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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from
 _____ 

to
 _____
 Commission File Number: 000-27031
 FULLNET COMMUNICATIONS, INC.
 (Exact name of registrant as specified 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
(Registrants telephone number)
 Securities registered pursuant to Section 12(b) of the Act: None
 Securities registered pursuant to Section 12(g) of the Act:
 Title of class
  o þ
 o þ
 þ o
 o o
 o
 
 Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ




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##### 



FULLNET COMMUNICATIONS, INC.
FORM 10-K
  TABLE OF CONTENTS
 PART I.Item 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    13Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    13PART II.Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    14Item 6. Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 8. Financial Statements and Supplemental Data
    
    
    22Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    22Item 9A. Controls and Procedures
    
    
    23Item 9A(T). Controls and Procedures
    
    
    23Item 9B. Other Information
    
    
    23PART III.Item 10. Directors, Executive Officers and Corporate Governance
    
    
    24Item 11. Executive Compensation
    
    
    25Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    28Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    29Item 14. Principal Accounting Fees and Services
    
    
    30Item 15. Exhibits, Financial Statement Schedules
    
    
    30SIGNATURES
    
    
    35Exhibit 10.42 Secured Promissory Note and Security Agreement dated December 30, 2009, issued to High Capital Funding, LLCCertification 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 prevail against AT&T on various disputed billings that total approximately $7,970,000;
    
    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. Business
   www.fullnet.net www.fulltel.net www.callmultiplier.com
          4




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




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
    
    Ease of Use  During the first quarter of 2001, we implemented a common, easy to use
CD-ROM based software package that automatically configures all of the individual Internet
access programs after a one-time entry by the user of a few required fields of information
such as, name, user name and password.
   
    
    Private label retail and business direct dial-up connectivity to the Internet and
 
    
    Secure private networks through our backbone network
    
    
    Dial-Up Connections
  
    
    Leased Line Connections
   6




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Fast and Reliable Internet Access
 Cost-Effective Access
 Superior Customer Support
           7




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9




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
    
    ILECs are not required to unbundle packet switching as a stand-alone network element.
 
    
    Two key components of the FCCs TELRIC pricing rules were clarified. First, the FCC clarified
that the risk-adjusted cost of capital used in calculating UNE prices should reflect the risks
associated with a competitive market. Second, the FCC declined to mandate the use of any
particular set of asset lives for depreciation, but clarified that the use of an accelerated
depreciation mechanism may present a more accurate method of calculating economic
depreciation.
 
    
    CLECs continue to be prohibited from avoiding any liability under contractual early
termination clauses in the event a CLEC converts a special access circuit to an UNE.
  10




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Item 1A. Risk Factors.
      11




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12




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Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
   13




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PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
  Common StockClosing Sale PricesHigh
    
    
    Low2009 Calendar Quarter Ended:March 31
    
    $
    .02
    
    
    $
    .01June 30
    
    
    .01
    
    
    
    .01September 30
    
    
    .01
    
    
    
    .01December 31
    
    
    .03
    
    
    
    .012008 Calendar Quarter Ended:March 31
    
    $
    .04
    
    
    $
    .04June 30
    
    
    .04
    
    
    
    .04September 30
    
    
    .02
    
    
    
    .01December 31
    
    
    .03
    
    
    
    .02
       Number ofSecuritiesWeighted-
    
    
    RemainingNumber of
    
    
    Average
    
    
    Available forShares
    
    
    Exercise Price
    
    
    FutureUnderlying
    
    
    of
    
    
    Issuance underUnexercised
    
    
    Outstanding
    
    
    EquityOptions
    
    
    Options and
    
    
    CompensationPlan Category
    
    and Warrants
    
    
    Warrants
    
    
    PlansEquity 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
    
    
    2,368,384
    
    
    $
    .50
    
    
    
    Warrants and certain stock options issued to non-employees
    
    
    326,000
    
    
    $
    .47
    
    
    
    Total
    
    
    2,694,384
    
    
    $
    .50
    
    
    
    
  14




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Item 6. Selected Financial Data.
  
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
         15




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For the Years Ended December 31,2009
    
    
    2008Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of revenues
    
    
    Amount
    
    
    of revenuesRevenues:Access service revenues
    
    $
    413,689
    
    
    
    22.9
    %
    
    $
    532,661
    
    
    
    28.2
    %Co-location and other revenues
    
    
    1,390,669
    
    
    
    77.1
    
    
    
    1,353,890
    
    
    
    71.8Total revenues
    
    
    1,804,358
    
    
    
    100.0
    
    
    
    1,886,551
    
    
    
    100.0Operating costs and expenses:Cost of access service revenues
    
    
    196,494
    
    
    
    10.9
    
    
    
    235,638
    
    
    
    12.5Cost of co-location and other revenues
    
    
    393,593
    
    
    
    21.8
    
    
    
    321,196
    
    
    
    17.0Selling, general and administrative expenses
    
    
    1,321,857
    
    
    
    73.3
    
    
    
    1,371,259
    
    
    
    72.7Depreciation and amortization
    
    
    217,842
    
    
    
    12.1
    
    
    
    252,338
    
    
    
