for 115,205 shares of the Companys stock were exercised at prices ranging from $.26 to $2.84 per share resulting in proceeds of approximately $166,000.

In August 2005, employee stock options for 112,915 shares of the Companys stock were exercised at prices ranging from $.26 to $2.84 per share
resulting in proceeds of approximately $130,000.

In September 2005, employee stock options for 14,333 shares of the Companys stock
were exercised at prices ranging from $.60 to $2.20 per share resulting in proceeds of approximately $13,000.

In November 2005, the
Company issued 90,000 shares of its common stock to two members of its Board of Director at $2.38 per share.

In November 2005, employee
stock options for 10,000 shares of the Companys stock were exercised at $.26 per share resulting in proceeds of approximately $3,000.

In December 2005, the Company issued 45,000 shares of its common stock to a member of its Board of Director at $1.58 per share. In addition, the Company cancelled 15,000 shares of its common stock valued at $3.10 per share issued to a
former Board member.



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##### Table of Contents

Common Stock-2004 Activity

In January 2004, the Company issued 1,360,000 shares of the Companys common stock at its fair market value of $2.00 per share to seven equity investors for gross proceeds of $2,720,000. In connection with this
private placement, the Company paid $203,950 and issued 50,000 shares of common stock to the finder. The value of these shares was $112,500. The Company agreed to issue to the finder an additional 50,000 shares in each of January 2005 and January
2006.

In January 2004, the Company issued 30,000 shares of its common stock at its fair market value of $2.15 per share to an employee.

In February 2004, the Company issued 5,300 shares of its common stock at its fair market value of $2.85 per share to 53 employees.

In May 2004, the Company issued 30,000 shares of its common stock at its fair market value of $3.85 per share to a member of its Board of
Directors. In August 2004, the Company issued 135,000 shares of its common stock to members of its Board of Directors of which 90,000 of these shares were issued at $3.10 per share and 45,000 of these shares at $3.40 per share. Such shares were
issued upon the effective date of stockholders approval of the Companys 2004 Equity Incentive Plan. In November 2004, the Company issued 45,000 shares of its common stock to another member of its Board of Director at $3.85 per share. In
addition, the Company cancelled 30,000 shares of its common stock valued at $2.75 per share issued to a former Board member.

In June 2004,
the Company issued 860,000 shares of its common stock at an exercise price of $1.00 per share to six accredited investors (including 500,000 shares to Wistron NeWeb) in connection with the exercise of warrants from the Companys January 2004
private placement. In connection with this private placement, the Company paid $43,000 for finders fee and $76,900 in legal fees.

In
June 2004, the Company issued 125,000 shares of its common stock at the conversion price of $2.00 per share to North America Ventures Fund II, L.P. in connection with the conversion of 25% of the investors convertible term note of $1,000,000,
funded in January 2004. In September and November 2004, the Company issued an aggregate of 250,000 shares of its common stock at the conversion price of $2.00 per share to North America Venture Fund II, L.P. in connection with the conversion of an
additional 50% of the investors convertible term note.

In June 2004, the Company issued 37,000 shares of its common stock at the
conversion price of $3.16 per share to Laurus Master Fund, Ltd. (Laurus) in connection with the payment of a portion of the principal and interest charges related to the investors convertible term note of $3,000,000, funded in
March 2004. In September and December 2004, the Company issued additional 30,797 and 16,508 shares of its common stock respectively at the conversion price of $3.16 per share to Laurus for further principal and interest payments under such note.

In July 2004, employee stock options for 83,333 shares were exercised at a price of $2.50 per share resulting in proceeds of $208,333.

In August 2004, the Company issued 167,691 shares of its common stock to one accredited investor in exchange for the assignment by that
investor to the Company of 554,183 shares of the common stock of the Companys subsidiary, Axesstel, Inc., a California corporation, as well as a general release of claims against the Company by that investor. These shares are reflected in
prior years outstanding common stock.

In October 2004, the Company issued 833,334 shares of the Companys common stock to three
private equity funds managed by ComVentures, a venture capital firm based in Palo Alto, California, at a price of $3.60 per share for aggregate proceeds of $3,000,002.



