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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the fiscal year ended December 31, 2007
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-27031
 FULLNET COMMUNICATIONS, INC.
 (Name of small business issuer in its Charter)
 OKLAHOMA
    
    73-1473361(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 201 Robert S. Kerr Avenue, Suite 210
Oklahoma City, Oklahoma 73102
(Address of principal executive offices)
 (405) 236-8200
(Issuers telephone number)
 Securities registered under Section 12(b) of the Act: None
 Securities registered under to Section 12(g) of the Act:
 Title of class
  þ o
 o
 þ o
 þ
  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 IItem 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    13Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 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
    
    
    20Item 8. Financial Statements and Supplemental Data
    
    
    20Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    20Item 9A. Controls and Procedures
    
    
    21Item 9A(T). Controls and Procedures
    
    
    21Item 9B. Other Information
    
    
    21PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    22Item 11. Executive Compensation
    
    
    24Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    26Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    28Item 14. Principal Accounting Fees and Services
    
    
    28Item 15. Exhibits, Financial Statement Schedules
    
    
    29SIGNATURES
    
    
    33Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   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 $7,900,000;
    
    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
             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.
    
    New Products and Services  Offer subscribers new products and services. We recently began
offering call waiting modem on hold, Postini e-mail spam and virus protection and a dial-up
accelerator.
   
    
    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
   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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
    
    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
  
 Item 4. Submission of Matters to a Vote of Security Holders
   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
    
    
    Low2007 Calendar Quarter Ended:March 31
    
    $
    .19
    
    
    $
    .03June 30
    
    
    .08
    
    
    
    .03September 30
    
    
    .05
    
    
    
    .03December 31
    
    
    .06
    
    
    
    .032006 Calendar Quarter Ended:March 31
    
    $
    .08
    
    
    $
    .08June 30
    
    
    .06
    
    
    
    .06September 30
    
    
    .04
    
    
    
    .04December 31
    
    
    .03
    
    
    
    .03
       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
    
    
    3,132,134
    
    
    $
    .42
    
    
    
    Warrants and certain stock options issued to non-employees
    
    
    376,000
    
    
    $
    .41
    
    
    
    Total
    
    
    3,508,134
    
    
    $
    .42
    
    
    
    
  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 31,2007
    
    
    2006Percentage
    
    
    
    
    
    
    PercentageAmount
    
    
    of revenues
    
    
    Amount
    
    
    of revenuesRevenues:Access service revenues
    
    $
    643,155
    
    
    
    33.9
    %
    
    $
    741,017
    
    
    
    41.9
    %Co-location and other revenues
    
    
    1,252,413
    
    
    
    66.1
    
    
    
    1,028,054
    
    
    
    58.1Total revenues
    
    
    1,895,568
    
    
    
    100.0
    
    
    
    1,769,071
    
    
    
    100.0Operating costs and expenses:Cost of access service revenues
    
    
    233,931
    
    
    
    12.3
    
    
    
    214,339
    
    
    
    12.1Cost of co-location and other revenues
    
    
    322,922
    
    
    
    17.0
    
    
    
    268,530
    
    
    
    15.2Selling, general and administrative expenses
    
    
    1,334,285
    
    
    
    70.4
    
    
    
    1,369,228
    
    
    
    77.4Depreciation and amortization
    
    
    297,176
    
    
    
    15.7
    
    
    
    309,893
    
    
    
    17.5Impairment expense
    
    
    13,032
    
    
    
    .7
    
    
    
    
    
    
    
    Total operating costs and expenses
    
    
    2,201,346
    
    
    
    116.1
    
    
    
    2,161,990
    
    
    
    122.2Loss from operations
    
    
    (305,778
    )
    
    
    (16.1
    )
    
    
    (392,919
    )
    
    
    (22.2
    )Gain on debt forgiveness
    
    
    54,795
    
    
    
    2.9
    
    
    
    19,925
    
    
    
    1.1Interest expense
    
    
    (96,668
    )
    
    
    (5.1
    )
    
    
    (106,309
    )
    
    
    (6.0
    )Net loss
    
    $
    (347,651
    )
    
    
    (18.3
    )%
    
    $
    (479,303
    )
    
    
    (27.1
    )%
         16




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Goodwill and Intangible Assets
    Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainAccounts payable  trade
    
