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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For fiscal year ended
December 31, 2003
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___________________ to ___________________ Commission File Number: 000-27031 FULLNET COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in its Charter) OKLAHOMA
    
    73-1473361(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 201 Robert S. Kerr Avenue, Suite 210
Oklahoma City, Oklahoma 73102 (Address of principal executive offices) (405) 236-8200 (Registrants telephone number) Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Title of each class Common Stock, $0.00001 Par Value Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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  o Indicate by check mark if there is no disclosure contained herein of
delinquent filers in response to Item 405 of Regulation S-B, and will
not be contained, to the best of the Registrants knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes  o  No  x The Registrants revenues for its most recent fiscal year were
$2,121,882 The aggregate market value of the registrants common stock, $0.00001
par value, held by non-affiliates of the Registrant as of December
31, 2003 was $275,698 based on the closing price of $.05 per share on
that date as reported by the OTC Bulletin Board. As of March 25,
2004, 6,713,135 shares of the registrants common stock, $0.00001 par
value, were outstanding. Transitional Small Business Disclosure Format (check one): Yes  x  No  o




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FULLNET COMMUNICATIONS, INC.
FORM 10-KSB
For the Fiscal Year Ended December 31, 2003  
 TABLE OF CONTENTS PART I.Item 1.
    
    Description Of Business
    
    
    4Item 2.
    
    Description of Property
    
    
    13Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART II.Item 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    14Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    14Item 7.
    
    Financial Statements
    
    
    18Item 8.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    18PART III.Item 9.
    
    Directors, Executive Officers, Promoters and Control Persons, Compliance with
Section 16(a) of the Exchange Act
    
    
    19Item 10.
    
    Executive Compensation
    
    
    20Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    
    22Item 12.
    
    Certain Relationships and Related Transactions
    
    
    24Item 13.
    
    Exhibits and Reports on Form 8-K
    
    
    24Item 14.
    
    Controls and Procedures
    
    
    28SIGNATURES
    
    
    30Certification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350
  2




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Annual Report on Form 10-KSB and the information
incorporated by reference may include forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). In
particular, we direct your attention to Item 1. Description of
Business, Item 2. Description of Property, Item 3. Legal Proceedings,
Item 6. Managements Discussion and Analysis or Plan of Operation,
and Item 7. Financial Statements and Supplementary Data. We intend
the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All
statements regarding our expected financial position and operating
results, our business strategy, our financing plans and the outcome
of any contingencies are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking
words such as may, believe, plan, will, anticipate,
estimate, expect, intend and other phrases of similar meaning.
Known and unknown risks, uncertainties and other factors could cause
the actual results to differ materially from those contemplated by
the statements. The forward-looking information is based on various
factors and was derived using numerous assumptions. Although we believe that our expectations that are expressed in
these forward-looking statements are reasonable, we cannot promise
that our expectations will turn out to be correct. Our actual results
could be materially different from our expectations, including the
following:  
    
    We may lose subscribers or fail to grow our subscriber base;
    
    We may not successfully integrate new subscribers or assets obtained through acquisitions;
    
    We may fail to compete with existing and new competitors;
    
    We may not be able to sustain our current growth;
    
    We may not adequately respond to technological developments impacting the Internet;
    
    We may experience a major system failure;
    
    We may not be able to find needed financing. This list is intended to identify some of the principal factors
that could cause actual results to differ materially from those
described in the forward-looking statements included elsewhere in
this report. These factors are not intended to represent a complete
list of all risks and uncertainties inherent in our business, and
should be read in conjunction with the more detailed cautionary
statements included in this Report under the caption Item 1.
Description of Business- Additional Factors to Consider, our other
Securities and Exchange Commission filings and our press releases. 3




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PART I 
 Item 1. Description Of Business General We are an integrated communications provider offering integrated
communications and Internet connectivity to individuals, businesses,
organizations, educational institutions and government agencies.
Through our subsidiaries, we provide high quality, reliable and
scalable Internet access, web hosting, and equipment co-location.
Our overall strategy is to become the dominant integrated
communications provider for residents and small to medium-sized
businesses in Oklahoma. References to us in this Report include our subsidiaries:
FullNet, Inc. (FullNet), FullTel, Inc. (FullTel), and FullWeb,
Inc. (FullWeb). Our principal executive offices are located at 201
Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102, and
our telephone number is (405) 236-8200. We also maintain an Internet
site on the World Wide Web (WWW) at www.fullnet.net. Information
contained on our Web site is not, and should not be deemed to be, a
part of this Report. Company History We were founded in 1995 as CEN-COM of Oklahoma, Inc., an
Oklahoma corporation, to bring dial-up Internet access and education
to rural locations in Oklahoma that did not have dial-up Internet
access. We changed our name to FullNet Communications, Inc. in
December 1995, and shifted our focus from offering dial-up services
to providing wholesale and private label network connectivity and
related services to other Internet service providers. During 1995
and 1996, we furnished wholesale and private label network
connectivity services to Internet service providers in Bartlesville,
Cushing, Durant, Perry, Tahlequah, and Tulsa. During 1996, we sold
our Internet service provider operations in Enid, Oklahoma and began
Internet service provider operations in Ponca City, Oklahoma. In
1997 we continued our focus on being a backbone provider by upgrading
and acquiring more equipment. We also started offering our own
Internet service provider brand access and services to our wholesale
customers. In 1998 our gross revenues exceeded $1,000,000 and we made the
Metro Oklahoma City Top 50 Fastest Growing Companies list. In 1998 we
commenced the process of organizing a competitive local exchange
carrier (CLEC) through FullTel, and acquired Animus Communications,
Inc. (Animus), a wholesale Web-service company, which enabled us to
become a total solutions provider to individuals and companies
seeking a one-stop shop in Oklahoma. Animus was renamed FullWeb in
January 2000. With the incorporation of FullTel and the acquisition of
FullWeb, our current business strategy is to become the dominant
integrated communications provider in Oklahoma, focusing on rural
areas. We expect to grow through the acquisition of additional
customers for our carrier-neutral co-location space, the acquisition
of Internet service providers, as well as through a FullNet brand
marketing campaign. During 2000 and 2001, we completed eight
separate acquisitions of Internet service provider companies, with
customers in the Oklahoma cities of Tahlequah, Bartlesville, Enid,
Nowata, Lawton, Oklahoma City, Adair, Jay, Pryor, Wyandotte, Leach,
Colcord and Moseley. During the month of February 2000, our common stock began
trading on the OTC Bulletin Board under the symbol FULO. While our
common stock trades on the OTC Bulletin Board, it is very thinly
traded, and there can be no assurance that our stockholders will be
able to sell their shares should they so desire. Any market for the
common stock that may develop, in all likelihood, will be a limited
one, and if such a market does develop, the market price may be
volatile. In June 2000, we began providing co-location services to KMC
Telecom V, Inc. (KMC), a facilities-based competitive local
exchange carrier pursuant to an agreement that ends on December 31,
2005. Under the terms of this agreement, we receive $42,275 per
month to provide co-location and support services for KMCs
telecommunications equipment at our network operations center in
Oklahoma City, Oklahoma. We completed our network operations center
during the first quarter of 2001. KMC moved into our network
operations center and began making payments during the third quarter
of 2000. We plan to market additional carrier neutral co-location
solutions in our network operations center to other competitive local
exchange carriers, Internet service providers and web-hosting
companies. Our co-location facility is carrier neutral, allowing customers
to choose among competitive offerings rather than being restricted to
one carrier. Our network operations center is Telco-grade and
provides customers a high level of operative reliability and
security. We offer flexible space arrangements for customers,
24-hour onsite support with both battery and generator backup. 4