    13.4Impairment expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    2,129,786
    
    
    
    118.0
    
    
    
    2,180,431
    
    
    
    115.6Loss from operations
    
    
    (325,428
    )
    
    
    (18.0
    )
    
    
    (293,880
    )
    
    
    (15.6
    )Gain on debt forgiveness
    
    
    235,663
    
    
    
    13.1
    
    
    
    
    
    
    
    Interest expense
    
    
    (89,888
    )
    
    
    (5.0
    )
    
    
    (97,668
    )
    
    
    (5.1
    )Net loss
    
    $
    (179,653
    )
    
    
    (9.9
    )%
    
    $
    (391,548
    )
    
    
    (20.8
    )%
         16




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For the Years Ended December 31,2009
    
    
    2008Net cash flows provided by operations
    
    $
    1,527
    
    
    $
    46,261Net cash flows used in investing activities
    
    
    (6,775
    )
    
    
    (51,826
    )Net cash flows provided by financing activities
    
    
    5,400
    
    
    
    1,949
     
    
    mergers and acquisitions and
    
    further development of operations support systems and other automated back office systems
     18




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Payments Due By PeriodLess than 1
    
    
    1  3
    
    
    3  5
    
    
    More thanTotal
    
    
    Year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt (a)
    
    $
    807,936
    
    
    $
    510,636
    
    
    $
    46,289
    
    
    $
    52,176
    
    
    $
    198,835Interest on fixed rate debt (a)
    
    
    580,056
    
    
    
    481,543
    
    
    
    33,070
    
    
    
    27,183
    
    
    
    38,260Operating leases
    
    
    939,312
    
    
    
    169,598
    
    
    
    371,811
    
    
    
    397,903
    
    
    
    Other agreements (b)
    
    
    256,443
    
    
    
    256,443
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    2,583,747
    
    
    $
    1,418,220
    
    
    $
    451,170
    
    
    $
    477,262
    
    
    $
    237,095
 
 (a)
    
    Included in this item are required payments under a $297,300 secured
promissory note payable. Also included are payments under convertible
promissory notes totaling $510,636 that were matured at December 31,
2009. The convertible promissory notes are included in the Less than
One Year total. We have not made payment or negotiated an extension
of the convertible promissory notes, and the lenders have not made any
demands. We are currently developing a plan to satisfy these notes
subject to the approval of each individual note holder.(b)
    
    This item represents a matured lease obligation. The lessor has not
made any formal demands for payment or instituted collection action;
however we are in discussions with the lessor to restructure this
liability.  19




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20




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Measuring Liabilities at Fair Value (Financial Accounting Standards Board (FASB) Accounting
Standards Update (ASU) 2009-05 to FASB Accounting Standards Codification (ASC) 820)
  Accounting Standards Codification (ASC 105-10)
  Subsequent Events (ASC 855-10)
  Interim Disclosure Fair Value of Financial Instruments (ASC 825-10)
  Intangible Assets
  Business Combinations (ASC 805-10)
  Noncontrolling Interests in Consolidated Financial Statements (ASC 810-10)
   21




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Fair Value Measurements (ASC 820-10)
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 8. Financial Statements and Supplemental Data.
  
 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
   22




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Item 9A. Controls and Procedures
    
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
 
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
 
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
  
 Item 9A(T). Controls and Procedures.
   
 Item 9B. Other Information
   23




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PART III.
 
 Item 10. Directors, Executive Officers, and Corporate Governance.
  Name
    
    Age
    
    PositionTimothy J. Kilkenny
    
    
    51
    
    
    Chairman of the Board of Directors and Chief Executive OfficerRoger P. Baresel
    
    
    54
    
    
    Director, President, Chief Financial Officer and SecretaryJason C. Ayers
    
    
    35
    
    
    Vice President of OperationsPatricia R. Shurley
    
    
    53
    
    
    Vice President of FinanceMichael D. Tomas
    
    
    37
    
    
    Vice President of Technology
        
    
    understanding of generally accepted accounting principles and financial statements;
 
    
    ability to assess the general application of generally accepted accounting principles in
connection with the accounting for estimates, accruals and reserves;
  24




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
    
    experience preparing, auditing, analyzing or evaluating financial statements that present
the breadth and level of complexity of accounting issues that are generally comparable to
the breadth and complexity of issues that can reasonably be expected to be raised by our
financial statements, or experience actively supervising one or more persons engaged in such
activities;
 
    
    understanding of internal controls and procedures for financial reporting; and
 
    
    understanding of audit committee functions.
      www.fullnet.net
 
 Item 11. Executive Compensation
  Long-TermAnnual Compensation
    
    
    CompensationSecuritiesUnderlyingOptions andFiscal
    
    
    
    
    
    
    Other
    
    
    WarrantsName and Principal Position
    
    Year
    
    
    Salary
    
    
    Compensation
    
    
    (#) (1)Timothy J. Kilkenny
    
    
    2009
    
    
    $
    108,902
    (2)
    
    $
    28,936
    (3)
    
    
    Chairman and CEO
    
    
    2008
    
    
    $
    115,187
    (2)
    
