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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB/A

(Amendment No. 3)



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(Mark One)

|x | ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------



For the Fiscal Year ended December 31, 2003



OR



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



For the transition period from
 to



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AXESSTEL, INC.

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



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



6815 Flanders
Drive, Suite 210, San Diego, California 92121

(address of principal executive offices)



(858) 625-2100

(Registrants telephone number, including area code)



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Securities registered under Section 12(b) of the Act:
None

Name of Each Exchange on Which to be so Registered: None

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



Common Stock

(Title of Class)



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



Check here if the disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form,
and no disclosure will be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-KSB or any amendment to this Form
10-KSB. ̈



State issuers revenues for its most recent fiscal year: $11,543,993.



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to
the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) As of March 25, 2004,
approximately $5.4 million.



As of October 5, 2004, there were
9,416,272 shares of our common stock issued and outstanding.



Transitional Small Business Disclosure format (check one):



 ̈Yes    x  No



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EXPLANATORY NOTE



This Amendment No. 3 to Form 10-KSB/A for Axesstel, Inc., a Nevada corporation (the Company), for the year ended
December 31, 2003 is being filed to amend and restate the items described below. The Companys Form 10-KSB was originally filed March 30, 2004, and was amended on April 19, 2004 (Amendment No. 1) and August 16, 2004 (Amendment No. 2). Based
upon an internal review of its application of generally accepted accounting principles, the Companys Audit Committee, in consultation with the Companys management and independent registered public accounting firms, determined to correct
the Companys method of accounting for capitalization of software development costs, the amortization of the Companys license purchased from Qualcomm Incorporated and certain other financial statement entries for stock options, employee
bonuses, goodwill impairment, and classifications among cost of goods sold, selling, general and administrative expenses and research and development. Certain corrections are also made to disclosures regarding agreements with Qualcomm, executive
compensation, fiscal year end option and warrant values, employment agreements and related party transactions.



This Amendment No. 3 amends Part I, Item 1, Description of Business, Part II, Item 6, Managements Discussion and Analysis, Part II, Item 5, Market
for Common Equity and Related Shareholder Matters, Part II, Item 7, Financial Statements, Part II, Item 8A, Controls and Procedures, Part III, Item 10, Executive Compensation, Part II, Item 12, Certain Relationships and Related Transactions, and
Part II, Item 13, Exhibits and Reports on Form 8-K for the following purposes:



| |  | To amend Part II, Item 7, Financial Statements, to restate the Companys Audited Consolidated Financial Statements as of December 31, 2003 and 2002 for the Consolidated Balance
Sheets; and for the years ended December 31, 2003 and 2002 for the Consolidated Statements of Operations and Comprehensive Income (Loss); the Consolidated Statements of Stockholders Equity and the Consolidated Statements of Cash Flows, and the
related Notes to Consolidated Financial Statements, as more fully described in Note 2 to the Consolidated Financial Statements;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To add to Part II, Item 7, Financial Statements, certain information concerning the restatement on the results of operations for the quarterly periods included in the years ended
December 31, 2003 and 2002, as restated;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To amend Part I, Item 1, Description of Business, and Part II, Item 7, Financial Statements, to correct certain disclosures regarding the Companys agreements with Qualcomm;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To amend Part I, Item 1, Description of Business, Part II, Item 5, Market for Common Equity and Related Shareholder Matters, and Part II, Item 6, Managements Discussion and
Analysis, to take into account the effects of the restatement;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To amend Part III, Item 10, Executive Compensation, and Part II, Item 12, Certain Relationships, to correct certain disclosures regarding executive compensation, fiscal year end
option and warrant values, employment agreements and related party transactions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To amend Part II, Item 13, Exhibits and Reports on Form 8-K, to add an additional plan of acquisition, reorganization, arrangement, liquidation or succession; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | To amend Part II, Item 8A, Controls and Procedures, to reflect the matters discussed above.
| | - | -------------------------------------------------------------------------------------------



The effects of this restatement to the December 31, 2003, and 2002 Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) are summarized below:



|                                         |  |                       |            |   |             |   |            |                       |  |             |           |  |   |          
|---------------------------------------- |  | --------------------- | ---------- | - | ----------- | - | ---------- | --------------------- |  | ----------- | --------- |  | - | ---------
|                                         |  | 2003                  |            |   | 2002       
|                                         |  | As previouslyreported |            |   | As restated |   |            | As previouslyreported |  | As restated
|Net revenues                             |  | $                     | 11,375,993 |   |             | $ | 11,543,993 |                       |  | $           | 8,086,787 |  | $ | 7,918,787
|Income (loss) before taxes               |  |                       | (2,991,181 | ) |             |   | (3,876,001 | )                     |  |             | 879,357   |  |   | 259,401  
|Net income (loss)                        |  |                       | (2,180,006 | ) |             |   | (2,609,271 | )                     |  |             | 635,626   |  |   | 55,265   
|Basic earnings (loss) per common share   |  | $                     | (0.34      | ) |             | $ | (0.41      | )                     |  | $           | 0.09      |  | $ | 0.01     
|Diluted earnings (loss) per common share |  | $                     | (0.34      | ) |             | $ | (0.41      | )                     |  | $           | 0.06      |  | $ | 0.01     



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This Form 10-KSB/A sets forth the complete text of each item of Form 10-KSB listed above, and for
convenience of the reader, also repeats the complete text of each item of Form 10-KSB which has not been amended. This Form 10-KSB/A also includes as Exhibits 31.1, 31.2 and 32.1 new certifications by the Chief Executive Officer and Chief Financial
Officer.



In order to preserve the nature and character of the
disclosures set forth in such items as originally filed, this Amendment No. 3 does not reflect events occurring after the filing of the original Form 10-KSB on March 30, 2004, with respect to Parts I and II and Item 13 of Part III, or events
occurring after the April 21, 2004 filing date of the Companys definitive proxy statement incorporated by reference in the original Form 10-KSB, with respect to Items 9-12 and 14 of Part III, except to reflect the revisions as described above.
Accordingly, this Form 10-KSB/A should be read in conjunction with the Companys filings made subsequent to the filing of the original Form 10-KSB, including any amendments to those filings. In that regard, the Company will be amending its
Forms 10-QSB/A for each of the quarters ended June 30, 2004 and March 31, 2004, to reflect restated financial results and other matters related to the restatement discussed above.



Additional details regarding the restatement is included in Note 2 to the Condensed Consolidated Financial Statements
included in Part II, Item 7, Financial Statements, and in Part II, Item 6, Managements Discussion and Analysis.



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TABLE OF CONTENTS



|         |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|Part I   |  |                                                                                                |  |   
|         |  |                                                                                               
|Item 1.  |  | Description of Business                                                                        |  | 1 
|         |  |                                                                                               
|Item 2.  |  | Description of Property                                                                        |  | 14
|         |  |                                                                                               
|Item 3.  |  | Legal Proceedings                                                                              |  | 14
|         |  |                                                                                               
|Item 4.  |  | Submission of Matters to a Vote of Shareholders                                                |  | 14
|         |  |                                                                                               
|Part II  |  |                                                                                                |  |   
|         |  |                                                                                               
|Item 5.  |  | Market for Common Equity and Related Shareholder Matters                                       |  | 15
|         |  |                                                                                               
|Item 6.  |  | Managements Discussion and Analysis                                                           |  | 16
|         |  |                                                                                               
|Item 7.  |  | Financial Statements and Supplementary Data                                                    |  | 23
|         |  |                                                                                               
|Item 8.  |  | Changes in and Disagreements With Accountants                                                  |  | 52
|         |  |                                                                                               
|Item 8A. |  | Controls and Procedures                                                                        |  | 53
|         |  |                                                                                               
|Part III |  |                                                                                                |  |   
|         |  |                                                                                               
|Item 9.  |  | Directors and Executive Officers of Axesstel                                                   |  | 56
|         |  |                                                                                               
|Item 10. |  | Executive Compensation                                                                         |  | 59
|         |  |                                                                                               
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 62
|         |  |                                                                                               
|Item 12. |  | Certain Relationships and Related Transactions                                                 |  | 63
|         |  |                                                                                               
|Item 13. |  | Exhibits and Reports on Form 8-K                                                               |  | 64
|         |  |                                                                                               
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 65



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





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PART I



ITEM 1. DESCRIPTION OF BUSINESS



Company
Structure.



Axesstel, Inc., a California corporation
(Axesstel California), was founded by Mike HP Kwon. Axesstel California was incorporated in California in July, 2000 and since its inception has focused on developing, designing, manufacturing and marketing carrier-grade subscriber
terminals such as fixed wireless telephones, wireless hybrid products and enhanced wireless devices for the telecommunications market, as well as the performance of engineering services to network operator-based customers.



On August 31, 2002, Axesstel California was acquired by Miracom Industries,
Inc., a Nevada corporation (Miracom), pursuant to a Corporate Combination Agreement under which Miracom issued to the former shareholders of Axesstel California approximately 5.6 million shares of its common stock in exchange for the
assignment of approximately 98% of the issued and outstanding capital stock of Axesstel California (at an exchange rate of .302591758 shares of Miracom common stock for one share of Axesstel California common stock). In connection with this
acquisition, Miracom also assumed all of Axesstel Californias outstanding options and warrants, which were adjusted in accordance with the exchange ratio. Miracom assumed options exercisable for 2,052,761 shares of stock and warrants
exercisable for 2,333,038 shares of stock.



Immediately prior
to the acquisition, Miracom effectuated a one-for-twenty nine reverse stock split of its outstanding shares of common stock; and as a result, the former shareholders of Axesstel California held approximately 95% of Miracoms common stock after
the issuance of shares in the acquisition. All share numbers and per share prices in this report give effect to the reverse split. In September 2002, Miracom changed its name to Axesstel, Inc. and adopted the business plan of Axesstel California as
its exclusive business. At the time of the acquisition, Mr. Kwon owned 41.9% of the outstanding shares of Axesstel California. TBK, ADDCOM, and Qualcomm, Inc. were also principal stockholders of Axesstel California, owning 13.1%, 10.9% and 10.9%,
respectively, of the outstanding shares of Axesstel California at that time.



Axesstel California established Axesstel Korea, a wholly-owned subsidiary corporation organized under the laws of Korea in July 2000 and established a branch office in Korea in July 2002 to engage in research and
development activities and to outsource the manufacture of telecommunications products and parts.



In December 2002, in order to accelerate technology development and productivity, we acquired Entatel, Ltd., a Korea-based company, mainly engaged in
developing, manufacturing and selling telecommunication products pursuant to a stock purchase agreement. The agreement was consummated in early 2003. In April 2003, Entatel was re-named Axesstel R&D Center, Ltd.



Our Business.



Axesstel, headquartered in San Diego, California, is comprised of two groups: a San Diego-based organization and a
Korea-based development and design facility. The San Diego office is chiefly composed of marketing, sales, operations, general research, finance and administration. It is responsible for all customer-facing activities, such as marketing
communications, product planning, product management and customer support, along with sales and business development activities on a worldwide basis.



From San Diego, Axesstel directs its global partners and business activities. Axesstels products are based upon Qualcomms Code Division
Multiple Access, or CDMA, technology, which allows Axesstel to focus its sales resources and efforts exclusively on CDMA operators worldwide. The territories currently targeted by Axesstel include North America, Latin America, the Caribbean, Africa,
Eastern Europe, and Asia (with particular emphasis on India, Pakistan and China).



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The Axesstel Korea office is entirely dedicated to the design and production of advanced CDMA wireless products for Axesstel. This office, located in Seoul, South Korea, takes advantage of Koreas expert
development, low-cost manufacturing and high-quality engineering talent. Recently expanded to approximately 60 engineers, through the acquisition of Entatel, a wireless R&D company, this office focuses on terminal design activities and leverages
Koreas leadership role in CDMA product development. Our Korean office is conveniently located to a variety of strategic manufacturing and production partners, which allows Axesstel to load-balance its production and optimize its orders, based
upon customer demand, quick turn-around, low-volume production and scheduled large-volume production runs.



Products.



Axesstels product and development activities fall into three primary categories: Wireless Local Loop (WLL) subscriber products, wireless hybrid products, and strategic Original Design & Manufacturing (ODM) product development.



The first category, Axesstels WLL products based upon
CDMA technology, represent a mature technology and are primarily directed towards developing countriesareas where a traditional copper-based telephony infrastructure is insufficient or impractical. We estimate that only 20% of the world
population has access to basic telephony. Product portfolio includes a variety of fixed wireless desktop phones and data terminals.



During 2003, Axesstel shipped products based on CDMAone (IS-95A/B) protocol standard. Axesstel invested engineering resources in the design and
development of CDMA2000 (1xRTT) products in 2003, and expects to begin commercial shipping of the upgraded version in 2004.



As predicted, the telecom infrastructure market appears to be recovering, and Axesstel sees great potential in its new line of CDMA2000 1x based products
and its CDMA2000 1xEV-DO data terminals and modems. For the first time, 1xEV-DO will provide users with broadband speeds (up to 2.4 Mbps) wirelessly in wide-area coverage. This third generation, or 3G, technology is just now being deployed
commercially and in trials. Preliminary results are extremely positive, as evidenced by Verizon Wireless committing to a national 1xEV-DO network deployment as well as other wireless carriers planning to incorporate Qualcomms CDMA2000 1xEV-DO
as their 3G data standard.



Of importance to Axesstels
distribution and marketing strategy, 1xEV-DO is particularly advantageous in regions as an alternative to wired broadband (e.g., DSL and cable) and in regions where wired broadband access is simply unavailable despite the need and demand for such
services. Axesstel is working closely with carriers who are deploying 1xEV-DO in order to develop the 3G terminal that best meets their commercial needs.



Axesstels hybrid solutions, such as the product Axesstel developed for Verizons landline operations (VerizonAvenue) was among the first to
integrate CDMA20001x phone, GPSone (E911) and DSS 900 MHz cordless in a single handset. In this multi-million dollar, fully-funded development project, Axesstel successfully completed the development of the handset exclusively for Verizon. At this
time, Verizon has officially placed the service launch on hold. No further information pertaining to the product announcement is available.



Axesstel continues to define and develop the next generation of hybrid product solutions which will have the capability to integrate advanced technologies
such as Wi-FI (802.11), VoIP (Voice Over Internet Protocol) and other carrier-grade standards. Axesstel is exploring a variety of alternatives for the development and marketing of new hybrid products.



The final business category, strategic ODM development, provided the majority
of our revenue in fiscal year 2003. Axesstel has used the funding from ODM projects in the past to support the development of its WLL products. However, Axesstel believes that the ODM market is experiencing consolidation and rapid changes



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making it less attractive to Axesstel. Therefore, management has elected to focus Axesstels resources on the WLL and hybrid businesses as they are expected to generate the bulk of our revenues in 2004. This shift in focus aligns our
marketing resources and engineering capabilities behind our core product business units.



Distribution Methods and Inventory.



Axesstel manages and conducts its own sales directly to CDMA operators and ODM customers worldwide. All of Axesstels annual sales for 2003 were generated through its own sales and marketing efforts.



During 2003, Axesstel was able to improve its reach by opening new
customer accounts, participating in large telecommunications operators bids and strengthening its sales alliance network by partnering selectively with leading infrastructure vendors. Axesstel expects to see solid results from those efforts in
2004. Where and when necessary, Axesstel partners with in-country logistics partners to facilitate import and manage support services. Axesstel is in the process of exploring partnerships whereby it will gain local in-country know-how, sales access
and support, especially in China and India, to help ensure a safe and effective entry into new markets.



Due to Axesstels product customization and lower risk business model, it does not engage in financing terms or build up of inventory, thereby
largely removing product and inventory-related obsolescence exposure. Axesstel does, however, expend considerable amounts on new product development. Axesstel will continue to invest in internal direct sales resources and distribution alliance
partners. As Axesstels business increases it expects to secure larger bank and strategic credit lines to reduce inventory lead times and component sourcing requirements.



Axesstel has earned ISO9001:2000 certification through its quality and control processes implemented by the Axesstel R&D
Center, Ltd.



Marketing Strategy.



We believe that Axesstel is the only manufacturer focused exclusively on WLL
CDMA products in North America which has full in-house engineering (from design through development and certification) and is a QUALCOMM CDMA licensee.



Axesstel products are currently deployed in 12 countries worldwide and in service with more than 14 carriers. In addition, there are samples being
actively tested in another 16 countries.



In developing
countries, Qualcomms CDMA standard is making significant headway in becoming the wireless infrastructure of choice, not only for mobile applications, but also for basic voice and data telephone services. This is particularly true in markets
that are adopting 2.5 generation and 3rd generation wireless standards, given the high capacity and low cost of deployment of CDMA2000 over competing standards such as GSM/GPRS and TDMA.



Although no assurances can be given, as next-generation wireless networks are deployed, Axesstel expects to expand its
Qualcomm licensing agreement to include CDMA2000 1xRTT and CDMA2000 1xEV-DO products and to supplement its current WLL product line with products based upon the CDMA2000 standard by the first half of 2004.



As Axesstel broadens its product portfolio from simple WLL desktop phones to
include wireless broadband data modems and hybrid solutions, it is also expanding its reach and distribution in select and targeted markets. Axesstel is committed to the WLL market and to addressing the needs of wireless carriers as they deploy
CDMA2000 networks and is leveraging its partnerships and relationships with wireless infrastructure manufacturers to offer innovative and turnkey solutions.



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The hybrid market is gaining interest as new technologies mature and carriers attempt to combine and leverage multiple network assets (both wireless and wireline) as evidenced by the Verizon contract. Axesstel is
committed to identifying product and customer opportunities.



Customers.



Critical to Axesstels strategy and long-term
success is its customer base. Axesstel focused in 2003 on developing large anchor accounts and plans to expand those activities in 2004. We believe CDMA is becoming the standard for fixed wireless and WLL applications especially in green-field
operations and developing regions of the world where WLL is essential to basic telephony access. In the year ended December 31, 2003, three customers accounted for an aggregate of 98% of our net sales. However, due to a shift in our business focus
towards WLL, we anticipate that the percentage of our revenues from these customers will decrease significantly. Our new customers related to the WLL business are expected to be limited to a few telecommunications carriers, so our dependence on a
limited number of customers is expected to continue.



Axesstel
reported a number of new contracts in 2003 including a substantial commitment from Telecard of Pakistan. Axesstel expects to announce new significant carrier partnerships in 2004 based on the sales pipeline that is being developed today.



Competition.



The telecommunication market is extremely competitive and is characterized by rapid technological change, new product
development, product obsolescence and evolving industry standards. In addition, price competition is intense and the market prices and margins of our products decline as competitors begin making similar products. Axesstel competes mainly in the WLL
segment of the telecommunications market. Our primary competitors are large, well-funded companies such as LG, Telular, Westech, and Pantech-Curitel.



The make up of our competitive landscape is due in part to the nascent stage of the WLL industry and the high degree of customization required to serve
each customer. Accordingly, other large telecommunications companies such as Samsung, Nokia and Motorola have elected to focus their resources on the traditional mass market mobile phone business. This dynamic has allowed Axesstel to gain a solid
foothold in the WLL market.



Supply Chain.



Axesstel maintains close relationships with our component supply chain
partners. Axesstel utilizes a variety of component agents/brokers to source the majority of our components, which averages between 200-300 items per phone unit.



Axesstel is developing a dual-sourcing strategy for key components such as memory, LCD, and plastics. The only exception to this program is the chipset
device (Qualcomms Mobile Subscriber Modem), which is sole-sourced directly from Qualcomm. Presently, there is a worldwide shortage for these chipsets due to high overall demand of CDMA based products. At times, this shortage has caused delays
in Axesstel receiving this product and has affected our production schedules. This constraint is being addressed by linking our customer forecasts and manufacturing capacity with Qualcomms chipset supply. In addition, as one of Axesstels
significant stockholders, Qualcomm has expressed a willingness to work with us in meeting our future sourcing needs. If Axesstel experiences significant delays in the future, it will severely impact our operations and detrimentally affect our
ability to produce and deliver product to our customers.



Research and
Development.



The wireless telecommunications industry is
characterized by rapid technological change, requiring a continuous effort to enhance and develop product. Our research and development team was greatly enhanced



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during the past year as we focused additional resources for the development of our WLL products. Research and development expenses for 2003 and 2002 were approximately $2.3 million and $.8 million, respectively.



Intellectual Property.



We operate in an industry where innovations, investment in new ideas and protection of resulting intellectual property
rights are important to success. We rely on a variety of intellectual property protections for our products and technologies, including patent, copyright, trademark and trade secret laws, and contractual obligations, and we pursue a policy of
vigorously enforcing such rights. In 2003, we filed five non-provisional applications; in 2004, we filed an additional five provisional patent applications. International applications corresponding to the United States non-provisional applications
are currently pending. We will continue to apply for intellectual property protection and licensing opportunities as appropriate.



We entered into a license agreement with Qualcomm Incorporated, a significant stockholder, whereby we licensed Qualcomms CDMA technology for use in
our products. We have entered into a license agreement with Qualcomm Incorporated, under which we were granted a worldwide nonexclusive license to Qualcomms CDMA technology to make, sell and lease fixed wireless terminal CDMA based products.
In addition to the license fees paid to Qualcomm, Qualcomm was issued shares of Series B Preferred Stock of Axesstel California, which were converted into shares of our common stock in connection with our acquisition of Axesstel California. The
License Agreement may be terminated by Qualcomm upon an uncured material breach of the License Agreement by us. We have also entered into various software agreements with Qualcomm to license its software to use with our products that incorporate
Qualcomms CDMA technology. These agreements are effective so long as the license agreement is effective. We intend to purchase additional software from Qualcomm that would be required for our newly proposed products.



Our policy is to enter into nondisclosure agreements with each employee and
consultant or third party to whom any of our proprietary information is disclosed. These agreements prohibit the disclosure of confidential information to others, both during and subsequent to employment or the duration of the working relationship.
These agreements could however be breached and we may not have adequate remedies for any breach. Our procedures for protecting trade secrets may not prevent them from becoming known or independently developed by competitors.



Government Regulations.



Our products are incorporated into commercial wireless communications systems that are subject to regulation domestically by
the FCC and internationally by other government agencies. Although the equipment operators (and not Axesstel) are usually responsible for compliance with these regulations, regulatory changes, including changes in the allocation of available
frequency spectrum, could negatively affect our business by restricting development efforts by our customers, making current products obsolete or increasing the opportunity for additional competition. In addition, the increasing demand for wireless
telecommunications has exerted pressure on regulatory bodies worldwide to adopt new standards for these products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental
approval process have in the past caused and may in the future cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers.



Axesstel is also subject to a variety of local, state, federal and foreign governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. The failure to comply with current or future regulations could result in the imposition of substantial fines
on us, suspension of production, alteration of our manufacturing processes or cessation of operations.



It is Axesstels belief that we operate our business in material compliance with applicable government regulations.



Risk Factors Relating To Our Business.



In addition to the other information in this report or incorporated in this
report by reference, you should consider carefully the following factors in evaluating us and our business before purchasing our common stock:



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Our success depends on the growth and availability of wireless telecommunications services in the markets we target.