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Mergers and Acquisitions Our acquisition strategy is designed to leverage our existing
network backbone and internal operations to enable us to enter new
markets in Oklahoma, as well as to expand our presence in existing
markets, and to benefit from economies of scale. Our Business Strategy As an integrated communications provider, we intend to increase
shareholder value by continuing to build scale through both
acquisitions and internal growth and then leveraging increased
revenues over our fixed costs base. Our strategy is to meet the
customer service requirements of retail, business, educational and
government Internet users in our target markets, while benefiting
from the scale advantages obtained through being a fully integrated
backbone and broadband provider. The key elements of our overall
strategy with respect to our principal business operations are as
follows: Target Strategic Acquisitions The goal of our acquisition strategy is to accelerate market
penetration by acquiring Internet service providers in Oklahoma
communities and to acquire strategic Internet service providers in
Oklahoma City and Tulsa. Additionally, we will continue to build
upon our core competencies and expand our technical, customer service
staff and sales force in Oklahoma communities. We evaluate
acquisition candidates based on their compatibility with our overall
business plan of penetrating rural and outlying markets as well as
Oklahoma City and Tulsa. When a candidate is acquired, we will
integrate our existing Internet, network connectivity and value-added
services with the services offered by the acquired company and use
either the local sales force or install our own dealer sales force to
continue to increase market share. The types of acquisitions targeted
by us include Internet service providers located in markets into
which we want to expand or to which we may already provide
private-label Internet connectivity. Other types of targeted
acquisitions include local business-only Internet service providers
in markets where we have established points of presence and would
benefit from the acquired companys local sale and network solutions
sales and technical staff and installed customer base through the
potential increase in our network utilization. When assessing an
acquisition candidate, we focus on the following criteria:  
    
    Potential revenue and subscriber growth;
    
    Low subscriber turnover or churn rates;
    
    Density in the market as defined by a high ratio of subscribers to points of presence (POPs);
    
    Favorable competitive environment;
    
    Low density network platforms that can be integrated readily into our backbone network; and
    
    Favorable consolidation savings. Generate Internal Sales Growth We intend to expand our customer base by increasing our
independent re-seller network as well as our marketing efforts. At
December 31, 2003, our direct sales force consisted of one individual
in our Oklahoma City office coordinating all our business-to-business
solutions sales. We currently have one individual responsible
statewide to manage the consumer Internet service provider market,
with independent re-sellers responsible for their individual markets.
Our sales force is supported in its efforts by technical engineers
and, in some instances, our senior management. We intend to increase
the size of our independent re-seller network to establish an
effective selling presence in all major communities in Oklahoma. In
addition, we are exploring other strategies to increase our sales,
including other marketing partners such as electric cooperatives. We
currently have one of the 20 local Oklahoma electric cooperatives as
a marketing partner. Grow Subscriber Base We intend to grow our subscriber base through a combination of
internal and acquisition driven growth. We anticipate that this
growth will increase the density of our subscriber base within a
service area utilizing our available network operations, customer
support, back office functions and management overhead without
further cost increase or with minimal cost increase. We expect our
local markets to generate internal subscriber growth primarily by
enhancing subscribers online experience, providing a sense of a
national presence while maintaining local community content and
developing a consumer recognized regional FullNet brand. Increase Rural Area Market Share We believe that the rural areas of Oklahoma are underserved by
Internet service providers, and that significant profitable growth
can be achieved in serving these markets by providing reliable
Internet connectivity at a reasonable cost to the residents and
businesses located in these areas. We believe we can obtain a
significant Internet service provider and business-to-business market
share in Oklahoma. To that end, we, through our wholly-owned
subsidiary, FullTel, became a licensed competitive local 5




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exchange carrier in Oklahoma. Since March 2003 when we installed our
telephone switch, FullTel, as a competitive local exchange carrier,
is able to provide local telephone numbers for Internet access. Enhance Subscribers Online Experience We intend to maximize our subscriber retention and add new
subscribers by enhancing our services in the following ways:  Ease of Use  During the first quarter of 2001, we implemented
a common, easy to use CD ROM based software package that
automatically configures all of the individual Internet access
programs after a one time entry by the user of a few required fields
of information such as, name, user name and password.  New Products and Services  Offer subscribers new
products and services. We recently began offering call waiting
modem on hold and Postini e-mail spam and virus protection. Internet Access Services Our core business is the sale of Internet access services to
individual and small business subscribers located in Oklahoma.
Through FullNet, we provide our customers with a variety of dial-up
and dedicated connectivity, as well as direct access to a wide range
of Internet applications and resources, including electronic mail.
FullNets full range of services includes:  
    
    Private label retail and business direct dial-up connectivity to the Internet and
    
    Secure private networks through our backbone network Our branded and private label Internet access services are
provided through a statewide network with points-of -presence in 178
communities throughout Oklahoma. Points-of-presence are local
telephone numbers through which subscribers can access the Internet.
Our business services consist of high-speed Internet access services
and other services that enable wholesale customers to outsource their
Internet and electronic commerce activities. We had approximately
2,700 subscribers at December 31, 2003. Additionally, FullNet sells
Internet access to other Internet service providers, who then resell
Internet access to their own customers under their private label or
under the FullNet brand name. We intend to expand our subscriber base through a marketing
campaign and through acquisitions. We are focusing our acquisition
efforts on companies with forward-looking sales and marketing,
high-quality customer service and a solid local market dominance.
See Item 1. Description of Business  Mergers and Acquisitions.
Additionally, we are expanding our independent re-seller network in
an effort to increase our subscriber base in the markets in which we
currently operate. Currently, we offer the following two types of Internet
connections:  
    
    Dial-Up Connections The simplest connection to the Internet is the dial-up account.
This method of service connects the user to the Internet through the
use of a modem and standard telephone line. Currently, FullNet users
can connect via dial-up at speeds up to 56 Kbps. We support these
users through the use of sophisticated modem banks located in our
facility in Oklahoma City that send data through a router and out to
the Internet. We support the higher speed 56K, V.92 MOH and
Integrated Services Digital Network connections with state-of-the-art
digital modems. With a dial-up connection, a user can gain access to
the Internet for e-mail, the World Wide Web, file transfer protocol,
news groups, and a variety of other useful applications.  
    