    $
    28,930
    (4)
    
    
    2007
    
    
    $
    115,877
    (2)
    
    $
    27,539
    (5)
    
    
    Roger P. Baresel
    
    
    2009
    
    
    $
    81,504
    (6)
    
    $
    32,053
    (9)
    
    
    President and CFO
    
    
    2008
    
    
    $
    47,468
    (7)
    
    $
    31,366
    (10)
    
    
    2007
    
    
    $
    60,536
    (8)
    
    $
    30,088
    (11)
    
    
    
 
 (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 $40,121 of deferred compensation.(3)
    
    Represents $8,400 of expense reimbursement for business use of Mr. Kilkennys automobile, $1,800 of expense reimbursement for
Mr. Kilkennys Internet connection and cell phone, $16,614 of insurance premiums, and $2,122 of post retirement benefits paid
by us for the benefit of Mr. Kilkenny.  25




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(4)
    
    Represents $8,400 of expense reimbursement for business use of Mr. Kilkennys automobile, $1,800 of expense reimbursement for
Mr. Kilkennys Internet connection and cell phone, $16,433 of insurance premiums, and $2,297 of post retirement benefits paid
by us for the benefit of Mr. Kilkenny.(5)
    
    Represents $8,400 of expense reimbursement for business use
of Mr. Kilkennys automobile, $1,800 of expense
reimbursement for Mr. Kilkennys Internet connection and
cell phone, $14,796 of insurance premiums, and $2,543 of
post retirement benefits paid by us for the benefit of Mr.
Kilkenny.(6)
    
    Includes $32,254 of deferred compensation.(7)
    
    Includes $8,051 of deferred compensation.(8)
    
    Includes $6,051 of deferred compensation.(9)
    
    Represents $8,400 of expense reimbursement for business use
of Mr. Baresels automobile, $4,560 of expense
reimbursement for Mr. Baresels home office and cell phone,
$17,422 of insurance premiums, and $1,671 of post
retirement benefits paid by us for the benefit of Mr.
Baresel.(10)
    
    Represents $8,400 of expense reimbursement for business use
of Mr. Baresels automobile, $4,560 of expense
reimbursement for Mr. Baresels home office and cell phone,
$16,551 of insurance premiums, and $1,855 of post
retirement benefits paid by us for the benefit of Mr.
Baresel.(11)
    
    Represents $8,400 of expense reimbursement for business use
of Mr. Baresels automobile, $5,040 of expense
reimbursement for Mr. Baresels home office and cell phone,
$14,797 of insurance premiums, and $1,851 of post
retirement benefits paid by us for the benefit of Mr.
Baresel.  26




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Number of Unexercised
    
    
    Value of Unexercised In-the-Options at
    
    
    Money Options atDecember 31, 2009
    
    
    December 31, 2009 (1)Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableTimothy J. Kilkenny
    
    
    714,000
    
    
    
    
    
    
    $
    
    
    
    $
    Chairman and CEORoger P. Baresel
    
    
    417,045
    
    
    
    
    
    
    $
    
    
    
    $
    President and CFO
 
 (1)
    
    Based on the December 31, 2009 estimated fair value of our common stock of $.03 per share.   Outstanding Equity Awards at December 31, 2009Stock Option AwardsNumber of Common Stock
    
    
    Option
    
    
    OptionUnderlying Options
    
    
    Exercise
    
    
    ExpirationName
    
    Exercisable
    
    
    Unexercisable
    
    
    Price(1)
    
    
    DateTimothy J. Kilkenny
    
    
    452,000
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/13Chairman and CEO
    
    
    80,000
    
    
    
    
    
    
    $
    .05
    
    
    
    03/18/1232,000
    
    
    
    
    
    
    $
    .11
    
    
    
    11/16/1150,000
    
    
    
    
    
    
    $
    .70
    
    
    
    07/18/11100,000
    
    
    
    
    
    
    $
    1.00
    
    
    
    12/08/10Roger P. Baresel
    
    
    200,848
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/13President and CFO
    
    
    40,000
    
    
    
    
    
    
    $
    .05
    
    
    
    03/18/1223,745
    
    
    
    
    
    
    $
    .11
    
    
    
    11/16/1152,452
    
    
    
    
    
    
    $
    .50
    
    
    
    10/16/11100,000
    
    
    
    
    
    
    $
    1.00
    
    
    
    10/13/10
 
 (1)
    
    The closing sale price of our common stock as reported on the OTC Bulletin Board on
December 31, 2009 was $0.03.    27




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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
  Common StockNumber of
    
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    
    Class (1)High Capital Funding, LLC (2) 

333 Sandy Springs Circle, Suite 230, Atlanta, Georgia 30328
    
    
    784,349
    
    
    
    9.9
    %Karen Gustafson & Greg Kusnick(3)

P.O. Box 22443, Seattle, Washington 98112
    
    
    410,231
    
    
    
    5.1
    %Greg Lowney & Maryanne Snyder (4)

15207 N.E. 68th Street, Redmond, Washington 98052
    
    
    410,231
    
    
    
    5.1
    %Laura L. Kilkenny (5)

