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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2005
  o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934For the transition period from ___________________ to ___________________
  Commission File Number: 000-27031
 FULLNET COMMUNICATIONS, INC.
 (Name of small business issuer in its Charter)
 OKLAHOMA
    
    73-1473361(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 201 Robert S. Kerr Avenue, Suite 210
Oklahoma City, Oklahoma 73102
 (Address of principal executive offices)
 (405) 236-8200
(Issuers telephone number)
 Securities registered under Section 12(b) of the Act: None
 Securities registered under to Section 12(g) of the Act:
 Title of class
  o
 þ o
 þ
 o þ
   o þ




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FULLNET COMMUNICATIONS, INC.
FORM 10-KSB
 TABLE OF CONTENTS
 PART I.Item 1. Description Of Business
    
    
    4Item 2. Description of Property
    
    
    13Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14PART II.Item 5. Market for Common Equity and Related Stockholder Matters
    
    
    15Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    16Item 7. Financial Statements
    
    
    20Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    20Item 8A. Controls and Procedures
    
    
    21Item 8B. Other Information
    
    
    21PART III.Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance
with Section 16(a) of the Exchange Act
    
    
    22Item 10. Executive Compensation
    
    
    23Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    25Item 12. Certain Relationships and Related Transactions
    
    
    26Item 13. Exhibits
    
    
    26Item 14. Principal Accountant Fees and Services
    
    
    30SIGNATURES
    
    
    31Certification Pursuant to Rules 13a-14(a) and 15d-14(a)Certification Pursuant to Rules 13a-14(a) and 15d-14(a)Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
   
    
    We may fail to negotiate an acceptable replacement interconnection agreement with AT&T (formerly SBC);
    
    We may fail to prevail against AT&T on various disputed back billings that total in excess of $3,000,000;
    
    We may lose subscribers or fail to grow our subscriber base;
    
    We may not successfully integrate new subscribers or assets obtained through acquisitions;
    
    We may fail to compete with existing and new competitors;
    
    We may not be able to sustain our current growth;
    
    We may not adequately respond to technological developments impacting the Internet;
    
    We may experience a major system failure;
    
    We may not be able to find needed capital resources.
  3




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PART I
 
 Item 1. Description Of Business
            4




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




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Fast and Reliable Internet Access
 6




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Cost-Effective Access
 Superior Customer Support
            7




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8




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9




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·
 ·
 ·
  10




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11




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12




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




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




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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
  Common StockClosing Sale PricesHigh
    
    Low2005 Calendar Quarter Ended:March 31
    
    $
    .07
    
    
    $
    .07June 30
    
    
    .07
    
    
    
    .07September 30
    
    
    .05
    
    
    
    .05December 31
    
    
    .09
    
    
    
    .092004 Calendar Quarter Ended:March 31
    
    $
    .05
    
    
    $
    .05June 30
    
    
    .04
    
    
    
    .04September 30
    
    
    .05
    
    
    
    .05December 31
    
    
    .07
    
    
    
    .05
       Number ofSecuritiesWeighted-
    
    
    RemainingNumber of
    
    
    Average
    
    
    Available forShares
    
    
    Exercise Price
    
    
    FutureUnderlying
    
    
    of
    
    
    Issuance underUnexercised
    
    
    Outstanding
    
    
    EquityOptions
    
    
    Options and
    
    
    CompensationPlan Category
    
    and Warrants
    
    
    Warrants
    
    
    Plans(1)Equity compensation plans approved by
our shareholders:None
    
    Not Applicable
    
    Not Applicable
    
    Not ApplicableEquity compensation plans not approved by our
shareholders:Stock option grants to non-employee directors
    
    
    
    
    
    $
    
    
    
    
    Stock options granted to employees
    
    
    3,083,034
    
    
    $
    .43
    
    
    
    Warrants and certain stock options issued to
non-employees
    
    
    402,000
    
    
    $
    .39
    
    
    
    Total
    
    
    3,485,034
    
    
    $
    .42
    
    
    
    
 15




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




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For the Years Ended December 31,2005
    
    
    2004Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of revenues
    
    
    Amount
    
    
    of revenuesRevenues:Access service revenues
    
    $
    874,560
    
    
    
    36.8
    %
    
    $
    898,973
    
    
    
    40.0
    %Co-location and other revenues
    
    
    1,504,245
    
    
    
    63.2
    
    
    
    1,361,795
    
    
    
    60.0Total revenues
    
    
    2,378,805
    
    
    
    100.0
    
    
    
    2,260,768
    
    
    
    100.0Cost of access service revenues
    
    
    276,427
    
    
    
    11.6
    
    
    
    231,274
    
    
    
    10.2Cost of co-location and other revenues
    
    
    192,253
    
    
    
    8.1
    
    
    
    114,517
    
    
    
    5.1Selling, general and administrative expenses
    
    
    1,320,215
    
    
    
    55.5
    
    
    
    1,279,779
    
    
    
    56.6Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    4,253
    
    
    
    .2Depreciation and amortization
    
    
    431,315
    
    
    
    18.1
    
    
    
    403,209
    
    
    
    17.8Total operating costs and expenses
    
    
    2,220,210
    
    
    
    93.3
    
    
    
    2,033,032
    
    
    
    89.9Income from operations
    
    
    158,595
    
    
    
    6.7
    
    
    
    227,736
    
    
    
    10.1Gain on debt forgiveness
    
    
    16,634
    
    
    
    0.7
    
    
    
    163,380
    
    
    
    7.2Gain on debt recovery
    
    
    17,500
    
    
    
    0.7
    
    
    
    
    
    
    
    Interest expense
    
    
    (118,401
    )
    
    
    (5.0
    )
    