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##### Table of Contents

In October 2004, employee stock options for 300,000 shares of the Companys stock were exercised at
a price of $0.26 per share resulting in proceeds of $78,000.

In October 2004, the Company issued an aggregate of 382,352 shares of common
stock to two private equity funds upon the cashless exercise of a warrant to purchase 500,000 shares of common stock at $1.00 per share in connection with the warrants agreement entered in January 2004.

Stock Option Activity

Prior to the adoption of the
2004 Equity Plan, the Company adopted three stock option plans which were approved by the Board of Directors, reserving a total of 2,893,842 shares, which are referred to as the Prior Plans. The Prior Plans were adopted on September 16, 2002
(911,671 shares), March 5, 2003 (982,171 shares) and September 29, 2003 (1,000,000 shares). Each of these plans provides for the issuance of non-statutory stock options to employees, directors and consultants, with an exercise price equal to the
fair market value of the Companys common stock on the date of grant. All options granted under the Prior Plans vest quarterly over three years. As of December 31, 2005, options to purchase 2,010,902 shares of common stock had been granted
under these plans, including 1,099,000 granted in 2004. As of September 2004, no additional options may be granted under the Prior Plans. Options with respect to 1,465,391 shares are outstanding under the Prior Plans as of December 31, 2005.

In September 2004, the Board of Directors adopted the 2004 Equity Incentive Plan (the 2004 Equity Plan). The stockholders
approved the plan in October 2004 with an effective date for such approval in November 2004. Under the 2004 Equity Plan, the Company has initially reserved for issuance an aggregate of 4,093,842 shares. The Companys prior stock option plans
described above (the Prior Plans) are no longer available for new grants, and the initial share reserve under the 2004 Equity Plan will adjust downward to the extent that shares are issued upon exercise of options under the Prior Plans.
Subject to a maximum of 11,593,842 shares that can be subject to the 2004 Equity Plan in the aggregate, the number of shares subject to the 2004 Equity Plan will increase each year by the least of:



| |  |  | three percent of the then outstanding shares;
| | - |  | ---------------------------------------------



| |  |  | 750,000 shares; or
| | - |  | ------------------



| |  |  | a number of shares determined by the Board.
| | - |  | -------------------------------------------

Awards under
the 2004 Equity Plan may be granted to any of the Companys employees, directors or consultants or those of the Companys affiliates. Awards may consist of stock options (both incentive stock options and non-statutory stock options), stock
awards, stock appreciation rights and cash awards. The Company granted to certain of its employees options to purchase 1,120,500 shares of common stock under the plan in 2005 and 347,000 in 2004.

A summary of Axesstels stock option activity and related information is as follows:



|                              |  |            |   |      |                          |      |         |           |   |                          |   |     
|----------------------------- |  | ---------- | - | ---- | ------------------------ | ---- | ------- | --------- | - | ------------------------ | - | ----
|                              |  | 2005       |   | 2004
|Option Summary                |  | Options    |   |      | Wt AverageExercise Price |      | Options |           |   | Wt AverageExercise Price
|Outstanding-beginning of year |  | 4,107,429  |   |      | $                        | 1.28 |         | 3,334,428 |   |                          | $ | 0.62
|Granted                       |  | 1,120,500  |   |      | $                        | 3.40 |         | 1,446,000 |   |                          | $ | 2.84
|Exercised                     |  | (2,037,605 | ) |      | $                        | 0.38 |         | (383,333  | ) |                          | $ | 0.75
|Forfeited                     |  | (306,623   | ) |      | $                        | 3.24 |         | (289,666  | ) |                          | $ | 1.63
|                              |  |            |   |      |                          |      |         |           |   |                          |   |     
|Outstanding-end of year       |  | 2,883,701  |   |      | $                        | 2.54 |         | 4,107,429 |   |                          | $ | 1.28
|                              |  |            |   |      |                          |      |         |           |   |                          |   |     



F-22



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##### Table of Contents

The following table summarizes the number of option shares, the weighted average exercise price, and weighted average
life (by years) by price range for both total outstanding options and total exercisable options as of December 31, 2005.