    Leased Line Connections Many businesses and some individuals have a need for more
bandwidth to the Internet to support a network of users or a busy Web
site. We have the capacity to sell a leased line connection to
users. This method of connection gives the user a full-time
high-speed (up to 1.5 mbps) connection to the Internet. The leased
line solution comes at greater expense to the user. These lines are
leased through the telephone companies at a high installation and
monthly fee. We believe that our Internet access services provide customers
with the following benefits: Fast and Reliable Internet Access-We have implemented a network
architecture providing exceptional quality and consistency in
Internet services, making us the recognized backbone leader in the
Oklahoma Internet service provider industry. We offer unlimited,
unrestricted and reliable Internet access at a low monthly price. A
user-to-modem ratio of approximately 7:1 assures access with minimal
busy signals. Dial-up access is available for the following modem
speeds: 14.4K, 28.8K, 33.6K, K56Flex, 56K V.90, v.92 MOH, ISDN 64K
and ISDN 128K. Our dial-up access supports all major platforms and
operating 6




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systems, including MS Windows, UNIX®, Mac OS, OS/2 and LINUX. This
allows simplified access to all Internet applications, including the
World Wide Web, email, and news and file transfer protocol. Cost-Effective Access-We offer high quality Internet
connectivity and enhanced business services at price points that are
generally lower than those charged by other Internet service
providers with national coverage. Additionally, we offer pre-bundled
access services packages under monthly or prepaid plans. Superior Customer Support-We provide superior customer service
and support, with customer care and technical personnel available by
telephone and on-line 24 hours per day, 365 days per year. CLEC Operations Through FullTel, our wholly owned subsidiary, we are a fully
licensed competitive local exchange carrier or CLEC in Oklahoma.
CLECs are new phone companies born out of the Telecommunications Act
of 1996 (Telecommunications Act), which requires the incumbent local
exchange carriers or ILECs, such as the regional Bell companies, to
provide CLECs access to their local facilities, and to compensate
CLECs for traffic originated by ILECs and terminated on the CLECs
network. By adding our own telephone switch and infrastructure to
the existing telephone network in March 2003, we are now able to
offer certain local services in most of Oklahoma, including local
dial-up and digital subscriber lines for the Internet access services
provided by us. As a CLEC, we may subscribe to and resell all forms
of local telephone service in Oklahoma. We intend to build our own
network infrastructure, which we believe will reduce our current
reliance upon the infrastructures of the ILECs. We believe that our
CLEC status, combined with the efficiencies inherent in operating our
own network, should result in lower overhead costs and a more
predictable infrastructure, both of which should be to the benefit of
our customers. While Internet access is the core focus of growth for us, we
plan to also provide traditional telephone service throughout
Oklahoma. A core piece of our marketing strategy is the cross
pollination between our Internet activities and FullTels local
dial-up service. By organizing and funding FullTel, we expect to gain
local dial-up Internet access to approximately 80% of Oklahoma. In
return, FullTel will gain immediate access to our entire Internet
service provider customer base. The FullTel data center telephone switching equipment was
installed in March 2003. At which time, FullTel began the process
of activating local access telephone numbers for every city in which
we will market, sell and operate our retail FullNet Internet service
provider brand, wholesale dial-up Internet service and our
business-to-business network design, connectivity, domain and Web
hosting businesses. At December 31, 2003 FullTel provided us with
local telephone access in approximately 178 cities. However, our
ability to fully take advantage of these opportunities will be
dependent upon the availability of additional capital. Sales and Marketing Although we expect that the bulk of our new subscribers will
come through acquisition of Internet service providers, our expanded
local sales system is also an integral part of our growth plan. We
believe local sales and marketing will develop further recognition of
our name brand that will lead to increased subscriber revenues. The 15 largest metropolitan areas in the United States comprise
only 38% of the U.S. population, leaving the majority of the
countrys population in hundreds of smaller markets as potential
subscribers. More specifically, predominantly smaller metropolitan
and rural markets may have penetration rates of 22% and lower, versus
larger markets with penetration rates of around 40%. In addition, in
many cases national providers are a long distance phone call in our
markets. Finally, since there is not as much competition in the
smaller metropolitan and rural markets, monthly churn rates are lower
and word-of-mouth referrals are a significant generator of new
subscribers. We believe that we have significant opportunities for
acquisition and internal sales growth in these market areas. We focus on marketing our services to two distinct market
segments: enterprises (primarily small and medium size businesses)
and consumers. By attracting enterprise customers who use the
network primarily during the daytime, and consumer customers who use
the network primarily at night, we are able to utilize our network
infrastructure more cost effectively. Competition The market for Internet connectivity and related services is
extremely competitive. We anticipate that competition will continue
to intensify as the use of the Internet grows. The tremendous growth
and potential market size of the Internet access market has attracted
many new start-ups as well as existing businesses from a variety of
industries. We believe that a reliable network, knowledgeable
salespeople and the quality of technical support currently are the
primary competitive factors in our targeted market and that price is
usually secondary to these factors. 7




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Our current and prospective competitors include, in addition to
other national, regional and local Internet service providers, long
distance and local exchange telecommunications companies, cable
television, direct broadcast satellite, wireless communications
providers and online service providers. While we believe that our
network, products and customer service distinguish us from these
competitors, most of these competitors have significantly greater
market presence, brand recognition, financial, technical and
personnel resources than us. Internet Service Providers Our current primary competitors include other Internet service
providers with a significant national presence that focuses on
business customers, such as Cox Communications and SBC. These
competitors have greater market share, brand recognition, financial,
technical and personnel resources than us. We also compete with
regional and local Internet service providers in our targeted
markets. Telecommunications Carriers The major long distance companies, also known as inter-exchange
carriers, including AT&T, MCI WorldCom, and Sprint, offer Internet
access services and compete with us. Reforms in the federal
regulation of the telecommunications industry have created greater
opportunities for ILECs, including the Regional Bell Operating
Companies or RBOCs, and other competitive local exchange carriers, to
enter the Internet connectivity market. In order to address the
Internet connectivity requirements of the business customers of long
distance and local carriers, we believe that there is a move toward
horizontal integration by ILECs and CLECs through acquisitions or
joint ventures with, and the wholesale purchase of, connectivity from
Internet service providers. The MCI/WorldCom merger (and the prior
WorldCom/MFS/UUNet consolidation), GTEs acquisition of BBN, the
acquisition by ICG Communications, Inc. of Netcom, Global Crossings
acquisition of Frontier Corp. (and Frontiers prior acquisition of
Global Center) and AT&Ts purchase of IBMs global communications
network are indicative of this trend. Accordingly, we expect that we
will experience increased competition from the traditional
telecommunications carriers. These telecommunication carriers, in
addition to their greater network coverage, market presence,
financial, technical and personnel resources also have large existing
commercial customer bases. Cable Companies, Direct Broadcast Satellite and Wireless Communications Companies Many of the major cable companies are offering Internet
connectivity, relying on the viability of cable modems and economical
upgrades to their networks, including Media One and Time Warner
Cablevision, Inc., Cox Communications and Tele-Communications, Inc.
(TCI). The companies that own these broadband networks could prevent us
from delivering Internet access through the wire and cable
connections that they own. Our ability to compete with telephone and
cable television companies that are able to support broadband
transmissions, and to provide better Internet services and products,
may depend on future regulation to guarantee open access to the
broadband networks. However, in January 1999, the Federal
Communications Commission declined to take any action to mandate or
otherwise regulate access by Internet service providers to broadband
cable facilities at this time. It is unclear whether and to what
extent local and state regulatory agencies will take any initiatives
to implement this type of regulation, and whether they will be
successful in establishing their authority to do so. Similarly, the
Federal Communications Commission is considering proposals that could
limit the right of Internet service providers to connect with their
customers over broadband local telephone lines. In addition to
competing directly in the Internet service provider market, both
cable and television facilities operators are also aligning
themselves with certain Internet service providers who would receive
preferential or exclusive use of broadband local connections to end
users. If high-speed, broadband facilities increasingly become the
preferred mode by which customers access the Internet and we are
unable to gain access to these facilities on reasonable terms, our
business, financial condition and results of operations could be
materially adversely affected. Online Service Providers The dominant online service providers, including Microsoft
Network, America Online, Incorporated and Earthlink, have all entered
the Internet access business by engineering their current proprietary
networks to include Internet access capabilities. We compete to a
lesser extent with these service providers, which currently are
primarily focused on the consumer marketplace and offer their own
content, including chat rooms, news updates, searchable reference
databases, special interest groups and shopping. However, America Onlines merger with Time-Warner, its
acquisition of Netscape Communications Corporation and related
strategic alliance with Sun Microsystems enable it to offer a broader
array of Internet -based services and products that could
significantly enhance its ability to appeal to the business
marketplace and, as a result, compete more directly with Internet
service providers like us. CompuServe has also announced that it
will target Internet connectivity for the small to medium sized
business market. 8