Currently, some of our largest potential markets are developing countries and regions where the demand for basic telephone service has started to grow
significantly only in recent years, such as India, Pakistan, China, Central and South America, Eastern Europe and North Africa. In these countries and regions, the relatively low cost of developing and constructing wireless communications
infrastructure as compared to traditional wireline infrastructure may make wireless an attractive alternative to wireline. Our success depends to a large extent on the continued growth and increased availability of cellular and other wireless
telecommunications services in these countries and regions and the availability of such services at competitive prices.



However, these countries and regions may decline to construct wireless systems, or construction may be delayed, for a variety of reasons, including
government regulation, general economic factors, the availability of funding and other competitive factors. These factors may also limit or delay purchases of equipment used to provide telephone services, such as our products. If system construction
and equipment purchases in these countries are not made or are delayed, the demand for our products in these countries will be limited or delayed. Similarly, if the use of wireless telecommunications services in these countries and regions is not
cost effective, or if our target customers are unable to afford our products or services, the demand for our products or services may be limited, which could materially and adversely affect our business operations and financial condition.



While wireless telecommunication systems in the United States
are more developed than in many other markets that we target, continued expansion of wireless infrastructure and demand for cellular fixed wireless products in the United States is also important for the growth of our business. As is the case with
conditions in other target markets, there is no guarantee that wireless telecommunications systems will continue to develop and if our potential customers in the U.S. cannot afford our products or services, the demand for our products or services
may be limited, which could materially and adversely affect our business operations and financial condition.



Unfavorable economic events in our target markets could lead to lower sales of our products.



Sales of our products depend on the growth of the cellular fixed wireless telecommunications industry in general and increased demand for Cellular Fixed
Wireless products worldwide. Based upon observed trends, we believe that the market for Cellular Fixed Wireless terminals and cellular desktop phones (collectively Fixed Wireless Terminals or FWTs) will experience substantial
growth over the next five years. We have identified significant growth opportunities in India, Pakistan, China, Central and South America, Eastern Europe and North Africa. Each of these markets will develop at a different pace, and the sales cycle
for these regions are likely to be several months or quarters.



In addition, unfavorable general economic conditions in any market will have a negative effect on sales in that market. Because economic conditions in one region often affect conditions globally, unfavorable general economic conditions in
one market or region might result in damage to industry growth and demand in other markets as well. In connection with the recent and present global economic conditions and the war on terror, our prospects for continued growth have been accordingly
reduced in the near term.



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



We believe that our success depends, in part, on our ability to obtain and enforce intellectual property protection for our technology. It is possible that any of our existing patents, or any patents that we may
obtain in the future, will expire, be challenged, invalidated or circumvented. If we lose or cannot enforce patent protection for our technology and products, our competitive position will be significantly harmed because it would be much easier for
competitors to sell products similar to ours. Alternatively, a competitor may independently develop



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and/or patent technologies that are substantially equivalent to or superior to our technology. If this happens, our patents will not provide protection and our competitive position will be significantly harmed.



As we expand our product line or develop new uses for our products, these
products or uses may be outside the protection provided by our current patents and other intellectual property rights. In addition, if we develop new products or enhancements to existing products we cannot assure you that we will be able to obtain
patents to protect them. Even if we do get patents for new products, these patents may not provide meaningful protection.



In some countries outside of the United States, patent protection is not available. Moreover, some countries that do allow registration of patents do not
provide meaningful redress for violations of patents. As a result, protecting intellectual property in these countries is difficult. Although we believe our products are superior to those of competitors, it is easier for competitors to sell products
similar to ours in countries where we do not have meaningful patent protection. This could result in a loss of potential sales.



The intense competition in the cellular fixed wireless telecommunications industry could prevent us from achieving or sustaining profitability.



Recently, we have seen an increase in the number of competitors using
docking station products. A docking station is an accessory product that enables a user with a cellular phone to easily connect it to phone(s), a fax machine or a computer modem, and therefore, simulate the functionality of certain of our products.
Docking Station Products have a competitive advantage from a pricing standpoint because the user already owns a cellular phone.



The market for cellular fixed wireless products is extremely competitive, and we may not be able to successfully compete with other companies already in
the market and new companies that enter the market. The major national and international companies in this market are:



| |  | Telular Corporation;
| | - | --------------------



| |  | Westech Korea, Inc.; and
| | - | ------------------------



| |  | LG Electronics.
| | - | ---------------



Many of our competitors have greater resources than us in many areas critical to succeeding in the industry, including:



| |  | financial resources;
| | - | --------------------



| |  | manufacturing capabilities;
| | - | ---------------------------



| |  | name recognition;
| | - | -----------------



| |  | research and development capabilities;
| | - | --------------------------------------



| |  | technical expertise;
| | - | --------------------



| |  | sales and marketing staffs; and
| | - | -------------------------------



| |  | distribution channels.
| | - | ----------------------



Based in part on these advantages, our competitors may succeed in developing products that are more effective, desirable and/or cheaper than ours or that
render our products and technology obsolete. They also may have better and more efficient marketing and distribution structures than we do. In addition, the market for our products is driven by large OEMs with significant capital resources, certain
of which have manufactured similar products in the past. If these OEMs again decide to make the products themselves, they would be able to dedicate significantly more resources towards exploiting market opportunities than we can dedicate, and this
could materially and adversely affect our sales.



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If our products are not compatible with existing technologies, our growth may be limited.



Our ability to increase our sales is dependent on our products being compatible with the technologies in place or being developed in our targeted markets.
Many developing countries and regions have not yet developed telecommunications systems, including wireless systems, or updated their existing systems. Imbedded telecommunications systems may be outdated and may not be able to support our products.
If our products do not work with or are not compatible with the telecommunications systems available to our potential customers, our products may not gain acceptance and our growth will be limited.



We may not be able to obtain the funding we need to operate our business.



Our ability to continue operations depends on having adequate funds to
cover our expenses. Our current operating plan provides for significant expenditures for research and development of new products, development of new markets for our products, and marketing programs for our products. Based on our current operating
plan, we believe that our existing capital resources will allow us to maintain our current and planned operations.



However, we caution you that our cash requirements may vary and are difficult to predict. We target markets in developing countries for product sales, and
the nature of these markets makes it difficult to predict revenues. Events that we cannot anticipate, economic and political factors, and our customers ability to execute their plans, may result in order cancellations which may increase our
capital needs. Thus, our actual cash requirements may be greater than we currently anticipate.



Accordingly, we may not have adequate funds to cover our expenses. If this were the case, we would need to find other financing sources to provide the necessary funds, such as public or private sales of our equity or
debt securities. We cannot assure you that if we needed additional funds we would be able to obtain them on terms we find acceptable. If we could not obtain the necessary financing we would be forced to cut back operations, which might include the
scaling back or elimination of research and development programs.



Our
revenues may increase or decrease significantly due to our reliance on a limited number of customers for most of our product sales.



We have traditionally relied on a limited number of customers for a substantial percentage of our net sales. In the year ended December 31, 2003, three
customers accounted for an aggregate of 98% of our net sales. However, due to the shift in our business focus towards WLL, we anticipate that the percentage of our revenues derived from these customers will decrease significantly.



We do anticipate that a substantial percentage of our revenues from our WLL
business will be derived from a limited number of large orders from telecommunications carriers in the countries and regions in which we intend to focus. The inability to obtain, the loss of or a significant reduction in, orders by such customers as
a result of competitive products, market conditions or other factors, would adversely impact our business, financial condition and results of operations. Furthermore, the concentration of our revenues in a limited number of large customers may cause
significant fluctuations in our future annual and quarterly operating results.



Our operating results may fluctuate greatly from quarter to quarter, which may cause the price of our common stock to be volatile.



Our quarterly operating results may fluctuate greatly due to numerous factors, including:



| |  | our anticipated reliance on large volume orders from only a few customers for most of our product sales;
| | - | --------------------------------------------------------------------------------------------------------



| |  | variations in our distribution channels;
| | - | ----------------------------------------



| |  | the mix of products we sell;
| | - | ----------------------------



| |  | general economic conditions in our target markets;
| | - | --------------------------------------------------



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| |  | the timing of final product approvals from any major distributor or end user;
| | - | -----------------------------------------------------------------------------



| |  | the timing of orders from and shipments to major customers;
| | - | -----------------------------------------------------------



| |  | the timing of new product introductions by us or our competitors;
| | - | -----------------------------------------------------------------



| |  | changes in the pricing policies of our suppliers;
| | - | -------------------------------------------------



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



| |  | the timing of personnel hirings;
| | - | --------------------------------



| |  | market acceptance of our new products or enhanced versions of our existing products; and
| | - | ----------------------------------------------------------------------------------------



| |  | our customers ability to obtain letters of credit to support orders.
| | - | ---------------------------------------------------------------------



These quarterly fluctuations may cause volatility in the price of our common stock.



Technology changes rapidly in our industry and our future success will depend on our ability to keep pace with these changes and meet the
needs of our customers.



The telecommunications equipment
industry is characterized by rapid technological advances, evolving industry standards, changing customer needs and frequent new product introductions and enhancements. The fixed wireless telecommunications industry also is experiencing significant
technological change. The introduction of products embodying new technologies and the emergence of new industry standards could render our existing products and technology obsolete and unmarketable.



To succeed, we must timely develop and market new products and enhancements
to existing products that keep pace with advancing technological developments and industry standards and that address the needs of customers. We may not be successful in developing and marketing new products and enhancements or we may experience
difficulties that prevent development of products and enhancements in a timely manner. The cost of buying additional licenses that are needed to develop new products or the cost of developing our own technologies may also be prohibitive or may
result in an increase in the price of our products. Such an increase could limit our ability to sell our products to customers and gain acceptance in the marketplace. In addition, our products may fail to meet the needs of the marketplace or achieve
market acceptance. Any of these circumstances would seriously harm our results and financial condition.



Our results depend on our ability to develop and introduce new products into existing and emerging markets and to reduce the costs to produce existing products.



The process of developing new technology is complex and uncertain, and if we
fail to accurately predict the changing needs of our customers and emerging technological trends, our results and financial condition may suffer. We must commit significant resources, including those contracted from third parties, to develop new
products before knowing whether our investments will result in products the market will accept.



The success of new products is dependent on several factors, including proper new product definition, component costs, timely completion and introduction
of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to
market in a timely manner, and achieve market acceptance of our products, or that products and technologies developed by others or new industry standards will not render our products or technologies obsolete or noncompetitive. Furthermore, we may
not successfully execute on new product opportunities because of technical hurdles that we or our contractors fail to overcome in a timely fashion. This could result in competitors providing a solution before we do, and loss of market share,
revenues and earnings.



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We have made significant investments in research and development for new products, services and technologies. Significant revenue from these investments may not be achieved for a number of years, if at all. Moreover,
these products and services may never be profitable, and even if they are profitable, operating margins for these businesses are not expected to be as high as the margins historically experienced for our other products.



We must devote substantial resources to research and development to remain competitive and
we may not have the resources to do so.



For us to be
competitive, we must continue to dedicate substantial resources to research and development of new products and enhancements of current and future products. We cannot assure you that we will have sufficient resources to fund the necessary research
and development or that our research and development efforts will be successful.



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



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



In order to succeed we must develop markets for our products and we may be unable to do so.



Our ability to achieve profitability depends on our ability to develop both domestic and international markets for our products and on our ability to gain
acceptance of our products by these markets. To date, we have only been able to devote limited resources towards our sales and marketing efforts. We cannot assure you that we will be able to devote additional resources to sales and marketing or that
we can develop adequate markets or generate enough sales to achieve and sustain profitability.



If our target customers are unable to afford our products, then our revenues may not grow as anticipated.



Our targeted geographic areas for expansion include third world and developing countries where the populations generally have limited financial resources.
Our ability to sell our products to customers in these regions depends in part on the ability of such potential customers to afford our products or to obtain and maintain the necessary credit to purchase our products. If our target customers do not
have the financial resources to purchase our products, or if they are unable to obtain and maintain credit to purchase our products, we may be unable to increase the sales of our products and our business and results of operations could be
materially and adversely impacted.



Sales cycles to major customers can be
long, which makes it difficult to forecast our results.



It typically takes us between three and six months to complete a sale to a major customer account, but it can take us up to a year or longer. It is therefore difficult to predict the quarter in which a particular sale will occur and to
forecast our sales. The period between our initial contact with a potential customer and its purchase of our products is relatively long due to several factors, including:



| |  | our need to educate potential customers about the uses, capabilities and benefits of our WLL terminals;
| | - | -------------------------------------------------------------------------------------------------------



| |  | the adoption of new technologies does not occur rapidly in our targeted geographic areas; and
| | - | ---------------------------------------------------------------------------------------------



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| |  | our targeted customers may have limited financial resources to allocate towards new technologies.
| | - | -------------------------------------------------------------------------------------------------



Any delay or failure to complete sales in a particular quarter could reduce our revenues in that quarter. If our sales cycle
unexpectedly lengthens in general or for one or more large orders, it would adversely affect the timing of our revenues.



Our dependence on third parties for our product distribution may limit our ability to generate revenue if these parties do not actively promote our products.



We utilize third parties such as resellers, distributors
and makers of complementary technology to complement our full-time sales staff in promoting sales of our products. If these third parties do not actively promote our products, our ability to generate revenue may be limited. We cannot control the
amount and timing of resources that these third parties devote to marketing activities on our behalf. Some of these business relationships are formalized in agreements which can be terminated with little or no notice and may be subject to amendment.
We also may not be able to negotiate acceptable distribution relationships in the future and cannot predict whether current or future distribution relationships will be successful.



Failure of critical suppliers to deliver sufficient quantities of parts in a timely and cost-effective manner could adversely impact our
operations.



We use numerous vendors to supply parts,
components and subassemblies for the manufacture of our products. It is not always possible to maintain multiple qualified suppliers for all of our parts, components and subassemblies. As a result, certain key parts, such as chipsets, may be
available only from a single supplier or a limited number of suppliers. On occasion, we have experienced problems in obtaining adequate and reliable quantities of various parts and components from certain key suppliers, which limits our ability to
manufacture our products. Our results of operations may be materially and adversely impacted if we cannot obtain sufficient parts to meet our requirements in a timely and cost effective manner. We presently are experiencing a delay in receiving the
necessary chips from Qualcomm because of the excess of demand over supply Qualcomm is experiencing. This is reducing and may continue to reduce our ability to meet customer demand for our product, potentially leading them to buy from other
suppliers.



We rely on third parties to manufacture OEM products and others
to manufacture components for our products.



We rely on
subcontractors, including one of our investors, to manufacture OEM products and product components, such as cellular transceivers and radio modules, and to assemble our products, such as cellular fixed wireless terminals. In the past, we experienced
delays in receiving subcontracted components and assembled products that resulted in delays in our ability to deliver products. We may experience similar delays in the future.



Our inability to obtain sufficient quantities of raw materials and key components when required, or to develop alternative
sources of supply if required in the future, could result in delays or reductions in product shipments and increased costs for affected parts. In addition, production capacity restraints at our subcontractors facilities could prevent us from
meeting production obligations. Delays in product deliveries for any reason or our failure to deliver products could significantly harm customer relationships and result in the loss of potential sales and subject us to substantial penalties.



Quality control problems could harm our sales.



We believe that our products currently meet high standards of quality. We
have instituted quality-monitoring procedures and we are ISO-9001 compliant. All of our major subcontractors also have quality control procedures in place and are ISO-9001 compliant. However, we and/or our subcontractors may experience quality
control problems in the future. If this occurs, the quality of our products could suffer, which could significantly harm product sales.



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If customers place orders to purchase customized products and are unable to complete the purchase, we may carry inventory which we are unable to sell.



In order to increase our sales, it may be necessary to customize our products for certain of our customers. The
customization of our products may result in completed products which are inoperable for or undesirable to other customers. Due to the financial and other resource limitations to which our targeted customers may be subject, there is a risk that our
orders may be cancelled without receipt of payment. If after a product is customized for a customer the order is cancelled, we may be unable to sell the customized product from our inventory and our revenues and results of operations may be
adversely affected.



We operate in developing markets, which may subject us
to volatile conditions not present in the United States.



Developing countries and regions are some of our largest potential markets. As we expand our operations in these countries, our business and performance could be negatively affected by a variety of factors and conditions that businesses
operating in the United States generally do not contend with, such as:



| |  | foreign currency exchange fluctuations and instability of foreign currencies;
| | - | -----------------------------------------------------------------------------



| |  | varying foreign governmental regulations and regulatory authority requirements;
| | - | -------------------------------------------------------------------------------



| |  | political or economic instability and volatility in particular countries or regions;
| | - | ------------------------------------------------------------------------------------



| |  | limited protection for intellectual property;
| | - | ---------------------------------------------



| |  | difficulties in staffing and managing international operations; and
| | - | -------------------------------------------------------------------



| |  | difficulties in collecting accounts receivable.
| | - | -----------------------------------------------



Our business has been exposed to risks due to civil and political unrest in third world countries such as Haiti. If civil and political conditions in
Haiti worsen, or if instability develops in other countries within our geographic focus, our operations and financial condition could be negatively affected. In addition, we have been exposed to and our business has been negatively affected by,
foreign currency fluctuations to which our customers have been subject. However, as our international operations grow, foreign exchange fluctuations and foreign currency inflation may pose greater risks for us and we may be required to develop and
implement additional strategies to manage these risks. If we are not successful in managing these risks, our business and financial condition could be seriously harmed.



We depend on attracting and retaining skilled employees, which may be difficult due to the competitive employment market.



If we lose any of our key, highly skilled technical, managerial and
marketing personnel due to the intense competition in the technology industry, our operations may suffer. As a result, our future success depends in part on our ability to identify, attract, retain and motivate such personnel. In particular, we have
experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our rapid growth and expansion. Competition for qualified engineers is intense, especially
in San Diego where our headquarters are located. Engineers are attracted towards opportunities to work on the newest technologies. If we are unable to provide such opportunities, or if we lose the services of a significant number of our engineers
and we cannot hire and integrate additional engineers, it could disrupt our ability to develop our products and implement our business strategy.



Sales of common stock issuable on the exercise of outstanding options and warrants may depress the price of the common stock.



As of December 31, 2003, there were options and warrants granted to our
employees, directors and consultants to purchase approximately 6.2 million shares of the Companys common stock, of which options and warrants for approximately 5.4 million shares were exercisable at that time. The exercise prices for the



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exercisable options and warrants range from $.07 to $3.50 per share, with a weighted average exercise price of $0.38. Options to purchase the remaining approximately 805,000 shares will become exercisable over the next three years. The
exercise prices for the options that are not yet exercisable have a weighted average exercise price of $1.45. In the future we may issue additional shares of common stock, convertible securities, options and warrants. The issuance of shares of
common stock issuable upon the exercise of convertible securities, options or warrants could cause substantial dilution to holders of common stock. It also could negatively affect the terms on which we could obtain equity financing.



There is a limited public market for our common stock. As a result, our stockholders may
be unable to readily sell their common stock or may experience higher transaction costs resulting from pricing inefficiencies.



Historically, there has been a limited public market for the shares of our common stock. Our common stock is currently quoted on the OTC Electronic
Bulletin Board and investors may find it more difficult to obtain accurate price quotations of our common stock than they would if the stock were quoted on the Nasdaq SmallCap Market. This means that our investors may not be able to sell their stock
readily and there may be inefficiencies in the pricing of our stock that could result in broader spreads between the bid and the ask prices.



Since our common stock is listed on the OTC Electronic Bulletin Board, which can be a volatile market, our investors may realize a loss on the disposition of their
shares.



Our common stock is quoted on the OTC Electronic
Bulletin Board, which is a more limited trading market than the Nasdaq SmallCap Market. Timely and accurate quotations of the price of our common stock may not always be available and trading volume in this market is relatively small. Consequently,
the activity of trading only a few shares may affect the market and result in wide swings in price and in volume. The price of our common stock may fall below the price at which an investor purchased shares, and an investor may receive less than the
amount invested if the investor sells its shares. Our shares of common stock may be subject to sudden and large falls in value, and an investor could experience the loss of the investors entire investment.



If the market price of our common stock continues to be volatile, the value of our stock
may decline.



The market price of our common stock has
been, and may continue to be, volatile, which means the value of your Axesstel stock may fluctuate. Factors that are difficult to predict and which contribute to volatility and may have other significant impacts on the market price of our common
stock include:



| |  | quarterly revenue,
| | - | ------------------



| |  | statements and ratings by financial analysts,
| | - | ---------------------------------------------



| |  | overall market performance, and
| | - | -------------------------------



| |  | announcements by our competitors concerning new product developments.
| | - | ---------------------------------------------------------------------



Nevada law and our charter documents may inhibit a potential takeover bid that would be beneficial to common stockholders.



Nevada law and our articles of incorporation may inhibit potential
acquisition bids for our common stock at a price greater than the market price of the common stock. We are subject to the anti-takeover provisions of the Nevada Revised Statutes, which could delay, deter or prevent a change of control of the Company
or make this type of transaction more difficult.



Employees.



As of December 31, 2003, Axesstel had approximately 80 employees in the
United States and Korea, approximately 60 of which are based in Korea, primarily for product design and development of software, mechanical, and hardware requirements within our products.



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ITEM 2. DESCRIPTION OF PROPERTY



We own no real property. The following is a summary of our property and related lease obligations:



Axesstel entered into a 60-month lease contract (from December 1, 2002 to November 30, 2006) for approximately 5,500 square feet of office space located
at 6305 Lusk Blvd., San Diego, CA 92121 with Stanley R. and Elise C. Smith Trust on October 15, 2001. The security deposit was $9,400. The monthly payment for 2003 was $9,682 which was subsequently adjusted to $9,972 beginning December 2003.



Axesstel also entered into additional sublease agreement with
Intel Corporation for approximately 2,600 square feet of office space located at 15373 Innovation Drive, Suite 200, San Diego, CA 92128. The lease is from November 5, 2003 to August 31, 2004. The monthly payment is $3,886.



Axesstel amended the lease in its Seoul offices as of February 11, 2003.
Axesstel entered into a contract to lease approximately 17,000 square feet of office space located at Ace Techno Tower 5-Cha, Suite # 706, 707, 708, 709, and 710 with Nasco, Inc. for two years (until February 10, 2005). The security deposit was
approximately $140,000 with monthly payments of approximately $14,000.



Each of our facilities are covered by appropriate levels of insurance and we believe them to be suitable for their respective uses and adequate for our present needs.



ITEM 3. LEGAL PROCEEDINGS



There
are no legal proceedings pending or, to our knowledge, threatened as of March 30, 2004.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS



None.