|               |  |                   |  |                          |      |      |     |             |           |                          |   |     
|-------------- |  | ----------------- |  | ------------------------ | ---- | ---- | --- | ----------- | --------- | ------------------------ | - | ----
|               |  | Total Outstanding |  | Total Exercisable       
|Price Range    |  | # of Shares       |  | Wt AverageExercise Price |      | Life |     | # of Shares |           | Wt AverageExercise Price
|$0.26 to $0.99 |  | 434,867           |  | $                        | 0.54 |      | 6.3 |             | 434,867   |                          | $ | 0.54
|$1.00 to $1.99 |  | 192,000           |  | $                        | 1.30 |      | 7.4 |             | 192,000   |                          | $ | 1.30
|$2.00 to $2.99 |  | 796,334           |  | $                        | 2.33 |      | 8.5 |             | 796,334   |                          | $ | 2.33
|$3.00 to $4.68 |  | 1,460,500         |  | $                        | 3.41 |      | 9.3 |             | 1,460,500 |                          | $ | 3.41
|               |  |                   |  |                          |      |      |     |             |           |                          |   |     
|               |  | 2,883,701         |  | $                        | 2.54 |      | 7.9 |             | 2,883,701 |                          | $ | 2.54
|               |  |                   |  |                          |      |      |     |             |           |                          |   |     

Stock Warrant Activity

The Company did not issue any warrants in 2005. For the year ended December 31, 2004, the Company issued warrants to purchase 1,828,624 shares of stock, with exercise prices ranging from $1.00 to $3.88 in
connection with its 2004 financing activities.

A summary of Axesstels warrant activity and related information is as follows:



|                              |  |            |   |      |                          |      |         |            |   |                          |   |     
|----------------------------- |  | ---------- | - | ---- | ------------------------ | ---- | ------- | ---------- | - | ------------------------ | - | ----
|                              |  | 2005       |   | 2004
|Warrant Summary               |  | Warrant    |   |      | Wt AverageExercise Price |      | Warrant |            |   | Wt AverageExercise Price
|Outstanding-beginning of year |  | 3,321,662  |   |      | $                        | 0.62 |         | 2,853,038  |   |                          | $ | 0.34
|Granted                       |  |           |   |      | $                        |     |         | 1,828,624  |   |                          | $ | 1.41
|Exercised                     |  | (2,720,387 | ) |      | $                        | 0.24 |         | (1,360,000 | ) |                          | $ | 1.00
|Forfeited                     |  |           |   |      | $                        |     |         |           |   |                          | $ |    
|                              |  |            |   |      |                          |      |         |            |   |                          |   |     
|Outstanding-end of year       |  | 601,275    |   |      | $                        | 2.56 |         | 3,321,662  |   |                          | $ | 0.62
|                              |  |            |   |      |                          |      |         |            |   |                          |   |     

The following table summarizes the number of warrants, the weighted average exercise price, and
weighted average life (by years) by price for both total outstanding warrants and total exercisable warrants as of December 31, 2005.



|               |  |                   |  |                          |      |      |     |            |         |                          |   |     
|-------------- |  | ----------------- |  | ------------------------ | ---- | ---- | --- | ---------- | ------- | ------------------------ | - | ----
|               |  | Total Outstanding |  | Total Exercisable       
|Price          |  | # ofShares        |  | Wt AverageExercise Price |      | Life |     | # ofShares |         | Wt AverageExercise Price
|$0.07          |  | 65,974            |  | $                        | 0.07 |      | 6.3 |            | 65,974  |                          | $ | 0.07
|$2.00 to $2.99 |  | 322,000           |  | $                        | 2.50 |      | 1.1 |            | 322,000 |                          | $ | 2.50
|$3.00 to $3.99 |  | 213,301           |  | $                        | 3.42 |      | 4.3 |            | 213,301 |                          | $ | 3.42
|               |  |                   |  |                          |      |      |     |            |         |                          |   |     
|               |  | 601,275           |  | $                        | 2.56 |      | 3.3 |            | 601,275 |                          | $ | 2.56
|               |  |                   |  |                          |      |      |     |            |         |                          |   |     

14. SEGMENT INFORMATION

The Company operates and tracks its results in one operating segment. The Company tracks revenues and assets by geographic region, but does not manage operations by region.