    $
    54,795
    
    
    $
    0
    
    
    $
    54,795
  Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainAccounts payable
    
    $
    21,380
    
    
    $
    1,455
    
    
    $
    19,925
        17




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For the Years Ended December 31,2007
    
    
    2006Net cash flows provided by operations
    
    $
    165,503
    
    
    $
    185,551Net cash flows used in investing activities
    
    
    (83,844
    )
    
    
    (91,915
    )Net cash flows used in financing activities
    
    
    (82,297
    )
    
    
    (92,603
    )
    
    
    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)
    
    $
    830,636
    
    
    $
    580,236
    
    
    $
    69,600
    
    
    $
    69,600
    
    
    $
    111,200Operating leases
    
    
    386,229
    
    
    
    189,853
    
    
    
    196,376
    
    
    
    
    
    
    
    Other agreements (b)
    
    
    270,142
    
    
    
    5,988
    
    
    
    5,988
    
    
    
    5,988
    
    
    
    252,178Total contractual cash obligations
    
    $
    1,487,007
    
    
    $
    776,077
    
    
    $
    271,964
    
    
    $
    75,588
    
    
    $
    363,378
 
 (a)
    
    Included in this item are required principal and interest payments under a $320,000 note
payable to a related party. Also included are convertible promissory notes totaling
$510,636 that were matured at December 31, 2007. 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 the required payments on a matured lease obligation to a related party.    Accounting for
Contingencies,
  Revenue Recognition
   19




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Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 . Accounting for Income Taxes
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities
 Business Combinations Business Combinations .
 Noncontrolling Interests in Consolidated
Financial Statements
 Disclosures about Derivative Instruments and
Hedging Activities
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
   20




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Item 9A. Controls and Procedures
   
    
    (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
    
    (ii) 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
    
    (iii) 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
   21




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PART III
 
 Item 10. Directors, Executive Officers, and Corporate Governance.
  Name
    
    Age
    
    
    PositionTimothy J. Kilkenny
    
    49
    
    
    Chairman of the Board of Directors and CEORoger P. Baresel
    
    52
    
    
    Director, President, Chief Financial Officer and SecretaryJason C. Ayers
    
    33
    
    
    Vice President of OperationsPatricia R. Shurley
    
    51
    
    
    Vice President of FinanceMichael D. Tomas
    
    35
    
    
    Vice President of Technology
       22




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
    
    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;
    
    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.
        23




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Item 11. Executive Compensation
  Annual
    
    
    Long-TermCompensation
    
    
    CompensationSecuritiesUnderlyingOptions andFiscal
    
    
    
    
    
    
    Other
    
    
    WarrantsName and Principal Position
    
    Year
    
    
    Salary
    
    
    Compensation
    
    
    (#) (1)Timothy J. Kilkenny
    
    
    
    
    
    
    2007
    
    
    $
    115,161
    (2)
    
    $
    20,946
    (5)
    
    
    Chairman and CEO
    
    
    
    
    
    
    2006
    
    
    $
    103,516
    (3)
    
    $
    19,130
    (6)
    
    
    2005
    
    
    $
    117,125
    (4)
    
    $
    21,954
    (7)
    
    
    
 
 (1)
    
    Options are granted with an exercise price equal to the fair market value of our common stock on the date of the grant.(2)
    
    Includes $40,121 of deferred compensation.(3)
    
    Includes $32,948 of deferred compensation.(4)
    
    Includes $40,075 of deferred compensation.(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, and $10,746 of insurance premiums paid by us for the benefit of Mr. Kilkenny.(6)
    
    Represents $7,700 of expense reimbursement for business use of Mr. Kilkennys automobile, $1,649 of expense
reimbursement for Mr. Kilkennys Internet connection and cell phone, and $9,781 of insurance premiums paid by us for
the benefit of Mr. Kilkenny.(7)
    
    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.      Number of Unexercised
    
    
    Value of Unexercised In-the-Options at
    
    
    Money Options atDecember 31, 2007
    
    
    December 31, 2007 (1)Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableTimothy J. KilkennyChairman and CEO
    
    
    714,000
    
    
    
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Based on the December 31, 2007 estimated fair value of our common stock of $.04 per share.  24




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Outstanding Equity Awards at December 31, 2007Stock Option AwardsNumber of Common Stock
    