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PART II



ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS



Through December 31, 2003, the Companys common stock has traded on the over-the-counter electronic bulletin board in the United States, under the trading symbol AXES. Trading volume and high/low/bid
prices for the past two years are disclosed in the following table, as reported by Yahoo Finance. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|               |  | High |      | Low
|Year 2002      |  |      |      |     |   |     
|First Quarter  |  | $    | 1.85 |     | $ | 0.80
|Second Quarter |  |      | 2.25 |     |   | 0.80
|Third Quarter  |  |      | 1.05 |     |   | 0.55
|Fourth Quarter |  |      | 3.00 |     |   | 0.90
|               |  |     
|Year 2003      |  |      |      |     |   |     
|First Quarter  |  | $    | 3.50 |     | $ | 1.20
|Second Quarter |  |      | 4.65 |     |   | 1.10
|Third Quarter  |  |      | 4.52 |     |   | 2.00
|Fourth Quarter |  |      | 3.25 |     |   | 1.55



On December 31, 2003,
the shareholders list for the Companys common shares showed approximately 250 registered shareholders and 6,699,168 shares issued and outstanding.



The Company has not declared any dividends on its common stock since its incorporation and does not anticipate that it will do so in the foreseeable
future. The present policy of the company is to retain future earnings for use in its operations and expansion of its business.



Common Stock-2003 Activity



In May 2003, the Company issued 92,500 shares of the Companys common stock at the price of $2.00 per share to accredited individuals and entities
for cash totaling $185,000. This issuance was made in reliance on Section 4(2) of the Securities Act.



In May 2003, the Company issued 300,000 shares (total value: $675,000) of the Companys common stock for the acquisition of one hundred percent of
the issued and outstanding capital stock of Entatel, pursuant to a Stock Purchase Agreement made in December 2002. This issuance was made in reliance on Section 4(2) of the Securities Act.



In May 2003, the Company issued 10,000 shares of the Companys common
stock valued at $1.89 per share for legal services. This issuance was made in reliance on Section 4(2) of the Securities Act.



In June 2003, the Company issued 100,000 shares of its common stock valued at $3.00 per share to an employee. This issuance was made in reliance on
Section 4(2) of the Securities Act.



In August 2003, the
Company issued a total of 90,000 shares of its common stock valued at $2.75 per share to three members of the Board of Directors. This issuance was made in reliance on Section 4(2) of the Securities Act.



In November 2003, the Company issued 9,622 shares of the Companys
common stock valued at $3.50 per share in connection with a settlement agreement with a consultant for consulting services rendered. This issuance was made in reliance on Section 4(2) of the Securities Act.



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In November 2003, the Company issued a total of 19,230 shares of its common stock to two employees valued at $1.30 per share. This issuance was made in reliance on Section 4(2) of the Securities Act.



Common Stock-2002 Activity



For the year ended December 31, 2002, giving effect to a one-to-twenty nine
reverse split, the Company issued 20,690 shares of common stock for debts assumed by a certain shareholder totaling $250,627 and 57,425 shares for payment of outstanding debts totaling $229,604. This issuance was made in reliance on Section 4(2) of
the Securities Act.



For the year ended December 31, 2002, the
Company issued 57,000 common shares for conversion of notes totaling $157,375 and 141,789 shares of common stock for services valued at $204,510. This issuance was made in reliance on Section 4(2) of the Securities Act.



In August 2002, in connection with the acquisition of Axesstel California, we
issued to the former shareholders of Axesstel California approximately 5.6 million shares of our common stock in exchange for the assignment to us of approximately 98% of the issued and outstanding capital stock of Axesstel California (at an
exchange rate of .302591758 shares of our common stock for one share of Axesstel California common stock). In connection with this acquisition, we also assumed all of Axesstel Californias outstanding options and warrants, which were adjusted
in accordance with the exchange ratio such that an option or warrant to purchase one share of Axesstel California common stock became an option or warrant to purchase .302591758 shares of our common stock. This issuance was made in reliance on
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.



In September 2002, 100,000 shares and warrants to purchase 200,000 shares, respectively, were granted for consultant services rendered. This issuance was made in reliance on Section 4(2) of the Securities Act.



In October 2002, the Company entered into a contract for legal services with
a legal consultant in Korea, in consideration for 10,000 shares of the Companys common stock. This issuance was made in reliance on Section 4(2) of the Securities Act.



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS



Forward-Looking Statements



This Annual Report
on Form 10-KSB contains certain forward looking statements including expectations of market conditions, challenges and plans, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor
provisions created by that statute. The words anticipate, expect, plan, intend and similar expressions are intended to identify such statements. Although the forward-looking statements in this report
reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known to us. Consequently, such statements are subject to risks and uncertainties, including, but not limited to those discussed
herein and, in particular, under the caption Risk Factors Relating To Our Business beginning on page 6 that could cause actual results to differ materially from those projected.



The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in these
forward-looking statements as a result of factors including, but not limited to, those under Risk Factors Relating to Our Business beginning on page 6 and elsewhere in this Report.



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In accordance with the Explanatory Note to this Amendment No. 3 to Form 10-KSB/A, forward looking statements have not been updated to reflect events or operations after March 30, 2004.



Company Overview



Axesstel California was formed approximately 3.5 years ago, and has performed wireless engineering development services,
while at the same time, concentrating its efforts in developing its own wireless subscriber products and solutions. On August 31, 2002, Axesstel California was acquired by Miracom Industries, Inc., a Nevada corporation (Miracom) pursuant
to a Corporate Combination Agreement under which Miracom issued to the former shareholders of Axesstel California approximately 5.6 million shares of our common stock in exchange for the assignment of approximately 98% of the issued and outstanding
capital stock of Axesstel California. Following the acquisition, the former shareholders of Axesstel California held approximately 95% of our common stock. The acquisition was accounted for as a reverse acquisition because former shareholders of
Axesstel California owned a majority of our outstanding stock subsequent to the acquisition. For accounting purposes, Axesstel California is deemed to have acquired Miracom, and therefore the financial statements of the Company included in this
report represent the financial results of Axesstel California only for the period from January 1, 2002 to August 30, 2002; and the financial results of the Company and Axesstel California for the post-acquisition period from August 31, 2002 through
December 31, 2002, and for the 2003 fiscal year.



In 2003, this
focus in our product business led to increased expenditures in research and development, and selling, general, and administrative expense. Overall headcount has increased approximately 250%, from an average of approximately 20 employees in 2002 to
approximately 70 employees in 2003. At the end of 2003, headcount increased to 80 employees. This investment has allowed Axesstel to introduce many additional products in the marketplace during the year. Management believes this investment will lead
to rapid growth in our product revenue in 2004.



Restatement



This Amendment No. 3 on Form 10-KSB/A restates our previously issued
consolidated balance sheets as of December 31, 2003 and 2002 and the consolidated statements of operations and comprehensive income (loss), stockholders equity and cash flows for the years then ended to correct our method of accounting for
capitalization of software development costs, the amortization of our license purchased from Qualcomm and certain other financial statement entries for stock options, employee bonuses, goodwill impairment, and classifications among cost of goods
sold, selling, general and administrative expenses and research and development.



In September 2004, we re-evaluated the application of certain accounting policies and procedures and determined that we had not been properly applying generally accepted accounting principles, primarily in relation to
the accounting for software development costs and intangible assets. In addition, certain other accounting corrections have been made to the accompanying consolidated financial statements.



Through the quarter ended June 30, 2004, we have been capitalizing software
development costs subsequent to the achievement of technological feasibility of the software component which is embedded in our product. We began to amortize these costs when the product was ready for sale. The Financial Accounting Standards Board
(FASB) Statement No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, other authoritative literature, interpretations and industry practices prescribe that the technological
feasibility is established when both the software and other components of the products research and development activities are completed. Only upon attainment of both requirements are we allowed to begin capitalizing software development
costs. Upon a thorough review of our engineering process, we have determined that the research and development activities of our products finish simultaneously with the commencement of the manufacturing process. As such, all development and research
activities performed up to the commencement of the manufacturing process should be expensed. Our consolidated financial statements as restated have been adjusted retroactively to reflect this change.



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Additionally, through the quarter ended June 30, 2004, we had determined that the CDMA intellectual property license purchased from Qualcomm had an indefinite life. After further review of industry practices, we have
determined that it is more customary to establish a definite life for the license, and we have assigned an estimated economic life of 10 years for the license. Our consolidated financial statements as restated (beginning in 2000) have been adjusted
retroactively to reflect this change.



Certain other financial
statement entries for stock options, employee bonuses, goodwill impairment, and classification between cost of goods sold, selling, general and administrative, and research and development were recorded as part of this restatement.



The effects of this restatement to the December 31, 2003, and 2002
consolidated statement of operations are as follows:



|                                  |  |                        |            |   |             |   |            |                        |  |             |           |  |   |          
|--------------------------------- |  | ---------------------- | ---------- | - | ----------- | - | ---------- | ---------------------- |  | ----------- | --------- |  | - | ---------
|                                  |  | 2003                   |            |   | 2002       
|                                  |  | As previously reported |            |   | As restated |   |            | As previously reported |  | As restated
|Net revenues                      |  | $                      | 11,375,993 |   |             | $ | 11,543,993 |                        |  | $           | 8,086,787 |  | $ | 7,918,787
|Income (loss) before income taxes |  |                        | (2,991,181 | ) |             |   | (3,876,001 | )                      |  |             | 879,357   |  |   | 259,401  
|Net income (loss)                 |  |                        | (2,180,006 | ) |             |   | (2,609,271 | )                      |  |             | 635,626   |  |   | 55,265   
|Basic earnings (loss) per share   |  | $                      | (0.34      | ) |             | $ | (0.41      | )                      |  | $           | 0.09      |  | $ | 0.01     
|Diluted earnings (loss) per share |  | $                      | (0.34      | ) |             | $ | (0.41      | )                      |  | $           | 0.06      |  | $ | 0.01     



RESULTS OF OPERATIONS



The following table sets forth, as a percentage of total
net sales, the consolidated statement of operations data for the periods indicated:



|                                             |  |                                |    |  |            |  
|-------------------------------------------- |  | ------------------------------ | -- |  | ---------- | -
|                                             |  | For the year endedDecember 31, |   
|                                             |  | 2003                           |    |  | 2002       |  
|                                             |  | (restated)                     |    |  | (restated) |  
|Net revenues                                 |  |                                |    |  |            |  
|Product sales                                |  | 37.2                           | %  |  | 49.2       | %
|Engineering development service              |  | 62.8                           | %  |  | 50.8       | %
|                                             |  |                                |    |  |            |  
|                                             |  | 100.0                          | %  |  | 100.0      | %
|Cost of goods sold                           |  |                                |    |  |            |  
|Product sales                                |  | 35.2                           | %  |  | 44.2       | %
|Engineering development service              |  | 29.4                           | %  |  | 11.8       | %
|                                             |  |                                |    |  |            |  
|                                             |  | 64.6                           | %  |  | 56.0       | %
|Gross profit                                 |  |                                |    |  |            |  
|Product sales                                |  | 1.9                            | %  |  | 5.1        | %
|Engineering development service              |  | 33.5                           | %  |  | 39.0       | %
|                                             |  |                                |    |  |            |  
|                                             |  | 35.4                           | %  |  | 44.1       | %
|Operating expenses                           |  |                                |    |  |            |  
|Research and development                     |  | 19.8                           | %  |  | 10.1       | %
|Selling, general and administrative expenses |  | 48.0                           | %  |  | 32.3       | %
|                                             |  |                                |    |  |            |  
|                                             |  | 67.8                           | %  |  | 42.4       | %
|Operating income (loss)                      |  | (32.4                          | )% |  | 1.7        | %
|Other income (expense)                       |  | (1.2                           | )% |  | 1.6        | %
|                                             |  |                                |    |  |            |  
|Income (loss) before income taxes            |  | (33.6                          | )% |  | 3.3        | %
|Provision (benefit) for income taxes         |  | (11.0                          | )% |  | 2.6        | %
|                                             |  |                                |    |  |            |  
|Net income (loss)                            |  | (22.6                          | )% |  | 0.7        | %



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FISCAL YEAR ENDED DECEMBER 31, 2003 COMPARED TO FISCAL YEAR ENDED

DECEMBER 31, 2002



Net Revenues



For the year ended December 31, 2003, net revenues were $11.5 million
compared to $7.9 million for the year ended December 31, 2002, representing a 46% increase. The increase in net revenues for the year ended December 31, 2003 was a result of increased sales by our engineering development service group, including
original design and manufacturing services we performed for third-party network operators.



Cost of Goods Sold



For
the year ended December 31, 2003, cost of goods sold was $7.5 million compared to $4.4 million for the year ended December 31, 2002, an increase of 68%. During the year ended December 31, 2003, our product cost of goods sold increased $569,000
attributable to an increase in product revenue of $391,000, and increased manufacturing costs of approximately $200,000. In the year ended December 31, 2003, $3.4 million of our cost of goods sold was attributable to engineering development services
compared to $930,000 for the year ended December 31, 2002; an increase of $2.5 million. This increase is attributable to the increased engineering service revenue of $3.2 million, and more labor intensive efforts to achieve the required milestones
associated with the engineering development service contracts.



Gross Profit



For the year ended December 31,
2003, gross profit as a percentage of net revenues was 35.4% compared to 44.1% for the year ended December 31, 2002. Engineering development service gross profit decreased from 76.9% in 2002 to 53.2% in 2003 due to increased engineering expense to
achieve contract milestones. In addition, our gross profit from product sales declined by approximately 5% as a result of increased manufacturing costs.



Research and Development Expenses



For the year ended December 31, 2003, research and development expenses were $2.3 million compared to $797,000 for the year ended December 31, 2002, an
increase of 186%. This increase is almost entirely related to an increase of research and development headcount from the December 2002 Entatel acquisition and other direct hires. Management believes this investment in research and development will
allow us the ability to design and develop a new line of products that will be launched in 2004.



Selling, General and Administrative Expenses



For the year ended December 31, 2003, selling, general and administrative expenses were $5.5 million compared to $2.6 million for the year ended
December 31, 2002, an increase of 116%. This net increase of $3.0 million was attributable to increases of $1.0 million in employee expense included in selling, general and administrative expenses as a result of additional hires to support our
business expansion and to increase focus on product sales, $1.3 million in increased legal, shareholder relations, and outside consulting fees and $717,000 of write downs in bad debt and other assets.



Other Income (expense)



For the year ended December 31, 2003, other expense was $138,000 compared to
other income of $127,000 in the year ended December 31, 2002. The increased expense was primarily due to the write-down of certain assets originating from the Miracom acquisition in 2002.



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Provision (benefit) for income taxes



For the year ended December 31, 2003, benefit from income taxes was $1,267,000 compared to a provision for income taxes of $204,000 for the year ended December 31, 2002. Provision or benefit for income taxes relates
to our taxable income or loss. We had net operating losses for the year ended December 31, 2003, and taxable income for the year ended December 31, 2002.



Liquidity and Capital Resources



During 2003, Axesstel funded its operations principally on the cash flows generated through operations. Most of the cash has been spent on research and
development and computer software as we continue to build our technological capabilities as well as hire additional engineering and support employees.



Axesstels cash decreased by approximately $0.4 million during 2003 and working capital decreased by approximately $3.4 million as we continued to
invest in the activities noted above and fund the loss incurred in 2003.



Axesstel does not anticipate making any significant capital purchases for the year 2004.



Sale of $1,000,000 Unsecured Convertible Term Note



In January 2004, we completed the sale and issuance of an unsecured convertible term note in the original principal amount of $1 million to North America
Venture Fund II, L.P., an accredited investor. Interest accrues on the note at the rate of 3% above prime, subject to certain adjustments. The principal and accrued interest due under the note are convertible by North America into shares of our
common stock at a conversion price of $2.00 per share. All unpaid principal and accrued interest, if not sooner converted, is due on January 8, 2005.



Sale of 1,360,000 Shares of Common Stock and Warrants to Purchase 1,632,000 Shares of Common Stock



In January 2004, we sold to seven accredited investors in a private
placement an aggregate of 1,360,000 shares of our common stock at a price of $2.00 per share for gross proceeds of $2,720,000. In connection with the private placement, we also issued to the investors warrants to purchase an aggregate of 1,632,000
shares of our common stock. Warrants for 860,000 of the shares have an exercise price of $1.00 per share and are exercisable until July 8, 2004. Warrants for 500,000 of the shares have an exercise price of $1.00 per share and are exerciseable until
January 8, 2005. The other warrants for 272,000 shares have an exercise price of $2.00 per share, subject to an increase to $3.30 per share upon the completion of certain milestones, and are exercisable beginning on the first date on which the
achievement of the milestones can be determined and expire 18 months after that date.



For services rendered in connection with this financing, we agreed to issue to a finder a total of 150,000 shares of our common stock. We issued 50,000 shares to the finder in January 2004, and we agreed to issue to
the finder an additional 50,000 shares in each of January 2005 and January 2006. We also paid to the finder a fee of $136,000, representing 5% of the gross proceeds in this financing.



Sale of $3,000,000 Secured Convertible Term Note



In March 2004, we completed the sale and issuance of a $3 million secured convertible promissory note to Laurus Master Fund,
Ltd., an accredited investor, pursuant to a securities purchase agreement. Interest accrues on the note at a rate of 3% above prime, subject to certain adjustments. In no event will the interest rate on the note be lower than 7% or greater than 10%.



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Under the terms of the note, we are obligated to make monthly payments of principal and interest. We have the option to pay these monthly payments in cash or in shares of our common stock (so long as the closing price
of the common stock is greater than $3.38 for ten consecutive trading days preceding the payment date). If we elect to pay in stock, we must issue to Laurus an amount of shares equivalent to the amount of the monthly payment due divided by $3.16. If
we elect to pay in cash, we must pay 102% of the amount of the monthly payment due.



We may pay the monthly payment in shares of our common stock only so long as there is an effective registration statement on file covering the resale of such shares. We have the option to convert all or a portion of
the outstanding principal of the note into shares of common stock if the closing price of the common stock is greater than $3.70 for ten consecutive trading days. However, the number of shares issued upon such conversion cannot exceed 30% of the
aggregate dollar trading volume of the common stock for the 22 trading days immediately preceding the payment date. The investor has the option, at any time, to convert all or a portion of the note into shares of our common stock at $3.16 per share.



The note is secured by a blanket lien on substantially all of
our assets pursuant to a security agreement executed by us in connection with the note. If an event of default occurs under the security agreement, Laurus has the right to accelerate payments under the note and to take possession of our assets, in
addition to other remedies.



We also issued to Laurus a warrant
exercisable for 100,000 shares of common stock that is exercisable until March 11, 2011. The exercise price of the warrant is as follows: (i) $3.31 per share for the first 50,000 shares, $3.59 per share for the next 25,000 shares, and $3.88 per
share for the remaining 25,000 shares. However, Laurus is not entitled to receive shares upon exercise of the warrant, upon payment of principal and interest or upon conversion of the promissory note if such receipt would cause Laurus to hold in
excess of 4.99 % of the outstanding shares of our common stock on the date of issuance of such shares. In connection with this financing, we paid Laurus Capital Management, LLC, manager of the investor, a fee of $108,000, which represented 3.6% of
the principal of the convertible note.



For services rendered
in connection with this financing, we issued to a finder a warrant to purchase 47,468 shares of our common stock at an exercise price of $3.16 per share. The warrant is exercisable for five years after the date of issuance. We also paid to the
finder a fee of $150,000, representing 5% of the gross proceeds from this financing.



If a registration statement covering the resale of the shares of common stock obtainable upon conversion of the note and exercise of the warrants held by Laurus and the finder is not declared effective on or before
June 9, 2004, we are obligated to pay to Laurus as liquidated damages $30,000, representing 1% of the original principal amount of the note, for each 30 day period (pro-rated for partial periods) that the registration statement is not effective.



Our current plans indicate that we will require approximately
$2 million in additional capital to fund our operations until our operations become self-funding, which is expected to occur during the third quarter of 2004. The availability of additional capital will depend on a number of factors, some of which
are outside our control. These include general market conditions, conditions in the private equity markets where we have historically raised capital, the then-current market price of our common stock, our ability to enter into major contracts for
the sale of our products, and our perceived future prospects.



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CRITICAL ACCOUNTING POLICIES



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



Revenue Recognition and Warranty Costs



Revenues from product sales are generally recognized when the risks of
ownership and title pass to the customer as specified in the respective sales agreements and other revenue recognition criterion as prescribed by Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements as
amended by SAB No. 104. Generally, the risks of ownership and title pass when product is shipped to the customers freight forwarder. We do not have a specific sales return policy and sales returns have been immaterial historically. If and when
products are returned, we normally exchange them or provide credits to the customer. The returned products in turn are shipped back to the manufacturer and we are issued a credit or exchange from the supplier. We provide allowances for potential
sales returns and credit losses when necessary. Management concluded that no allowance was needed as of December 31, 2003 and 2002.



Collections from product sales are generally received via letter of credit arrangements. As such, collections on trade receivable accounts are reasonably
assured. At times, we extend credit based on evaluation of the customers financial condition, generally without requiring collateral. However, credit losses incurred to date have been insignificant since credit is granted to customers with
reputable credit history.



On certain contracts, we provide a
warranty replacement unit at one percent of total units shipped. The cost related to the warranty replacement unit is included in the cost of goods sold and recorded when revenue is recognized. All products are tested for quality inspection prior to
shipment and we have experienced a minimal level of defective units. Management believes that no additional warranty reserve is needed other than the warranty replacement unit costs.



Revenues from engineering services are recorded as milestones are reached according to the contract.



Capitalized Software Costs



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



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Valuation of Long-Lived Assets, Intangible Assets and Goodwill



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



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



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



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



When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based upon the existence of one or more of
the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business model. During the year ended December 31, 2003, we recognized goodwill impairment costs of approximately $297,000.



Our intangible assets consist mainly of our license from Qualcomm, which
amounted to $2,229,544 as of December 31, 2003 ($3,000,000 less $770,456 of amortization). We are amortizing this asset over a ten year estimated life. The license agreement has no fixed termination date and we do not anticipate impairment in the
foreseeable future because our revenues come from the sale of telephones to developing countries where our technologies are not expected to be subject to rapid technological changes.



Deferred Tax Assets



We periodically and at least annually evaluate the realizability of the net deferred tax assets, taking into consideration prior earnings history, actual
revenue and operations, projected operating results and the reversal of temporary differences. At December 31, 2003, we did not have a valuation allowance on the net deferred tax assets as we believe it is more likely than not that the deferred tax
assets will be realized. Based on a five year financial projection prepared by us, we expect to generate a sufficient level of income to utilize the benefits of the deferred tax assets recorded. Significant management judgment is required in
projecting such cash flows and in determining whether a valuation allowance is required.



ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM



To the Board of Directors and Stockholders

of Axesstel, Inc.



We have audited the consolidated balance sheet of Axesstel, Inc. (a Nevada corporation) and subsidiaries as of December 31,
2003, and the related consolidated statements of operations and comprehensive loss, stockholders equity, and cash flows for the year then ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audit.



We conducted our audit in accordance with standards of the Public Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of Axesstel, Inc and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.



As discussed in Note 2 to the accompanying consolidated financial statements,
the Company has restated its financial statements as of December 31, 2003 and for the year then ended.



Gumbiner, Savett, Finkel, Fingleson & Rose, Inc.