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We believe that our ability to attract business customers and to
market value-added services is a key to our future success. However,
there can be no assurance that our competitors will not introduce
comparable services or products at similar or more attractive prices
in the future or that we will not be required to reduce our prices to
match competition. Recently, many competitive ISPs have shifted their
focus from individual customers to business customers. Moreover, there can be no assurance that more of our competitors
will not shift their focus to attracting business customers,
resulting in even more competition for us. There can be no assurance
that we will be able to offset the effects of any such competition or
resulting price reductions. Increased competition could result in
erosion of our market share and could have a material adverse effect
on our business, financial condition and results of operations. Government Regulations The following summary of regulatory developments and legislation
is not complete. It does not describe all present and proposed
federal, state, and local regulation and legislation affecting the
Internet service provider and telecommunications industries.
Existing federal and state regulations are currently subject to
judicial proceedings, legislative hearings, and administrative
proposals that could change, in varying degrees, the manner in which
our businesses operate. We cannot predict the outcome of these
proceedings or their impact upon the Internet service provider and
telecommunications industries or upon our business. Both the provision of Internet access service and the provision
of underlying telecommunications services are affected by federal,
state, local and foreign regulation. The Federal Communications
Commission or FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications carriers to the extent that
they involve the provision, origination or termination of
jurisdictionally interstate or international communications. The
state regulatory commissions retain jurisdiction over the same
facilities and services to the extent they involve origination or
termination of jurisdictionally intrastate communications. In
addition, as a result of the passage of the Telecommunications Act,
state and federal regulators share responsibility for implementing
and enforcing the domestic pro-competitive policies of the
Telecommunications Act. In particular, state regulatory commissions
have substantial oversight over the provision of interconnection and
non-discriminatory network access by ILECs. Municipal authorities
generally have some jurisdiction over access to rights of way,
franchises, zoning and other matters of local concern. Our Internet operations are not currently subject to direct
regulation by the FCC or any other U.S. governmental agency, other
than regulations applicable to businesses generally. However, the
FCC continues to review its regulatory position on the usage of the
basic network and communications facilities by Internet service
providers. Although in an April 1998 Report, the FCC determined that
Internet service providers should not be treated as
telecommunications carriers and therefore should not be regulated, it
is expected that future Internet service provider regulatory status
will continue to be uncertain. Indeed, in that report, the FCC
concluded that certain services offered over the Internet, such as
phone-to-phone Internet telephony, may be functionally
indistinguishable from traditional telecommunications service
offerings, and their non-regulated status may have to be re-examined. Changes in the regulatory structure and environment affecting
the Internet access market, including regulatory changes that
directly or indirectly affect telecommunications costs or increase
the likelihood of competition from RBOCs or other telecommunications
companies, could have an adverse effect on our business. Although
the FCC has decided not to allow local telephone companies to impose
per-minute access charges on Internet service providers, and the
reviewing court has upheld that decision, further regulatory and
legislative consideration of this issue is likely. In addition, some
telephone companies are seeking relief through state regulatory
agencies. The imposition of access charges would affect our costs of
serving dial-up customers and could have a material adverse effect on
our business, financial condition and results of operations. In addition to our Internet service provider operations, we have
recently focused attention on acquiring telecommunications assets and
facilities, which is a regulated activity. Fulltel, our wholly owned
subsidiary, has received competitive local exchange carrier or CLEC
certification in Oklahoma, and an important part of our growth
strategy is obtaining CLEC certification in certain other states.
The Telecommunications Act requires CLECs not to prohibit or unduly
restrict resale of their services; to provide dialing parity,
number portability, and nondiscriminatory access to telephone
numbers, operator services, directory assistance, and directory
listings; to afford access to poles, ducts, conduits, and
rights-of-way; and to establish reciprocal compensation arrangements
for the transport and termination of telecommunications traffic. In
addition to federal regulation of CLECs, the states also impose
regulatory obligations upon CLECs. While these obligations vary from
state to state, most states require CLECs to file a tariff for their
services and charges; require CLECs to charge just and reasonable
rates for their services, and not to discriminate among
similarly-situated customers; to file periodic reports and pay
certain fees; and to comply with certain services standards and
consumer protection laws. As a provider of domestic basic
telecommunications services, particularly competitive local exchange
services, we could become subject to further regulation by the FCC
and/or another regulatory agency, including state and local entities. 9