F-23



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##### Table of Contents

Revenues by geographic region based on customer locations for the year ended December 31, 2005 and
2004 were as follows:



|                     |  |      |            |      |   |           
|-------------------- |  | ---- | ---------- | ---- | - | ----------
|                     |  | 2005 |            | 2004
|Revenues             |  |      |            |      |   |           
|Asia and Pacific Rim |  | $    | 68,909,960 |      | $ | 47,493,712
|Latin America        |  |      | 25,223,126 |      |   | 15,070,890
|Other                |  |      | 532,625    |      |   |          
|                     |  |      |            |      |   |           
|Total revenues       |  | $    | 94,665,711 |      | $ | 62,564,602
|                     |  |      |            |      |   |           

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

The summary quarterly financial data for 2005 and 2004 consists of the following:



|                                  |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|--------------------------------- |  | ----------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                  |  | 1st Quarter |            |   | 2nd Quarter |   |            | 3rd Quarter |  |   | 4th Quarter |  
|2005                              |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|Revenues                          |  | $           | 29,010,455 |   |             | $ | 36,969,554 |             |  | $ | 16,898,645  |   |  | $ | 11,787,057 |  
|Income (loss) before income taxes |  |             | (1,379,923 | ) |             |   | 347,874    |             |  |   | (2,480,772  | ) |  |   | (4,640,171 | )
|Net income (loss)                 |  |             | (1,389,218 | ) |             |   | 328,132    |             |  |   | (4,498,487  | ) |  |   | (4,641,601 | )
|Basic earnings (loss) per share   |  | $           | (0.10      | ) |             | $ | 0.01       |             |  | $ | (0.20       | ) |  | $ | (0.21      | )
|                                  |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|Diluted earnings (loss) per share |  | $           | (0.10      | ) |             | $ | 0.01       |             |  | $ | (0.20       | ) |  | $ | (0.21      | )
|                                  |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|2004                              |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|Revenues                          |  | $           | 428,600    |   |             | $ | 7,874,990  |             |  | $ | 26,068,468  |   |  | $ | 28,192,544 |  
|Loss before income taxes          |  |             | (2,657,338 | ) |             |   | (1,739,832 | )           |  |   | (2,387,404  | ) |  |   | (1,788,478 | )
|Net loss                          |  |             | (1,594,403 | ) |             |   | (1,043,899 | )           |  |   | (2,387,404  | ) |  |   | (3,244,652 | )
|Basic loss per share              |  | $           | (0.20      | ) |             | $ | (0.13      | )           |  | $ | (0.26       | ) |  | $ | (0.30      | )
|                                  |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|Diluted loss per share            |  | $           | (0.20      | ) |             | $ | (0.13      | )           |  | $ | (0.26       | ) |  | $ | (0.30      | )
|                                  |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  

16. COMMITMENTS AND CONTINGENCIES

Operating Leases

USA: In May 2004, the Company entered into a non-cancelable operating lease for
13,120 square feet of office space for its corporate headquarters and U.S. operations, which lease is secured by a letter of credit. The premise is located at 6815 Flanders Drive, San Diego, California. In May 2005, the Company entered into an
agreement to extend this operating lease and expand the square footage of the lease to a total of 17,101 square feet. The amended lease term is 67 months with monthly payments ranging from approximately $27,000 to $34,000, plus a five year option to
renew. The amended lease commenced in August 2005. The Company has an additional lease commitment at its former location in San Diego, California. This facility has been subleased as of August 2004 for the remainder of the lease term until November
2006.

Korea: In June 2005, the Company entered into a non-cancelable operating lease for 28,880 square feet of factory space for its
Korean operations. The premise is located at Gyeonggi-do, Seoul Korea. The lease term is two years with monthly payments of approximately $26,000. In August 2005, the Company entered into a ten year operating lease for approximately 5,600 square
meters (approximately 18,400 square feet) of office space for its Korean research and development center. The premise is located in the Gyeonggi Province. The lease calls for annual lease payments to be made in advance in December of each year in an
amount equal to two percent of the Building Value as defined in the lease. For the years 2005 and 2006, annual rent is approximately $224,000. The Building Value and resulting rent per square meter is subject to adjustment after 2006
based on market conditions. The research and development centers previous lease in Seoul terminated in August 2005.