3160 Long Drive, Newcastle, Oklahoma 73065
    
    
    465,000
    
    
    
    5.9
    %
 
 (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 7,922,721 outstanding shares of common stock as of March
26, 2010.(2)
    
    High Capital Funding, LLC, the parent company of Generation Capital
Associates, holds 497,156 shares of our common stock which is issuable
at December 31, 2009. Generation Capital Associates holds 267,608
shares of our common stock. The number of shares includes 19,585
shares of our common stock that are subject to currently exercisable
common stock purchase warrants held by Generation Capital Associates.
Amounts shown do not include 545,415 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 have a secured promissory note with High Capital
Funding, LLC and an operating lease with Generation Capital
Associates. At December 31, 2009 the outstanding principal and
interest of the secured promissory note was $297,349 and we had
recorded $256,443 in unpaid lease payments.(3)
    
    Ms. Gustafson & Mr. Kusnick hold 155,129 shares of our common stock.
The number of shares includes 255,102 shares of our common stock that
are subject to a currently convertible promissory note.(4)
    
    Mr. Lowney & Ms. Snyder hold 155,129 shares of our common stock. The
number of shares includes 255,102 shares of our common stock that are
subject to a currently convertible promissory note.(5)
    
    Ms. Kilkenny is the former-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.  28




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Common StockBeneficially OwnedNumber of
    
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    
    Class (1)Timothy J. Kilkenny* (2)(3)
    
    
    2,083,722
    
    
    
    24.2
    %Roger P. Baresel* (2)(4)
    
    
    575,362
    
    
    
    6.9
    %Jason C. Ayers (2)(5)
    
    
    405,795
    
    
    
    5.1
    %Patricia R. Shurley (6)
    
    
    292,000
    
    
    
    3.7
    %Michael D. Tomas (7)
    
    
    245,000
    
    
    
    3.1
    %All executive officers and directors as a group (5 individuals)
    
    
    3,601,879
    
    
    
    43.0
    %
 
 *
    
    Director(1)
    
    Percent of class for any stockholder listed is calculated without regard to shares
of common stock issuable to others upon exercise of outstanding stock options. Any
shares a stockholder is deemed to own by having the right to acquire by exercise
of an option or warrant are considered to be outstanding solely for the purpose of
calculating that stockholders ownership percentage. We computed the percentage
ownership amounts in accordance with the provisions of Rule 13d-3(d), which
includes as beneficially owned all shares of common stock which the person or
group has the right to acquire within the next 60 days, based upon 7,922,721
shares being outstanding at March 26, 2010.(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 1,269,722 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 5,600 and 152,717
shares of our common stock, respectively. The number of shares includes 100,000
shares of our common stock subject to currently exercisable stock options held by
Mr. Baresel, and 317,045 shares of our common stock subject to currently
exercisable stock options held by Mrs. Baresel.(5)
    
    Jason C. Ayers holds 323,295 shares of our common stock. The number of shares
includes 82,500 shares of our common stock that are subject to currently
exercisable common stock options held by Mr. Ayers.(6)
    
    Patricia R. Shurley holds 209,500 shares of our common stock. The number of
shares includes 82,500 shares of our common stock that are subject to currently
exercisable common stock purchase options held by Ms. Shurley.(7)
    
    Michael D. Tomas holds 177,500 shares of our common stock. The number of shares
includes 67,500 shares of our common stock that are subject to currently
exercisable common stock purchase options held by Mr. Tomas. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence
   29




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##### Table of Contents



Item 14. Principal Accounting Fees and Services
  2009
    
    
    2008Audit Fees  Eide Bailly LLP
    
    $
    40,650
    
    
    $
    Audit Fees  Eide Bailly LLP and its predecessor Murrell, Hall, McIntosh & Co., PLLP
    
    
    
    
    
    
    36,100Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
  
 Item 15. Exhibits, Financial Statement Schedules.
  ExhibitNumber
    
    Exhibit3.1
    
    
    Certificate of Incorporation, as amended (filed as
Exhibit 2.1 to Registrants Registration Statement on
Form 10-SB, file number 000-27031 and incorporated herein
by reference).
    
    #3.2
    
    
    Bylaws (filed as Exhibit 2.2 to Registrants Registration
Statement on Form 10-SB, file number 000-27031 and
incorporated herein by reference)
    
    #4.1
    
    
    Specimen Certificate of Registrants Common Stock (filed
as Exhibit 4.1 to the Companys Form 10-KSB for the
fiscal year ended December 31, 1999, and incorporated
herein by reference).
    
    #4.2
    
    
    Certificate of Correction to the Amended Certificate of Incorporation and the Ninth
Section of the Certificate of Incorporation (filed as Exhibit 2.1 to Registrants
Registration Statement on form 10-SB, file number 000-27031 and incorporated by
reference).
    
    #4.3
    
    
    Certificate of Correction to Articles II and V of Registrants Bylaws (filed as Exhibit
2.1 to Registrants Registration Statement on Form 10-SB, file number 000-27031 and
incorporated herein by reference).
    