    
    (165,110
    )
    
    
    (7.3
    )Income before income taxes
    
    
    74,328
    
    
    
    3.1
    
    
    
    226,006
    
    
    
    10.0Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    74,328
    
    
    
    3.1
    %
    
    $
    226,006
    
    
    
    10.0
    %
        17




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Goodwill and Intangible Assets
   Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainAccounts payable
    
    $
    27,634
    
    
    $
    11,000
    
    
    $
    16,634
  Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainNotes payable including accrued interest
    
    $
    96,208
    
    
    $
    36,536
    
    
    $
    59,672Accounts payable
    
    
    115,519
    
    
    
    17,474
    
    
    
    98,045Accrued liabilities
    
    
    5,663
    
    
    
    
    
    
    
    5,663Total
    
    $
    217,390
    
    
    $
    54,010
    
    
    $
    163,380
         18




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For the Years Ended December 31,2005
    
    
    2004Net cash flows provided by operations
    
    $
    460,818
    
    
    $
    608,208Net cash flows used in investing activities
    
    
    (258,305
    )
    
    
    (252,362
    )Net cash flows used in financing activities
    
    
    (199,765
    )
    
    
    (355,100
    )
          19




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Accounting for Contingencies,
  Share-Based Payment . Accounting for Stock Based
Compensation Accounting for Stock Issued to Employees .
 Inventory Costs Accounting for Real Estate Time-Sharing Transactions Exchange of Non-monetary Assets Accounting Changes and Error Corrections Accounting for Certain Hybrid Financial
Instruments Accounting for Servicing of Financial Assets
 
 Item 7. Financial Statements
  
 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
    20




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Item 8A. Controls and Procedures
    
 Item 8B. Other Information
  21




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PART III.
 
 Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with
Section 16(a) of the Exchange Act
  Name
    
    Age
    
    PositionTimothy J.Kilkenny
    
    
    47
    
    
    Chairman of the Board of Directors and CEORoger P. Baresel
    
    
    50
    
    
    Director, President, Chief Financial Officer and SecretaryJason C. Ayers
    
    
    31
    
    
    Vice President of OperationsPatricia R. Shurley
    
    
    49
    
    
    Vice President of FinanceMichael D. Tomas
    
    
    33
    
    
    Vice President of Technology
          22




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Item 10. Executive Compensation
  Long-TermAnnual Compensation
    
    
    CompensationSecuritiesUnderlyingOptions andFiscal
    
    
    
    
    
    
    Other
    
    
    WarrantsName and Principal Position
    
    Year
    
    
    Salary
    
    
    Compensation
    
    
    (#) (1)Timothy J. Kilkenny
    
    
    2005
    
    
    $
    117,125
    (2)
    
    $
    21,954
    (5)
    
    
    Chairman and CEO
    
    
    2004
    
    
    
    81,413
    (3)
    
    
    17,130
    (6)
    
    
    2003
    
    
    
    80,717
    (4)
    
    
    14,986
    (7)
    
    
    452,000
 
 (1)
    
    Options are granted with an exercise price equal to the fair market value of
our common stock on the date of the grant.(2)
    
    Includes $40,075 of deferred compensation.(3)
    
    Includes $20,833 of deferred compensation.(4)
    
    Includes $25,000 of deferred compensation.(5)
    
    Represents $8,400 of expense reimbursement for business use of Mr.
Kilkennys automobile, $1,909 of expense reimbursement for Mr. Kilkennys
Internet connection and cell phone, and $11,645 of insurance premiums paid by us
for the benefit of Mr. Kilkenny. 23




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(6)
    
    Represents $8,400 of expense reimbursement for business use of Mr.
Kilkennys automobile, $1,995 of expense reimbursement for Mr. Kilkennys
Internet connection and cell phone, and $6,735 of insurance premiums paid by us
for the benefit of Mr. Kilkenny.(7)
    
    Represents $8,400 of expense reimbursement for business use of Mr.
Kilkennys automobile, $1,030 of expense reimbursement for Mr. Kilkennys
Internet connection and cell phone, and $5,556 of insurance premiums paid by us
for the benefit of Mr. Kilkenny.      Number of Unexercised
    
    
    Value of Unexercised In-the-Options at
    
    
    Money Options atDecember 31, 2005
    
    
    December 31, 2005 (1)Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableTimothy J. Kilkenny
    
    
    714,000
    
    
    
    
    
    
    $
    25,800
    
    
    $
    Chairman and CEO
 
 (1)
    
    Based on the December 31, 2005 estimated fair value of our common stock of
$.09 per share.      24




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Item 11. Security Ownership of Certain Beneficial Owners and Management
   Common StockNumber of
    
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    
    Class (1)Generation Capital Associates (2)
    
    
    707,608
    
    
    
    9.9
    %Rupinder Sidu (3)
    
    
    481,185
    
    
    
    7.0
    %Karen Gustafson & Greg Kusnick(4)
    
    
    441,481
    
    
    
    6.3
    %Greg Lowney & Maryanne Snyder (5)
    
    
    441,481
    
    
    
    6.3
    %Laura L. Kilkenny (6)
    
    
    465,000
    
    
    
    6.9
    %
 
 (1)
    
    Percent of class for any stockholder listed is calculated without regard
to shares of common stock issuable to others upon exercise of outstanding stock
options. Any shares a stockholder is deemed to own by having the right to
acquire by exercise of an option or warrant are considered to be outstanding
solely for the purpose of calculating that stockholders ownership percentage. We
computed the percentage ownership amounts in accordance with the provisions of
Rule 13d-3(d), which includes as beneficially owned all shares of common stock
which the person or group has the right to acquire within the next 60 days, based
upon 6,741,135 outstanding shares of common stock as of March 28, 2006.(2)
    