F-24



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##### Table of Contents

Minimum annual lease payments are approximately as follows:



|                         |  |             |           |                |   |         |        |  |   |          
|------------------------ |  | ----------- | --------- | -------------- | - | ------- | ------ |  | - | ---------
|Year Ending December 31, |  | TotalAmount |           | SubleaseAmount |   |         | Amount
|2006                     |  |             | 992,000   |                |   | (67,000 | )      |  |   | 925,000  
|2007                     |  |             | 725,000   |                |   |        |        |  |   | 725,000  
|2008                     |  |             | 580,000   |                |   |        |        |  |   | 580,000  
|2009                     |  |             | 592,000   |                |   |        |        |  |   | 592,000  
|2010                     |  |             | 634,000   |                |   |        |        |  |   | 634,000  
|Thereafter               |  |             | 1,115,000 |                |   |        |        |  |   | 1,115,000
|                         |  |             |           |                |   |         |        |  |   |          
|                         |  | $           | 4,638,000 |                | $ | (67,000 | )      |  | $ | 4,571,000
|                         |  |             |           |                |   |         |        |  |   |          

Rent expense is charged ratably over the life of the lease using the straight line method.

Legal Proceedings

From time to time,
the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business, including claims of alleged infringement, misuse or misappropriation of intellectual property rights of third parties. As of
December 31, 2005, the Company is not a party to any such litigation which management believes would have a material adverse effect on the Companys financial position or results of operations.

Litigation Settlement

In September 2004, the Company
received formal notification of a lawsuit in the Seoul Central District Court, Republic of Korea, by Axess Telecom Co., Ltd (ATC). The lawsuit was filed against the Companys wholly-owned California subsidiary, Axesstel, Inc.
(Axesstel California), alleging that a covenant in a development agreement executed by the parties in September 2001 precludes Axesstel California from developing fixed wireless products or competing in the fixed wireless business
without ATCs consent until September 2006. In September 2004, in a separate action filed by the Companys subsidiary, Axesstel R&D Center Co., Ltd. (Axesstel R&D), Axesstel R&D obtained a court order prohibiting
ATC from using certain trade names related to a trademark owned by Axesstel R&D.

In October 2004, the Company entered into a
settlement agreement with ATC. Under the agreement, the Company agreed to pay Axess Telecom $900,000 (of which $870,000 related to the settlement agreement and $30,000 relates to the currency exchange rates) by December 31, 2004. This payment
was completed in December 2004. Under the settlement agreement, ATC agreed to dismiss its lawsuit against Axesstel California. The Company in turn agreed on behalf of Axesstel R&D not to enforce the court order against ATC prohibiting ATC from
using certain trade names related to a trademark owned by Axesstel R&D provided ATC stops all use of the subject trade names within six months from the date of the settlement agreement. The parties agreed that the former agreements to which ATC
and Axesstel California were parties are terminated, that neither partys current or prior products infringe on the other partys intellectual property rights, and that the parties are free to compete with each other. The agreement also
provides for ATC to transition its manufacturing of fixed wireless products to the Company on terms to be negotiated.

The Company also
entered into a memorandum of understanding with ATC under which the Company agreed to purchase by January 31, 2005 (subsequently extended to February 28, 2005) convertible bonds of ATC for KRW 1 billion (approximately $870,000 representing
the presumed cost of the bonds based on currency exchange rates at the time of settlement) on terms to be negotiated in good faith. Due to the requirement to make this purchase and the uncertainty as to recoupment of the Companys investment in
ATC, the Company has charged this additional $870,000 as litigation settlement during the quarter ended September 30, 2004, for a total litigation settlement charge of $1,740,000 during the third quarter of 2004 related to these agreements.



F-25



---

##### Table of Contents

Furthermore, the Company recorded charges of $88,000 in the fourth quarter of 2004 and $17,000 in the first quarter of 2005 for foreign exchange losses. A
payment of $975,000 ($870,000 original investment plus $105,000 foreign exchange) was completed in February 2005, satisfying all amounts owed in the agreement.