    #4.4
    
    
    Form of Warrant Agreement for Interim Financing in the amount of $505,000 (filed as
Exhibit 4.1 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March
31, 2000 and incorporated herein by reference).
    
    #4.5
    
    
    Form of Warrant Certificate for Florida Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.2 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #4.6
    
    
    Form of Promissory Note for Florida Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.3 to Registrants Quarterly Report on Form 10-QSB for the
Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #
  30




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##### Table of Contents



ExhibitNumber
    
    Exhibit4.7
    
    
    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)
    
    #
  31




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##### Table of Contents



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).
    
    #
  32




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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
    
    #
  33




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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
    
    #10.42
    
    
    Secured Promissory Note and Security Agreement dated December 30, 2009, issued to High Capital Funding, LLC
    
    *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.  34




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##### Table of Contents



REGISTRANT:
FULLNET COMMUNICATIONS, INC.Date: March 31, 2010
    By:
    /s/ TIMOTHY J. KILKENNYTimothy J. KilkennyChief Executive OfficerDate: March 31, 2010
    By:
    /s/ ROGER P. BARESELRoger P. BareselPresident and Chief Financial and Accounting OfficerPursuant to the requirements of the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.Date: March 31, 2010
    By:
    /s/ TIMOTHY J. KILKENNYTimothy J. Kilkenny,Chairman of the Board and DirectorDate: March 31, 2010
    By:
    /s/ ROGER P. BARESELRoger P. Baresel, Director  35




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##### Table of Contents



F-1




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  December 31,2009
    
    
    2008ASSETSCURRENT ASSETSCash
    
    $
    11,905
    
    
    $
    11,753Accounts receivable, net
    
    
    15,043
    
    
    
    11,318Prepaid expenses and other current assets
    
    
    11,705
    
    
    
    36,785Total current assets
    
    
    38,653
    
    
    
    59,856PROPERTY AND EQUIPMENT, net
    
    
    120,944
    
    
    
    324,227INTANGIBLE ASSETS, net
    
    
    998
    
    
    
    8,782OTHER ASSETS
    
    
    5,250
    
    
    
    5,250TOTAL
    
    $
    165,845
    
    
    $
    398,115LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable, current portion
    
    $
    492,533
    
    
    $
    208,215Accrued and other liabilities, current portion
    
    
    1,317,892
    
    
    
    1,205,087Notes payable, current portion
    
    
    510,636
    
    
    
    545,436Deferred revenue
    
    
    96,066
    
    
    
    128,548Total current liabilities
    
    
    2,417,127
    
    
    
    2,087,286ACCOUNTS PAYABLE, less current portion
    
    
    
    
    
    
    254,174ACCRUED AND OTHER LIABILITIES, less current portion
    
    
    
    
    
    
    185,755NOTES PAYABLE, less current portion
    
    
    297,300
    
    
    
    259,100Total liabilities
    
    
    2,714,427
    
    
    
    2,786,315STOCKHOLDERS DEFICITCommon stock  $.00001 par value; authorized, 10,000,000 shares; issued and
outstanding,
7,355,308 in 2009 and 2008
    
    
    74
    
    
    
    74Common stock issuable, 567,413 and 70,257 shares in 2009 and 2008, respectively
    
    
    57,601
    
    
    
    57,596Additional paid-in capital
    
    
    8,397,733
    
    
    
    8,378,467Accumulated deficit
    
    
    (11,003,990
    )
    
    
    (10,824,337
    )Total stockholders deficit
    
    
    (2,548,582
    )
    
    
    (2,388,200
    )TOTAL
    
    $
    165,845
    
    
    $
    398,115
   F-2




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2009
    
    
    2008REVENUESAccess service revenues
    
    $
    413,689
    
    
    $
    532,661Co-location and other revenues
    
    
    1,390,669
    
    
    
    1,353,890Total revenues
    
    
    1,804,358
    
    
    
    1,886,551OPERATING COSTS AND EXPENSESCost of access service revenues
    
    
    196,494
    
    
    
    235,638Cost of co-location and other revenues
    
    
    393,593
    
    
    
    321,196Selling, general and administrative expenses
    
    
    1,321,857
    
    
    
    1,371,259Depreciation and amortization
    
    
    217,842
    
    
    
    252,338Total operating costs and expenses
    
    
    2,129,786
    
    
    
    2,180,431LOSS FROM OPERATIONS
    
    
    (325,428
    )
    
    
    (293,880
    )GAIN ON DEBT FORGIVENESS
    
    
    235,663
    
    
    
    INTEREST EXPENSE
    
    
    (89,888
    )
    
    
    (97,668
    )NET LOSS
    
    $
    (179,653
    )
    
    $
    (391,548
    )Net loss per common shareBasic
    
    $
    (.02
    )
    
    $
    (.05
    )Assuming dilution
    
    $
    (.02
    )
    
    $
    (.05
    )Weighted average number of common shares outstandingBasic
    
    
    7,428,327
    
    
    
    7,288,679Assuming dilution
    
    
    7,428,327
    
    
    