March 18, 2004, except for the restatement as described in Note 2

which is as of September 30, 2004

Santa Monica, CA 90404



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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM



To the Board of Directors

Axesstel, Inc. and Subsidiaries

San Diego, California



We have audited the
accompanying consolidated balance sheet of Axesstel, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations and comprehensive income (loss), stockholders equity (deficit), and cash flows for the
year then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.



We conducted our audit in accordance with standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Axesstel, Inc. and subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.



As discussed in Note 2 to the accompanying consolidated financial statements, the Company has restated its financial
statements as of December 31, 2002 and for the year then ended.



KENNY H. LEE CPA GROUP, INC.



February 28, 2003, except for the restatement as described in Note 2

which is as of
September 30, 2004



Los Angeles, CA



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AXESSTEL, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002



ASSETS



|                                     |  |          |           |          |   |          
|------------------------------------ |  | -------- | --------- | -------- | - | ---------
|                                     |  | 2003     |           | 2002    
|                                     |  | Restated |           | Restated
|Current assets                       |  |          |           |          |   |          
|Cash and cash equivalents            |  | $        | 376,336   |          | $ | 768,665  
|Accounts receivable                  |  |          | 1,408,888 |          |   | 1,154,022
|Prepayments and other current assets |  |          | 612,687   |          |   | 381,217  
|                                     |  |          |           |          |   |          
|Total current assets                 |  |          | 2,397,911 |          |   | 2,303,904
|                                     |  |         
|Property and equipment, net          |  |          | 1,463,266 |          |   | 1,380,554
|                                     |  |         
|Other assets                         |  |          |           |          |   |          
|Security deposits                    |  |          | 158,418   |          |   | 174,990  
|Deferred tax assets                  |  |          | 1,515,000 |          |   | 200,000  
|License, net                         |  |          | 2,229,544 |          |   | 1,136,540
|Goodwill                             |  |          | 385,564   |          |   | 296,889  
|Other, net                           |  |          | 731,231   |          |   | 370,840  
|                                     |  |          |           |          |   |          
|Total other assets                   |  |          | 5,019,757 |          |   | 2,179,259
|                                     |  |          |           |          |   |          
|Total assets                         |  | $        | 8,880,934 |          | $ | 5,863,717
|                                     |  |          |           |          |   |          







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



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AXESSTEL, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002



LIABILITIES AND STOCKHOLDERS EQUITY



|                                                                                                                                                                |  |          |            |   |          |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ---------- | - | -------- | - | --------- | -
|                                                                                                                                                                |  | 2003     |            |   | 2002     |  
|                                                                                                                                                                |  | Restated |            |   | Restated |  
|Current liabilities                                                                                                                                             |  |          |            |   |          |   |           |  
|Accounts payable                                                                                                                                                |  | $        | 1,479,466  |   |          | $ | 730,795   |  
|Due to Qualcomm, Inc.                                                                                                                                           |  |          | 1,300,000  |   |          |   |          |  
|Note payable                                                                                                                                                    |  |          | 200,000    |   |          |   |          |  
|Current obligations under capital leases                                                                                                                        |  |          | 221,040    |   |          |   | 202,462   |  
|Fund raising advances                                                                                                                                           |  |          | 1,720,000  |   |          |   |          |  
|Accrued expenses and other current liabilities                                                                                                                  |  |          | 810,524    |   |          |   | 1,276,827 |  
|                                                                                                                                                                |  |          |            |   |          |   |           |  
|Total current liabilities                                                                                                                                       |  |          | 5,731,030  |   |          |   | 2,210,084 |  
|                                                                                                                                                                |  |         
|Long-term liabilities                                                                                                                                           |  |          |            |   |          |   |           |  
|Obligations under capital leases, excluding current installments                                                                                                |  |          |           |   |          |   | 107,831   |  
|                                                                                                                                                                |  |          |            |   |          |   |           |  
|Total long-term liabilities                                                                                                                                     |  |          |           |   |          |   | 107,831   |  
|                                                                                                                                                                |  |         
|Stockholders equity                                                                                                                                            |  |          |            |   |          |   |           |  
|Common stock, par value $.0001; Authorized 50,000,000 shares; 6,699,168 and 6,077,816 shares issued and outstanding at December 31, 2003 and
2002, respectively |  |          | 670        |   |          |   | 608       |  
|Additional paid-in capital                                                                                                                                      |  |          | 6,726,604  |   |          |   | 4,518,654 |  
|Accumulated other comprehensive loss                                                                                                                            |  |          | (37,694    | ) |          |   | (43,055   | )
|Accumulated deficit                                                                                                                                             |  |          | (3,539,676 | ) |          |   | (930,405  | )
|                                                                                                                                                                |  |          |            |   |          |   |           |  
|Total stockholders equity                                                                                                                                      |  |          | 3,149,904  |   |          |   | 3,545,802 |  
|                                                                                                                                                                |  |          |            |   |          |   |           |  
|Total liabilities and stockholders equity                                                                                                                      |  | $        | 8,880,934  |   |          | $ | 5,863,717 |  
|                                                                                                                                                                |  |          |            |   |          |   |           |  





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



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AXESSTEL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)



|                                                   |  |                                |            |   |          |   |           |  
|-------------------------------------------------- |  | ------------------------------ | ---------- | - | -------- | - | --------- | -
|                                                   |  | For the YearEnded December 31, |           
|                                                   |  | 2003                           |            |   | 2002     |  
|                                                   |  | Restated                       |            |   | Restated |  
|Net revenues                                       |  |                                |            |   |          |   |           |  
|Product sales                                      |  | $                              | 4,290,013  |   |          | $ | 3,898,787 |  
|Engineering development service                    |  |                                | 7,253,980  |   |          |   | 4,020,000 |  
|                                                   |  |                                |            |   |          |   |           |  
|                                                   |  |                                | 11,543,993 |   |          |   | 7,918,787 |  
|Cost of goods sold                                 |  |                                |            |   |          |   |           |  
|Product sales                                      |  |                                | 4,067,376  |   |          |   | 3,498,651 |  
|Engineering development service                    |  |                                | 3,391,537  |   |          |   | 929,910   |  
|                                                   |  |                                |            |   |          |   |           |  
|                                                   |  |                                | 7,458,913  |   |          |   | 4,428,561 |  
|Gross profit                                       |  |                                |            |   |          |   |           |  
|Product sales                                      |  |                                | 222,637    |   |          |   | 400,136   |  
|Engineering development service                    |  |                                | 3,862,443  |   |          |   | 3,090,090 |  
|                                                   |  |                                |            |   |          |   |           |  
|                                                   |  |                                | 4,085,080  |   |          |   | 3,490,226 |  
|Research and development                           |  |                                | 2,278,141  |   |          |   | 796,742   |  
|Selling, general and administrative expenses       |  |                                | 5,545,244  |   |          |   | 2,561,450 |  
|                                                   |  |                                |            |   |          |   |           |  
|Total operating expenses                           |  |                                | 7,823,385  |   |          |   | 3,358,192 |  
|                                                   |  |                                |            |   |          |   |           |  
|Operating income (loss)                            |  |                                | (3,738,305 | ) |          |   | 132,034   |  
|Other income (expense)                             |  |                                |            |   |          |   |           |  
|Interest income and other income                   |  |                                | 230,749    |   |          |   | 204,564   |  
|Interest expense and other expense                 |  |                                | (368,445   | ) |          |   | (77,197   | )
|                                                   |  |                                |            |   |          |   |           |  
|Total other income (expense)                       |  |                                | (137,696   | ) |          |   | 127,367   |  
|                                                   |  |                                |            |   |          |   |           |  
|Income (loss) before income taxes                  |  |                                | (3,876,001 | ) |          |   | 259,401   |  
|Provision (benefit) for income taxes               |  |                                | (1,266,730 | ) |          |   | 204,136   |  
|                                                   |  |                                |            |   |          |   |           |  
|Net income (loss)                                  |  |                                | (2,609,271 | ) |          |   | 55,265    |  
|Other comprehensive income (loss)                  |  |                                |            |   |          |   |           |  
|Foreign currency translation adjustment            |  |                                | 5,361      |   |          |   | (43,055   | )
|                                                   |  |                                |            |   |          |   |           |  
|Comprehensive income (loss)                        |  | $                              | (2,603,910 | ) |          | $ | 12,210    |  
|                                                   |  |                                |            |   |          |   |           |  
|Basic earnings (loss) per common share             |  | $                              | (0.41      | ) |          | $ | 0.01      |  
|                                                   |  |                                |            |   |          |   |           |  
|Diluted earnings (loss) per common share           |  | $                              | (0.41      | ) |          | $ | 0.01      |  
|                                                   |  |                                |            |   |          |   |           |  
|Weighted average number of common shares - basic   |  |                                | 6,417,376  |   |          |   | 6,879,120 |  
|                                                   |  |                                |            |   |          |   |           |  
|Weighted average number of common shares - diluted |  |                                | 6,417,376  |   |          |   | 9,869,321 |  
|                                                   |  |                                |            |   |          |   |           |  





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



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AXESSTEL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

For the Years Ended December 31,

Restated



|                                                        |  |              |   |  |                          |     |   |                                            |   |           |                    |  |   |                          |   |  |   |            |   |  |   |            |  
|------------------------------------------------------- |  | ------------ | - |  | ------------------------ | --- | - | ------------------------------------------ | - | --------- | ------------------ |  | - | ------------------------ | - |  | - | ---------- | - |  | - | ---------- | -
|                                                        |  | Common Stock |   |  | AdditionalPaid-inCapital |     |   | AccumulatedOtherComprehensiveIncome (Loss) |   |           | AccumulatedDeficit |  |   | TotalStockholdersEquity |  
|                                                        |  | Shares       |   |  | Amount                   |     |   |                                            |   |          
|Balance at December 31, 2001                            |  | 6,554,487    |   |  | $                        | 66  |   |                                            | $ | 222,761   |                    |  | $ |                         |   |  | $ | (812,673   | ) |  | $ | (589,846   | )
|Stock issued for acquisitions and others                |  | 3,617,236    |   |  |                          | 362 |   |                                            |   | 109,566   |                    |  |   |                          |   |  |   | (172,997   | ) |  |   | (63,069    | )
|Stock issued for services                               |  | 737,334      |   |  |                          | 7   |   |                                            |   | 62,025    |                    |  |   |                          |   |  |   |            |   |  |   | 62,032     |  
|One-to-twenty nine reverse split                        |  | (7,044,733   | ) |  |                          | (48 | ) |                                            |   | (274,766  | )                  |  |   |                          |   |  |   |            |   |  |   | (274,814   | )
|Stock issued for debts assumed by certain shareholder   |  | 20,690       |   |  |                          | 2   |   |                                            |   | 250,625   |                    |  |   |                          |   |  |   |            |   |  |   | 250,627    |  
|Stock issued for payment of outstanding debts           |  | 57,425       |   |  |                          | 6   |   |                                            |   | 229,598   |                    |  |   |                          |   |  |   |            |   |  |   | 229,604    |  
|Stock issued for conversion of debts                    |  | 57,000       |   |  |                          | 6   |   |                                            |   | 157,369   |                    |  |   |                          |   |  |   |            |   |  |   | 157,375    |  
|Stock issued for consultant services                    |  | 141,789      |   |  |                          | 14  |   |                                            |   | 204,496   |                    |  |   |                          |   |  |   |            |   |  |   | 204,510    |  
|Stock issued for conversion of Series A preferred stock |  | 1,331,404    |   |  |                          | 133 |   |                                            |   | 1,839,867 |                    |  |   |                          |   |  |   |            |   |  |   | 1,840,000  |  
|Stock issued for conversion of Series B preferred stock |  | 605,184      |   |  |                          | 60  |   |                                            |   | 1,499,940 |                    |  |   |                          |   |  |   |            |   |  |   | 1,500,000  |  
|Stock options granted for employee compensation         |  |              |   |  |                          |     |   |                                            |   | 217,172   |                    |  |   |                          |   |  |   |            |   |  |   | 217,172    |  
|Cumulative translation adjustment                       |  |              |   |  |                          |     |   |                                            |   | 1         |                    |  |   | (43,055                  | ) |  |   |            |   |  |   | (43,054    | )
|Net income                                              |  |              |   |  |                          |     |   |                                            |   |           |                    |  |   |                          |   |  |   | 55,265     |   |  |   | 55,265     |  
|                                                        |  |              |   |  |                          |     |   |                                            |   |           |                    |  |   |                          |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2002                            |  | 6,077,816    |   |  | $                        | 608 |   |                                            | $ | 4,518,654 |                    |  | $ | (43,055                  | ) |  | $ | (930,405   | ) |  | $ | 3,545,802  |  
|                                                        |  |              |   |  |                          |     |   |                                            |   |           |                    |  |   |                          |   |  |   |            |   |  |   |            |  
|Stock issued for services                               |  | 109,622      |   |  |                          | 11  |   |                                            |   | 300,069   |                    |  |   |                          |   |  |   |            |   |  |   | 300,080    |  
|Stock issued for acquisition                            |  | 300,000      |   |  |                          | 30  |   |                                            |   | 674,970   |                    |  |   |                          |   |  |   |            |   |  |   | 675,000    |  
|Stock issued for cash                                   |  | 92,500       |   |  |                          | 9   |   |                                            |   | 184,991   |                    |  |   |                          |   |  |   |            |   |  |   | 185,000    |  
|Stock issued for employee compensation                  |  | 119,230      |   |  |                          | 12  |   |                                            |   | 324,988   |                    |  |   |                          |   |  |   |            |   |  |   | 325,000    |  
|Stock warrants granted for consulting services          |  |              |   |  |                          |     |   |                                            |   | 620,333   |                    |  |   |                          |   |  |   |            |   |  |   | 620,333    |  
|Stock options granted for employee compensation         |  |              |   |  |                          |     |   |                                            |   | 102,600   |                    |  |   |                          |   |  |   |            |   |  |   | 102,600    |  
|Cumulative translation adjustment                       |  |              |   |  |                          |     |   |                                            |   | (1        | )                  |  |   | 5,361                    |   |  |   |            |   |  |   | 5,360      |  
|Net loss                                                |  |              |   |  |                          |     |   |                                            |   |           |                    |  |   |                          |   |  |   | (2,609,271 | ) |  |   | (2,609,271 | )
|                                                        |  |              |   |  |                          |     |   |                                            |   |           |                    |  |   |                          |   |  |   |            |   |  |   |            |  
|Balance at December 31, 2003                            |  | 6,699,168    |   |  | $                        | 670 |   |                                            | $ | 6,726,604 |                    |  | $ | (37,694                  | ) |  | $ | (3,539,676 | ) |  | $ | 3,149,904  |  
|                                                        |  |              |   |  |                          |     |   |                                            |   |           |                    |  |   |                          |   |  |   |            |   |  |   |            |  



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



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AXESSTEL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,



|                                                                                                   |  |          |            |   |          |   |            |  
|-------------------------------------------------------------------------------------------------- |  | -------- | ---------- | - | -------- | - | ---------- | -
|                                                                                                   |  | 2003     |            |   | 2002     |  
|                                                                                                   |  | Restated |            |   | Restated |  
|Cash flows from operating activities:                                                              |  |          |            |   |          |   |            |  
|Net income (loss)                                                                                  |  | $        | (2,609,271 | ) |          | $ | 55,265     |  
|                                                                                                   |  |          |            |   |          |   |            |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |          |            |   |          |   |            |  
|Depreciation and amortization                                                                      |  |          | 947,817    |   |          |   | 421,828    |  
|Impairment of goodwill                                                                             |  |          | 296,889    |   |          |   |           |  
|Loss from sale of marketable securities                                                            |  |          |           |   |          |   | 41,987     |  
|Loss from write down and disposition of assets                                                     |  |          | 318,244    |   |          |   |           |  
|Issuance of stock for services                                                                     |  |          | 93,830     |   |          |   | 62,032     |  
|Issuance of stock for employee compensation                                                        |  |          | 125,000    |   |          |   |           |  
|Stock options granted for employee compensation                                                    |  |          | 102,600    |   |          |   | 217,172    |  
|Stock warrants granted for consulting services                                                     |  |          | 620,332    |   |          |   | 204,510    |  
|Deferred tax assets                                                                                |  |          | (1,315,000 | ) |          |   | (2,354     | )
|(Increase) decrease in                                                                             |  |          |            |   |          |   |            |  
|Accounts receivable                                                                                |  |          | (254,866   | ) |          |   | (1,041,740 | )
|Prepayments and other current assets                                                               |  |          | (231,470   | ) |          |   | (721,274   | )
|Inventories                                                                                        |  |          |           |   |          |   | 31,990     |  
|Other assets                                                                                       |  |          | 16,572     |   |          |   | (173,061   | )
|Increase (decrease) in                                                                             |  |          |            |   |          |   |            |  
|Accounts payable                                                                                   |  |          | 748,671    |   |          |   | 501,044    |  
|Accrued expenses and other liabilities                                                             |  |          | (466,303   | ) |          |   | 1,288,219  |  
|                                                                                                   |  |          |            |   |          |   |            |  
|Total adjustments                                                                                  |  |          | 1,002,316  |   |          |   | 830,353    |  
|                                                                                                   |  |          |            |   |          |   |            |  
|Net cash (used in) provided by operating activities                                                |  |          | (1,606,955 | ) |          |   | 885,618    |  
|                                                                                                   |  |          |            |   |          |   |            |  
|Cash flows from investing activities:                                                              |  |          |            |   |          |   |            |  
|Acquisition of property and equipment                                                              |  |          | (806,482   | ) |          |   | (101,050   | )
|Acquisition of license                                                                             |  |          |           |   |          |   | (200,000   | )
|Proceeds from sales of marketable securities                                                       |  |          |           |   |          |   | 63,859     |  
|                                                                                                   |  |          |            |   |          |   |            |  
|Net cash used in investing activities                                                              |  |          | (806,482   | ) |          |   | (237,191   | )
|                                                                                                   |  |          |            |   |          |   |            |  
|Cash flows from financing activities:                                                              |  |          |            |   |          |   |            |  
|Issuance of stock for cash                                                                         |  |          | 185,000    |   |          |   |           |  
|Fund raising advances                                                                              |  |          | 1,720,000  |   |          |   |           |  
|Issuance of note payable                                                                           |  |          | 200,000    |   |          |   |           |  
|Repayment of note payable, convertible                                                             |  |          |           |   |          |   | (147,000   | )
|Increase in obligations under capital leases                                                       |  |          |           |   |          |   | 583,640    |  
|Principal repayments under capital lease obligations                                               |  |          | (89,253    | ) |          |   | (273,347   | )
|                                                                                                   |  |          |            |   |          |   |            |  
|Net cash provided by financing activities                                                          |  |          | 2,015,747  |   |          |   | 163,293    |  
|                                                                                                   |  |          |            |   |          |   |            |  
|Cumulative translation adjustment                                                                  |  |          | 5,361      |   |          |   | (43,055    | )
|Net increase (decrease) in cash and cash equivalents                                               |  |          | (392,329   | ) |          |   | 768,665    |  
|Cash and cash equivalents at beginning of year                                                     |  |          | 768,665    |   |          |   |           |  
|                                                                                                   |  |          |            |   |          |   |            |  
|Cash and cash equivalents at end of year                                                           |  | $        | 376,336    |   |          | $ | 768,665    |  
|                                                                                                   |  |          |            |   |          |   |            |  



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



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AXESSTEL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)

For the Years Ended December 31,



|                                                  |  |      |         |      |   |       
|------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|Supplemental disclosure of cash flow information: |  |      |         |      |   |       
|Cash paid during the year for:                    |  |      |         |      |   |       
|                                                  |  | 2003 |         | 2002
|Interest                                          |  | $    | 19,996  |      | $ |      
|Income tax                                        |  | $    | 387,713 |      | $ | 64,100



Supplemental disclosures of noncash
investing and financing activities:



During 2003, the
Company acquired all of the issued and outstanding capital stock of Entatel, Ltd. in exchange for 300,000 shares of the Companys common stock. The following summarizes the changes in the Companys financial statements as a result of the
transaction:



|                  |  |   |        
|----------------- |  | - | -------
|Goodwill          |  | $ | 385,564
|Workforce         |  |   | 247,472
|Other assets, net |  |   | 41,964 
|                  |  |   |        
|Total             |  | $ | 675,000
|                  |  |   |        



During 2003, the
Company acquired an additional license for $1,300,000, payable throughout 2004.



During 2003, the Company issued stock with a value of $625,080 for Board of Director services, employee compensation, and consulting services. Of this amount, $218,830 was amortized during 2003.



During 2002, the Company had the following transactions:



|                                                        |  |   |          
|------------------------------------------------------- |  | - | ---------
|Stock issued for conversion of Series A preferred stock |  | $ | 1,840,000
|Stock issued for conversion of Series B preferred stock |  |   | 1,500,000
|                                                        |  |   |          
|                                                        |  | $ | 3,340,000
|                                                        |  |   |          





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



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



December 31, 2003



1. THE COMPANY AND ITS SIGNIFICANT
ACCOUNTING POLICIES



The Company



Axesstel, Inc. (Axesstel or the Company) develops,
designs, manufactures and markets carrier-grade subscriber terminals such as fixed wireless telephones, wireless hybrid products and enhanced wireless devices for the telecommunication market. The Company also performs engineering services to their
Network Operator based customers.



Axesstel was originally
formed in July 2000 as a California corporation (Axesstel California). On July 16, 2002, Axesstel California entered into a Corporate Combination Agreement with Miracom Industries, Inc., a Nevada corporation (Miracom), which
was amended on August 22, 2002 (the Combination Agreement). Pursuant to the Combination Agreement, on August 31, 2002, Miracom acquired through a tender offer 98% of the outstanding common stock of Axesstel California and Axesstel
California became a subsidiary of Miracom. Miracom then changed its name to Axesstel, Inc., the former directors and officers of Miracom resigned, and the directors and officers of Axesstel California became the directors and officers of the
Company. Following the acquisition, the former shareholders of Axesstel California held approximately 95% of the outstanding common stock of the Company on a fully-diluted basis. The acquisition was accounted for as a reverse acquisition because the
former shareholders of Axesstel California owned a majority of the Companys outstanding stock subsequent to the acquisition. For accounting purposes, Axesstel California is deemed to have acquired Miracom, and therefore the consolidated
financial statements of the Company represent only the financial results of Axesstel California for the period from January 1, 2002 to August 30, 2002; and the financial results of the Company and Axesstel California for the post-acquisition period
from August 31, 2002 through December 31, 2002, and for the full year ended December 31, 2003. (See Note 11 for further information on the Miracom transaction.)



The number of shares of common stock and share prices in this report give effect to a one share for twenty-nine share reverse split which occurred on
August 30, 2002.



The Company established a wholly
owned-subsidiary named Axesstel Korea, Ltd. in Korea in July 2000 and a branch office in Korea in July 2002, in order to engage in research and development activities and to outsource the manufacture of its telecommunication products and parts.



In December 2002, the Company acquired Entatel, Ltd.
(Entatel), a Korea-based company, mainly engaged in developing, manufacturing and selling telecommunication products. The Company acquired one hundred percent of the issued and outstanding capital stock of Entatel, in exchange for
300,000 shares of the Companys common stock. The acquisition was consummated in 2003 and was accounted for under the purchase method of accounting, pursuant to SFAS No. 141, Business Combinations (See Note 11). In April 2003,
Entatel was re-named Axesstel R&D Center Co., Ltd.