    
    Option
    
    
    OptionUnderlying Options
    
    
    Exercise
    
    
    ExpirationName
    
    Exercisable
    
    
    Unexercisable
    
    
    Price(1)
    
    
    DateTimothy J. Kilkenny
    
    
    120,000
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/13Chairman and CEO
    
    
    150,000
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/13182,000
    
    
    
    
    
    
    $
    .04
    
    
    
    10/09/1380,000
    
    
    
    
    
    
    $
    .05
    
    
    
    03/18/1232,000
    
    
    
    
    
    
    $
    .11
    
    
    
    11/16/1150,000
    
    
    
    
    
    
    $
    .70
    
    
    
    07/18/11100,000
    
    
    
    
    
    
    $
    1.00
    
    
    
    12/08/10
 
 (1)
    
    The closing sale price of our common stock as reported on the OTC Bulletin Board on
December 31, 2007 was $0.04.       25




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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)Generation Capital Associates (2)
1085 Riverside Trace, Atlanta, Georgia 30328
    
    
    778,108
    
    
    
    9.9
    %Karen
Gustafson & Greg Kusnick (3)P.O. Box 22443, Seattle, Washington 98112
    
    
    410,231
    
    
    
    5.4
    %Greg Lowney & Maryanne Snyder (4)
15207 N.E. 68th Street, Redmond, Washington 98052
    
    
    410,231
    
    
    
    5.4
    %Laura L. Kilkenny (5)
3160 Long Drive, Newcastle, Oklahoma 73065
    
    
    465,000
    
    
    
    6.3
    %
 
 (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 7,425,565 outstanding shares of common stock as of
March 30, 2008.(2)
    
    Generation Capital Associates holds 267,608 shares of our common
stock. The number of shares includes 345,000 shares of our common
stock that are subject to currently exercisable common stock purchase
warrants. Amounts shown do not include 54,500 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 an operating lease and an
interim loan with Generation Capital (see Item. 13 Certain
Relationships and Related Transactions, and Director Independence).(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.  26




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Common StockBeneficially OwnedNumber of
    
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    
    Class (1)Timothy J. Kilkenny* (2)(3)
    
    
    1,729,000
    
    
    
    21.3
    %Roger P. Baresel* (2)(4)
    
    
    575,362
    
    
    
    7.4
    %Jason C. Ayers (2)(5)
    
    
    405,795
    
    
    
    5.5
    %Patricia R. Shurley (2)(6)
    
    
    292,000
    
    
    
    3.9
    %Michael D. Tomas (2)(7)
    
    
    260,000
    
    
    
    3.5
    %All executive officers and directors as a group (5 persons)
    
    
    3,262,157
    
    
    
    41.6
    %
 
 *
    
    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 7,425,565
shares being outstanding at March 30, 2008.(2)
    
    Address is c/o 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102.(3)
    
    Timothy J. Kilkenny and Barbara J. Kilkenny, husband and wife, hold 915,000 and
100,000 shares of our common stock, respectively. The number of shares includes
714,000 shares of our common stock that are subject to currently exercisable stock
options held by Mr. Kilkenny.(4)
    
    Roger P. Baresel and Judith A. Baresel, husband and wife, hold 34,408 and 92,659
shares of our common stock, respectively. They hold 31,250 shares of our common
stock as joint tenants. The number of shares includes 198,745 shares of our common
stock subject to currently exercisable stock options held by Mr. Baresel, and
218,300 shares of our common stock subject to currently exercisable stock options
held by Mrs. Baresel.(5)
    
    Jason C. Ayers holds 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 82,500 shares of our common stock that are subject to currently
exercisable common stock purchase options held by Mr. Tomas.  27




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Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  2007
    
    
    2006Audit Fees  Murrell, Hall, McIntosh & Co., PLLP
    
    $
    35,500
    
    
    $
    34,000Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
   28




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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).
    
    #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).
    
    #
  29




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##### Table of Contents



ExhibitNumber
    
    Exhibit4.16
    
    
    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).
    
    #10.1
    
    
    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).
    