17. RELATED PARTY TRANSACTIONS

The Company uses Wistron NeWeb Corporation (WNC) as its contract manufacturer. For the year
ended December 31, 2005, the Company purchased $75.5 million of product from WNC. During this period, the Company paid to WNC $81.6 million, and owed an additional $7.5 million at December 31, 2005. As of December 31, 2005, WNC owned
500,000 of the 22,543,589 shares of the Companys outstanding common stock, as well as a warrant to purchase 100,000 shares of the Companys common stock, representing a 2.6% beneficial ownership interest in the Company.

During the year ended December 31, 2004, the Company purchased $52.5 million of product from WNC. During this period, the Company paid
$38.9 million, and owed an additional $13.6 at December 31, 2004. As of December 31, 2004, WNC owned 500,000 of the 11,253,466 shares of the Companys outstanding common stock, as well as a warrant to purchase 100,000 shares of
the Companys common stock, representing a 5.3% beneficial ownership interest in the Company.

Mr. Haydn Hsieh, one of the
Companys directors, is also the President and Chief Executive Officer of WNC.



F-26



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##### Table of Contents

EXHIBIT INDEX



|           |  |                                                                                                                                                                 
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Document Description                                                                                                                                            
|3.1        |  | Articles of Incorporation of the registrant, as amended(18)                                                                                                     
|           | 
|3.2        |  | Amended and Restated Bylaws of the registrant(18)                                                                                                               
|           | 
|4.1        |  | Specimen Common Stock Certificate(16)                                                                                                                           
|           | 
|10.1       |  | Form of Common Stock Purchase Warrant, exercise price $1.00, dated January 8, 2004(7)                                                                           
|           | 
|10.2       |  | Form of Common Stock Purchase Warrant, exercise price $2.00 subject to adjustment, dated January 8, 2004(7)                                                     
|           | 
|10.3       |  | Common Stock Purchase Warrant issued March 16, 2004, by the registrant to Laurus Master Fund, Ltd(7)                                                            
|           | 
|10.4       |  | Registration Rights Agreement dated March 11, 2004, by and among the registrant and Laurus Master Fund, Ltd(7)                                                  
|           | 
|10.5       |  | Letter Agreement with North America Venture Fund II, L.P., dated April 15, 2004(1)                                                                              
|           | 
|10.6       |  | Lease Agreement for Office Space by and between Axesstel California and Smith Trust dated October 15, 2001(9)                                                   
|           | 
|10.7       |  | Centerpark Plaza Office Lease with Mullrock Umbrella, LLC, dated May 28, 2004(8)                                                                                
|           | 
|10.8       |  | Centerpark Plaza Office Lease with R&D Portfolio Holdings, LLC, dated June 2, 2005(18)                                                                          
|           | 
|10.9       |  | Lease Agreement between TBK Electronics Corp. and registrant, dated July 13, 2005(19)                                                                           
|           | 
|10.11      |  | Lease between Axesstel Korea, Inc. and Seongnam Industry Promotion Foundation, dated August 29, 2005(18)                                                        
|           | 
|10.12      |  | Form of Indemnity Agreement for directors and executive officers of the registrant(5)                                                                           
|           | 
|10.13      |  | Subscriber Unit License Agreement between Axesstel California and Qualcomm Incorporated dated November 14, 2000, as amended +(10)                               
|           | 
|10.14      |  | Supply Agreement by and between TeleCard Limited and the registrant dated November 2003+(10)                                                                    
|           | 
|10.15      |  | Supply Agreement by and between TeleCard Limited and the registrant dated November 2003+(10)                                                                    
|           | 
|10.16      |  | Purchase order with Tata Teleservices (Maharashtra) Limited, dated April 20, 2004+(1)                                                                           
|           | 
|10.17      |  | Purchase order with Tata Teleservices, Ltd., dated April 26, 2004+(1)                                                                                           
|           | 
|10.18      |  | Supply Agreement between BellSouth International, Inc. and Axesstel-California, dated March 18, 2004+(11)                                                       
|           | 
|10.19      |  | Form of Common Stock Purchase Warrant issued to finder and its assignees, dated March 11, 2004, in connection with the March 2004 Convertible Note Financing(11)
|           | 
|10.20      |  | Offer Letter for Patrick Gray, dated February 11, 2004*(11)                                                                                                     
|           | 
|10.21      |  | Offer Letter for Lixin Cheng, dated December 22, 2003*(11)                                                                                                      
|           | 
|10.22      |  | Letter Agreement with Lixin Cheng dated June 16, 2005*(17)                                                                                                      
|           | 
|10.23      |  | Component Supply Agreement between QUALCOMM CDMA Technologies Asia-Pacific PTE LTD. and Axesstel-California, dated February 28, 2001, as amended+(16)           
|           | 
|10.24      |  | DMSS5100 Software Agreement between QUALCOMM Incorporated and Axesstel-California, dated December 5, 2002, as amended+(16)                                      