    Generation Capital Associates address is 1085 Riverside Trace, Atlanta,
GA 30328. Generation Capital Associates holds 267,608 shares of our common
stock. The number of shares includes 440,000 shares of our common stock that are
subject to currently exercisable common stock purchase warrants. Amounts shown
do not include 150,000 shares of our common stock that are subject to common
stock purchase warrants that are not currently exercisable because they contain a
provision prohibiting their exercise to the extent that they would increase
Generation Capital Associates percentage ownership beyond 9.9% of our
outstanding shares of common stock. We are in default on an operating lease and
an interim loan with Generation Capital (see Item. 12 Certain Relationships and
Related Party Transactions).(3)
    
    Rupinder Sidus address is 10229 Tavistock Road, Orlando, FL 32827. Mr.
Sidu holds 344,018 shares of our common stock. The number of shares includes
137,167 shares of our common stock that are subject to currently exercisable
common stock purchase warrants.(4)
    
    Karen Gustafson & Greg Kusnicks address is P.O. Box 22443, Seattle, WA
98112. Ms. Gustafson & Mr. Kusnick hold 155,129 shares of our common stock. The
number of shares includes 31,250 shares of our common stock that are subject to
currently exercisable common stock purchase warrants and 255,102 shares of our
common stock that are subject to a currently convertible promissory note.(5)
    
    Greg Lowney & Maryanne Snyders address is 15207 N.E. 68th
Street, Redmond, WA 98052. Mr. Lowney & Ms. Snyder hold 155,129 shares of our
common stock. The number of shares includes 31,250 shares of our common stock
that are subject to currently exercisable common stock purchase warrants and
255,102 shares of our common stock that are subject to a currently convertible
promissory note.(6)
    
    Laura L. Kilkennys address is 3160 Long Dr., Newcastle, OK 73065. Ms.
Kilkenny is the ex-wife of Timothy J. Kilkenny, our Chairman of the Board and
Chief Executive Officer. Ms. Kilkenny holds 415,000 shares of our common stock.
The number of shares includes 50,000 shares of our common stock that are subject
to currently exercisable common stock purchase options.  Common StockBeneficially OwnedNumber of
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    Class (1)Timothy J. Kilkenny* (2)(3)
    
    
    1,729,000
    
    
    
    23.2
    %Roger P. Baresel* (2)(4)
    
    
    587,862
    
    
    
    8.2
    %Jason C. Ayers (2)(5)
    
    
    405,795
    
    
    
    5.7
    %Patricia R. Shurley (2)(6)
    
    
    292,000
    
    
    
    4.2
    %Michael D. Tomas (2)(7)
    
    
    260,000
    
    
    
    3.8
    %All executive officers and
directors as a group (5 persons)
    
    
    3,274,657
    
    
    
    45.1
    %
 
 *
    
    Director 25




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(1)
    
    Percent of class for any stockholder listed is calculated without regard
to shares of common stock issuable to others upon exercise of outstanding stock
options. Any shares a stockholder is deemed to own by having the right to
acquire by exercise of an option or warrant are considered to be outstanding
solely for the purpose of calculating that stockholders ownership percentage. We
computed the percentage ownership amounts in accordance with the provisions of
Rule 13d-3(d), which includes as beneficially owned all shares of common stock
which the person or group has the right to acquire within the next 60 days, based
upon 6,723,135 shares being outstanding at March 28, 2006.(2)
    
    Address is c/o 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City,
Oklahoma 73102.(3)
    
    Timothy J. Kilkenny and Barbara J. Kilkenny, husband and wife, hold
915,000 and 100,000 shares of our common stock, respectively. The number of
shares includes 714,000 shares of our common stock that are subject to currently
exercisable stock options held by Mr. Kilkenny.(4)
    
    Roger P. Baresel and Judith A. Baresel, husband and wife, hold 34,408 and
92,659 shares of our common stock, respectively. They hold 31,250 shares of our
common stock as joint tenants. The number of shares includes 198,745 shares of
our common stock subject to currently exercisable stock options held by Mr.
Baresel, 218,300 shares of our common stock subject to currently exercisable
stock options held by Mrs. Baresel, and 12,500 currently exercisable common stock
purchase warrants held jointly.(5)
    
    Jason C. Ayers holds 25,865 shares of our common stock. The number of
shares includes 379,930 shares of our common stock that are subject to currently
exercisable common stock options held by Mr. Ayers.(6)
    
    The number of shares includes 292,000 shares of our common stock that are
subject to currently exercisable common stock purchase options held by Ms.
Shurley.(7)
    
    The number of shares includes 260,000 shares of our common stock that are
subject to currently exercisable common stock purchase options held by Mr. Tomas. 
 Item 12. Certain Relationships and Related Transactions
   
 Item 13. Exhibits
  ExhibitNumber
    
    Exhibit3.1
    
    Certificate of Incorporation, as amended (filed as Exhibit 2.1 to
Registrants Registration Statement on Form 10-SB, file number 000-27031 and
incorporated herein by reference).
    
    #3.2
    
    Bylaws (filed as Exhibit 2.2 to Registrants Registration Statement on Form
10-SB, file number 000-27031 and incorporated herein by reference)
    
    #4.1
    
    Specimen Certificate of Registrants Common Stock (filed as Exhibit 4.1 to
the Companys Form 10-KSB for the fiscal year ended December 31, 1999, and
incorporated herein by reference).
    
    #
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ExhibitNumber
    
    Exhibit4.2
    
    Certificate of Correction to the Amended Certificate of Incorporation and the
Ninth Section of the Certificate of Incorporation (filed as Exhibit 2.1 to
Registrants Registration Statement on form 10-SB, file number 000-27031 and
incorporated by reference).
    