    7,288,679
   F-3




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
   CommonCommon stock
    
    
    stock
    
    
    Additional
    
    
    AccumulatedShares
    
    
    Amount
    
    
    issuable
    
    
    paid-in capital
    
    
    deficit
    
    
    TotalBalance at January 1, 2008
    
    
    6,670,878
    
    
    $
    67
    
    
    $
    57,596
    
    
    $
    8,350,255
    
    
    $
    (10,432,789
    )
    
    $
    (2,024,871
    )Stock options exercise
    
    
    684,430
    
    
    
    7
    
    
    
    
    
    
    
    28,042
    
    
    
    
    
    
    
    28,049Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170
    
    
    
    
    
    
    
    170Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (391,548
    )
    
    
    (391,548
    )Balance at December 31,
2008
    
    
    7,355,308
    
    
    $
    74
    
    
    $
    57,596
    
    
    $
    8,378,467
    
    
    $
    (10,824,337
    )
    
    $
    (2,388,200
    )Warrant extension granted in settlement of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,218
    
    
    
    
    
    
    
    4,218Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    138Common stock issuable in
settlement of liabilities
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    14,910
    
    
    
    
    
    
    
    14,915Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (179,653
    )
    
    
    (179,653
    )Balance at December 31,
2009
    
    
    7,355,308
    
    
    $
    74
    
    
    $
    57,601
    
    
    $
    8,397,733
    
    
    $
    (11,003,990
    )
    
    $
    (2,548,582
    )
   F-4




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (179,653
    )
    
    $
    (391,548
    )Adjustments to reconcile net loss to net cash provided by operating activitiesDepreciation and amortization
    
    
    217,842
    
    
    
    252,338Gain on debt forgiveness
    
    
    (235,663
    )
    
    
    Stock compensation
    
    
    138
    
    
    
    170Provision for uncollectible accounts receivable
    
    
    2,939
    
    
    
    (108
    )Net (increase) decrease inAccounts receivable
    
    
    (6,664
    )
    
    
    14,758Prepaid expenses and other current assets
    
    
    25,080
    
    
    
    25,486Net increase (decrease) inAccounts payable
    
    
    34,362
    
    
    
    16,233Accrued and other liabilities
    
    
    175,628
    
    
    
    112,970Deferred revenue
    
    
    (32,482
    )
    
    
    15,962Net cash provided by operating activities
    
    
    1,527
    
    
    
    46,261CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (6,775
    )
    
    
    (51,826
    )Net cash used in investing activities
    
    
    (6,775
    )
    
    
    (51,826
    )CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on borrowings under notes payable
    
    
    (291,900
    )
    
    
    (26,100
    )Proceeds from notes payable
    
    
    297,300
    
    
    
    Proceeds from exercise of stock options
    
    
    
    
    
    
    28,049Net cash provided by financing activities
    
    
    5,400
    
    
    
    1,949NET INCREASE (DECREASE) IN CASH
    
    
    152
    
    
    
    (3,616
    )Cash at beginning of year
    
    
    11,753
    
    
    
    15,369Cash at end of year
    
    $
    11,905
    
    
    $
    11,753SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    4,566
    
    
    $
    31,299Warrant extension granted in settlement of liabilities
    
    
    4,218
    
    
    
    Common stock issuable in settlement of liabilities
    
    
    14,915
    
    
    
    
   F-5




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##### Table of Contents



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




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##### Table of Contents



Consolidation
  Revenue Recognition
     F-7




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##### Table of Contents



Accounts Receivable
  2009
    
    
    2008Accounts receivable
    
    $
    205,622
    
    
    $
    198,958Less allowance for doubtful accounts
    
    
    (190,579
    )
    
    
    (187,640
    )$
    15,043
    
    
    $
    11,318
  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
  Long-Lived Assets
   F-8




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##### Table of Contents



Accrued and Other Liabilities
  2009
    
    
    2008Accrued interest
    
    $
    463,676
    
    
    $
    630,892Accrued deferred compensation
    
    
    700,157
    
    
    
    567,305Accrued other liabilities
    
    
    154,059
    
    
    
    192,6451,317,892
    
    
    
    1,390,842Less current portion
    
    
    1,317,892
    
    
    
    1,205,087$
    
    
    
    $
    185,755
  Accrued in:2009
    
    $
    132,8522008
    
    
    60,3152007
    
    
    71,3212000-2006
    
    
    435,669$
    700,157
   Income Taxes
   Loss Per Share
  2009
    
    
    2008Numerator:Net loss
    
    $
    (179,653
    )
    
    $
    (391,548
    )Denominator:Weighted average shares and share equivalents outstanding  basic
    
    
    7,428,327
    
    
    
    7,288,679Effect of dilutive stock options
    
    
    
    
    
    
    Effect of dilutive warrants
    
    
    
    
    
    
    Effect of dilutive convertible promissory notes
    
    
    
    
    
    
    Weighted average shares and share equivalents outstanding  assuming dilution
    
    
    7,428,327
    
    
    
    7,288,679Net loss per share  basic
    
    $
    (.02
    )
    
    $
    (.05
    )Net loss per share  assuming dilution
    
    $
    (.02
    )
    