Principles of
Consolidation



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



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



Revenue Recognition and Warranty Costs



Revenues from product sales are generally recognized when the risks of ownership and title pass to the customer as specified
in the respective sales agreements and other revenue recognition criterion as prescribed by Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements as amended by SAB No. 104. Generally, the risk of
ownership and title pass when product is shipped to the customers freight forwarder. The Company does not have a specific sales return policy since sales returns have not been significant. If and when products are returned, the Company
normally exchanges them or provides credits to the customer. The returned products are shipped back to the supplier and the Company is allowed a credit or exchange from the supplier. The Company provides allowances for potential sales returns and
credit losses when necessary. Management concluded that no allowance was needed as of December 31, 2003 and 2002.



On certain contracts, the Company provides for a warranty replacement unit at one percent of total units shipped. The cost related to the standard
warranty replacement unit is included in the cost of goods sold and recorded when revenue is recognized. All products are tested for quality inspection prior to shipment and the Company has historically experienced a minimal level of defective
units. Management believes that no additional warranty reserve is needed other than the standard warranty replacement unit costs.



Revenues from engineering development services are recorded as milestones are reached according to the contract.



Comprehensive Income



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



Research and Development



Costs incurred in research and development activities are expensed as
incurred. During the year ended December 31, 2003, revenue was recorded for research and development efforts under development services contracts with the related costs classified as engineering development services.



License



License includes the costs of a non-exclusive worldwide software technology license with no fixed termination date. License
costs are amortized on a straight-line basis over the estimated economic life of the license, which is approximately ten years.



Software Development Costs



Software development costs for products sold (primarily firmware embedded in the Companys products) incurred after technological feasibility is
established are capitalized in accordance with Statement of Financial Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. Significant management judgment is required in determining
when technological feasibility has been achieved



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



for a particular product. Capitalized software development costs are amortized when products are available for general release to customers, using the
greater of the amount computed using (a) the ratio that current gross revenues for the products bear to the total current and anticipated future gross revenues for the products or (b) the straight-line method over the estimated useful life of the
products.



Cash and Cash Equivalents



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



Property and Equipment



Property and equipment are recorded at cost.



Depreciation is provided using the straight-line method over the following
estimated useful lives of the respective assets, as follows:



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



Impairment of Long-Lived Assets



Effective January 1, 2002, the Company adopted the
provisions of SFAS No. 144 Accounting for the Impairment of Long-Lived Assets. The adoption of SFAS 144 did not have a material effect on the consolidated financial statements of the Company. SFAS 144 establishes the accounting for impairment
of long-lived tangible and intangible assets other than goodwill and for the disposal of a business. Pursuant to SFAS 144, the Company periodically evaluates, at least annually, whether facts or circumstances indicate that the carrying value of its
depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the
carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an
impairment cost as a charge to operations at the time it is recognized.



Fair Value of Financial Instruments



The
Company measures its financial assets and liabilities in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The carrying values of accounts receivable, accounts payable, note payable,
accrued expenses and other liabilities, and obligations under capital leases approximate fair value due to the short-term maturities of these instruments.



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



Stock-Based Compensation



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



If the Company had elected to recognize compensation expense
based upon the fair value of the share price (determined by the approximate market price at the time of grant) at the grant date for stock option awards consistent with the methodology prescribed by SFAS No. 123, the Companys net income (loss)
and earnings per share would be adjusted to the pro forma amounts indicated below for the years ended December 31, 2003 and 2002 as follows:

|                                                                                                                                            |  |                        |            |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | -------- | -
|                                                                                                                                            |  | Year Ended December 31 |           
|                                                                                                                                            |  | 2003                   |            |   | 2002 |  
|Net income (loss), as reported                                                                                                              |  | $                      | (2,609,271 | ) |      | $ | 55,265   |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                        | (317,254   | ) |      |   | (410,382 | )
|                                                                                                                                            |  |                        |            |   |      |   |          |  
|Pro forma net loss                                                                                                                          |  | $                      | (2,926,525 | ) |      | $ | (355,117 | )
|                                                                                                                                            |  |                        |            |   |      |   |          |  
|Earnings (loss) per share:                                                                                                                  |  |                        |            |   |      |   |          |  
|Basic  as reported                                                                                                                         |  | $                      | (.41       | ) |      | $ | .01      |  
|Basic  pro forma                                                                                                                           |  | $                      | (.46       | ) |      | $ | (.04     | )
|Diluted  as reported                                                                                                                       |  | $                      | (.41       | ) |      | $ | .01      |  
|Diluted  pro forma                                                                                                                         |  | $                      | (.46       | ) |      | $ | (.04     | )



For purposes of
computing the pro forma disclosures required by SFAS No. 123, the fair value of each option granted to employees and directors is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year
ended December 31, 2003 and 2002: dividend yields of 0%, expected volatility of 133%, risk-free interest rate of 6%, and expected lives of five years.



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



Income Taxes



The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.



In accordance with SFAS No. 109, deferred income taxes are recognized for
the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial report amounts at each



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Notes to Consolidated Financial Statements(Continued)



December 31, 2003



period end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period, if any, and the change during the period in deferred
tax assets and liabilities.



Earnings (Loss) per Share



The Company utilizes SFAS No. 128, Earnings per Share. Basic
earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share
except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Potential common shares
includes stock that would be issued on exercise of outstanding options and warrants reduced by the number of shares which could be purchased from the related exercise proceeds and conversion of debt. For 2003, 6,188,833 potentially dilutive
securities are excluded from the computation because they are anti-dilutive.



Foreign Currency Exchange Gains and Losses



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



Estimates



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



Certain Risks and Concentrations



While all obligations for the Companys foreign customers are secured by letters of credit, the Company generally does not receive security for
domestic customer obligations. Credit losses incurred through December 31, 2003 have been insignificant, and the Company has not recorded a reserve for collectibility at December 31, 2003 or 2002. The Company performs ongoing customer credit
evaluations and may in the future establish a collectibility allowance if appropriate.



The Companys products include components subject to rapid technological change. Significant technological change could adversely affect the Companys operating results and subject the Company to product
obsolescence. The Company has return privileges with its suppliers and other ongoing programs to minimize the adverse effects of technological change, and the Company has not recorded a reserve for inventory obsolescence at December 31, 2003 or
2002.



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



During 2003, three customers accounted for 40%, 35% and 23% of the Companys net revenues,
respectively. At December 31, 2003, the amounts due from such customers were $0, $1,358,888, and $50,000, respectively, which were included in accounts receivable. During 2003, the Company purchased substantially all of its products from one
manufacturer. At December 31, 2003, the amount due to this manufacturer was $1,279,215, which was included in accounts payable.



During 2002, three customers accounted for 34%, 31% and 19% of the Companys revenue, respectively. At December 31, 2002, the amount due from these
customers was $750,000, which was included in accounts receivable. During 2002, the Company purchased approximately 92% of its products from one manufacturer. At December 31, 2002, no amount was due to this manufacturer.



As of December 31, 2003, the Company maintained net assets of approximately
$1,200,000 at its location in Korea. Although this country is considered politically and economically stable, it is possible that unanticipated events in this foreign country could disrupt the Companys operations.



Reclassifications



Certain reclassifications have been made to the 2002 financial statements to conform to the 2003 presentation.



Recently Issued Accounting Pronouncements



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosure in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these financial statements.



2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS



The Companys previously issued consolidated balance sheets as of December 31, 2003 and 2002 and the consolidated statements of operations and
comprehensive income (loss), stockholders equity and cash flows for the years then ended have been restated to correct the Companys method of accounting for capitalization of software development costs, the amortization of the
Companys license purchased from Qualcomm, and certain other financial statement entries for stock options, employee bonuses, goodwill impairment, and classifications among cost of goods sold, selling, general and administrative expenses and
research and development.



In September 2004, the Company
re-evaluated the application of certain accounting policies and procedures and determined that the Company had not been properly applying generally accepted accounting principles, primarily in relation to the accounting for software development
costs and intangible assets. In addition, certain other accounting corrections have been made to the accompanying consolidated financial statements.



Through the quarter ended June 30, 2004, the Company has been capitalizing software development costs subsequent to the achievement of technological
feasibility of the software component which is embedded in the Companys product. The Financial Accounting Standards Board, (FASB) Statement No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed, other authoritative literature,



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



interpretations and industry practices prescribe that the technological feasibility is established when both the software and other components of the
products research and development activities are completed. Only upon attainment of both requirements is the Company allowed to begin capitalizing software development costs. Upon a thorough review of the Companys engineering process,
the Company has determined that the research and development activities of the Companys products finish simultaneously with the commencement of the manufacturing process. As such, all development and research activities performed up to the
commencement of the manufacturing process should be expensed. The Companys consolidated financial statements as restated have been adjusted retroactively to reflect this change.



Additionally, through the quarter ended June 30, 2004, the Company had determined that the CDMA intellectual license
purchased from Qualcomm had an indefinite life. After further review of industry practices, the Company has determined that it is more customary to establish a definite life for the license, and the Company has assigned an estimated economic life of
10 years for the license. The Companys consolidated financial statements as restated (beginning in 2000) have been adjusted retroactively to reflect this change.



Certain other financial statement adjustments for stock options employee bonuses, goodwill impairment, and classifications
among cost of goods sold, selling, general and administrative, and research and development were recorded as part of this restatement.



The impact of this restatement, which has been reflected throughout the consolidated financial statements and accompanying notes, is as follows:



Consolidated Balance Sheet



|                                           |  |                       |            |   |                   |   |            |                      |  |   |             |   |  |   |           |  
|------------------------------------------ |  | --------------------- | ---------- | - | ----------------- | - | ---------- | -------------------- |  | - | ----------- | - |  | - | --------- | -
|                                           |  | December 31, 2003     |            |   | December 31, 2002 |  
|                                           |  | As previouslyreported |            |   | As restated       |   |            | Aspreviouslyreported |  |   | As restated |  
|Accounts receivable                        |  | $                     | 1,408,888  |   |                   | $ | 1,408,888  |                      |  | $ | 1,322,022   |   |  | $ | 1,154,022 |  
|Total current assets                       |  |                       | 2,397,911  |   |                   |   | 2,397,911  |                      |  |   | 2,471,904   |   |  |   | 2,303,904 |  
|Deferred tax assets                        |  |                       | 880,000    |   |                   |   | 1,515,000  |                      |  |   |            |   |  |   | 200,000   |  
|License, net                               |  |                       | 3,000,000  |   |                   |   | 2,229,544  |                      |  |   | 1,700,000   |   |  |   | 1,136,540 |  
|Development costs                          |  |                       | 1,033,909  |   |                   |   |           |                      |  |   | 217,164     |   |  |   |          |  
|Goodwill                                   |  |                       | 522,453    |   |                   |   | 385,564    |                      |  |   | 296,889     |   |  |   | 296,889   |  
|Other, net                                 |  |                       | 324,981    |   |                   |   | 731,231    |                      |  |   |            |   |  |   | 370,840   |  
|Total other assets                         |  |                       | 5,919,761  |   |                   |   | 5,019,757  |                      |  |   | 2,389,043   |   |  |   | 2,179,259 |  
|Total assets                               |  |                       | 9,780,938  |   |                   |   | 8,880,934  |                      |  |   | 6,241,501   |   |  |   | 5,863,717 |  
|Accounts payable                           |  |                       | 1,479,466  |   |                   |   | 1,479,466  |                      |  |   |            |   |  |   | 730,795   |  
|Deferred tax liability                     |  |                       |           |   |                   |   |           |                      |  |   | 117,277     |   |  |   |          |  
|Accrued expenses and other liabilities     |  |                       | 810,524    |   |                   |   | 810,524    |                      |  |   | 1,694,790   |   |  |   | 1,276,827 |  
|Total current liabilities                  |  |                       | 5,731,030  |   |                   |   | 5,731,030  |                      |  |   | 2,014,529   |   |  |   | 2,210,084 |  
|Common stock                               |  |                       | 6,699      |   |                   |   | 670        |                      |  |   | 6,078       |   |  |   | 608       |  
|Additional paid-in capital                 |  |                       | 6,400,803  |   |                   |   | 6,726,104  |                      |  |   | 4,296,012   |   |  |   | 4,518,654 |  
|Accumulated deficit                        |  |                       | (2,319,900 | ) |                   |   | (3,539,676 | )                    |  |   | (139,894    | ) |  |   | (930,405  | )
|Total stockholders equity                 |  |                       | 4,049,908  |   |                   |   | 3,149,904  |                      |  |   | 4,119,141   |   |  |   | 3,545,802 |  
|Total liabilities and stockholders equity |  |                       | 9,780,938  |   |                   |   | 8,880,934  |                      |  |   | 6,241,501   |   |  |   | 5,863,717 |  



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



Consolidated Statements of Operations and Comprehensive Income (Loss)



|                                             |  |                       |            |   |                   |   |            |                      |  |             |           |  |   |          
|-------------------------------------------- |  | --------------------- | ---------- | - | ----------------- | - | ---------- | -------------------- |  | ----------- | --------- |  | - | ---------
|                                             |  | December 31, 2003     |            |   | December 31, 2002
|                                             |  | As previouslyreported |            |   | As restated       |   |            | Aspreviouslyreported |  | As restated
|Net revenues                                 |  | $                     | 11,375,993 |   |                   | $ | 11,543,993 |                      |  | $           | 8,086,787 |  | $ | 7,918,787
|Cost of goods sold                           |  |                       | 7,458,913  |   |                   |   | 7,458,913  |                      |  |             | 3,498,651 |  |   | 4,428,561
|Gross profit                                 |  |                       | 3,917,080  |   |                   |   | 4,085,080  |                      |  |             | 4,588,136 |  |   | 3,490,226
|Research and development                     |  |                       | 1,290,556  |   |                   |   | 2,278,141  |                      |  |             | 162,909   |  |   | 796,742  
|Selling, general and administrative expenses |  |                       | 5,480,009  |   |                   |   | 5,545,244  |                      |  |             | 3,673,237 |  |   | 2,561,450
|Total operating expenses                     |  |                       | 6,770,565  |   |                   |   | 7,823,385  |                      |  |             | 3,836,146 |  |   | 3,358,192
|Operating income (loss)                      |  |                       | (2,853,485 | ) |                   |   | (3,738,305 | )                    |  |             | 751,990   |  |   | 132,034  
|Income (loss) before income taxes            |  |                       | (2,991,181 | ) |                   |   | (3,876,001 | )                    |  |             | 879,357   |  |   | 259,401  
|Provision (benefit) for income taxes         |  |                       | (811,175   | ) |                   |   | (1,266,730 | )                    |  |             | 243,731   |  |   | 204,136  
|Net income (loss)                            |  |                       | (2,180,006 | ) |                   |   | (2,609,271 | )                    |  |             | 635,626   |  |   | 55,265   
|Comprehensive income (loss)                  |  |                       | (2,174,645 | ) |                   |   | (2,603,910 | )                    |  |             | 592,571   |  |   | 12,210   
|Basic earnings (loss) per common share       |  | $                     | (0.34      | ) |                   | $ | (0.41      | )                    |  | $           | 0.09      |  | $ | 0.01     
|Diluted earnings (loss) per common share     |  | $                     | (0.34      | ) |                   | $ | (0.41      | )                    |  | $           | 0.06      |  | $ | 0.01     



Consolidated Statements of Cash
Flows



|                                                    |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|--------------------------------------------------- |  | --------------------- | ---------- | - | ----------------- | - | ---------- | --------------------- |  | - | ----------- | - |  | - | ---------- | -
|                                                    |  | December 31, 2003     |            |   | December 31, 2002 |  
|                                                    |  | As previouslyreported |            |   | As restated       |   |            | As previouslyreported |  |   | As restated |  
|Net income (loss)                                   |  | $                     | (2,180,006 | ) |                   | $ | (2,609,271 | )                     |  | $ | 635,626     |   |  | $ | 55,265     |  
|                                                    |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|Depreciation and amortization                       |  |                       | 529,981    |   |                   |   | 947,817    |                       |  |   | 208,368     |   |  |   | 421,828    |  
|Impairment of goodwill                              |  |                       | 160,000    |   |                   |   | 296,889    |                       |  |   |            |   |  |   |           |  
|Loss from sale of marketable securities             |  |                       |           |   |                   |   |           |                       |  |   | 41,987      |   |  |   | 41,987     |  
|Loss from write down and disposition of assets      |  |                       | 318,244    |   |                   |   | 318,244    |                       |  |   |            |   |  |   |           |  
|Issuance of stock for services                      |  |                       | 300,080    |   |                   |   | 93,830     |                       |  |   | 62,032      |   |  |   | 62,032     |  
|Issuance of stock for employee compensation         |  |                       | 325,000    |   |                   |   | 125,000    |                       |  |   |            |   |  |   |           |  
|Stock warrants granted for employee compensation    |  |                       |           |   |                   |   | 102,600    |                       |  |   |            |   |  |   | 217,172    |  
|Stock warrants granted for consulting services      |  |                       | 620,332    |   |                   |   | 620,332    |                       |  |   | 204,510     |   |  |   | 204,510    |  
|Deferred tax assets                                 |  |                       | (880,000   | ) |                   |   | (1,315,000 | )                     |  |   |            |   |  |   | (2,354     | )
|(Increase) decrease in:                             |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|Accounts receivable                                 |  |                       | (86,866    | ) |                   |   | (254,866   | )                     |  |   | (1,209,740  | ) |  |   | (1,041,740 | )
|Prepayments and other current assets                |  |                       | (231,470   | ) |                   |   | (231,470   | )                     |  |   | (350,434    | ) |  |   | (721,274   | )
|Inventories                                         |  |                       |           |   |                   |   |           |                       |  |   | 31,990      |   |  |   | 31,990     |  
|Other assets                                        |  |                       | (143,428   | ) |                   |   | 16,572     |                       |  |   | (173,061    | ) |  |   | (173,061   | )
|Increase (decrease) in:                             |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|Accounts payable                                    |  |                       | 1,479,466  |   |                   |   | 748,671    |                       |  |   | (229,751    | ) |  |   | 501,044    |  
|Accrued expenses and other liabilities              |  |                       | (890,796   | ) |                   |   | (466,303   | )                     |  |   | 1,881,255   |   |  |   | 1,288,219  |  
|                                                    |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|Total adjustments                                   |  |                       | 1,500,543  |   |                   |   | 1,002,316  |                       |  |   | 467,156     |   |  |   | 830,353    |  
|                                                    |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|Net cash (used in) provided by operating activities |  |                       | (679,463   | ) |                   |   | (1,606,955 | )                     |  |   | 1,102,782   |   |  |   | 885,618    |  
|                                                    |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|Acquisition of property and equipment               |  |                       | (806,482   | ) |                   |   | (806,482   | )                     |  |   | (101,050    | ) |  |   | (101,050   | )
|Acquisition of license                              |  |                       |           |   |                   |   |           |                       |  |   | (200,000    | ) |  |   | (200,000   | )
|Additions to development costs                      |  |                       | (816,745   | ) |                   |   |           |                       |  |   | (217,164    | ) |  |   |           |  
|Proceeds from sales of marketable securities        |  |                       |           |   |                   |   |           |                       |  |   | 63,859      |   |  |   | 63,859     |  
|                                                    |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  
|Net cash used in investing activities               |  |                       | (1,623,227 | ) |                   |   | (806,482   | )                     |  |   | (454,355    | ) |  |   | (237,191   | )
|                                                    |  |                       |            |   |                   |   |            |                       |  |   |             |   |  |   |            |  



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



|                                                     |  |                      |           |             |                   |           |                      |  |   |             |   |  |   |          |  
|---------------------------------------------------- |  | -------------------- | --------- | ----------- | ----------------- | --------- | -------------------- |  | - | ----------- | - |  | - | -------- | -
|                                                     |  | December 31, 2003    |           |             | December 31, 2002 |          
|                                                     |  | Aspreviouslyreported |           | As restated |                   |           | Aspreviouslyreported |  |   | As restated |  
|Issuance of stock for cash                           |  |                      | 185,000   |             |                   | 185,000   |                      |  |   |            |   |  |   |         |  
|Fund raising advances                                |  |                      | 1,720,000 |             |                   | 1,720,000 |                      |  |   |            |   |  |   |         |  
|Issuance of note payable                             |  |                      |          |             |                   | 200,000   |                      |  |   |            |   |  |   |         |  
|Repayment of note payable, convertible               |  |                      |          |             |                   |          |                      |  |   | (147,000    | ) |  |   | (147,000 | )
|Increase in obligations under capital leases         |  |                      |          |             |                   |          |                      |  |   | 583,640     |   |  |   | 583,640  |  
|Principal repayments under capital lease obligations |  |                      |          |             |                   | (89,253   | )                    |  |   | (273,347    | ) |  |   | (273,347 | )
|                                                     |  |                      |           |             |                   |           |                      |  |   |             |   |  |   |          |  
|Net cash used in financing activities                |  | $                    | 1,905,000 |             | $                 | 2,015,747 |                      |  | $ | 163,293     |   |  | $ | 163,293  |  
|                                                     |  |                      |           |             |                   |           |                      |  |   |             |   |  |   |          |  



3. PREPAYMENTS AND OTHER CURRENT
ASSETS



Prepayments and other current assets at December
31, 2003 and 2002 consisted of the following:



|                  |  |      |         |      |   |        
|----------------- |  | ---- | ------- | ---- | - | -------
|                  |  | 2003 |         | 2002
|Prepaid taxes     |  | $    | 455,731 |      | $ |       
|Employee advances |  |      | 61,727  |      |   | 33,406 
|Supplier advances |  |      | 90,236  |      |   | 221,427
|Other receivables |  |      | 4,993   |      |   | 126,384
|                  |  |      |         |      |   |        
|                  |  | $    | 612,687 |      | $ | 381,217
|                  |  |      |         |      |   |        



4. PROPERTY AND EQUIPMENT



Property and equipment at December 31, 2003 and 2002
consisted of the following:



|                                                     |  |      |           |      |   |          
|---------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                     |  | 2003 |           | 2002
|Machinery and equipment, including computer software |  | $    | 1,243,843 |      | $ | 1,289,807
|Office equipment                                     |  |      | 555,901   |      |   | 325,683  
|Furniture and fixtures                               |  |      | 29,190    |      |   | 26,693   
|Leasehold improvements                               |  |      | 42,120    |      |   | 18,059   
|                                                     |  |      |           |      |   |          
|                                                     |  | $    | 1,871,054 |      | $ | 1,660,242
|Less: Accumulated depreciation                       |  |      | 407,788   |      |   | 279,688  
|                                                     |  |      |           |      |   |          
|                                                     |  | $    | 1,463,266 |      | $ | 1,380,554
|                                                     |  |      |           |      |   |          



5. OTHER ASSETS



Other assets at December 31, 2003 and 2002 consisted of the following:



|                                              |  |      |         |      |   |        
|--------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                              |  | 2003 |         | 2002
|Workforce intangible from Entatel acquisition |  | $    | 164,981 |      | $ |       
|Workforce bonuses                             |  |      | 160,000 |      |   | 370,840
|Deferred compensation                         |  |      | 406,250 |      |   |       
|                                              |  |      |         |      |   |        
|                                              |  | $    | 731,231 |      | $ | 370,840
|                                              |  |      |         |      |   |        



Other assets are
amortized over a two to three year period.