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The Telecommunications Act has caused fundamental changes in the
markets for local exchange services. In particular, the
Telecommunications Act and the FCC rules issued pursuant to it
mandate competition in local markets and require that ILECs
interconnect with CLECs. Under the provisions of the
Telecommunications Act, the FCC and state public utility commissions
share jurisdiction over the implementation of local competition: the
FCC was required to promulgate general rules and the state
commissions were required to arbitrate and approve individual
interconnection agreements. The courts have generally upheld the FCC
in its promulgation of rules, including a January 25, 1999 U.S.
Supreme Court ruling which determined that the FCC has jurisdiction
to promulgate national rules in pricing for interconnection. In July 2000, the Eighth Circuit Court issued a decision on the
earlier remand from the Supreme Court and rejected, as contrary to
the 96 Act, the use of hypothetical network costs, including total
element long-run incremental costs methodology (TELRIC), which the
FCC had used in developing certain of its pricing rules. The Eighth
Circuit Court also vacated the FCCs pricing rules related to UNEs,
termination and transport, but upheld its prior decision that ILECs
universal service subsidies should not be included in the costs of
providing network elements. Finally, the Eighth Circuit Court also
vacated the FCCs rules requiring that: (1) ILECs recombine unbundled
network elements for competitors in any technically feasible
combination; (2) all preexisting interconnection agreements be
submitted to the states for review; and (3) the burden of proof for
retention of a rural exemption be shifted to the ILEC. The FCC
sought review of the Eighth Circuit Courts invalidation of TELRIC
and was granted certiorari. On May 13, 2002, the Supreme Court
reversed certain of the Eighth Circuit Courts findings and affirmed
that the FCCs rules concerning forward looking economic costs,
including TELRIC, were proper under the 96 Act. The Supreme Court
also restored the FCCs requirement that the ILECs combine UNEs for
competitors when they are unable to do so themselves. In November 1999, the FCC released an order making unbundling
requirements applicable to all ILEC network elements uniformly.
UNE-P is created when a competing carrier obtains all the network
elements needed to provide service from the ILEC. In December 1999,
the FCC released an order requiring the provision of unbundled local
copper loops enabling CLECs to offer competitive Digital Subscriber
Loop Internet access. The FCC reconsidered both orders in its first
triennial review of its policies on UNEs completed in early 2003, as
further discussed below. On August 21, 2003, the FCC released the text of its Triennial
Review Order. In response to the remand of the United States Court
of Appeals for the District of Columbia circuit, the FCC adopted new
rules governing the obligations of ILECs to unbundle the elements of
their local networks for use by competitors. The FCC made national
findings of impairment or non-impairment for loops, transport and,
most significantly, switching. The FCC delegated to the states the
authority to engage in additional fact finding and make alternative
impairment findings based on a more granular impairment analysis
including evaluation of applicability of FCC-established triggers.
The FCC created mass market and enterprise market customer
classifications that generally correspond to the residential and
business markets, respectively. The FCC found that CLECs were not
impaired without access to local circuit switching when serving
enterprise market customers on a national level. CLECs, however,
were found to be impaired on a national level without access to local
switching when serving mass market customers. State commissions
had 90 days to ask the FCC to waive the finding of no impairment
without switching for enterprise market customers. The FCC
presumption that CLECs are impaired without access to transport, high
capacity loops and mass market switching is subject to a more
granular nine month review by state commissions pursuant to FCC-
established triggers and other economic and operational criteria. The FCC also opened a further notice of proposed rulemaking to
consider the pick and choose rules under which a competing carrier
may select from among the various terms of interconnection offered by
an ILEC in its various interconnection agreements. Comments have
been filed, but the FCC has not issued a decision. The Triennial Review Order also provided that:  
    
    ILECs are not required to unbundle packet switching as a
stand-alone network element.      Two key components of the FCCs TELRIC pricing rules were
clarified. First, the FCC clarified that the risk-adjusted cost of
capital used in calculating UNE prices should reflect the risks
associated with a competitive market. Second, the FCC declined to
mandate the use of any particular set of asset lives for
depreciation, but clarified that the use of an accelerated
depreciation mechanism may present a more accurate method of
calculating economic depreciation.      CLECs continue to be prohibited from avoiding any liability
under contractual early termination clauses in the event a CLEC
converts a special access circuit to an UNE. We are monitoring the Oklahoma state commission proceedings and
participating where necessary as the commission undertakes the 90 day
and nine month analyses to establish rules or make determinations as
directed by the Triennial Review Order. In addition, numerous
petitions and appeals have been filed in the courts and with the FCC
challenging many of the findings in the Triennial Review Order and
seeking a stay on certain portions of the order. The appeals have
been consolidated in the D.C. Circuit Court of Appeals. Oral
arguments were heard on January 28, 2004. On March 2, 2004, a
three-judge panel in the D.C. Circuit Court of Appeals overturned the
FCCs Triennial Review Order with regard to network unbundling rules.
A majority 10




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of the FCC Commissioners is seeking a court-ordered stay and plan to
appeal the ruling to the Supreme Court. Until all of these
proceedings are concluded, the impact of this order, if any, on our
CLEC operations cannot be determined. An important issue for CLECs is the right to receive reciprocal
compensation for the transport and termination of Internet traffic.
We believe that, under the Telecommunications Act, CLECs are entitled
to receive reciprocal compensation from ILECs. However, some ILECs
have disputed payment of reciprocal compensation for Internet
traffic, arguing that Internet service provider traffic is not local
traffic. Most states have required ILECs to pay CLECs reciprocal
compensation. However, in October 1998, the FCC determined that
dedicated digital subscriber line service is an interstate service
and properly tariffed at the interstate level. In February 1999, the
FCC concluded that at least a substantial portion of dial-up Internet
service provider traffic is jurisdictionally interstate. The FCC also
concluded that its jurisdictional decision does not alter the
exemption from access charges currently enjoyed by Internet service
providers. The FCC established a proceeding to consider an
appropriate compensation mechanism for interstate Internet traffic.
Pending the adoption of that mechanism, the FCC saw no reason to
interfere with existing interconnection agreements and reciprocal
compensation arrangements. The FCC order has been appealed. In
addition, there is a risk that state public utility commissions that
have previously considered this issue and ordered the payment of
reciprocal compensation by the ILECs to the CLECs may be asked by the
ILECs to revisit their determinations, or may revisit their
determinations on their own motion. To date, at least one ILEC has
filed suit seeking a refund from a carrier of reciprocal compensation
that the ILEC had paid to that carrier. There can be no assurance
that any future court, state regulatory or FCC decision on this
matter will favor our position. An unfavorable result may have an
adverse impact on our potential future revenues as a CLEC. At the
present time, we are reviewing this matter with outside counsel to
determine the availability, if any, of reciprocal compensation to us
as well as the cost of billing for it and collecting it. As we become a competitor in local exchange markets, we will
become subject to state requirements regarding provision of
intrastate services. This may include the filing of tariffs
containing rates and conditions. As a new entrant, without market
power, we expect to face a relatively flexible regulatory
environment. Nevertheless, it is possible that some states could
require us to obtain the approval of the public utilities commission
for the issuance of debt or equity or other transactions which would
result in a lien on our property used to provide intrastate services. Additional Factors to Consider This Report includes forward looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Although we believe that our plans, intentions and
expectations reflected in such forward looking statements are
reasonable, we can give no assurance that such plans, intentions or
expectations will be achieved. Important factors that could cause
actual results to differ materially from our forward looking
statements are set forth below and elsewhere in this Annual Report.
All forward looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the
cautionary statements set forth below. Limited Operating History. We have a relatively limited
operating history upon which an evaluation of our prospects can be
made. Consequently, the likelihood of our success must be considered
in view of all of the risks, expenses and delays inherent in the
establishment and growth of a new business including, but not limited
to, expenses, complications and delays which cannot be foreseen when
a business is commenced, initiation of marketing activities, the
uncertainty of market acceptance of new services, intense competition
from larger more established competitors and other factors. Our
ability to achieve profitability and growth will depend on successful
development and commercialization of our current and proposed
services. No assurance can be given that we will be able to
introduce our proposed services or market our services on a
commercially successful basis. Necessity of Additional Financing. In order for us to have any
opportunity for significant commercial success and profitability, we
must successfully obtain additional financing, either through
borrowings, additional private placements or an initial public
offering, or some combination thereof. Although we are actively
pursuing a variety of funding sources, there can be no assurance that
we will be successful in such pursuit. Limited Marketing Experience. We have limited experience in
developing and commercializing new services based on innovative
technologies, and there is limited information available concerning
the potential performance of our hardware or market acceptance of our
proposed services. There can be no assurance that unanticipated
expenses, problems or technical difficulties will not occur which
would result in material delays in product commercialization or that
our efforts will result in successful product commercialization. Uncertainty of Products/Services Development. Although
considerable time and financial resources were expended in the
development of our services and products, there can be absolutely no
assurance that problems will not develop which would have a material
adverse effect on us. We will be required to commit considerable
time, effort and resources to finalize such development and adapt our
products/services to satisfy specific requirements of potential
customers. Continued system refinement, enhancement and development
efforts are subject to all of the risks inherent in the development
of new products/services and technologies, including unanticipated
delays, expenses, technical problems or difficulties, as well as the
possible insufficiency of funds to satisfactorily complete
development, which could result in abandonment or substantial change
in 11