    #4.3
    
    Certificate of Correction to Articles II and V of Registrants Bylaws (filed
as Exhibit 2.1 to Registrants Registration Statement on Form 10-SB, file
number 000-27031 and incorporated herein by reference).
    
    #4.4
    
    Form of Warrant Agreement for Interim Financing in the amount of $505,000
(filed as Exhibit 4.1 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.5
    
    Form of Warrant Certificate for Florida Investors for Interim Financing in
the amount of $505,000 (filed as Exhibit 4.2 to Registrants Quarterly Report
on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein
by reference).
    
    #4.6
    
    Form of Promissory Note for Florida Investors for Interim Financing in the
amount of $505,000 (filed as Exhibit 4.3 to Registrants Quarterly Report on
Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by
reference).
    
    #4.7
    
    Form of Warrant Certificate for Georgia Investors for Interim Financing in
the amount of $505,000 (filed as Exhibit 4.4 to Registrants Quarterly Report
on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein
by reference).
    
    #4.8
    
    Form of Promissory Note for Georgia Investors for Interim Financing in the
amount of $505,000 (filed as Exhibit 4.5 to Registrants Quarterly Report on
Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by
reference).
    
    #4.9
    
    Form of Warrant Certificate for Illinois Investors for Interim Financing in
the amount of $505,000 (filed as Exhibit 4.6 to Registrants Quarterly Report
on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein
by reference).
    
    #4.10
    
    Form of Promissory Note for Illinois Investors for Interim Financing in the
amount of $505,000 (filed as Exhibit 4.7 to Registrants Quarterly Report on
Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by
reference).
    
    #4.11
    
    Form of Warrant Agreement for Interim Financing in the amount of $500,000
(filed as Exhibit 4.8 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.12
    
    Form of Warrant Certificate for Interim Financing in the amount of $500,000
(filed as Exhibit 4.9 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.13
    
    Form of Promissory Note for Interim Financing in the amount of $500,000
(filed as Exhibit 4.10 to Registrants Quarterly Report on Form 10-QSB for
the Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.14
    
    Form of Convertible Promissory Note for September 29, 2000, private placement
(filed as Exhibit 4.13 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000 and incorporated herein by reference).
    
    #4.15
    
    Form of Warrant Agreement for September 29, 2000, private placement (filed as
Exhibit 4.13 to Registrants Form 10-KSB for the fiscal year ended December
31, 2000 and incorporated herein by reference).
    
    #4.16
    
    Form of 2001 Exchange Warrant Agreement (filed as Exhibit 4.16 to
Registrants Form 10-QSB for the quarter ended June 30, 2001 and incorporated
herein by reference)
    
    #4.17
    
    Form of 2001 Exchange Warrant Certificate (filed as Exhibit 4.17 to
Registrants Form 10-QSB for the quarter ended June 30, 2001 and incorporated
herein by reference)
    
    #
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ExhibitNumber
    
    Exhibit10.1
    
    Financial Advisory Services Agreement between the Company and National
Securities Corporation, dated September 17, 1999 (filed as Exhibit 10.1 to
Registrants Form 10-KSB for the fiscal year ended December 31, 1999, and
incorporated herein by reference).
    
    #10.2
    
    Lease Agreement between the Company and BOK Plaza Associates, LLC, dated
December 2, 1999 (filed as Exhibit 10.2 to Registrants Form 10-KSB for the
fiscal year ended December 31, 1999, and incorporated herein by reference).
    
    #10.3
    
    Interconnection agreement between Registrant and Southwestern Bell dated
March 19, 1999 (filed as Exhibit 6.1 to Registrants Registration Statement
on Form 10-SB, file number 000-27031 and incorporated herein by reference).
    
    #10.4
    
    Stock Purchase Agreement between the Company and Animus Communications, Inc.
(filed as Exhibit 6.2 to Registrants Registration Statement on Form 10-SB,
file number 000-27031 and incorporated herein by reference).
    
    #10.5
    
    Registrar Accreditation Agreement effective February 8, 2000, by and between
Internet Corporation for Assigned Names and Numbers and FullWeb, Inc. d/b/a
FullNic f/k/a Animus Communications, Inc. (filed as Exhibit 10.1 to
Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31,
2000 and incorporated herein by reference).
    
    #10.6
    
    Master License Agreement For KMC Telecom V, Inc., dated June 20,2000, by and between FullNet Communications, Inc. and KMC Telecom V,
Inc. (filed as Exhibit 10.1 to the Registrants Quarterly Report on Form
10-QSB for the Quarter ended June 30, 2000 and incorporated herein by
reference).
    
    #10.7
    
    Domain Registrar Project Completion Agreement, dated May 10, 2000, by and
between FullNet Communications, Inc., FullWeb, Inc. d/b/a FullNic and Think
Capital (filed as Exhibit 10.2 to Registrants Quarterly Report on Form
10-QSB for the Quarter ended June 30, 2000 and incorporated herein by
reference).
    
    #10.8
    
    Amendment to Financial Advisory Services Agreement between Registrant and
National Securities Corporation, dated April 21, 2000 (filed as Exhibit 10.3
to Registrants Quarterly Report on Form 10-QSB for the Quarter ended June
30, 2000 and incorporated herein by reference).
    
    #10.9
    
    Asset Purchase Agreement dated June 2, 2000, by and between FullNet of Nowata
and FullNet Communications, Inc. (filed as Exhibit 99.1 to Registrants Form
8-K filed on June 20, 2000 and incorporated herein by reference).
    