    #
  30




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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
    
    #
  31




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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.  32




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##### Table of Contents



SIGNATURES
  REGISTRANT:FULLNET COMMUNICATIONS, INC.Date: March 31, 2008
    By:
    /s/ TIMOTHY J. KILKENNYTimothy J. KilkennyChief Executive OfficerDate: March 31, 2008
    By:
    /s/ ROGER P. BARESELRoger P. BareselPresident and Chief Financial and Accounting Officer  Date: March 31, 2008
    By:
    /s/ TIMOTHY J. KILKENNYTimothy J. Kilkenny,Chairman of the Board and DirectorDate: March 31, 2008
    By:
    /s/ ROGER P. BARESELRoger P. Baresel,
Director  33




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
        F-1




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  December 31,2007
    
    
    2006ASSETSCURRENT ASSETSCash
    
    $
    15,369
    
    
    $
    16,007Accounts receivable, net
    
    
    25,968
    
    
    
    24,407Prepaid expenses and other current assets
    
    
    62,271
    
    
    
    95,452Total current assets
    
    
    103,608
    
    
    
    135,866PROPERTY AND EQUIPMENT, net
    
    
    507,968
    
    
    
    699,128INTANGIBLE ASSETS, net
    
    
    25,553
    
    
    
    47,725OTHER ASSETS
    
    
    5,250
    
    
    
    18,282TOTAL
    
    $
    642,379
    
    
    $
    901,001LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable  trade
    
    $
    176,014
    
    
    $
    185,949Accounts payable  related party, current portion
    
    
    5,988
    
    
    
    270,142Accrued and other current liabilities
    
    
    1,017,223
    
    
    
    848,783Accrued interest  related party, current portion
    
    
    34,800
    
    
    
    184,197Notes payable, current portion
    
    
    510,636
    
    
    
    592,933Notes payable  related party, current portion
    
    
    34,800
    
    
    
    320,000Deferred revenue
    
    
    112,586
    
    
    
    108,437Total current liabilities
    
    
    1,892,047
    
    
    
    2,510,441ACCOUNTS PAYABLE  related party, less current portion
    
    
    264,154
    
    
    
    ACCRUED INTEREST  related party, less current portion
    
    
    181,397
    
    
    
    NOTES PAYABLE, less current portion
    
    
    285,200
    
    
    
    OTHER LIABILITIES
    
    
    44,452
    
    
    
    67,927Total liabilities
    
    
    2,667,250
    
    
    
    2,578,368STOCKHOLDERS DEFICITCommon stock  $.00001 par value; authorized,
10,000,000 shares; issued and outstanding,
6,670,878 shares in 2007 and 2006
    
    
    68
    
    
    
    68Common stock issuable, 70,257 shares in 2007 and 2006
    
    
    57,596
    
    
    
    57,596Additional paid-in capital
    
    
    8,350,254
    
    
    
    8,350,107Accumulated deficit
    
    
    (10,432,789
    )
    
    
    (10,085,138
    )Total stockholders deficit
    
    
    (2,024,871
    )
    
    
    (1,677,367
    )TOTAL
    
    $
    642,379
    
    
    $
    901,001
   F-2




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2007
    
    
    2006REVENUESAccess service revenues
    
    $
    643,155
    
    
    $
    741,017Co-location and other revenues
    
    
    1,252,413
    
    
    
    1,028,054Total revenues
    
    
    1,895,568
    
    
    
    1,769,071OPERATING COSTS AND EXPENSESCost of access service revenues
    
    
    233,931
    
    
    
    214,339Cost of co-location and other revenues
    
    
    322,922
    
    
    
    268,530Selling, general and administrative expenses
    
    
    1,334,285
    
    
    
    1,369,228Depreciation and amortization
    
    
    297,176
    
    
    
    309,893Impairment expense
    
    
    13,032
    
    
    
    Total operating costs and expenses
    
    
    2,201,346
    
    
    
    2,161,990LOSS FROM OPERATIONS
    
    
    (305,778
    )
    
    
    (392,919
    )GAIN ON DEBT FORGIVENESS
    
    
    54,795
    
    
    
    19,925INTEREST EXPENSE
    
    
    (96,668
    )
    
    
    (106,309
    )NET LOSS
    
    $
    (347,651
    )
    
    $
    (479,303
    )Net loss per common shareBasic
    
    $
    (.05
    )
    
    $
    (.07
    )Assuming dilution
    
    $
    (.05
    )
    