1



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##### Table of Contents

|           |  |                                                                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Document Description                                                                                                                        
|           | 
|10.25      |  | DMSS5010 Software Agreement between QUALCOMM Incorporated and Axesstel-California, dated November 26, 2003+(16)                             
|           | 
|10.26      |  | AMSS6500 Software Agreement between QUALCOMM Incorporated and Axesstel-California, dated April 11, 2004+(16)                                
|           | 
|10.27      |  | Securities Purchase Agreement dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                            
|           | 
|10.28      |  | Common Stock Purchase Warrant dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                            
|           | 
|10.29      |  | Security Agreement dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                                       
|           | 
|10.30      |  | Registration Rights Agreement dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                            
|           | 
|10.31      |  | Convertible Term Note dated as of August 18, 2004 between the registrant and Laurus Master Fund, Ltd.(2)                                    
|           | 
|10.32      |  | Stock Purchase Agreement dated October 12, 2004 between the registrant and certain investors affiliated with ComVentures(4)                 
|           | 
|10.33      |  | 2001 Stock Option Plan*(5)                                                                                                                  
|           | 
|10.34      |  | Form Notice of Grant of Stock Option (2001 Stock Option Plan)*(5)                                                                           
|           | 
|10.35      |  | Form Stock Option Agreement (2001 Stock Option Plan)*(5)                                                                                    
|           | 
|10.36      |  | Form Notice of Grant of Stock Option (September 2002, March 2003 and September 2003 Option Pools)*(5)                                       
|           | 
|10.37      |  | Form Stock Option Agreement (September 2002, March 2003 and September 2003 Option Pools)*(5)                                                
|           | 
|10.38      |  | Table of Stock Option Grants under 2001 Stock Option Plan And Prior Plans*(16)                                                              
|           | 
|10.39      |  | 2004 Equity Incentive Plan*(5)                                                                                                              
|           | 
|10.40      |  | Form of Stock Option Agreement (2004 Equity Incentive Plan)* (14)                                                                           
|           | 
|10.41      |  | Form of Stock Award Agreement (2004 Equity Incentive Plan)*(14)                                                                             
|           | 
|10.42      |  | Form of Subscription Agreement dated February 2003(3)                                                                                       
|           | 
|10.43      |  | Promissory Note, as amended, dated August 17, 2004, between the registrant and Wells Fargo HSBC Trade Bank, National Association(3)         
|           | 
|10.44      |  | Security Agreement: Rights to Payment dated August 17, 2004, between the registrant and Wells Fargo HSBC Trade Bank, National Association(3)
|           | 
|10.46      |  | Warrant to Purchase Common Stock dated September 1, 2002 issued to The Search for Value, Inc.(16)                                           
|           | 
|10.47      |  | Separation Agreement and General Release, dated December 13, 2005, between Axesstel, Inc. and David L. Morash*(20)                          