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



6. LICENSE



In November 2000, the Company entered into a Subscriber Unit License Agreement (the Agreement) with Qualcomm and obtained a license of CDMA
(Code Division Multiple Access) technology, Qualcomms intellectual property, to manufacture and sell certain CDMA based products and to purchase certain components and equipment from time to time.



The Agreement called for an Up-Front License Fee of $3,000,000,
payable with 2,000,000 shares of Axesstel Californias Series B Preferred Stock amounting to $1,500,000 and five variable installment payments for the remaining $1,500,000 maturing no later than 360 days after the effective date, with no
interest. The Company paid $200,000 towards these installments.



The Agreement was amended in March 2002 to (i) reduce the scope of the license and (ii) accept the previous $200,000 cash payment and the issuance of 2,000,000 shares of Series B Preferred Stock of Axesstel California as payment in full for
the Up Front License Fee. In August 2002, the Series B Preferred Stock was converted into 605,184 shares of the Companys common stock. In December 2003, the Agreement was amended further to (i) increase the scope of the license and (ii)
increase the Up-Front License Fee by $1,300,000 payable over the next 12 months.



This License, as amended, allows the Company to manufacture fixed wireless CDMA based products and to sell or distribute them worldwide. This license has no fixed termination date and the Company has assigned an
estimated life of 10 years for the license. As of December 31, 2003 and 2002, the license consisted of the following:



|                         |  |      |           |   |      |   |           |  
|------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                         |  | 2003 |           |   | 2002 |  
|License costs            |  | $    | 3,000,000 |   |      | $ | 1,700,000 |  
|Accumulated amortization |  |      | (770,456  | ) |      |   | (563,460  | )
|                         |  |      |           |   |      |   |           |  
|                         |  | $    | 2,229,544 |   |      | $ | 1,136,540 |  
|                         |  |      |           |   |      |   |           |  



Amortization expense
related to this license amounted to $206,996 and $213,460 for the years ended December 31, 2003 and 2002, respectively.



7. SOFTWARE DEVELOPMENT COSTS



Capitalized software development costs are amortized when products are available for general release to customers, using the greater of the amount
computed using (a) the ratio that current gross revenues for the products bear to the total of current and anticipated future gross revenues for those products or (b) the straight-line method over the estimated useful lives of the products. There
were no capitalized software costs as of December 31, 2003 and 2002.



8.
GOODWILL AND OTHER INTANGIBLES



The Company adopted SFAS
No. 142 Goodwill and Other Intangible Assets as of January 1, 2002. SFAS No. 142 requires, among other things, the discontinuance of amortization of goodwill and other indefinite lived assets. In addition, the standard requires the
reassessment of the useful lives of existing recognized intangibles and the testing for impairment of goodwill and other intangibles. The Company has elected to test annually for impairment. These tests will be performed more frequently if there are
triggering events. The Company has



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



completed its testing for the year ended December 31, 2003 using the method discussed in SFAS No. 142 and determined that there was an impairment of
$296,889. Impairment costs, when recognized, are recorded as a charge to operations.



For the year ended December 31, 2002, the Company amortized goodwill amounting to $21,336. As of December 31, 2003 and 2002, net goodwill amounted to $385,564 and $296,889, respectively.



For the year ended December 31, 2003, the Company recorded $247,742 of
workforce acquired as part of the Entatel acquisition (See Note 11) and amortized $82,761 of this intangible.



9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES



Accrued expenses and other current liabilities at December 31, 2003 and 2002 consisted of the following:



|                           |  |      |         |      |   |          
|-------------------------- |  | ---- | ------- | ---- | - | ---------
|                           |  | 2003 |         | 2002
|Overdraft with bank        |  | $    | 93,405  |      | $ |         
|Customer advances          |  |      | 26,146  |      |   |         
|Accrued taxes              |  |      | 21,877  |      |   | 201,782  
|Accrued operating expenses |  |      | 669,096 |      |   | 1,075,045
|                           |  |      |         |      |   |          
|                           |  | $    | 810,524 |      | $ | 1,276,827
|                           |  |      |         |      |   |          



10. INCOME TAXES



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

|                                           |  |      |            |   |      |   |        
|------------------------------------------ |  | ---- | ---------- | - | ---- | - | -------
|                                           |  | 2003 |            |   | 2002
|Current tax provision (benefit):           |  |      |            |   |      |   |        
|Federal                                    |  | $    | (123,847   | ) |      | $ | 123,847
|State                                      |  |      | 1,600      |   |      |   | 77,935 
|Foreign                                    |  |      | 170,517    |   |      |   |       
|                                           |  |      |            |   |      |   |        
|                                           |  |      | 48,270     |   |      |   | 201,782
|                                           |  |      |            |   |      |   |        
|Deferred tax provision (benefit):          |  |      |            |   |      |   |        
|Federal                                    |  |      | (1,283,000 | ) |      |   | 2,354  
|State                                      |  |      | (32,000    | ) |      |   |       
|                                           |  |      |            |   |      |   |        
|                                           |  |      | (1,315,000 | ) |      |   | 2,354  
|                                           |  |      |            |   |      |   |        
|Total provision (benefit) for income taxes |  | $    | (1,266,730 | ) |      | $ | 204,136
|                                           |  |      |            |   |      |   |        



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



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



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Notes to Consolidated Financial Statements(Continued)



December 31, 2003



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



Significant components of the Companys net deferred tax asset or liability at December 31, 2003 are as follows:

|                                 |  |      |           |  
|-------------------------------- |  | ---- | --------- | -
|                                 |  | 2003 |          
|Net operating loss carryforwards |  | $    | 1,393,000 |  
|Amortization                     |  |      | 141,000   |  
|Other                            |  |      | (19,000   | )
|                                 |  |      |           |  
|                                 |  | $    | 1,515,000 |  
|                                 |  |      |           |  



In assessing the
realizability of deferred tax assets of $1,515,000 and $200,000 at December 31, 2003 and 2002, respectively, management considered whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the
projected future taxable income and tax planning strategies in making this assessment. At December 31, 2003, the Company did not have a valuation allowance on the net deferred tax assets as the Company believed it was more likely than not that the
deferred tax assets will be realized. Based on a five year financial projection prepared by the Company, management believes the Company will generate a sufficient levels of income to utilize the benefits of the deferred tax assets recorded.
Significant management judgment is required in determining whether an indicator of impairment exists and projecting cash flows.



A reconciliation of the expected tax computed at the U.S. statutory federal income tax rate to the total benefit for income taxes at December 31, 2003
follows:



|                                     |  |      |            |  
|------------------------------------ |  | ---- | ---------- | -
|                                     |  | 2003 |           
|Expected tax at 34%                  |  | $    | (1,318,000 | )
|International tax rate differences   |  |      | (158,000   | )
|State income tax, net of federal tax |  |      | (75,000    | )
|Non-deductible expenses              |  |      | 261,000    |  
|Other                                |  |      | 23,270     |  
|                                     |  |      |            |  
|Benefit for income taxes             |  | $    | (1,266,730 | )
|                                     |  |      |            |  



At December 31, 2003,
the Company had net operating loss carryforwards of approximately $3,975,000 for federal tax purposes, expiring through 2023. In addition, the Company had net operating loss carryforwards of approximately $1,100,000 for state tax purposes, expiring
through 2013.



Internal Revenue Code Section 382 restricts the
ability of a corporation to utilize existing net operating losses in the event of an ownership change. Accordingly, a portion of the Companys net operating losses for Federal income tax purposes may be limited due to future changes
in ownership. Although the Company has not undertaken a formal evaluation to determine the restricted amounts, the Company believes the utilization of its net operating losses may be limited to approximately $1,000,000 per year to offset future
taxable income, if any.



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



11. BUSINESS COMBINATIONS



Entatel Acquisition



In December 2002, in order to accelerate technology development and productivity, the Company acquired Entatel, Ltd. (Entatel), a Korea-based
company, mainly engaged in developing, manufacturing and selling telecommunication products pursuant to a stock purchase agreement. Pursuant to the Agreement, the Company acquired all of the issued and outstanding capital stock of Entatel, in
exchange for 300,000 shares (valued at $2.25 per share) of the Companys common stock. The acquisition was accounted for under the purchase method of accounting, pursuant to SFAS No. 141, Business Combinations issued in June 2001.
The purchase transaction was consummated in early 2003.



The
assets acquired consisted of:



|                 |  |             |        
|---------------- |  | ----------- | -------
|                 |  | Asset Value
|Goodwill         |  | $           | 385,564
|Workforce        |  |             | 247,472
|Other net assets |  |             | 41,964 
|                 |  |             |        
|                 |  | $           | 675,000
|                 |  |             |        



Miracom Acquisition



Axesstel was originally formed in July 2000 as a California corporation
(Axesstel California). On July 16, 2002, Axesstel California entered into a Corporate Combination Agreement with Miracom Industries, Inc., a Nevada corporation (Miracom), which was amended on August 22, 2002 (the
Combination Agreement). Pursuant to the Combination Agreement, on August 31, 2002, Miracom acquired through a tender offer 98% of the outstanding common stock of Axesstel California and Axesstel California became a subsidiary of
Miracom. The Company issued 0.302591758 shares of common stock for each share of Axesstel California common stock outstanding immediately prior to the acquisition. The Company also assumed each outstanding option and warrant for the purchase of
Axesstel Californias common stock, with the number of shares and the exercise prices of the options and warrants assumed adjusted to reflect the exchange ratio set forth above. The Company assumed outstanding options to purchase 2,052,761
shares. Options for 1,625,508 of these shares had an exercise price of $0.26 per share and options for 427,253 of these shares had an exercise price of $0.07 per share. The Company assumed outstanding warrants to purchase 2,333,038 shares, all of
which had an exercise price of $0.07 per share. As of December 31, 2003, no assumed stock options or warrants were exercised.



Following the acquisition, the former shareholders of Axesstel California held approximately 95% of the outstanding common stock of the Company on a
fully-diluted basis. The acquisition was accounted for as a reverse acquisition because the former shareholders of Axesstel California owned a majority of the Companys outstanding stock subsequent to the acquisition.



12. COMMITMENTS



Leases



The Company entered into non-cancelable operating leases expiring through November 2006 for office space in the U.S.A. and in Korea. One of the leases
contains a provision for fixed rent increases of not more than three percent per annum, along with an increase in certain operating expenses.



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Notes to Consolidated Financial Statements(Continued)



December 31, 2003



Rent expense charged to operations for the year ended December 31, 2003 and 2002 was $328,298
and $164,416, respectively.



Future minimum lease payments
under the non-cancelable operating leases as of December 31, 2003 are as follows:



|                             |  |                |        
|---------------------------- |  | -------------- | -------
|Year Ending December 31,     |  | OperatingLease
|2004                         |  | $              | 355,375
|2005                         |  |                | 160,945
|2006                         |  |                | 109,697
|                             |  |                |        
|Total minimum lease payments |  | $              | 626,017
|                             |  |                |        



13. STOCKHOLDERS EQUITY



Common Stock-2003 Activity



In May 2003, the Company issued 92,500 shares of the Companys common
stock at their fair market value of $2.00 per share to individuals and entities for cash totaling $185,000.



In May 2003, the Company issued 300,000 shares (total value: $675,000) of the Companys common stock for the acquisition of 100% of the issued and
outstanding capital stock of Entatel, pursuant to a Stock Purchase Agreement made in December 2002.



In May 2003, the Company issued 10,000 shares of its common stock at their fair market value of $1.89 per share for legal services rendered, totaling
$18,903.



In June 2003, the Company issued 100,000 shares of
its common stock for employee compensation at their fair market value of $3.00, totaling $300,000.



In August 2003, the Company issued 90,000 shares of its common stock at their fair market value of $2.75 per share to members of the Board of Directors,
totaling $247,500.



In November 2003, the Company issued 9,622
shares of the Companys common stock at their fair market value of $3.50 per share for consulting services rendered, totaling $33,677.



In November 2003, the Company issued 19,230 shares of its common stock for employee compensation at their fair market value of $1.30 per share, totaling
$24,999.



For the year ended December 31, 2003, the Company
issued warrants for the purchase of 220,000 shares of common stock, with exercise prices of $2.80 and $3.50 per share, for consulting services. These warrants have been valued at $549,000, and are charged to operations over the expected period of
services to be provided.



Common Stock-2002 Activity



For the year ended December 31, 2002, the Company issued 20,690 shares of
common stock for debts assumed by a certain stockholder totaling $250,627 and 57,425 shares for payment of outstanding debts totaling $229,604.



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



For the year ended December 31, 2002, the Company issued 57,000 common shares for conversion of notes
totaling $157,375 and 141,789 shares of common stock for services rendered totaling $204,510.



In August 2002, 4,400,000 shares of Series A Preferred Stock of Axesstel California were converted into 1,331,404 shares of common stock pursuant to the Corporation Combination Agreement dated July 16, 2002, as
amended. (See Note 11.)



In September 2002, warrants for
100,000 shares and 200,000 shares, respectively, were granted for consultant services rendered of $52,000 and $104,000 respectively.



In October 2002, the Company entered into a contract for legal services with a legal consultant in Korea, in consideration for 10,000 shares of the
Companys common stock. As of December 31, 2002, the issuance of the common stock was in progress, and the transaction is recorded under Other Liabilities in the Consolidated Balance Sheet as of December 31, 2002.



Stock Option and Warrant Activity



In August 2002, the Company assumed options exercisable for 2,052,761 shares
of common stock and warrants exercisable for 2,333,038 shares of common stock in connection with the acquisition of Axesstel by Miracom. The vesting of all such granted options were accelerated, such that 100% of these options are completely vested.



In September 2002, the Company established a stock option
plan, under which shares of common stock are reserved for issuance to employees, officers, directors and consultants. Under the Plan, the Company may grant up to 911,671 (15% of total outstanding shares) non-statutory options. Pursuant to the plan,
the Company granted options for the purchase of 191,500 shares of its common stock to its employees, officers, directors and consultants for the year ended December 31, 2003. The options vest over a 3 year period.



In March 2003, the Company established a new stock option plan. Under the
Plan, the Company may grant options to purchase up to 982,171 shares of common stock or approximately 15% of current total outstanding shares. Pursuant to this plan, the Company granted stock options for the purchase of 431,000 shares of the
Companys common stock to its employees, officers, directors and consultants for the year ended December 31, 2003. The options vest over a 3 year period.



In September 2003, the Company established an additional stock option plan pursuant to which options to purchase a total of
1,000,000 shares of common stock may be granted to the Companys employees, officers, directors and consultants. The options granted under this stock option plan vest over a 3 year period. As of December 31, 2003, no options under the plan
had been granted.



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



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Notes to Consolidated Financial Statements(Continued)



December 31, 2003



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



|                              |  |           |   |      |                          |      |         |           |                          |   |     
|----------------------------- |  | --------- | - | ---- | ------------------------ | ---- | ------- | --------- | ------------------------ | - | ----
|                              |  | 2003      |   | 2002
|Option Summary:               |  | Options   |   |      | Wt AverageExercise Price |      | Options |           | Wt AverageExercise Price
|Outstanding-beginning of year |  | 2,771,445 |   |      | $                        | 0.40 |         |          |                          | $ |    
|Granted                       |  | 622,500   |   |      | $                        | 1.97 |         | 2,771,445 |                          | $ | 0.40
|Exercised                     |  |          |   |      | $                        |     |         |          |                          | $ |    
|Forfeited                     |  | (58,150   | ) |      | $                        | 1.84 |         |          |                          | $ |    
|                              |  |           |   |      |                          |      |         |           |                          |   |     
|Outstanding-end of year       |  | 3,335,795 |   |      | $                        | 0.67 |         | 2,771,445 |                          | $ | 0.40
|                              |  |           |   |      |                          |      |         |           |                          |   |     



The following table
summarizes the number of option shares, the weighted average exercise price, and weighted average life (by years) by price range for both total outstanding options and total exercisable options as of December 31, 2003.



|               |  |                   |  |                          |      |      |     |             |           |                          |   |     
|-------------- |  | ----------------- |  | ------------------------ | ---- | ---- | --- | ----------- | --------- | ------------------------ | - | ----
|               |  | Total Outstanding |  | Total Exercisable       
|Price range    |  | # of Shares       |  | Wt AverageExercise Price |      | Life |     | # of Shares |           | Wt AverageExercise Price
|$0.00 to $0.50 |  | 2,052,761         |  | $                        | 0.22 |      | 8.7 |             | 2,052,761 |                          | $ | 0.22
|$0.51 to $1.00 |  | 542,533           |  | $                        | 0.60 |      | 8.7 |             | 241,866   |                          | $ | 0.60
|$1.01 to $2.00 |  | 503,167           |  | $                        | 1.77 |      | 9.1 |             | 163,389   |                          | $ | 1.81
|$2.01 to $3.50 |  | 237,334           |  | $                        | 2.37 |      | 9.1 |             | 72,536    |                          | $ | 2.40
|               |  |                   |  |                          |      |      |     |             |           |                          |   |     
|Total:         |  | 3,335,795         |  | $                        | 0.67 |      | 8.8 |             | 2,530,552 |                          | $ | 0.42
|               |  |                   |  |                          |      |      |     |             |           |                          |   |     



For the year ended
December 31, 2003, the Company issued warrants to purchase 220,000 shares of stock, with exercise prices of $2.80 and $3.50 per share, for consulting services. These warrants have been valued at $549,000, and are charged to operations over the
expected period of services to be provided.



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



|                              |  |           |  |                          |      |         |           |                          |   |     
|----------------------------- |  | --------- |  | ------------------------ | ---- | ------- | --------- | ------------------------ | - | ----
|                              |  | 2003      |  | 2002                    
|Warrant Summary:              |  | Warrant   |  | Wt AverageExercise Price |      | Warrant |           | Wt AverageExercise Price
|Outstanding-beginning of year |  | 2,633,038 |  | $                        | 0.13 |         | 2,333,038 |                          | $ | 0.07
|Granted                       |  | 220,000   |  | $                        | 2.86 |         | 300,000   |                          | $ | 0.60
|Exercised                     |  |          |  | $                        |     |         |          |                          | $ |    
|Forfeited                     |  |          |  | $                        |     |         |          |                          | $ |    
|                              |  |           |  |                          |      |         |           |                          |   |     
|Outstanding-end of year       |  | 2,853,038 |  | $                        | 0.34 |         | 2,633,038 |                          | $ | 0.13
|                              |  |           |  |                          |      |         |           |                          |   |     



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



The following table summarizes the number of warrants, the weighted average exercise price, and
weighted average life (by years) by price for both total outstanding warrants and total exercisable warrants as of December 31, 2003.



|      |  |                   |  |                          |      |      |     |             |           |                          |   |     
|----- |  | ----------------- |  | ------------------------ | ---- | ---- | --- | ----------- | --------- | ------------------------ | - | ----
|      |  | Total Outstanding |  | Total Exercisable       
|Price |  | # of Shares       |  | Wt AverageExercise Price |      | Life |     | # of Shares |           | Wt AverageExercise Price
|$0.07 |  | 2,333,038         |  | $                        | 0.07 |      | 8.4 |             | 2,333,038 |                          | $ | 0.07
|$0.60 |  | 300,000           |  | $                        | 0.60 |      | 8.7 |             | 300,000   |                          | $ | 0.60
|$2.80 |  | 200,000           |  | $                        | 2.80 |      | 9.8 |             | 200,000   |                          | $ | 2.80
|$3.50 |  | 20,000            |  | $                        | 3.50 |      | 4.5 |             | 20,000    |                          | $ | 3.50
|      |  |                   |  |                          |      |      |     |             |           |                          |   |     
|      |  | 2,853,038         |  | $                        | 0.34 |      | 8.5 |             | 2,853,038 |                          | $ | 0.34
|      |  |                   |  |                          |      |      |     |             |           |                          |   |     



14. SEGMENT INFORMATION



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



Net revenues by geographic region based on customer locations for the year ended December 31, 2003 and 2002 were as follows:



|                 |  |      |            |      |   |          
|---------------- |  | ---- | ---------- | ---- | - | ---------
|                 |  | 2003 |            | 2002
|Net revenues     |  |      |            |      |   |          
|United States    |  | $    | 7,590,880  |      | $ | 5,340,770
|Pacific Rim/Asia |  |      | 3,953,113  |      |   | 1,372,103
|Latin America    |  |      |           |      |   | 1,204,994
|Other            |  |      |           |      |   | 920      
|                 |  |      |            |      |   |          
|                 |  | $    | 11,543,993 |      | $ | 7,918,787
|                 |  |      |            |      |   |          



15. QUARTERLY FINANCIAL DATA



The restated summary quarterly financial data for 2003
and 2002 consists of the following:



|                                  |  |             |           |             |   |             |  |   |             |   |  |   |            |  
|--------------------------------- |  | ----------- | --------- | ----------- | - | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                  |  | 1st Quarter |           | 2nd Quarter |   | 3rd Quarter |  |   | 4th Quarter |  
|2003 (as previously reported)     |  |             |           |             |   |             |  |   |             |   |  |   |            |  
|Net revenues                      |  | $           | 3,279,105 |             | $ | 4,962,650   |  | $ | 1,043,100   |   |  | $ | 2,091,138  |  
|Income (loss) before income taxes |  |             | 1,420,535 |             |   | 364,061     |  |   | (1,093,957  | ) |  |   | (3,681,820 | )
|Net income (loss)                 |  |             | 807,726   |             |   | 205,085     |  |   | (637,982    | ) |  |   | (2,554,835 | )
|Basic earnings (loss) per share   |  | $           | 0.13      |             | $ | 0.03        |  | $ | (0.10       | ) |  | $ | (0.38      | )
|Diluted earnings (loss) per share |  | $           | 0.10      |             | $ | 0.02        |  | $ | (0.10       | ) |  | $ | (0.38      | )
|                                  |  |             |           |             |   |             |  |   |             |   |  |   |            |  



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Notes to Consolidated Financial Statements(Continued)