    $
    (.07
    )Weighted average number of common shares outstandingBasic
    
    
    6,741,135
    
    
    
    6,740,985Assuming dilution
    
    
    6,741,135
    
    
    
    6,740,985
   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, 2006
    
    
    6,652,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,328,004
    
    
    $
    (9,605,835
    )
    
    $
    (1,220,169
    )Warrant exercise
    
    
    18,000
    
    
    
    2
    
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    180Warrant extension granted in
settlement of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,900
    
    
    
    
    
    
    
    21,900Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (479,303
    )
    
    
    (479,303
    )Balance at December 31,
2006
    
    
    6,670,878
    
    
    $
    68
    
    
    $
    57,596
    
    
    $
    8,350,107
    
    
    $
    (10,085,138
    )
    
    $
    (1,677,367
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    147Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (347,651
    )
    
    
    (347,651
    )Balance at December 31,
2007
    
    
    6,670,878
    
    
    $
    68
    
    
    $
    57,596
    
    
    $
    8,350,254
    
    
    $
    (10,432,789
    )
    
    $
    (2,024,871
    )
   F-4




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries
  Years ended December 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (347,651
    )
    
    $
    (479,303
    )Adjustments to reconcile net loss to net cash provided by operating activitiesDepreciation and amortization
    
    
    297,176
    
    
    
    309,893Gain on bad debt recovery
    
    
    
    
    
    
    Gain on debt forgiveness
    
    
    (54,795
    )
    
    
    (19,925
    )Impairment expense
    
    
    13,032
    
    
    
    Stock compensation
    
    
    147
    
    
    
    25Provision for uncollectible accounts receivable
    
    
    94
    
    
    
    19,628Net (increase) decrease inAccounts receivable
    
    
    (1,655
    )
    
    
    78,581Prepaid expenses and other current assets
    
    
    33,181
    
    
    
    13,179Net increase (decrease) inAccounts payable  trade
    
    
    (9,935
    )
    
    
    44,876Accounts payable  related party
    
    
    54,795
    
    
    
    73,060Accrued and other liabilities
    
    
    144,965
    
    
    
    125,884Accrued interest  related party
    
    
    32,000
    
    
    
    32,000Deferred revenue
    
    
    4,149
    
    
    
    (12,347
    )Net cash provided by operating activities
    
    
    165,503
    
    
    
    185,551CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (82,934
    )
    
    
    (76,412
    )Acquisition of assets
    
    
    (910
    )
    
    
    (15,503
    )Net cash used in investing activities
    
    
    (83,844
    )
    
    
    (91,915
    )CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on borrowings under notes payable
    
    
    (82,297
    )
    
    
    (92,783
    )Proceeds from exercise of warrants
    
    
    
    
    
    
    180Net cash used in financing activities
    
    
    (82,297
    )
    
    
    (92,603
    )NET INCREASE (DECREASE) IN CASH
    
    
    (638
    )
    
    
    1,033Cash at beginning of year
    
    
    16,007
    
    
    
    14,974Cash at end of year
    
    $
    15,369
    
    
    $
    16,007SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    13,456
    
    
    $
    19,375Warrant extension granted in settlement of liabilities
    
    
    
    
    
    
    21,900
   F-5




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##### Table of Contents



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




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##### Table of Contents



Consolidation
  Revenue Recognition
 Revenue Recognition
  Accounts Receivable
  2007
    
    
    2006Accounts receivable
    
    $
    213,716
    
    
    $
    212,061Less allowance for doubtful accounts
    
    
    (187,748
    )
    
    
    (187,654
    )$
    25,968
    
    
    $
    24,407
  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
  F-7




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##### Table of Contents



Intangible Assets
 Goodwill and Intangible Assets
 Long-Lived Assets
 Accounting for the Impairment or Disposal of
Long-lived Assets
 Accrued and Other Current Liabilities
  2007
    
    
    2006Accrued interest
    
    $
    349,561
    
    
    $
    294,995Accrued deferred compensation
    
    
    506,990
    
    
    
    435,669Accrued other liabilities
    
    
    160,672
    
    
    
    118,119$
    1,017,223
    
    
    $
    848,783
  Accrued in:2007
    
    $
    71,3212006
    
    
    81,7522005
    
    
    48,8312000-2005
    
    
    305,086$
    506,990
   Income Taxes
   F-8




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##### Table of Contents



Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 . Accounting for Income Taxes
  Loss per share
  2007
    