    #10.10
    
    Asset Purchase Agreement dated February 4, 2000, by and between FullNet of
Bartlesville and FullNet Communications, Inc. (filed as Exhibit 2.1 to
Registrants Form 8-K filed on February 18, 2000 and incorporated herein by
reference).
    
    #10.11
    
    Agreement and Plan of Merger Among FullNet Communications, Inc., FullNet,
Inc. and Harvest Communications, Inc. dated February 29, 2000 (filed as
Exhibit 2.1 to Registrants Form 8-K filed on March 10, 2000 and incorporated
herein by reference).
    
    #10.12
    
    Asset Purchase Agreement dated January 25, 2000, by and between FullNet of
Tahlequah, and FullNet Communications, Inc. (filed as Exhibit 2.1 to
Registrants Form 8-K filed on February 9, 2000 and incorporated herein by
reference).
    
    #10.13
    
    Promissory Note dated August 2, 2000, issued to Timothy J. Kilkenny (filed as
Exhibit 10.13 to Registrants Form 10-KSB for the fiscal year ended December
31, 2000).
    
    #10.14
    
    Warrant Agreement dated August 2, 2000, issued to Timothy J. Kilkenny (filed
as Exhibit 10.14 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000).
    
    #10.15
    
    Warrant Certificate dated August 2, 2000 issued to Timothy J. Kilkenny (filed
as Exhibit 10.15 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000).
    
    #10.16
    
    Stock Option Agreement dated December 8, 2000, issued to Timothy J. Kilkenny
(filed as Exhibit 10.16 to Registrants Form 10-KSB for the fiscal year ended
December 31, 2000).
    
    #
 28




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##### Table of Contents



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




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.39
    
    Form of Convertible Promissory Note dated September 6, 2002
    
    #10.40
    
    Employment Agreement with Timothy J. Kilkenny dated July 31, 2002
    
    #10.41
    
    Employment Agreement with Roger P. Baresel dated July 31, 2002
    
    #21.1
    
    Subsidiaries of the Registrant
    
    #31.1
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Timothy J. Kilkenny
    
    *31.2
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Roger P. Baresel
    
    *32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Timothy J. Kilkenny
    
    *32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Roger P. Baresel
    
    *
 
 #
    
    Incorporated by reference.*
    
    Filed herewith. 
 Item 14. Principal Accountant Fees and Services
    2005
    
    2004Audit Fees  Murrell, Hall, McIntosh & Co., PLLP
    
    $
    28,000
    
    
    
    Audit Fees  Evans, Gaither & Associates, PLLC
    
    $
    5,565
    
    
    $
    33,160Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
  30




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##### Table of Contents



REGISTRANT:
FULLNET COMMUNICATIONS, INC.
 Date: March 31, 2006
    
    By:
    
    /s/ TIMOTHY J. KILKENNYTimothy J. KilkennyChief Executive OfficerDate: March 31, 2006
    
    By:
    
    /s/ ROGER P. BARESELRoger P. BareselPresident and Chief Financial and
Accounting Officer
  Date: March 31, 2006
    
    By:
    
    /s/ TIMOTHY J. KILKENNYTimothy J. Kilkenny,Chairman of the Board and DirectorDate: March 31, 2006
    
    By:
    
    /s/ ROGER P. BARESELRoger P. Baresel, Director
 31




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
      
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 F-2




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  December 31,2005
    
    
    2004ASSETSCURRENT ASSETSCash
    
    $
    14,974
    
    
    $
    12,226Accounts receivable, net
    
    
    122,616
    
    
    
    59,212Prepaid expenses and other current assets
    
    
    108,631
    
    
    
    81,809Total current assets
    
    
    246,221
    
    
    
    153,247PROPERTY AND EQUIPMENT, net
    
    
    888,957
    
    
    
    990,863INTANGIBLE ASSETS, net
    
    
    75,874
    
    
    
    160,010OTHER ASSETS
    
    
    18,282
    
    
    
    5,250TOTAL
    
    $
    1,229,334
    
    
    $
    1,309,370LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable  trade
    
    $
    160,998
    
    
    $
    171,457Accounts payable  related party
    
    
    218,982
    
    
    
    145,921Accrued and other current liabilities
    
    
    709,999
    
    
    
    604,993Accrued interest  related party
    
    
    152,197
    
    
    
    120,197Notes payable, current portion
    
    
    594,804
    
    
    
    648,825Notes payable  related party
    
    
    320,000
    
    
    
    320,000Capital lease obligations, current portion
    
    
    
    
    
    
    12,761Deferred revenue
    
    
    120,784
    
    
    
    187,194Total current liabilities
    
    
    2,277,764
    
    
    
    2,211,348NOTES PAYABLE, less current portion
    
    
    90,912
    
    
    
    205,070CAPITAL LEASE OBLIGATIONS, less current portion
    
    
    
    
    
    
    18,825DEFERRED RENT
    
    
    80,827
    
    
    
    168,624STOCKHOLDERS DEFICITCommon stock  $.00001 par value; authorized, 10,000,000
shares; issued and outstanding, 6,652,878 shares in 2005
and 2004
    
    
    66
    
    
    
    66Common stock issuable, 70,257 shares in 2005 and 2004
    
    
    57,596
    
    
    
    57,596Additional paid-in capital
    
    
    8,328,004
    
    
    
    8,328,004Accumulated deficit
    
    
    (9,605,835
    )
    
    
    (9,680,163
    )Total stockholders deficit
    
    
    (1,220,169
    )
    
    
    (1,294,497
    )TOTAL
    
    $
    1,229,334
    
    
    $
    1,309,370
  F-3




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2005
    
    
    2004REVENUESAccess service revenues
    
    $
    874,560
    
    
    $
    898,973Co-location and other revenues
    
    
    1,504,245
    
    
    