    $
    (.05
    )
  F-9




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##### Table of Contents



Stock Options and Warrants
     F-10




---



##### Table of Contents



WeightedWeighted
    
    
    average
    
    
    Aggregateaverage
    
    
    remaining
    
    
    intristic2009
    
    
    exercise price
    
    
    contractual life (yrs)
    
    
    valueOptions outstanding, beginning of year
    
    
    2,447,704
    
    
    
    .53Options granted during the year
    
    
    3,000
    
    
    
    .01Options cancelled during the year
    
    
    (82,320
    )
    
    
    1.25Options outstanding, end of year
    
    
    2,368,384
    
    
    $
    .50
    
    
    
    2.61
    
    
    $
    60Options exercisable at end of year
    
    
    2,325,384
    
    
    $
    .51
    
    
    
    2.51
    
    
    $
    
  Weightedaveragegrant date2009
    
    
    fair valueNon-vested options outstanding, beginning of year
    
    
    44,000
    
    
    $
    1,565Options granted during the year
    
    
    3,000
    
    
    
    30Options vested during the year
    
    
    (4,000
    )
    
    
    (141
    )Non-vested options outstanding, end of year
    
    
    43,000
    
    
    $
    1,454
  Common Stock Purchase Warrants
    Number
    
    
    
    
    Exercise
    
    
    Expirationof shares
    
    
    
    
    price
    
    
    year275,000
    
    
    
    
    
    1.00
    
    
    
    201270,000
    
    
    
    
    
    .13
    
    
    
    201214,000
    
    
    
    
    
    .10
    
    
    
    201212,000
    
    
    
    
    
    .08
    
    
    
    2012220,000
    
    
    
    
    
    .01
    
    
    
    2012591,000
  F-11




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##### Table of Contents



Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average2009
    
    
    Exercise Price
    
    
    2008
    
    
    Exercise PriceWarrants outstanding, beginning of year
    
    
    591,000
    
    
    $
    .49
    
    
    
    641,000
    
    
    $
    .45Warrants expired during the year
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    .01Warrants outstanding, end of year
    
    
    591,000
    
    
    $
    .49
    
    
    
    591,000
    
    
    $
    .49
 Advertising
  Use of Estimates
  Recently Issued Accounting Standards
 Measuring Liabilities at Fair Value (Financial Accounting Standards Board (FASB) Accounting
Standards Update (ASU) No. 2009-05 to FASB Accounting Standards Codification (ASC) 820)
  Accounting Standards Codification (ASC 105-10)
  Subsequent Events (ASC 855-10)
  Interim Disclosure Fair Value of Financial Instruments (ASC 825-10)
   F-12




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##### Table of Contents



Intangible Assets
  Business Combinations (ASC 805-10)
  Noncontrolling Interests in Consolidated Financial Statements (ASC 810-10)
  Fair Value Measurements (ASC 820-10)
   F-13




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##### Table of Contents



2009
    
    
    2008Computers and equipment
    
    $
    1,477,727
    
    
    $
    1,470,952Leasehold improvements
    
    
    966,915
    
    
    
    966,915Software
    
    
    57,337
    
    
    
    57,337Furniture and fixtures
    
    
    28,521
    
    
    
    28,5212,530,500
    
    
    
    2,523,725Less accumulated depreciation
    
    
    (2,409,556
    )
    
    
    (2,199,498
    )$
    120,944
    
    
    $
    324,227
    December 31,2009
    
    
    2008InterCorp acquisition
    
    $
    4,119
    
    
    $
    4,119Talihina acquisition
    
    
    21,017
    
    
    
    21,017CWIS acquisition
    
    
    105,638
    
    
    
    105,638LAWTONNET 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
    
    
    
    70,0003,202,704
    
    
    
    3,202,704Less accumulated amortization
    
    
    (3,201,706
    )
    
    
    (3,193,922
    )$
    998
    
    
    $
    8,782
   F-14




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##### Table of Contents



December 31,
    
    
    December 31,2009
    
    
    2008Interim loan from a shareholder,
interest at 10%, requires payments
equal to 50% of the net proceeds
received by the Company from its
private placement of convertible
promissory notes, matured December
2001; unsecured (1)(2)
    
    $
    
    
    
    $
    293,900Convertible promissory notes; interest
at 12.5% of face amount, payable
quarterly; these notes are unsecured
and are matured at December 31, 2009
(convertible into approximately
1,003,659 shares at December 31, 2009
and December 31, 2008) (3)
    
    
    510,636
    
    
    
    510,636Secured promissory note from a
shareholder; interest at 6%, requires
monthly installments of interest only
for the first year then monthly
installments of $3,301 including
principal and interest; maturing
December 30, 2011; secured by all
tangible and intangible assets of the
Company (1)(2)
    
    
    297,300
    
    
    
    807,936
    
    
    
    804,536Less current portion
    
    
    510,636
    
    
    
    545,436$
    297,300
    
    
    $
    259,100
  F-15




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##### Table of Contents



(1)
    