    
    2006Numerator:Net loss
    
    $
    (347,651
    )
    
    $
    (479,303
    )Denominator:Weighted average shares and share equivalents outstanding  basic
    
    
    6,741,135
    
    
    
    6,740,985Effect of dilutive stock options
    
    
    
    
    
    
    Effect of dilutive warrants
    
    
    
    
    
    
    Effect of dilutive convertible promissory notes
    
    
    
    
    
    
    Weighted average shares and share equivalents outstanding  assuming dilution
    
    
    6,741,135
    
    
    
    6,740,985Net loss per share  basic
    
    $
    (.05
    )
    
    $
    (.07
    )Net loss per share  assuming dilution
    
    $
    (.05
    )
    
    $
    (.07
    )
       F-9




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##### Table of Contents



Stock Options and Warrants
 Share-Based Payment Accounting for Stock-Based Compensation Accounting Principles Board Accounting for Stock Issued to Employees
   2007
    
    
    2006Risk free interest rate
    
    
    4.4
    %
    
    
    4.4
    %Expected lives (in years)
    
    
    5
    
    
    
    5Expected volatility
    
    
    138
    %
    
    
    118
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
  Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average2007
    
    
    Exercise Price
    
    
    2006
    
    
    Exercise PriceOptions outstanding, beginning of year
    
    
    3,122,034
    
    
    $
    .42
    
    
    
    3,083,034
    
    
    $
    .45Options granted during the year
    
    
    48,000
    
    
    
    .04
    
    
    
    39,000
    
    
    
    .09Options exercised during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options cancelled during the year
    
    
    (37,900
    )
    
    
    .09
    
    
    
    
    
    
    
    Options outstanding, end of year
    
    
    3,132,134
    
    
    $
    .42
    
    
    
    3,122,034
    
    
    $
    .42Options exercisable at end of year
    
    
    3,085,134
    
    
    $
    .43
    
    
    
    3,083,034
    
    
    $
    .43Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    .04
    
    
    
    
    
    
    $
    .07
  F-10




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##### Table of Contents



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
    
    
    2,336,711
    
    
    5.45 years
    
    $
    0.12
    
    
    
    2,289,711
    
    
    $
    0.12$1.00-$1.50
    
    
    671,290
    
    
    2.85 years
    
    $
    1.07
    
    
    
    671,290
    
    
    $
    1.07$1.81-$3.00
    
    
    124,133
    
    
    2.32 years
    
    $
    2.62
    
    
    
    124,133
    
    
    $
    2.623,132,134
    
    
    4.77 years
    
    $
    0.42
    
    
    
    3,085,134
    
    
    $
    0.43
 Common Stock Warrants and Certain Stock Options
      Number
    
    
    Exercise
    
    
    Expirationof shares
    
    
    price
    
    
    year50,000
    
    
    
    .01
    
    
    
    2008275,000
    
    
    
    1.00
    
    
    
    200970,000
    
    
    
    .13
    
    
    
    2009220,000
    
    
    
    .01
    
    
    
    200914,000
    
    
    
    .10
    
    
    
    201212,000
    
    
    
    .08
    
    
    
    2012641,000
  Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average2007
    
    
    Exercise Price
    
    
    2006
    
    
    Exercise PriceWarrants and certain stock options outstanding, beginning
of year
    
    
    667,000
    
    
    $
    .44
    
    
    
    1,479,306
    
    
    $
    .82Warrants and certain stock options issued during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants and certain stock options exercised during the
year
    
    
    
    
    
    
    
    
    
    
    (18,000
    )
    
    
    .01Warrants and certain stock options expired during the year
    
    
    (26,000
    )
    
    
    .07
    
    
    
    (794,306
    )
    
    
    1.16Warrants and certain stock options outstanding, end of
year
    
    
    641,000
    
    
    $
    .45
    
    
    
    667,000
    
    
    $
    .44
  F-11




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##### Table of Contents



Advertising
  Use of Estimates
  Recently Issued Accounting Standards
 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 . Accounting for Income Taxes
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations Business Combinations
 Noncontrolling Interests in Consolidated
Financial Statements
 Disclosures about Derivative Instruments and
Hedging Activities
  F-12