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commercialization. There can be no assurance that development
efforts will be successfully completed on a timely basis, or at all,
that we will be able to successfully adapt our hardware and/or
software to satisfy specific requirements of potential customers, or
that unanticipated events will not occur which would result in
increased costs or material delays in development or
commercialization. In addition, technologies as complex as those
planned to be incorporated into our products/services may contain
errors which become apparent subsequent to commercial use. Remedying
such errors could delay our plans and cause us to incur substantial
additional costs. New Concept; Uncertainty of Market Acceptance and
Commercialization Strategy. As is typical in the case of a new
business concept, demand and market acceptance for a newly introduced
product/service is subject to a high level of uncertainty. Achieving
market acceptance for this new concept will require significant
efforts and expenditures by us to create awareness and demand by
consumers. Our marketing strategy and preliminary and future
marketing plans may be unsuccessful and are subject to change as a
result of a number of factors, including progress or delays in our
marketing efforts, changes in market conditions (including the
emergence of potentially significant related market segments for
applications of our technology), the nature of possible license and
distribution arrangements which may or may not become available to us
in the future and economic, regulatory and competitive factors.
There can be no assurance that our strategy will result in successful
product commercialization or that our efforts will result in initial
or continued market acceptance for our proposed products. Competition; Technological Obsolescence. The markets that we
intend to enter are characterized by intense competition and an
increasing number of potential new market entrants who have developed
or are developing potentially competitive products and/or services.
We will face competition from numerous sources, certain of which may
have substantially greater financial, technical, marketing,
distribution, personnel and other resources than us, permitting such
companies to implement extensive marketing campaigns, both generally
and in response to efforts by additional competitors to enter into
new markets and market new products and services. In addition, the
markets for our proposed products/services are characterized by
rapidly changing technology and evolving industry standards that
could result in product obsolescence or short product life cycles.
Accordingly, our ability to compete will be dependent upon our
ability to complete the development of our products and to introduce
our products and/or services into the marketplace in a timely manner,
to continually enhance and improve our software and to successfully
develop and market new products. There can be no assurance that we
will be able to compete successfully, that competitors will not
develop technologies or products that render our products and/or
services obsolete or less marketable or that we will be able to
successfully enhance our products or develop new products and/or
services. Risks Relating to the Internet. Businesses reliant on the
Internet may be at risk due to inadequate development of the
necessary infrastructure, such as reliable network backbones, or
complementary services, such as high-speed modems and security
procedures. The Internet has experienced, and is expected to continue
to experience, significant growth in the number of users and amount
of traffic. There can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed
on it by sustained growth. In addition, there may be delays in the
development and adoption of new standards and protocols, the
inability to handle increased levels of Internet activity or due to
increased government regulation. If the necessary Internet
infrastructure or complementary services are not developed to
effectively support growth that may occur, our business, results of
operations and financial condition would be materially adversely
affected. Potential Government Regulations. We are subject to state
commission, Federal Communications Commission and court decisions as
they relate to the interpretation and implementation of the
Telecommunications Act, the interpretation of Competitive Local
Exchange Carrier interconnection agreements in general and our
interconnection agreements in particular. In some cases, we may
become bound by the results of ongoing proceedings of these bodies or
the legal outcomes of other contested interconnection agreements that
are similar to agreements to which we are a party. The results of any
of these proceedings could have a material adverse effect on our
business, prospects, financial condition and results of operations. Dependence on Key Personnel. Our success depends in large part
upon the continued successful performance of our current executive
officers and key employees, Messrs. Timothy J. Kilkenny, Roger P.
Baresel and Jason Ayers, for our continued research, development,
marketing and operation. Although we have employed, and will employ
in the future, additional qualified employees as well as retaining
consultants having significant experience, if Messrs. Kilkenny,
Baresel or Ayers fail to perform any of their duties for any reason
whatsoever, our ability to market, operate and support our
products/services will be adversely affected. While we are located
in areas where the available pool of people is substantial, there is
also significant competition for qualified personnel. Limited Public Market. During February 2000, our common stock
began trading on the OTC Bulletin Board under the symbol FULO. While
our common stock continues to trade on the OTC Bulletin Board, there
can be no assurance that our stockholders will be able to sell their
            shares should they so desire. Any market for the common stock that
may develop, in all likelihood, will be a limited one, and if such a
market does develop, the market price may be volatile. No Payment of Dividends on Common Stock. We have not paid any
dividends on our common stock. For the foreseeable future, we
anticipate that all earnings, if any, which may be generated from our
operations, will be used to finance our growth and that cash
dividends will not be paid to holders of the common stock. 12