    1,361,795Total revenues
    
    
    2,378,805
    
    
    
    2,260,768OPERATING COSTS AND EXPENSESCost of access service revenues
    
    
    276,427
    
    
    
    231,274Cost of co-location and other revenues
    
    
    192,253
    
    
    
    114,517Selling, general and administrative expenses
    
    
    1,320,215
    
    
    
    1,279,779Loss on sale of assets
    
    
    
    
    
    
    4,253Depreciation and amortization
    
    
    431,315
    
    
    
    403,209Total operating costs and expenses
    
    
    2,220,210
    
    
    
    2,033,032INCOME FROM OPERATIONS
    
    
    158,595
    
    
    
    227,736GAIN ON DEBT FORGIVENESS
    
    
    16,634
    
    
    
    163,380GAIN ON DEBT RECOVERY
    
    
    17,500
    
    
    
    INTEREST EXPENSE
    
    
    (118,401
    )
    
    
    (165,110
    )INCOME before income taxes
    
    
    74,328
    
    
    
    226,006Income tax expense
    
    
    
    
    
    
    NET INCOME
    
    $
    74,328
    
    
    $
    226,006Net income per common shareBasic
    
    $
    .01
    
    
    $
    .03Assuming dilution
    
    $
    .01
    
    
    $
    .03Weighted average number of common shares outstandingBasic
    
    
    6,723,135
    
    
    
    6,715,718Assuming dilution
    
    
    8,284,956
    
    
    
    7,799,796
  F-4




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
   CommonCommon stock
    
    
    stock
    
    
    Additional
    
    
    AccumulatedShares
    
    
    Amount
    
    
    issuable
    
    
    paid-in capital
    
    
    deficit
    
    
    TotalBalance at January 1, 2004
    
    
    6,642,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,327,294
    
    
    $
    (9,906,169
    )
    
    $
    (1,521,213
    )Intrinsic value of beneficial conversion feature
on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    210Stock issued on debt settlement
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    226,006
    
    
    
    226,006Balance at December 31, 2004
    
    
    6,652,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,328,004
    
    
    $
    (9,680,163
    )
    
    $
    (1,294,497
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,328
    
    
    
    74,328Balance at December 31, 2005
    
    
    6,652,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,328,004
    
    
    $
    (9,605,835
    )
    
    $
    (1,220,169
    )
  F-5




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    74,328
    
    
    $
    226,006Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    431,315
    
    
    
    403,209Amortization of discount and costs relating to financing
    
    
    
    
    
    
    1,757Gain on debt forgiveness
    
    
    (16,634
    )
    
    
    (163,380
    )Gain on debt recovery
    
    
    (17,500
    )
    
    
    Loss on sale of assets
    
    
    
    
    
    
    4,253Provision for uncollectible accounts receivable
    
    
    23,695
    
    
    
    60,592Net (increase) decrease inAccounts receivable
    
    
    (69,599
    )
    
    
    (51,669
    )Prepaid expenses and other current assets
    
    
    (26,822
    )
    
    
    (21,646
    )Other assets
    
    
    
    
    
    
    1,521Net increase (decrease) inAccounts payable  trade
    
    
    6,175
    
    
    
    (106,457
    )Accounts payable  related party
    
    
    73,061
    
    
    
    56,977Accrued and other liabilities
    
    
    17,209
    
    
    
    177,153Accrued interest  related party
    
    
    32,000
    
    
    
    32,087Deferred revenue
    
    
    (66,410
    )
    
    
    (12,195
    )Net cash provided by operating activities
    
    
    460,818
    
    
    
    608,208CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (185,387
    )
    
    
    (205,112
    )Proceeds from sale of assets, net of closing costs
    
    
    
    
    
    
    8,670Acquisition of assets
    
    
    (72,918
    )
    
    
    (55,920
    )Net cash used in investing activities
    
    
    (258,305
    )
    
    
    (252,362
    )CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on borrowings under notes payable
    
    
    (151,890
    )
    
    
    (272,118
    )Principal payments on note payable to related party
    
    
    (16,289
    )
    
    
    (10,529
    )Principal payments on capital lease obligations
    
    
    (31,586
    )
    
    
    (72,453
    )Net cash used in financing activities
    
    
    (199,765
    )
    
    
    (355,100
    )NET INCREASE IN CASH
    
    
    2,748
    
    
    
    746Cash at beginning of year
    
    
    12,226
    
    
    
    11,480Cash at end of year
    
    $
    14,974
    
    
    $
    12,226SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    36,267
    
    
    $
    76,735NONCASH INVESTING AND FINANCING ACTIVITIESAssets acquired through issuance of capital lease
    
    
    
    
    
    
    54,992
  F-6




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
     
    
    Dial-up and direct high-speed connectivity to the Internet through the FullNet brand name;
    
    Backbone services to private label Internet services providers (ISPs) and businesses;
    
    Carrier-neutral telecommunications premise co-location;
    
    Web page hosting;
    
    Equipment co-location; and
    
    Telecommunications services.
     F-7




---



##### Table of Contents



Consolidation
  Revenue Recognition
 Revenue Recognition
  F-8




---



##### Table of Contents



Accounts Receivable
  2005
    
    
    2004Accounts receivable
    
    $
    231,785
    
    
    $
    144,685Less allowance for doubtful accounts
    
    
    (109,169
    )
    