2



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##### Table of Contents

|           |  |                                                                                                                                    
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Document Description                                                                                                               
|           | 
|10.48      |  | Warrant to Purchase Common Stock dated September 1, 2002 issued to Newport Capital Consultants(16)                                 
|           | 
|10.49      |  | Warrant to Purchase Common Stock dated October 1, 2003 issued to The Search for Value, Inc.(16)                                    
|           | 
|10.50      |  | Warrant to Purchase Common Stock dated October 1, 2003 issued to Newport Capital Consultants(16)                                   
|           | 
|10.51      |  | Executive Employment Agreement dated November 9, 2004 between the registrant and Mike H.P. Kwon*(3)                                
|           | 
|10.52      |  | Form of Release Agreement dated November 4, 2004(6)                                                                                
|           | 
|10.53      |  | Settlement Agreement and General Release of All Claims dated November 15, 2004*(13)                                                
|           | 
|10.54      |  | USB Driver Software Tools Limited Use Agreement between the registrant and QUALCOMM Incorporated dated October 21, 2004(16)        
|           | 
|10.55      |  | Product Purchase Agreement dated as of June 15, 2004 with Data Teleservices Limited and Data Teleservices (Maharashtia) Limited(15)
|           | 
|10.56      |  | Stock Purchase Agreement dated February 2, 2005 between the registrant and certain investors affiliated with ComVentures(16)       
|           | 
|10.57      |  | Form of Warrant Agreement to Mike H.P. Kwon and Saton Yukie(5)                                                                     
|           | 
|10.58      |  | 2006 Change in Control Plan and Summary Plan Description*                                                                          
|           | 
|14.1       |  | Code of Ethics for Directors, Officers and Employees(10)                                                                           
|           | 
|21.1       |  | Subsidiaries of the registrant                                                                                                     
|           | 
|23.1       |  | Consent of Gumbiner Savett Inc.                                                                                                    
|           | 
|24.1       |  | Power of Attorney (included on signature page)                                                                                     
|           | 
|31.1       |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                 
|           | 
|31.2       |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                 
|           | 
|32.1       |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     

---

|(1) | Incorporated by reference to exhibits to Registrants Form 10-QSB/A for the period ending June 30, 2004, filed on September 7, 2004
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to exhibits to Registrants Form 8-K filed on August 20, 2004
|--- | ---------------------------------------------------------------------------------------

|(3) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending September 30, 2004, filed on November 15, 2004
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to exhibits to Registrants Form 8-K filed on October 15, 2004.
|--- | -----------------------------------------------------------------------------------------

|(5) | Incorporated by reference to exhibits to Registrants Form SB-2/A filed on October 29, 2004.
|--- | --------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to exhibits to Registrants Form 8-K filed on November 10, 2004.
|--- | ------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending March 31, 2003, filed on May 24, 2004
|--- | -----------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending June 30, 2003 filed on August 16, 2004
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to exhibits to Registrants Form 10-KSB/A for the period ending December 31, 2003, filed on April 19, 2004
|--- | ------------------------------------------------------------------------------------------------------------------------------------



3



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##### Table of Contents

|(10) | Incorporated by reference to exhibits to Registrants Form 10-KSB/A for the period ending December 31, 2003, filed on August 16, 2004
|---- | -------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to exhibits to Registrants Form 10-QSB/A for the period ending March 31, 2004, filed on September 7, 2004
|---- | ------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to exhibits to Registrants Form 10-QSB/A for the period ending June 30, 2004, filed on September 7, 2004
|---- | -----------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to exhibits to Registrants Form 8-K filed on November 19, 2004.
|---- | ------------------------------------------------------------------------------------------

|(14) | Incorporated by reference to exhibits to Registrants Form 8-K filed on January 12, 2005.
|---- | -----------------------------------------------------------------------------------------

|(15) | Incorporated by reference to exhibits to Registrants Form 8-K/A filed on February 1, 2005.
|---- | -------------------------------------------------------------------------------------------

|(16) | Incorporated by reference to exhibits to Registrants Form SB-2 filed on February 4, 2005
|---- | -----------------------------------------------------------------------------------------

|(17) | Incorporated by reference to exhibits to Registrants Form 8-K filed on June 22, 2005.
|---- | --------------------------------------------------------------------------------------

|(18) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending July 1, 2005, filed on August 15, 2005.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(19) | Incorporated by reference to exhibits to Registrants Form 10-QSB for the period ending September 30, 2005, filed on November 14, 2005.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------

|(20) | Incorporated by reference to exhibits to Registrants Form 8-K filed on January 12, 2006.
|---- | -----------------------------------------------------------------------------------------



|+ | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission
and are marked by an asterisk.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | Management contract, or compensatory plan or arrangement.
|- | ---------------------------------------------------------



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