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##### Table of Contents



Reclassifications
    2007
    
    
    2006Computers and equipment
    
    $
    1,420,177
    
    
    $
    1,340,246Leasehold improvements
    
    
    965,864
    
    
    
    962,861Software
    
    
    57,337
    
    
    
    57,337Furniture and fixtures
    
    
    28,521
    
    
    
    28,5212,471,899
    
    
    
    2,388,965Less accumulated depreciation
    
    
    (1,963,931
    )
    
    
    (1,689,837
    )$
    507,968
    
    
    $
    699,128
    December 31,2007
    
    
    2006InterCorp acquisition
    
    $
    4,119
    
    
    $
    4,119Talihina acquisition
    
    
    21,017
    
    
    
    20,107CWIS 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
    
    
    
    3,201,794Less accumulated amortization
    
    
    (3,177,151
    )
    
    
    (3,154,069
    )$
    25,553
    
    
    $
    47,725
   F-13




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##### Table of Contents



December 31,
    
    
    December 31,2007
    
    
    2006Notes payable to a bank, payable in
monthly installments of $8,768,
including interest of 9.5%, maturing
September 2008; collateralized by
property and equipment, accounts
receivable and Company common stock
owned by the founder and CEO of the
Company; guaranteed by the founder and
CEO of the Company; partially
guaranteed by the Small Business
Administration
    
    $
    
    
    
    $
    77,297Interim loan from a related party,
interest at 10%, requires payments
equal to 50% of the net proceeds
received by the Company from its
private placement of convertible
promissory notes, matured
December 2001; unsecured (1)
    
    
    320,000
    
    
    
    320,000Convertible promissory notes; interest
at 12.5% of face amount, payable
quarterly; these notes are unsecured
and are matured at December 31, 2006
(convertible into approximately
1,003,659 shares at December 31, 2007
and December 31, 2006) (2)
    
    
    510,636
    
    
    
    510,636Other notes payable
    
    
    
    
    
    
    5,000830,636
    
    
    
    912,933Less current portion
    
    
    545,436
    
    
    
    912,933$
    285,200
    
    
    $
    
 (1)
    
    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. At December 31, 2007, the outstanding
principal and interest of the interim loan was $536,197.(2)
    
    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.   F-14




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##### Table of Contents



Year ending December 312008
    
    $
    545,4362009
    
    
    34,8002010
    
    
    34,8002011
    
    
    34,8002012 and thereafter
    
    
    180,800$
    830,636
    Year ending December 312008
    
    $
    189,8532009
    
    
    196,3762010
    
    
    2011
    
    
    $
    386,229
    F-15




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##### Table of Contents



2007
    
    
    2006Income taxes at federal statutory rate
    
    $
    (120,000
    )
    
    $
    (163,000
    )State income taxes
    
    
    (15,000
    )
    
    
    (22,000
    )Change in valuation allowance
    
    
    (50,000
    )
    
    
    202,000Nondeductible expenses
    
    
    3,000
    
    
    
    2,000Other
    
    
    182,000
    
    
    
    (19,000
    )Total tax expense
    
    $
    
    
    
    $
    
  2007
    
    
    2006Deferred income tax assetsBasis difference in property and equipment and intangible assets
    
    $
    334,000
    
    
    $
    302,000Deferred revenue
    
    
    43,000
    
    
    
    42,000Net operating loss
    
    
    1,070,000
    
    
    
    1,037,000Deferred compensation and other
    
    
    259,000
    
    
    
    375,000Valuation allowance
    
    
    (1,706,000
    )
    
    
    (1,756,000
    )Net deferred income tax asset
    
    
    
    
    
    
    Change in valuation allowance
    
    $
    (50,000
    )
    
    $
    202,000
  Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 . Accounting for Income Taxes
   Common
Stock
    F-16




---



##### Table of Contents



Carrying Value
    
    
    Settlement Amount
    
    
    GainAccounts payable  related party
    
    $
    54,795
    
    
    $
    0
    
    
    $
    54,795
  Carrying Value
    
    
    Settlement Amount
    
    
    GainAccounts payable
    
    $
    21,380
    
    
    $
    1,455
    
    
    $
    19,925
       F-17




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit31.1
    
    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
    
    *