    
    (85,473
    )$
    122,616
    
    
    $
    59,212
  1  29 days
    
    
    1.5
    %30  59 days
    
    
    30
    %60  89 days
    
    
    50
    %> 90 days
    
    
    100
    %
 Property and Equipment
  Software
    
    3 yearsComputers and equipment
    
    5 yearsFurniture and fixtures
    
    7 yearsLeasehold improvements
    
    Shorter of estimated life of improvement or the lease term
 Intangible Assets
 Goodwill and Intangible
Assets
 Long-Lived Assets
 Accounting
for the Impairment or Disposal of Long-lived Assets
 F-9




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##### Table of Contents



Accrued and Other Current Liabilities
  2005
    
    
    2004Accrued interest
    
    $
    237,165
    
    
    $
    182,861Accrued deferred compensation
    
    
    353,917
    
    
    
    305,086Accrued other liabilities
    
    
    118,917
    
    
    
    117,046$
    709,999
    
    
    $
    604,993
  Accrued in:2005
    
    $
    48,8312004
    
    
    43,5712000-2003
    
    
    261,515$
    353,917
   Income Taxes
 
 Income per share
  2005
    
    
    2004Numerator:Net income
    
    $
    74,328
    
    
    $
    226,006Denominator:Weighted average shares outstanding  basic
    
    
    6,723,135
    
    
    
    6,715,718Effect of dilutive stock options
    
    
    733,579
    
    
    
    244,932Effect of dilutive warrants
    
    
    828,242
    
    
    
    839,146Weighted average shares outstanding 
assuming dilution
    
    
    8,284,956
    
    
    
    7,799,796Net income per share  basic
    
    $
    .01
    
    
    $
    .03Net income per share  assuming dilution
    
    $
    .01
    
    
    $
    .03
  F-10




---



##### Table of Contents



Stock Options and Warrants
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 2005
    
    
    2004Net incomeAs reported
    
    $
    74,328
    
    
    $
    226,006Pro forma
    
    $
    53,281
    
    
    $
    178,616Basic income per shareAs reported
    
    $
    .01
    
    
    $
    .03Pro forma
    
    $
    .01
    
    
    $
    .03Diluted income per shareAs reported
    
    $
    .01
    
    
    $
    .03Pro forma
    
    $
    .01
    
    
    $
    .02
   2005
    
    
    2004Risk free interest rate
    
    
    4.4
    %
    
    
    4.5
    %Expected lives (in years)
    
    
    5
    
    
    
    5Expected volatility
    
    
    118
    %
    
    
    122.5
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 F-11




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##### Table of Contents



Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average2005
    
    
    Exercise Price
    
    
    2004
    
    
    Exercise PriceOptions outstanding, beginning of year
    
    
    3,014,700
    
    
    $
    .45
    
    
    
    2,903,366
    
    
    $
    .45Options granted during the year
    
    
    111,000
    
    
    
    .08
    
    
    
    118,000
    
    
    
    .05Options exercised during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled during the year
    
    
    (42,666
    )
    
    
    .07
    
    
    
    (6,666
    )
    
    
    .04Options outstanding, end of year
    
    
    3,083,034
    
    
    $
    .43
    
    
    
    3,014,700
    
    
    $
    .43Options exercisable at end of year
    
    
    3,083,034
    
    
    $
    .43
    
    
    
    2,528,535
    
    
    $
    .51Weighted average fair value of options
granted during the year
    
    
    
    
    
    $
    .07
    
    
    
    
    
    
    $
    .05
  Options outstanding
    
    
    Options exercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Range of
    
    Number
    
    
    remaining
    
    
    average exercise
    
    
    Number
    
    
    average exerciseexercise prices
    
    outstanding
    
    
    contractual life
    
    
    price
    
    
    exercisable at
    
    
    price$0.01 - $0.70
    
    
    2,287,611
    
    
    7.36 years
    
    $
    0.12
    
    
    
    2,287,611
    
    
    $
    0.12$1.00-$1.50
    
    
    671,290
    
    
    4.85 years
    
    $
    1.07
    
    
    
    671,290
    
    
    $
    1.07$1.81-$3.00
    
    
    124,133
    
    
    4.32 years
    
    $
    2.62
    
    
    
    124,133
    
    
    $
    2.623,083,034
    
    
    6.69 years
    
    $
    0.43
    
    
    
    3,083,034
    
    
    $
    0.43
 Common Stock Warrants and Certain Stock Options
    Number
    
    Exercise
    
    Expirationof shares
    
    price
    
    year436,748
    
    
    $
    2.00
    
    
    
    2006311,000
    
    
    
    1.00
    
    
    
    200673,500
    
    
    
    .13
    
    
    
    2006100,000
    
    
    
    .11
    
    
    
    2006456,058
    
    
    
    .01
    
    
    
    20066,000
    
    
    
    .12
    
    
    
    200720,000
    
    
    
    .05
    
    
    
    200750,000
    
    
    
    .01
    
    
    
    200814,000
    
    
    
    .10
    
    
    
    201212,000
    
    
    
    .08
    
    
    
    20121,479,306
 F-12




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##### Table of Contents



Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average2005
    
    
    Exercise Price
    
    
    2004
    
    
    Exercise PriceWarrants and certain stock options outstanding, beginning of year
    
    
    2,119,306
    
    
    $
    .62
    
    
    
    2,201,681
    
    
    $
    .68Warrants and certain stock options issued during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants and certain stock options expired during the year
    
    
    (640,000
    )
    
    
    .16
    
    
    
    (82,375
    )
    
    
    1.71Warrants and certain stock options outstanding, end of year
    
    
    1,479,306
    
    
    $
    .82
    
    
    
    2,119,306
    
    
    $
    .62
 Advertising
 
 Use of Estimates
  Recently Issued Accounting Standards
 Share-Based Payment. Accounting for Stock Based Compensation Accounting for Stock
Issued to Employees.
 Inventory Costs Accounting for Real
Estate Time-Sharing Transactions Exchange of Non-monetary Assets Accounting
Changes and Error Corrections Accounting
for Certain Hybrid Financial Instruments Accounting for Servicing of Financial Assets
 F-13