    INTERIM LOAN  In September 2007, the lender agreed to accept monthly payments of $5,800
beginning December 1, 2007 to be allocated 50% to principal and 50% to interest. The Company was
unable to make all of the required payments pursuant to the terms of the September 2007 agreement.
Beginning in June 2009, the lender agreed to accept temporary reduced monthly payments of $1,000
until such time as the Companys financial position significantly improves. The Company was unable
to make all of the reduced monthly payments. In October 2009 the lender assigned the interim loan
to its parent company (see INTERIM LOAN INTEREST CONVERSION AND PRINCIPAL PAYMENT WITH NEW SECURED
PROMISSORY NOTE and SECURED PROMISSORY NOTE below).(2)
    
    INTERIM LOAN INTEREST CONVERSION AND PRINCIPAL PAYMENT WITH NEW SECURED PROMISSORY NOTE  On
December 29, 2009 the parent company agreed to convert $248,578 of accrued interest on the interim
loan into 497,156 restricted shares of the Companys common stock valued at $.50 per share (the
Conversion). These shares were issuable at December 31, 2009, were equal to approximately 6.8%
of the total number of shares outstanding and were issued on January 20, 2010. This transaction
was accounted for as a troubled debt restructuring and a gain on debt forgiveness of $235,663 was
recorded. On December 29, 2009 the Company paid the remaining outstanding principal balance of
this interim loan of $292,300 with the proceeds from a new secured promissory note (see SECURED
PROMISSORY NOTE below).SECURED PROMISSORY NOTE  On December 29, 2009 the parent company further agreed to make a new
loan to the Company in the amount of $297,300. The proceeds from this loan were used to repay the
remaining principal amount of the interim loan of $292,300. In connection with the Conversion, the
Company also agreed to issue additional shares of stock to the parent company in the event that any
additional shares are issued at less than $.50 per share, excluding employee stock options, prior
to the payment in full of the secured promissory note. At December 31, 2009, the outstanding
principal and interest of the secured promissory note was $297,349.(3)
    
    During 2000 and 2001, the Company issued 11% convertible promissory notes or converted other
notes payable or accounts payable to convertible promissory notes in an amount totaling $2,257,624.
The terms of the Notes were 36 months with limited prepayment provisions. Each of the Notes may be
converted by the holder at any time at $1.00 per common stock share and by the Company upon
registration and when the closing price of the Companys common stock has been at or above $3.00
per share for three consecutive trading days. Additionally, the Notes were accompanied by warrants
exercisable for the purchase of the number of shares of Companys common stock equal to the number
obtained by dividing 25% of the face amount of the Notes purchased by $1.00. These warrants were
exercisable at any time during the five years following issuance at an exercise price of $.01 per
share. Under the terms of the Notes, the Company was required to register the common stock
underlying both the Notes and the detached warrants by filing a registration statement with the
Securities and Exchange Commission within 45 days following the Final Expiration Date of the
Offering (March 31, 2001). On May 31, 2001, the Company exchanged 2,064,528 shares of its common
stock and warrants (exercisable for the purchase of 436,748 shares of common stock at $2.00 per
share) for convertible promissory notes in the principal amount of $1,746,988 (recorded at
$1,283,893) plus accrued interest of $123,414. The warrants expired on May 31, 2006. This exchange
was accounted for as an induced debt conversion and a debt conversion expense of $370,308 was
recorded.     2010
    
    $
    510,6362011
    
    
    297,3002012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    $
    807,936
  F-16




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##### Table of Contents



Year ending December 312010
    
    $
    169,5982011
    
    
    182,6442012
    
    
    189,1672013
    
    
    195,6902014
    
    
    202,213$
    939,312
     2009
    
    
    2008Income taxes benefit at federal statutory rate
    
    $
    (61,000
    )
    
    $
    (133,000
    )Tax effect of state income taxes benefit
    
    
    (8,000
    )
    
    
    (17,000
    )Change in valuation allowance
    
    
    72,000
    
    
    
    225,000Nondeductible expenses
    
    
    3,000
    
    
    
    3,000Other
    
    
    (6,000
    )
    
    
    (78,000
    )Total tax expense
    
    $
    
    
    
    $
    
  2009
    
    
    2008Deferred income tax assetsBasis difference in property and equipment and intangible assets
    
    $
    407,000
    
    
    $
    422,000Deferred revenue
    
    
    37,000
    
    
    
    49,000Net operating loss
    
    
    1,255,000
    
    
    
    1,209,000Deferred compensation and other
    
    
    304,000
    
    
    
    251,000Valuation allowance
    
    
    (2,003,000
    )
    
    
    (1,931,000
    )Net deferred income tax asset
    
    
    
    
    
    
    Change in valuation allowance
    
    $
    72,000
    
    
    $
    225,000
     F-17




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F-18




---



##### Table of Contents



2009
    
    
    2008Risk free interest rate
    
    
    4.4
    %
    
    
    4.4
    %Expected lives (in years)
    
    
    5
    
    
    
    5Expected volatility
    
    
    131
    %
    
    
    140
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
  2009
    
    
    2008Stock-based compensation expense
    
    $
    138
    
    
    $
    170Impact on income per share:Basic
    
    $
    NIL
    
    
    $
    NILAssuming dilution
    
    $
    NIL
    
    
    $
    NIL
       F-19




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F-20