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Penny Stock Regulation. Broker-dealer practices in connection
with transactions in penny stocks are regulated by certain penny
stock rules adopted by the SEC. Penny stocks generally are equity
securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the
NASDAQ system). The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the
rules, to deliver a standardized risk disclosure document that
provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson in
the transaction, and, if the broker dealer is the sole market-maker,
the broker-dealer must disclose this fact and the broker-dealers
presumed control over the market, and monthly account statements
showing the market value of each penny stock held in the customers
account. In addition, broker-dealers who sell such securities to
persons other than established customers and accredited investors
(generally, those persons with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their
spouse), must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the
purchasers written agreement to the transaction. Consequently,
these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security that
is or becomes subject to the penny stock rules. Our common stock is
subject to the penny stock rules at the present time, and
consequently our stockholders will find it more difficult to sell
their shares. Customers In 2003 and 2002, we had one customer that represented 33% and
27%, respectively, of our gross revenues. In June 2000, pursuant to
an agreement that ends on December 31, 2005, we began providing
co-location services to KMC Telecom V, Inc. (KMC), a
facilities-based competitive local exchange carrier. Under the terms
of this agreement, we receive $42,275 per month to provide
co-location and support services for KMCs telecommunications
equipment at our network operations center in Oklahoma City,
Oklahoma. KMC moved into our network operations center and began
making payments during the third quarter of 2000. Employees As of December 31, 2003, we had 15 employees employed in
engineering, sales, marketing, customer support and related
activities and general and administrative functions. None of our
employees are represented by a labor union, and we consider our
relations with our employees to be good. We also engage consultants
from time to time with respect to various aspects of our business. 
 Item 2. Description of Property We maintain our executive office in approximately 13,000 square
feet at 201 Robert S. Kerr Avenue, suite 210 in Oklahoma City, at an
effective annual rental rate of $10.20 per square foot. These
premises are occupied pursuant to a ten-year lease that expires
December 31, 2009. 
 Item 3. Legal Proceedings We are not currently engaged in any material legal proceedings.
We are, however, subject to state commission, FCC and court decisions
as they relate to the interpretation and implementation of the
Telecommunications Act, the interpretation of CLEC interconnection
agreements in general and our interconnection agreements in
particular. In some cases, we may be bound by the results of ongoing
proceedings of these bodies or the legal outcomes of other contested
interconnection agreements that are similar to agreements to which we
are a party. The results of any of these proceedings could have a
material adverse effect on our business, prospects, financial
condition and results of operations. 
 Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this Report. 13




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PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters Our common stock is traded in the over-the-counter market and is
quoted on the OTC Bulletin Board under the symbol FULO. Prior to
February 9, 2000, there was no public trading market for our common
stock. The closing sale prices reflect inter-dealer prices without
adjustment for retail markups, markdowns or commissions and may not
reflect actual transactions. The following table sets forth the high
and low closing sale prices of our common stock during the calendar
quarters presented as reported by the OTC Bulletin Board. Common StockClosing Sale PricesHigh
    
    Low2003 Calendar Quarter Ended:March 31
    
    $
    .06
    
    
    $
    .06June 30
    
    
    .04
    
    
    
    .04September 30
    
    
    .05
    
    
    
    .05December 31
    
    
    .05
    
    
    
    .052002 Calendar Quarter Ended:March 31
    
    $
    .06
    
    
    $
    .05June 30
    
    
    .10
    
    
    
    .10September 30
    
    
    .06
    
    
    
    .06December 31
    
    
    .05
    
    
    
    .05
 Number of stockholders The number of beneficial holders of record of our common stock
as of the close of business on March 25, 2004 was approximately 113. Dividend Policy To date, we have declared no cash dividends on our common stock,
and do not expect to pay cash dividends in the near term. We intend
to retain future earnings, if any, to provide funds for operations
and the continued expansion of our business. Recent Sales of Unregistered Securities During December 2003, we issued 50,000 shares of common stock as
a result of the exercise of an option at a price of $.04 per share.
This offering was pursuant to Rule 506 of Regulation D of the
Securities Act. On January 1, 2002, we agreed to issue 11,815 shares of common
stock in payment of $11,815 accrued interest on a portion of our
convertible promissory notes. This offering was pursuant to Rule 506
of Regulation D of the Securities Act. During September 2002, we received $5,000 from the issuance of a
five-year 8% convertible note payable. This note is convertible into
our common stock at the election of the holder, at a conversion rate
of $.15 per share, subject to adjustment under certain circumstances.
This offering was pursuant to Rule 506 of Regulation D of the
Securities Act. During December 2002, we agreed to issue 1,500 shares of common
stock in settlement of a note payable. This offering was pursuant to
Rule 506 of Regulation D of the Securities Act. With respect to each of the foregoing common stock and warrant
sale transactions, we relied on Sections 4(2) and 3(b) of the
Securities Act of 1933 and applicable registration exemptions of
Rules 504 and 506 of Regulation D and applicable state securities
laws. 
 Item 6. Managements Discussion and Analysis or Plan of Operation The following discussion should be read in conjunction with our
Consolidated Financial Statements and notes thereto included in Part
II, Item 7 of this Report. The results shown herein are not
necessarily indicative of the results to be expected in any future
periods. This discussion contains forward-looking statements based
on current expectations that involve risks and uncertainties. Actual
results and the timing of events could differ materially from the
forward-looking statements as a result of a number of factors. For a
discussion of the factors that could cause actual results to differ
materially from the forward-looking 14




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statements, see Item 1. Description of Business  Additional Factors
to Consider and our other periodic reports and documents filed with
the Securities and Exchange Commission. Overview We are an integrated communications provider offering integrated
communications and Internet connectivity to individuals, businesses,
organizations, educational institutions and government agencies.
Through our subsidiaries, we provide high quality, reliable and
scalable Internet access, web hosting, and equipment co-location. Our overall goal is to become the dominant integrated
communications provider for residents and small to medium-sized
businesses in Oklahoma. We believe that the rural areas of Oklahoma
are underserved by Internet service providers, and that significant
profitable growth can be achieved in serving these markets by
providing reliable Internet connectivity and value-added services at
a reasonable cost to the residents and businesses located in these
areas. We believe we can obtain a significant Internet service
provider and business-to-business market share in Oklahoma. Our
wholly-owned subsidiary, FullTel, is a licensed competitive local
exchange carrier in Oklahoma. FullTel, as a competitive local
exchange carrier, is able to provide local telephone numbers for
Internet access. The market for Internet connectivity and related services is
extremely competitive. We anticipate that competition will continue
to intensify. The tremendous growth and potential market size of the
Internet access market has attracted many new start-ups as well as
existing businesses from a variety of industries. We believe that a
reliable network, knowledgeable salespeople and the quality of
technical support currently are the primary competitive factors in
our targeted market and that price is usually secondary to these
factors. Results of Operations The following table sets forth certain statement of operations
data as a percentage of revenues for the years ended December 31,
2003 and 2002: For the Years Ended December 31,2003
    
    2002Amount
    
    Percent
    
    Amount
    PercentRevenues:Access service revenues
    
    $
    990,769
    
    
    
    46.7
    %
    
    $
    1,421,699
    
    
    
    58.6
    %Co-location and other revenues
    
    
    1,131,113
    
    
    
    53.3
    
    
    
    1,003,317
    
    
    
    41.4Total revenues
    
    
    2,121,882
    
    
    
    100.0
    
    
    
    2,425,016
    
    
    
    100.0Cost of access service revenues
    
    
    518,049
    
    
    
    24.4
    
    
    