December 31, 2003



|                                  |  |             |           |   |             |   |             |  |   |             |   |  |   |            |  
|--------------------------------- |  | ----------- | --------- | - | ----------- | - | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                  |  | 1st Quarter |           |   | 2nd Quarter |   | 3rd Quarter |  |   | 4th Quarter |  
|2003 (as restated)                |  |             |           |   |             |   |             |  |   |             |   |  |   |            |  
|Net revenues                      |  | $           | 3,447,105 |   |             | $ | 4,962,650   |  | $ | 1,043,100   |   |  | $ | 2,091,138  |  
|Income (loss) before income taxes |  |             | 1,169,649 |   |             |   | 81,021      |  |   | (1,517,466  | ) |  |   | (3,609,205 | )
|Net income (loss)                 |  |             | 783,649   |   |             |   | 54,021      |  |   | (1,016,466  | ) |  |   | (2,430,475 | )
|Basic earnings (loss) per share   |  | $           | 0.13      |   |             | $ | 0.01        |  | $ | (0.15       | ) |  | $ | (0.37      | )
|Diluted earnings (loss) per share |  | $           | 0.10      |   |             | $ | 0.01        |  | $ | (0.15       | ) |  | $ | (0.37      | )
|                                  |  |             |           |   |             |   |             |  |   |             |   |  |   |            |  
|                                  |  |             |           |  
|2002 (as previously reported)     |  |             |           |   |             |   |             |  |   |             |   |  |   |            |  
|Net revenues                      |  | $           | 414,447   |   |             | $ | 2,781,773   |  | $ | 2,772,774   |   |  | $ | 2,117,793  |  
|Income (loss) before income taxes |  |             | (142,950  | ) |             |   | 449,008     |  |   | 1,042,860   |   |  |   | (469,561   | )
|Net income (loss)                 |  |             | (103,124  | ) |             |   | 333,905     |  |   | 583,517     |   |  |   | (168,672   | )
|Basic earnings (loss) per share   |  | $           | (0.01     | ) |             | $ | 0.03        |  | $ | 0.08        |   |  | $ | (0.02      | )
|Diluted earnings (loss) per share |  | $           | (0.01     | ) |             | $ | 0.03        |  | $ | 0.08        |   |  | $ | (0.02      | )
|                                  |  |             |           |   |             |   |             |  |   |             |   |  |   |            |  
|                                  |  |             |           |  
|2002 (as restated)                |  |             |           |   |             |   |             |  |   |             |   |  |   |            |  
|Net revenues                      |  | $           | 414,447   |   |             | $ | 2,781,773   |  | $ | 2,772,774   |   |  | $ | 1,949,793  |  
|Income (loss) before income taxes |  |             | (196,315  | ) |             |   | 395,643     |  |   | 697,628     |   |  |   | (637,655   | )
|Net income (loss)                 |  |             | (156,489  | ) |             |   | 270,540     |  |   | 238,285     |   |  |   | (297,071   | )
|Basic earnings (loss) per share   |  | $           | (0.01     | ) |             | $ | 0.02        |  | $ | 0.04        |   |  | $ | (0.04      | )
|Diluted earnings (loss) per share |  | $           | (0.01     | ) |             | $ | 0.02        |  | $ | 0.04        |   |  | $ | (0.04      | )
|                                  |  |             |           |   |             |   |             |  |   |             |   |  |   |            |  



16. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS



In November 2000, the Company
entered into a license agreement with Qualcomm to manufacture and sell certain products incorporating Qualcomms CDMA (Code Division Multiple Access) technology. For the year ended December 31, 2003, the Company has directly paid $992,000 and
owes an additional $1.3 million for software purchases, fees and royalties to Qualcomm. This does not include the Qualcomm chipsets purchased directly by our contract manufacturer, estimated at $1.0 million for the year. As of December 31, 2003,
Qualcomm owns 605,000 of the 6,699,168 shares of the Companys outstanding common stock, representing a 9.0% ownership interest in the Company. For the year ended December 31, 2002, the Company paid Qualcomm $215,000. This does not include the
Qualcomm chipsets purchased directly by our contract manufacturer, estimated at $875,000 for the year. No amounts were owed to Qualcomm as of December 31, 2002. As of December 31, 2002, Qualcomm owned 605,000 of the 6,077,816 shares of the
Companys outstanding common stock, representing a 9.9% ownership interest in the Company.



17. SUBSEQUENT EVENTS



Sale of $1,000,000 Unsecured Convertible Term Note



In January 2004, the Company completed the sale and issuance of an unsecured convertible term note in the original principal amount of $1 million to North America Venture Fund II, L.P., an accredited investor. Interest accrues on the note
at the rate of 3% above prime, subject to certain adjustments. The principal and accrued interest due under the note are convertible by North America into shares of the Companys common stock at a conversion price of $2.00 per share. All unpaid
principal and accrued interest, if not sooner converted, is due on January 8, 2005.



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



Sale of 1,360,000 Shares of Common Stock and Warrants to Purchase 1,632,000 Shares of Common Stock



In January 2004, the Company sold to seven accredited
investors in a private placement an aggregate of 1,360,000 shares of its common stock at a price of $2.00 per share for gross proceeds of $2,720,000. In connection with the private placement, the Company also issued to the investors warrants to
purchase an aggregate of 1,632,000 shares of its common stock. Warrants for 860,000 of these shares have an exercise price of $1.00 per share and are exercisable until July 8, 2004. Warrants for 500,000 of these shares have an exercise price of
$1.00 per share and are exercisable until July 8, 2005. Warrants for the other 272,000 shares have an exercise price of $2.00 per share, subject to an increase to $3.30 per share upon the completion of certain milestones, and are exercisable
beginning on the first date on which the achievement of the milestones can be determined and expire 18 months after that date.



For services rendered in connection with the above financing, the Company agreed to issue to a finder a total of 150,000 shares of its common stock. The
Company issued 50,000 shares to the finder in January 2004, and agreed to issue to the finder an additional 50,000 shares in each of January 2005 and January 2006. The Company also paid to the finder a fee of $136,000, representing 5% of the gross
proceeds in the financing.



Sale of $3,000,000 Secured
Convertible Term Note



In March 2004, the Company
completed the sale and issuance of a $3 million secured convertible promissory note to Laurus Master Fund, Ltd., an accredited investor, pursuant to a securities purchase agreement. Interest accrues on the note at a rate of 3% above prime, subject
to certain adjustments. In no event will the interest rate on the note be lower than 7% or greater than 10%.



Under the terms of the note, the Company is obligated to make monthly payments of principal and interest. The Company has the option to pay these monthly
payments in cash or in shares of its common stock (so long as the closing price of the common stock is greater than $3.38 for ten consecutive trading days preceding the payment date). If the Company elects to pay in stock, it must issue to Laurus an
amount of shares equivalent to the amount of the monthly payment due divided by $3.16. If the Company elects to pay in cash, it must pay 102% of the amount of the monthly payment due.



The Company may pay the monthly payment in shares of its common stock only so long as there is an effective registration
statement on file covering the resale of such shares. The Company has the option to convert all or a portion of the outstanding principal of the note into shares of common stock if the closing price of the common stock is greater than $3.70 for ten
consecutive trading days. However, the number of shares issued upon such conversion cannot exceed 30% of the aggregate dollar trading volume of the common stock for the 22 trading days immediately preceding the payment date. The investor has the
option, at any time, to convert all or a portion of the note into shares of the Companys common stock at $3.16 per share.



The note is secured by a blanket lien on substantially all of the Companys assets pursuant to a security agreement executed by the Company in
connection with the note. If an event of default occurs under the security agreement, Laurus has the right to accelerate payments under the note and to take possession of the Companys assets, in addition to other remedies.



The Company also issued to Laurus Master Fund a warrant exercisable for
100,000 shares of common stock that is exercisable until March 11, 2011. The exercise price of the warrant is as follows: $3.31 per share for the first 50,000 shares, $3.59 per share for the next 25,000 shares, and $3.88 per share for the remaining
25,000



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AXESSTEL, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



December 31, 2003



shares. However, Laurus is not entitled to receive shares upon exercise of the warrant, upon payment of principal and interest or upon conversion of the
promissory note if such receipt would cause Laurus to hold in excess of 4.99% of the outstanding shares of the Companys common stock on the date of issuance of such shares. In connection with this financing, the Company paid Laurus Capital
Management, LLC, manager of the purchaser, a fee of $108,000, which represented 3.6% of the principal of the convertible note.



For services rendered in connection with the financing, the Company issued to a finder a warrant to purchase 47,468 shares of its common stock at an
exercise price of $3.16 per share. The warrant is exercisable for five years after the date of issuance. The Company also paid to the finder a fee of $150,000, representing 5% of the gross proceeds from the financing.



If a registration statement covering the resale of the shares of common stock
obtainable upon conversion of the note and exercise of the warrants held by Laurus and the finder is not declared effective on or before June 9, 2004, the Company is obligated to pay to Laurus as liquidated damages $30,000, representing 1% of the
original principal amount of the note, for each 30 day period (pro-rated for partial periods) that the registration statement is not effective.



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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS



a) Previous independent accountants



(i) Effective
November 3, 2003, Axesstel, Inc. (Registrant), confirmed with its auditors, Kenny H. Lee CPA Group (Kenny Lee), that the firm would no longer be representing the Registrant as its accountants. As of that date, the Company was
informed by Kenny Lee that they declined to stand for re-election as the Companys auditors.



(ii) Kenny H. Lee CPA Group last reported on Registrants financial statements as of February 28, 2003. Registrants financial statements for
the fiscal year ended December 31, 2001, as audited by Kenny Lee, included an independent auditors report containing an explanatory paragraph describing the uncertainty as to the Companys ability to continue as a going concern.
Registrants financial statements for the fiscal year ended December 31, 2002, as audited by Kenny Lee, contained no paragraph regarding any uncertainty as to the Companys ability to continue as a going concern.



(iii) The change of independent accountants was ratified by the Board of
Directors of Axesstel, Inc. on November 3, 2003.



(iv) During
Axesstels two most recent fiscal years and the subsequent interim period through November 3, 2003, there were no disagreements with Kenny Lee on any matter of accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved, to Kenny Lees satisfaction, would have caused it to make reference to the subject matter of the disagreement in connection with its report. However, Kenny Lees reports on the Companys
consolidated financial statements for the year ended December 31, 2001 contained an explanatory paragraph describing the uncertainty as to the Companys ability to continue as a going concern. No such paragraph was included in the financial
statements for the year ended December 31, 2002.



(v) During
the two most recent fiscal years and the subsequent interim period through November 3, 2003, there have been no reportable events (as defined in Regulation S-B Item 304(a)(1)(iv)).



| | (a) | During the previous two fiscal years and the subsequent interim period through November 3, 2003, Kenny Lee did not advise Axesstel that the internal controls necessary for the
registrant to develop reliable financial statements do not exist.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | During the previous two fiscal years and the subsequent interim period through November 3, 2003, Kenny Lee did not advise Axesstel that any information had come to their attention
which had led them to no longer be able to rely on managements representation, or that had made Kenny Lee unwilling to be associated with the financial statements prepared by management.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | During the previous two fiscal years and the subsequent interim period through November 3, 2003, Kenny Lee did not advise Axesstel that the scope of any audit needed to be expanded
significantly or that more investigation was necessary.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | During the previous two fiscal years and the subsequent interim period through November 3, 2003, Kenny Lee did not advise Axesstel that there was any information which the
accountants concluded would materially impact the fairness and reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal period(s)
subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to the accountants satisfaction, would prevent it from rendering an unqualified audit report on those
financial statements).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(vi) The Registrant has
requested that Kenny H. Lee CPA Group furnish it with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, dated November 14, 2003, was filed as Exhibit 16.1 to the Form 8-K of the
Registrant filed on December 9, 2003.



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(b) New independent accountants



The Registrant has
engaged Gumbiner, Savett, Finkel, Fingleson & Rose, Inc. (Gumbiner) as its new independent accountant on November 3, 2003. Prior to November 3, 2003 the Registrant had not consulted with Gumbiner regarding (i) the application of
accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Registrants consolidated financial statements, and no written report or oral advice was provided to the
Registrant by Gumbiner concluding there was an important factor to be considered by the Registrant in reaching a decision as to an accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement,
as that term is defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructions to Item 304 of Regulation S-B, or a reportable event, as that term is defined in Item 304(a)(1)(iv) of Regulation S-B.



ITEM 8A.
CONTROLS AND PROCEDURES



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



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



Under the supervision of our Chief Executive Officer and our interim Chief
Financial Officer, we re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and interim Chief
Financial Officer concluded that as of December 31, 2003, the design and operation of such disclosure controls and procedures were effective, but for the weaknesses discussed below. These weaknesses included the following: a lack of effective
documentation for stock options and other compensatory equity grants; the absence of a procedure to obtain from officers and directors information required to be disclosed about such persons; the absence or ineffectiveness of a rule compliance
checking procedure for SEC filings; and lack of effective record keeping and compliance assistance for reports required under Section 16(a) of the Exchange Act.



In addition, in connection with the audit of our financial statements for the year ended December 31, 2003, our independent registered public
accounting firm identified several matters relating to significant deficiencies in the design or operation of our internal controls, some of which were characterized as material weaknesses. A material weakness constitutes a greater deficiency than a
significant deficiency. For the year ended December 31, 2003, and for each of the quarters within that year, these items had the potential to impair our ability to record, process, summarize and report financial data consistent with the assertions
of our management in our financial statements. The material weaknesses identified included the lack of an in-place accounting system to identify and track development costs by product in accordance with SFAS No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased or Otherwise Marketed, the lack of an in-place accounting system to properly identify and track engineering service costs, and the lack of a detailed accounting system for allocation of engineer payroll
costs. The significant deficiencies included a lack of formal month-end closings and financial reporting and analysis procedures for our San Diego, California operations, and incorrect recording of employee signing bonuses.



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In September 2004, we re-evaluated the application of certain accounting policies and procedures and determined that we had not been properly applying generally accepted accounting principles, primarily in relation to
the accounting for software developments costs and intangible assets, and we determined to restate our published financial statements to correct for the errors. We believe the misapplication of generally accepted accounting principles was in part a
result of the weaknesses in disclosure controls and procedures identified above.



We have implemented a number of remedial steps to address the noted weaknesses in disclosure controls and procedures and deficiencies in the design and operation of our internal controls over financial reporting.
These include:



| |  | The hiring of David Morash as President and Chief Operating Officer, and Mr. Morashs interim assumption of the duties of Chief Financial Officer. Mr. Morash has significant
experience as a chief financial officer, having served in such positions for a number of public companies.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The hiring of a Controller with significant experience as a controller of a large public company that had international and domestic subsidiaries.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The hiring of a General Counsel with significant experience as in-house counsel for both public and private companies.
| | - | ----------------------------------------------------------------------------------------------------------------------



| |  | A substantial internal review of stock option and equity grants, and an ongoing process of completing the documentation for such grants.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | A more substantial review of SEC filings by a disclosure committee consisting of the Vice President of Finance, the Controller and the General Counsel.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The implementation of improved disclosure controls and procedures, including the collection of officer and director questionnaires, the implementation of a Section 16(a) filing and
tracking procedure, and increased involvement of the General Counsel and outside legal counsel in corporate matters.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A simplification of the organizational structure within the Company.
| | - | --------------------------------------------------------------------



| |  | The implementation of a cost accounting system to identify and track development costs by product in accordance with SFAS No. 86, to identify and track engineering service costs by
project, and to allocate engineer payroll costs.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The implementation of formal month-end closings and financial reporting and analysis procedures.
| | - | ------------------------------------------------------------------------------------------------



(b) Changes In Internal Controls Over Financial Reporting. No significant changes were made in our internal controls over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended December 31, 2003.



(c) Limitations On Disclosure Controls And Procedures. Our management, including our Principal Executive Officer and Principal Financial Officer, does not
expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud, even as the same are improved to address the deficiencies noted above. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company



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have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



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PART III



ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF AXESSTEL



The directors and executive officers, their ages, positions held and duration as a director, as of April 21, 2004 are as follows:



|                     |  |     |  |                                                   |  |              
|-------------------- |  | --- |  | ------------------------------------------------- |  | -------------
|Name                 |  | Age |  | Position and Offices                              |  | DirectorSince
|Mike HP Kwon         |  | 39  |  | Chairman of the Board and Chief Operating Officer |  | 2002         
|Satoru Yukie         |  | 48  |  | President and Vice Chairman of the Board          |  | 2002         
|Jin Yong (Jason) Kim |  | 39  |  | Executive Vice President and Director             |  | 2002         
|John Chough          |  | 37  |  | Chief Financial Officer                           |  | N/A          
|Craig Hagopian       |  | 39  |  | Chief Marketing Officer                           |  | N/A          
|David Morash         |  | 59  |  | Chief Operating Officer and Director              |  | 2004         
|Jai Baghat           |  | 56  |  | Director                                          |  | 2003         
|Seung Taik Yang      |  | 63  |  | Director                                          |  | 2003         
|Haydn Hsieh          |  | 49  |  | Director                                          |  | 2004         



The terms of all directors will expire
at the next annual meeting of stockholders, or when their successors are elected and qualified. Directors are elected each year, and all directors serve one-year terms. Officers serve at the pleasure of the Board of Directors. There are no
arrangements or understandings between us or any other person pursuant to which he was or is to be selected as a director, executive officer or nominee. We have entered into employment agreements with each of our executive officers, which are
described in Part III, Item 11 below under the heading Employment Agreements.



Biographical Information



Mike Kwon,
Chief Executive Officer and Chairman of the Board



An
experienced and seasoned wireless veteran, Mr. Mike Kwon founded Axesstel California in July 2000. He has served as an officer and director of Axesstel since September 2002, when Axesstel California became a subsidiary of Axesstel. Prior to founding
Axesstel California, Mr. Kwon was the Vice President of Sales at Neopoint, Inc. from 1998 to 2000. Prior to Neopoint, Mr. Kwon founded Digital Line, Inc., and served as CEO from 1996 to 1998. At Digital Line, Mr. Kwon identified business
opportunities for the resale of analog mobile phones. Mr. Kwon received his Bachelor of Arts in Business Administration from Rutgers University.



Satoru Yukie, President and Vice Chairman of the Board



Joining Axesstel in May 2002, Mr. Satoru Yukie oversees all aspects of Axesstel, including the development, manufacturing and marketing of products. Prior
to joining the Company, Mr. Yukie was the founder and Chief Executive Officer of Accetio, Inc. from 2001 to 2002. At Accetio, Mr. Yukie led their broadband wireless terminal and gateway solution strategy. For the twenty years prior to founding
Accetio, Mr. Yukie held various positions at Sony Corporation of American, Sony Electronics and Sony Corporation (Japan). These positions entailed leading business units in the consumer electronics and telecommunications industries, including
strategic business planning, international business development, marketing, product management and sales management. Mr. Yukie was responsible for successfully introducing the first CDMA phones to numerous countries worldwide. Mr. Yukie earned a
Bachelor of Arts in Engineering with a specialization in Control Engineering from Sophia University in Tokyo and an MBA from California Coast University.



Jason Kim, Executive Vice President and Director



Mr. Jason Kim joined Axesstel California upon its formation in July 2000. He has served as an officer and director of Axesstel since September 2002, when
Axesstel California became a subsidiary of Axesstel. Mr. Kims



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primary function is to supervise and coordinate Axesstels internal function and logistical planning of product cycle development. Prior to joining Axesstel, Mr. Kim worked for SK Telecom from 1995 to 1999 and HanHwa Information System
from 1985 to 1989. Mr. Kim received a Bachelor of Arts in Electrical Engineering from Kon-Kook University in Korea.



John Chough, Chief Financial Officer



Mr. John Chough joined Axesstel California in January 2001 as Director of Finance and Operations. He has served as Chief Financial Officer of Axesstel
since September 2002, when Axesstel California became a subsidiary of Axesstel. Mr. Chough brings to Axesstel years of experience from Bain & Company, specializing in telecom and financial sector consultancy. Prior to Bain & Company, Mr.
Chough served as Chief Operating Officer of ISOFT Corporation, a Korea based mobile Internet solutions and applications company. Mr. Chough earned his Bachelor of Arts with distinction in Economics and Mathematics from Cornell University and his MBA
with concentrations in finance and international business from Columbia University.



Craig Hagopian, Chief Marketing Officer



Mr.
Craig Hagopian joined Axesstel California in May 2002. He has served as an officer of Axesstel since September 2002, when Axesstel California became a subsidiary of Axesstel. Prior to joining Axesstel, he served as the Chief Alliance Strategist for
AIR2LAN, a leading regional broadband wireless Internet provider. At AIR2LAN, he was responsible for top line revenue growth, customer acquisition strategy and business alignment from a pure fixed wireless deployment to a market mobility service
offering. For the past 15 years, Mr. Hagopian has held various high technology and sales and marketing positions at AIR2LAN, EPSON America and MCI WorldComs SkyTel Communications. Mr. Hagopian received a Bachelor of Science in Finance from the
University of Southern California.



David Morash, Chief Operating Officer
and Director



Mr. David Morash has served as an officer
and director of Axesstel since February 2004. Prior to joining Axesstel, Mr. Morash served as Executive Vice President and Chief Financial Officer of REMEC, Inc. from 2001 to 2003. From 2000 to 2001 Mr. Morash served as Executive Vice President and
Chief Financial Officer at Wireless Knowledge and held various positions, including senior management positions, at Safeskin Corporation from 1994 to 2000. Mr. Morash holds an MBA from Columbia Graduate School of Business and a Bachelor of Arts from
Columbia College.



Jai Bhagat, Director



Jai Bhagat has served as a director of Axesstel since September 2003. In
2000, he founded AIR2LAN, a premier broadband service provider, and currently serves as its Chairman and Chief Executive Officer. Previous to this, Mr. Bhagat was a co-founder of SkyTel Communications, Inc. and served as its Vice Chairman and CEO
prior to its recent merger with MEI WorldCom. Mr. Bhagat also serves as Chairman of License Exempt sector of Wireless Communications Association International, a national trade association representing the broadband wireless industry.
Recently, Mr. Bhagat was on the Southern Governors Association Advisory Committee on Research, Development and Technology. Mr. Bhagat has served as Chairman, as well as a board member of the Personal Communications Industry Association, and
American Mobile Satellite Corporation (now Motient). He currently serves on the boards of several wireless communications based companies including: MeshNetworks, Inc., a mobile wireless Internet technology company; JP Mobile, a Dallas, Texas based
company that designs and markets advanced messaging software and solutions for handheld devices and wireless communications devices; and, SmartSynch, Inc., a wireless data solutions company. He serves as a strategic advisor to JP Mobile, and as
Chairman of the Board of Smart Synch. Mr. Bhagat obtained a Master of Science in Electrical Engineering from Howard University and a Bachelor of Science in Electrical Engineering from Bits Pican in India.



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Seung Taik Yang, Director



Seung Taik Yang has
served as a director of Axesstel since September 2003. Mr. Yang is currently the president of Tongmyong University of Information Technology in Busan, Korea. From March 2001 to July 2002, he served as the Minister of Information and Communications
for the Republic of Korea. Prior to serving as the Minister of Information and Communications, Mr. Yang was a chair professor at Kwangwoon University and at the Information and Communications University. In 1998, he established the Information and
Communications University and became its first president. Between 1992 and 1998, he was president of ETRI, served as commissioner of the Korean Communications Commission, and was a member of the Presidential Council for Science and Technology. From
1986 to 1992, he was the founding president of Korea Informatics Telesis, Inc. and Korea Telecomm International, both of which are subsidiaries of Korea Telecom. Dr. Yang earned his Bachelor of Science Degree in Electrical Engineering at Seoul
National University in Korea. He received his Master of Science in Electrical Engineering at Virginia Polytechnic Institute and achieved his Doctorate in Electrical Engineering at the Polytechnic Institute of Brooklyn.