---



##### Table of Contents



Reclassifications
    2005
    
    
    2004Computers and equipment
    
    $
    1,296,856
    
    
    $
    1,172,768Leasehold improvements
    
    
    940,032
    
    
    
    930,861Software
    
    
    56,512
    
    
    
    56,512Furniture and fixtures
    
    
    19,153
    
    
    
    19,1532,312,553
    
    
    
    2,179,294Less accumulated depreciation
    
    
    (1,423,596
    )
    
    
    (1,188,431
    )$
    888,957
    
    
    $
    990,863
 
   December 31,2005
    
    
    2004Talihina acquisition
    
    $
    12,813
    
    
    $
    CWIS acquisition
    
    
    101,548
    
    
    
    41,442LAWTONNET acquisition
    
    
    65,000
    
    
    
    65,000SONET acquisition
    
    
    42,547
    
    
    
    42,547IPDatacom acquisition
    
    
    137,849
    
    
    
    137,849FOT acquisition
    
    
    93,649
    
    
    
    93,649FOB acquisition
    
    
    194,780
    
    
    
    194,780FON acquisition
    
    
    139,650
    
    
    
    139,650Harvest merger
    
    
    2,009,858
    
    
    
    2,009,858Animus acquisition
    
    
    318,597
    
    
    
    318,597Tulsa acquisition
    
    
    70,000
    
    
    
    70,0003,186,291
    
    
    
    3,113,372Less accumulated amortization
    
    
    (3,110,417
    )
    
    
    (2,953,362
    )$
    75,874
    
    
    $
    160,010
  F-14




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##### Table of Contents



Notes payable consist of the following:December
    
    
    December31, 2005
    
    
    31, 2004Notes payable to a bank, payable in monthly
installments of $8,768, including interest of
9.5%, maturing September 2008; collateralized
by property and equipment, accounts receivable
and Company common stock owned by the founder
and CEO of the Company; guaranteed by the
founder and CEO of the Company; partially
guaranteed by the Small Business
Administration (1)
    
    $
    170,080
    
    
    $
    291,390Interim loan from a related party, interest at
10%, requires payments equal to 50% of the net
proceeds received by the Company from its
private placement of convertible promissory
notes, matured December 2001; unsecured (2)
    
    
    320,000
    
    
    
    320,000Convertible promissory notes; interest at
12.5% of face amount, payable quarterly; these
notes are unsecured and are matured at
December 31, 2005 (convertible into
approximately 1,003,659 shares at December 31,
2005 and December 31, 2004) (3)
    
    
    510,636
    
    
    
    510,636Note payable to an individual, payable in
monthly installments of $1,277 until paid in
full, including interest at a variable rate
(prime plus 2.25%; 7.4% at December 31, 2005),
matures September 2014; collateralized by
substantially all assets acquired in
conjunction with the acquisition of Harvest
Communications, Inc.
    
    
    
    
    
    
    9,580Note payable to the Companys founder and CEO,
payable in monthly installments of $1,034
including interest at 8.5%, maturing May 2006;
unsecured
    
    
    
    
    
    
    16,289Other notes payable
    
    
    5,000
    
    
    
    26,0001,005,716
    
    
    
    1,173,895Less current portion
    
    
    914,804
    
    
    
    968,825$
    90,912
    
    
    $
    205,070
 F-15




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##### Table of Contents



Year ending December 312006
    
    $
    914,8042007
    
    
    90,9122008
    
    
    2009
    
    
    2010
    
    
    $
    1,005,716
 F-16




---



##### Table of Contents



Year ending December 312006
    
    $
    176,8072007
    
    
    183,3302008
    
    
    189,8532009
    
    
    196,376$
    746,366
  
   2005
    
    
    2004Income taxes at federal statutory rate
    
    $
    25,000
    
    
    $
    79,000State income taxes
    
    
    3,000
    
    
    
    9,000Change in valuation allowance
    
    
    (30,000
    )
    
    
    (70,000
    )Nondeductible expenses
    
    
    2,000
    
    
    
    3,000Other
    
    
    
    
    
    
    (21,000
    )Total tax expense
    
    $
    
    
    
    $
    
  2005
    
    
    2004Deferred income tax assetsBasis difference in property and equipment and intangible assets
    
    $
    301,000
    
    
    $
    364,000Deferred revenue
    
    
    46,000
    
    
    
    71,000Net operating loss
    
    
    894,000
    
    
    
    1,001,000Deferred compensation and other
    
    
    313,000
    
    
    
    148,000Valuation allowance
    
    
    (1,554,000
    )
    
    
    (1,584,000
    )Net deferred income tax asset
    
    $
    
    
    
    $
    Change in valuation allowance
    
    $
    (30,000
    )
    
    $
    (70,000
    )
 F-17




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##### Table of Contents



Common Stock
        Carrying Value
    
    
    Settlement Amount
    
    
    GainAccounts payable
    
    $
    27,634
    
    
    $
    11,000
    
    
    $
    16,634
 F-18




---



##### Table of Contents



Carrying Value
    
    
    Settlement Amount
    
    
    GainNotes payable including accrued interest
    
    $
    96,208
    
    
    $
    36,536
    
    
    $
    59,672Accounts payable
    
    
    115,519
    
    
    
    17,474
    
    
    
    98,045Accrued liabilities
    
    
    5,663
    
    
    
    
    
    
    
    5,663Total
    
    $
    217,390
    
    
    $
    54,010
    
    
    $
    163,380
      F-19