Haydn Hsieh, Director



Haydn Hsieh has served as a director of Axesstel since April 2004. Mr. Hsieh is currently the President and Chief Executive
Officer of Wistron NeWeb Corp. a substantial beneficial owner of our common stock and our primary contract manufacturer. He is also the Chairman of Acer Enrich Technology Corp. He has held various positions within Acer Inc. Group since 1981. Mr.
Hsieh holds a Bachelor of Electrical Engineering from Ta-Tung Institute of Technology and a Masters in Business Administration from National ChengChi University.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934 requires the Companys executive officers, directors and persons
beneficially owning more than 10% of the Companys common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. The Company has undertaken an extensive review of the Section 16(a) reports filed
on behalf of each person subject to Section 16(a) prior to December 31, 2003, to determine whether all of their reportable transactions in the Companys common stock were timely reported and to ensure proper reporting of all of their beneficial
holdings. The review revealed that there were a number of holdings and transactions that were not timely reported and the Company has undertaken to assist the subject persons to file the necessary forms. The Company has also developed new procedures
to ensure improved compliance with Section 16(a) on an on-going basis.



Based solely on copies of such forms furnished as provided above, to the Companys knowledge all reports required under Section 16(a) during the most recent fiscal year or prior years, except for the following:



| |  | Mike HP Kwon, Hong Joon (John) Chough and Satoru Yukie, each an officer and/or director, each filed late a Form 3 disclosing his holdings as of the date he became an officer and/or
director.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Bobby Cha, Hong Joon (John) Chough, Craig Hagopian, Jin Yong (Jason) Kim and Satoru Yukie , each an officer and/or director, each failed to file one Form 4 during the fiscal year
ended December 31, 2002, disclosing one transaction, an option grant. Form 5s reporting such transactions are intended to be filed as soon as practicable.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Jai Bhagat, Seung Taik Yang, Craig Hagopian and Kwang Ho (Kenny) Lee, each a director or officer, each failed to file a Form 3 disclosing his holdings as of the date he became a
director or officer. Form 5s reporting such holdings are intended to be filed as soon as practicable.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Jai Bhagat, Seung Taik Yang and Kwang Ho (Kenny) Lee, each a director, each failed to file a Form 4 during the fiscal year ended December 31, 2003, disclosing one transaction, a
grant of common stock. Form 5s reporting such transactions are intended to be filed as soon as practicable.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Qualcomm, Inc., TBK/Bong Keun Kim and Guardtec, Inc., each a beneficial owner of greater than ten percent of our common stock, each failed to file a Form 3 as of the date it became
a beneficial owner of greater than ten percent of our common stock. Form 5s reporting such holdings are intended to be filed as soon as practicable.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Audit Committee Financial Expert



As of April 21, 2004, our Board of Directors has not yet designated an audit committee financial expert as that term is defined in Item 401(e)(2) of
Regulation S-B. The board considers it desirable to have an audit committee financial expert on the audit committee, and intends to identify and appoint a qualified candidate as soon as practicable.



Code of Ethics



We have adopted a Code of Ethics for Directors, Officers and Employees, a code of ethics that applies to all
employees, including our executive officers. A copy of our Code of Ethics for Directors, Officers and Employees is filed with the Securities and Exchange Commission as Exhibit 14.1 to this annual report. In the event that we make any amendments to,
or grant any waivers of, a provision of the Code of Ethics for Directors, Officers and Employees that applies to the principal executive officer, principal financial officer, or principal accounting officer that requires disclosure under applicable
SEC rules, we intend to disclose such amendment or waiver and the reasons therefore on a Form 8-K or on our next periodic report.



ITEM 10. EXECUTIVE COMPENSATION



Compensation
of Directors



Directors who are not Axesstel employees do
not receive any cash compensation for serving on our Board of Directors. We reimburse non-employee directors for reasonable costs and expenses incurred in attending Board of Directors meetings. Directors who are not employees of the Company
have received grants of 30,000 shares of Company common stock at the beginning of such directors term. These grants vest as to 10,000 shares on the date of the first board meeting attended, and an additional 10,000 shares on each anniversary
thereof.



Directors who are Axesstel employees receive no
additional compensation for serving on the Board of Directors.



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Summary Compensation Table



The following
Summary Compensation Table sets forth as to our Chief Executive Officer and the other four most highly compensated Executive Officers (the named executive officers) all compensation awarded to, earned by, or paid to the named executive officers for
all services rendered in all capacities to us and our subsidiaries for the years ended December 31, 2003, 2002 and 2001, except as may otherwise be specifically noted.



Summary Compensation Table



|                                       |  |              |  |                     |                       |                              |     |                                   |  |                                   |              |  |                  
|-------------------------------------- |  | ------------ |  | ------------------- | --------------------- | ---------------------------- | --- | --------------------------------- |  | --------------------------------- | ------------ |  | -----------------
|                                       |  |              |  | Annual Compensation |                       | Long-Term CompensationAwards
|Name and Principal Position            |  | Fiscal Year  |  | Base Salary ($)     |                       | Bonus ($)                    |     | Other Annual Compensation ($) (1) |  | Securities Underlying Options (#)
|Mike Kwon Chief
Executive Officer      |  | 200320022001 |  | $$$                 | 243,000160,000121,513 |                              | $$$ | 60,000                          |  | $$$                               | 15,4907,102 |  | 1,227,171620,439
|                                       |  |              |  |                     |                      
|Satoru Yukie President                 |  | 20032002     |  | $$                  | 220,000100,000        |                              | $$  | 50,000                           |  | $                                 |             |  | 1,294,367       
|                                       |  |              |  |                     |                      
|Jason Kim Executive Vice President     |  | 200320022001 |  | $$$                 | 160,000116,33390,000  |                              | $$$ | 35,000                          |  | $$$                               | 7,489      |  | 234,315299,132  
|                                       |  |              |  |                     |                      
|John Chough Chief Financial Officer    |  | 200320022001 |  | $$$                 | 100,00090,00075,000   |                              | $$$ | 15,000                          |  | $$$                               |           |  | 111,098172,476  
|                                       |  |              |  |                     |                      
|Craig Hagopian Chief Marketing Officer |  | 20032002     |  | $$                  | 160,000100,000        |                              | $$  | 25,000                           |  | $$                                |            |  | 30,000151,295    

---

|(1) | Other annual compensation consists of automobile allowance.
|--- | -----------------------------------------------------------



None of the named executive officers received any grants of options or stock appreciation rights during the year ended December 31, 2003.



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Options



The following table provides the
specified information concerning unexercised options held as of December 31, 2003, by the named executive officers. None of the named executive officers exercised any options during the last fiscal year.



FY-End Option and Warrant Values



|               |             |                                                                 |               |                                                          |             |   |               |  |   |        
|-------------- | ----------- | --------------------------------------------------------------- | ------------- | -------------------------------------------------------- | ----------- | - | ------------- |  | - | -------
|Name           |             | Number of Securities Underlying Unexercised Options at 12/31/03 |               | Value of Unexercised in the Money Options at 12/31/03(1)
|               | Exercisable |                                                                 | Unexercisable |                                                          | Exercisable |   | Unexercisable
|Mike Kwon      |             | 1,786,651                                                       |               | 60,959                                                   |             | $ | 4,200,602     |  | $ | 115,822
|Satoru Yukie   |             | 1,245,367                                                       |               | 49,000                                                   |             |   | 3,007,692     |  |   | 93,100 
|Jason Kim      |             | 494,655                                                         |               | 38,792                                                   |             |   | 1,130,491     |  |   | 73,705 
|John Chough    |             | 260,766                                                         |               | 22,808                                                   |             |   | 592,256       |  |   | 43,335 
|Craig Hagopian |             | 163,795                                                         |               | 17,500                                                   |             |   | 362,651       |  |   | 33,250 

---

|(1) | Represents the difference between the $2.50 closing selling price of the Companys common stock on the OTC Bulletin Board on December 31, 2003, and the exercise price(s) of the
named executive officers options.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Employment Arrangements



The Company has no employment contracts or arrangements with any of the named executive officers.



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



The following table sets forth certain information regarding the ownership of the our common stock as of April 21, 2004, by: (i) each director and
director-nominee; (ii) each person who is known by us to be the beneficial owner of more than five percent of the outstanding common stock; (iii) each of the named executive officers; and (iv) all our executive officers and directors as a group.
Except as otherwise indicated in the footnotes, all information with respect to share ownership and voting and investment power has been furnished to us by the persons listed. Except as otherwise indicated in the footnotes, each person listed has
sole voting power with respect to the shares shown as beneficially owned.



|                                                                               |  |                                  |     |  |                    |  
|------------------------------------------------------------------------------ |  | -------------------------------- | --- |  | ------------------ | -
|Name and Address of Beneficial Owner (1)                                       |  | Number ofSharesBeneficiallyOwned |     |  | Percent ofClass(2) |  
|Mike Kwon                                                                      |  | 4,267,239                        | (3) |  | 43.58              | %
|Satoru Yukie                                                                   |  | 1,259,367                        | (3) |  | 13.62              | %
|TBK/Bong Keun Kim                                                              |  | 1,028,811                        |     |  | 12.88              | %
|Guardtec, Inc. 9F. E-space B/D, 212-26 Guro-dong, Guro-gu Seoul, Korea 152-050 |  | 605,183                          |     |  | 7.58               | %
|Qualcomm, Inc. 5775 Morehouse Dr. San Diego, CA 92121                          |  | 605,183                          |     |  | 7.58               | %
|Jason Kim                                                                      |  | 608,620                          | (3) |  | 7.17               | %
|John Chough                                                                    |  | 267,282                          | (3) |  | 3.24               | %
|Craig Hagopian                                                                 |  | 174,628                          | (3) |  | 2.14               | %
|Seung Taik Yang                                                                |  | 30,000                           | (4) |  | *                  |  
|Jai Bhagat                                                                     |  | 30,000                           | (4) |  | *                  |  
|Kenny Lee                                                                      |  | 30,000                           | (4) |  | *                  |  
|All executive officers and directors as a group (8 persons)                    |  | 6,708,803                        | (3) |  | 55.72              | %

---

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



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



|(2) | Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has
sole voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on 7,987,451 shares outstanding on April 21, 2004, adjusted as required by rules promulgated by the SEC.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes shares issuable upon exercise of options and warrants within 60 days of April 21, 2004 as follows: Mr. Kwon, 1,804,068; Mr. Yukie, 1,259,367; Mr. Kim, 505,739; Mr. Chough,
267,282; Mr. Hagopian, 174,628; and all executive officers and directors as a group, 4,052,751.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes 20,000 shares subject to repurchase within 60 days of April 21, 2004.
|--- | ------------------------------------------------------------------------------



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Equity Incentive Plans



The following table
describes our equity compensation plans, which were established by resolutions of the Board of Directors, as of December 31, 2003:



|                                                           |  |                            |     |  |                                                                                         |     |  |                                                                              |      |                                                                                                                                       |          
|---------------------------------------------------------- |  | -------------------------- | --- |  | --------------------------------------------------------------------------------------- | --- |  | ---------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | Number ofShares Issued (a) |     |  | Number of Shares tobe Issued UponExercise ofOutstanding Options,Warrants and
Rights (b) |     |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and
Rights (c) |      | Number of SharesRemaining Availablefor Future Issuanceunder EquityCompensation
Plans(excluding securitiesreferenced incolumn (b)) (d)
|Equity compensation plans approved by our stockholders     |  | 0                          |     |  | 2,068,959                                                                               | (1) |  | $                                                                            | 0.22 |                                                                                                                                       | 0        
|Equity compensation plans not approved by our stockholders |  | 338,852                    | (3) |  | 4,136,072                                                                               | (2) |  | $                                                                            | 0.69 |                                                                                                                                       | 1,610,808

---

|(1) | Includes options to purchase 2,068,959 shares of common stock with a weighted average exercise price of $0.22 per share, all of which options were granted pursuant to the
shareholder-approved 2001 Stock Option Plan of Axesstel California and assumed by the Company in connection with the Corporate Combination Agreement between Miracom and Axesstel California.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes (i) options to purchase 1,283,034 shares of common stock granted pursuant to the Companys stock option plans established by the Board of Directors in September 2002,
March 2003 and September 2003 with a weighted average exercise price of $1.39 per share; (ii) 320,000 shares of common stock subject to warrants issued to various consultants in 2002 and 2003 with a weighted average exercise price of $2.50 per
share; and (iii) 200,000 shares of common stock subject to a warrant with an exercise price of $.60 per share issued to Jimmy Sung, our President and Chairman prior to our acquisition of Axesstel California, in September 2002 for services rendered.
Also includes (i) 1,122,671 shares of common stock subject to a warrant issued to Mike HP Kwon with an exercise price of $0.07 per share, (ii) 1,210,367 shares of common stock subject to a warrant issued to Satoru Yukie with an exercise price of
$0.07 per share, both of which warrants were assumed by the Company in connection with the Corporate Combination Agreement between Miracom and Axesstel California.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes (i) 9,622 shares of common stock at the price of $3.50 per share issued to a consultant pursuant to a settlement agreement in November 2003; (ii) 19,230 shares of common
stock at the price of $1.30 per share issued to various employees in November 2003; (iii) 90,000 shares of common stock at the price of $2.80 per share issued to members of the Board of Directors in November 2003; (iv) 100,000 shares of common stock
issued for services rendered to various consultants in September 2002; (v) 100,000 shares of common stock issued at the price of $3.00 per share to an employee in June 2003; and (v) 20,000 shares of common stock issued for services rendered to two
legal consultants in Korea.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Mr. Haydn Hsieh, a director, is also the President and Chief Executive Officer of our primary manufacturer, Wistron NeWeb Corp. It is anticipated that payments to Wistron NeWeb will exceed $60,000 during 2004.



Kenny H. Lee was a director of our company from August 2003
through March 2004. Mr. Lee is the Chief Executive Officer and Managing Director of Kenny H. Lee CPA Group, Inc., which served as our independent accountant for the fiscal year ended December 31, 2002, and until November 3, 2003. The Board of
Directors approved an invitation for Mr. Lee to join our Board of Directors and serve on our audit committee in December 2002, and Mr. Lee declined such invitation. Mr. Lee then accepted a renewed invitation to join the Board in June 2003. In August
2003, we issued 30,000 shares of common stock to Mr. Lee in consideration of his services as director, consistent with the terms of his invitation to join the board. Such shares were to vest 10,000 shares upon Mr. Lees first attendance at a
board meeting, which occurred in September 2003, and 10,000 shares on each anniversary thereafter. During the period from January 1, 2002 to December 31, 2002, Kenny H. Lee CPA



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Group billed us for $24,812 in audit fees and $7,885 in tax and other fees. During the period from January 1, 2003 to November 3, 2003, Kenny H. Lee CPA Group billed us for $22,060 in audit fees and $5,000 in tax fees. Effective as of
November 3, 2003, we dismissed Kenny H. Lee CPA Group as our independent accountant, as further described in Part II, Item 8 above.



We entered into a license agreement with Qualcomm Incorporated, a significant shareholder, whereby we license Qualcomms CDMA technology for use in
our products. During the period from January 1, 2003 to March 31, 2004, we paid Qualcomm $1.0 million.



ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits:



|              |  |                                                                                                                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                           
|2.1           |  | Corporate Combination Agreement by and between Miracom Industries, Inc. and Axesstel, Inc. effective July 16, 2002, incorporated herein by reference to the Registrants Form 8-K filed
with the Commission on September 16, 2002.
|2.2           |  | First Amendment to Corporate Combination Agreement by and between Miracom Industries, Inc. and Axesstel, Inc. dated August 22, 2004.*                                                                                             
|3.1           |  | Articles of Incorporation of the Registrant, as amended**                                                                                                                                                                         
|3.2           |  | Amended and Restated Bylaws of the Registrant, as amended**                                                                                                                                                                       
|4.1           |  | Specimen Common Stock Certificate**                                                                                                                                                                                               
|10.1          |  | Form of Indemnity Agreement for directors and executive officers of the Registrant**                                                                                                                                              
|10.2          |  | Lease Agreement for Office Space by and between Axesstel and Smith Trust dated October 15, 2001**                                                                                                                                 
|10.3         |  | Subscriber Unit License Agreement by and between Axesstel, Inc. and Qualcomm Incorporated dated November 14, 2000, as amended**                                                                                                   
|10.4         |  | Supply Agreement by and between TeleCard Limited and Axesstel dated November 2003**                                                                                                                                               
|10.5         |  | Supply Agreement by and between TeleCard Limited and Axesstel dated November 2003**                                                                                                                                               
|14.1          |  | Code of Ethics For Directors, Officers and Employees**                                                                                                                                                                            
|21.1          |  | Subsidiaries of the Registrant**                                                                                                                                                                                                  
|23.1          |  | Consent of Gumbiner, Savett, Finkel, Fingleson & Rose, Inc.*                                                                                                                                                                      
|23.2          |  | Consent of Kenny H. Lee CPA Group, Inc.*                                                                                                                                                                                          
|24.1          |  | Power of Attorney, previously filed and contained on the signature page attached hereto.                                                                                                                                          
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                               
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                               
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                   

---

| | Confidential treatment requested.
|- | ---------------------------------

|* | Filed Herewith
|- | --------------

|** | Previously Filed
|-- | ----------------



(b) Reports on Form 8-K



On November 18, 2003, the Registrant filed a Form 8-K with the Securities and Exchange Commission reporting on Item 4 and Item 7 a change in its
independent auditors. The Registrant filed a Form 8-K/A amending the Item 4 and Item 7 disclosures on December 9, 2003.



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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



Principal Accountant Audit Fees and Services Fees



The following tables describe fees for professional audit services and fees for other services rendered by Kenny H. Lee CPA Group, Inc., our principal accountant from January 1, 2002 to September 2003, and by Gumbiner, Savett, Finkel,
Fingleson & Rose, Inc. (Gumbiner), our principal accountant from September 2003 to December 31 2003.



The following table sets forth the aggregate fees billed from January 1, 2002 to December 31, 2002 by Kenny H. Lee CPA Group, Inc:



|                   |  |   |       
|------------------ |  | - | ------
|Audit Fees         |  | $ | 24,812
|Audit Related Fees |  | $ | 0     
|Tax Fees           |  | $ | 5,000 
|All Other Fees     |  | $ | 2,885 
|                   |  |   |       
|Total              |  | $ | 32,697
|                   |  |   |       



The following table
sets forth the aggregate fees billed from January 1, 2003 to September 2003 by Kenny H. Lee CPA Group, Inc:



|                   |  |   |       
|------------------ |  | - | ------
|Audit Fees         |  | $ | 22,060
|Audit Related Fees |  | $ | 0     
|Tax Fees           |  | $ | 5,000 
|All Other Fees     |  | $ | 0     
|                   |  |   |       
|Total              |  | $ | 27,060
|                   |  |   |       



The following table
sets forth the aggregate fees billed from September 2003 to December 31, 2003 by Gumbiner:



|                   |  |   |       
|------------------ |  | - | ------
|Audit Fees         |  | $ | 12,500
|Audit Related Fees |  | $ | 0     
|Tax Fees           |  | $ | 0     
|All Other Fees     |  | $ | 0     
|                   |  |   |       
|Total              |  | $ | 12,500
|                   |  |   |       



Audit Committee Pre-Approval
Policies and Procedures



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



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SIGNATURES



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



AXESSTEL, INC.By:

/s/    Mike HP KwonMike HP KwonChairman and Chief Executive Officer (Principal Executive Officer)Date: October 12, 2004




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



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



|                                                      |  |                                                                                                                               |  |                 
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ----------------
|Signature                                             |  | Title                                                                                                                         |  | Date            
|/s/    Mike HP KwonMike HP Kwon                       |  | Chairman, Chief Executive Officer and Director (Principal Executive Officer)                                                  |  | October 12, 2004
|                                                      |  |                                                                                                                              
|/s/    David MorashDavid Morash                       |  | President, Chief Operating Officer, Interim Chief Financial Officer and Director (Principal Financial and Accounting Officer) |  | October 12, 2004
|                                                      |  |                                                                                                                              
|*Jai Bhagat                                           |  | Director                                                                                                                      |  | October 12, 2004
|                                                      |  |                                                                                                                              
|*Seung Taik Yang                                      |  | Director                                                                                                                      |  | October 12, 2004
|                                                      |  |                                                                                                                              
|/s/    Haydn HsiehHaydn Hsieh                         |  | Director                                                                                                                      |  | October 12, 2004
|                                                      |  |                                                                                                                              
|/s/    Eric SchultzEric Schultz                       |  | Director                                                                                                                      |  | October 12, 2004
|                                                      |  |                                                                                                                              
|/s/    Harry L. CasariHarry L. Casari                 |  | Director                                                                                                                      |  | October 12, 2004
|                                                      |  |                                                                                                                              
|*/s/    Mike H.P. KwonMike H.P. Kwon Attorney-In-Fact |  |                                                                                                                               |  |                 



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                   
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                           
|2.1           |  | Corporate Combination Agreement by and between Miracom Industries, Inc. and Axesstel, Inc. effective July 16, 2002, incorporated herein by reference to the Registrants Form 8-K filed
with the Commission on September 16, 2002.
|2.2           |  | First Amendment to Corporate Combination Agreement by and between Miracom Industries, Inc. and Axesstel, Inc. dated August 22, 2002.*                                                                                             
|3.1           |  | Articles of Incorporation of the Registrant, as amended**                                                                                                                                                                         
|3.2           |  | Amended and Restated Bylaws of the Registrant, as amended**                                                                                                                                                                       
|4.1           |  | Specimen Common Stock Certificate**                                                                                                                                                                                               
|10.1          |  | Form of Indemnity Agreement for directors and executive officers of the Registrant**                                                                                                                                              
|10.2          |  | Lease Agreement for Office Space by and between Axesstel and Smith Trust dated October 15, 2001**                                                                                                                                 
|10.3         |  | Subscriber Unit License Agreement by and between Axesstel, Inc. and Qualcomm Incorporated dated November 14, 2000, as amended**                                                                                                   
|10.4         |  | Supply Agreement by and between TeleCard Limited and Axesstel dated November 2003**                                                                                                                                               
|10.5         |  | Supply Agreement by and between TeleCard Limited and Axesstel dated November 2003**                                                                                                                                               
|14.1          |  | Code of Ethics For Directors, Officers and Employees**                                                                                                                                                                            
|21.1          |  | Subsidiaries of the Registrant**                                                                                                                                                                                                  
|23.1          |  | Consent of Gumbiner, Savett, Finkel, Fingleson & Rose, Inc.*                                                                                                                                                                      
|23.2          |  | Consent of Kenny H. Lee CPA Group, Inc.*                                                                                                                                                                                          
|24.1          |  | Power of Attorney, previously filed and contained on the signature page attached hereto.                                                                                                                                          
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                               
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                               
|32.1          |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                   

---

| | Confidential treatment requested.
|- | ---------------------------------

|* | Filed Herewith
|- | --------------

|** | Previously Filed
|-- | ----------------