    834,338
    
    
    
    34.4Cost of co-location and other revenues
    
    
    109,914
    
    
    
    5.2
    
    
    
    98,371
    
    
    
    4.1Selling, general and administrative expenses
    
    
    1,140,905
    
    
    
    53.8
    
    
    
    1,315,827
    
    
    
    54.3Loss (gain) on sale of assets
    
    
    (30,218
    )
    
    
    (1.4
    )
    
    
    (33,827
    )
    
    
    (1.4
    )Depreciation and amortization
    
    
    467,483
    
    
    
    22.0
    
    
    
    660,870
    
    
    
    27.2Total operating costs and expenses
    
    
    2,206,133
    
    
    
    104.0
    
    
    
    2,875,579
    
    
    
    118.6Loss from operations
    
    
    (84,251
    )
    
    
    (4.0
    )
    
    
    (450,563
    )
    
    
    (18.6
    )Interest expense
    
    
    (594,357
    )
    
    
    (28.0
    )
    
    
    (372,417
    )
    
    
    (15.3
    )Net loss
    
    $
    (678,608
    )
    
    
    (32.0
    )%
    
    $
    (822,980
    )
    
    
    (33.9
    )%
 Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues Access service revenues decreased $430,930 or 30.3% to $990,769
for the year ended December 31, 2003 from $1,421,699 for the year
2002. This decrease was primarily due to a net reduction in the
number of customers, including the sale of approximately 160 and 400
customers, respectively, during 2003 and 2002. Historically we had
been making an estimate regarding a portion of the classification
between access service revenues and co-location and other revenues.
During September 2003 we completed an improvement in our accounting
system that allows us to more accurately classify our revenue between
the two categories. This resulted in a cumulative adjustment to
correct our year-to-date classification of approximately $36,000
which increased co-location and other revenue and decreased access
service revenue for the year 2003 and approximately $26,000 which
increased access service revenue and decreased co-location and other
revenue during the year 2002. 15




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Co-location and other revenues increased $127,796 or 12.7% to
$1,131,113 for the year ended December 31, 2003 from $1,003,317 for
the year 2002. This net increase was primarily attributable to
selling additional services to existing customers and the addition
of one large co-location customer during the second quarter of 2002
and one large co-location customer during the third quarter of 2003. Operating Costs and Expenses Cost of access service revenues decreased $316,289 or 37.9% to
$518,049 for the year ended December 31, 2003 from $834,338 for the
year 2002. This decrease was primarily due to the restructuring of
our network in order to operate in a more cost effective manner.
During the year ended December 31, 2003 we received approximately
$76,000 in back billings from SBC. We are in the process of
reviewing these bills and at December 31, 2003 we had paid
approximately $10,000, received credit from SBC of approximately
$14,000 and accrued the balance of approximately $52,000. Cost of co-location and other revenues increased $11,543 or
11.7% to $109,914 for the year ended December 31, 2003 from $98,371
for the year 2002. This increase was primarily due to an increase in
cost of equipment related to co-location services. Selling, general and administrative expenses decreased $174,922
or 13.3% to $1,140,905 for the year ended December 31, 2003 from
$1,315,827 for the year 2002. This decrease was primarily due to a
decrease in employee costs. Employee costs decreased $160,972 for
the year ended December 31, 2003 from the year 2002. This decrease
was primarily due to a decrease in the number of employees from 19 at
December 31, 2002 to 15 at December 31, 2003 and a decrease in wage
rates. In addition, our five most highly compensated officers have
voluntarily agreed to defer a portion of their compensation. For the
years ending December 31, 2003 and 2002 the amounts deferred totaled
$52,790 and $57,346, respectively. Selling, general and
administrative expenses as a percentage of total revenues decreased
to 53.8% during 2003 from 54.3% during 2002. During the year ended December 31, 2003, we recorded a gain on
sale of assets of $30,218 primarily attributable to the sale of a
block of customers that were located in an area outside our primary
geographic service area. During the same period in 2002 we recorded
a gain on sale of assets of $33,827 primarily attributable to the
sale of customers in certain cities based upon our determination that
it was no longer cost effective for us to provide access services to
those cities. Depreciation and amortization expense decreased $193,387 or
29.3% to $467,483 for the year ended December 31, 2003 from $660,870
for the prior year. In January 2002, upon initially applying SFAS
142 we reassessed useful lives of our acquired customer bases and we
began amortizing these intangible assets over their estimated useful
lives and in direct relation to any decreases in the acquired
customer bases. Amortization expense for the years ended December
31, 2003 and 2002 relating to intangible assets was $236,791 and
$448,579, respectively, of which $101,033 and $312,821, respectively,
was related to decreases in the number of acquired customers. Interest Expense Interest expense increased $221,940 or 59.6% to $594,357 for the
year ended December 31, 2003 from $372,417 for the year 2002. This
increase was primarily attributable to the increase in amortization
of the discount on our convertible promissory notes. Pursuant to the
provisions of the convertible promissory notes, the conversion price
decreased from $.63 at December 31, 2002 to $.49 at December 31,
2003. Reductions in conversion price are recognized as an interest
expense at the date of reduction by an increase to additional paid-in
capital and an increase in the discount on the convertible promissory
notes. In 2003 and 2002, $360,139 and $125,696, respectively, of our
interest expense was related to the decrease in the conversion price.
The majority of these convertible promissory notes matured in 2003,
therefore no additional interest from these conversion prices will be
recognized. Liquidity and Capital Resources As of December 31, 2003, we had $11,480 in cash and $2,401,373
in current liabilities, including $171,876 of deferred revenues that
will not require settlement in cash. At December 31, 2003, we had a deficit working capital of
$2,300,200, while at December 31, 2002 we had a deficit working
capital of $1,929,308. We do not have a line of credit or credit
facility to serve as an additional source of liquidity. Historically
we have relied on shareholder loans as an additional source of funds. As of December 31, 2003, $428,787 of the $464,903 we owed to our
trade creditors was past due. We have no formal agreements regarding
payment of these amounts. At December 31, 2003, we had outstanding
principal and interest owed on matured notes totaling $1,128,025. We
have not made payment or negotiated an extension of the notes and the
lenders have not 16




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##### Table of Contents



made any demands. We are currently developing a plan to satisfy
these notes which will be subject to the approval of each individual
note holder. For the Years Ended December 31,2003
    
    2002Net cash flows provided by operations
    
    $
    209,413
    
    
    $
    57,761Net cash flows provided by investing activities
    
    
    12,103
    
    
    
    87,726Net cash flows used in financing activities
    
    
    (236,991
    )
    
    
    (172,107
    )
 Net cash provided by investing activities was $12,103 and
$87,726, respectively, for the years ended December 31, 2003 and
2002. Cash provided during 2003 of $57,262 was primarily related to
the sale of a block of our access service revenue business that was
located in a part of Oklahoma that was outside our primarily
geographic area of focus and was offset by $45,159 cash used for the
purchases of equipment. The cash provided during 2002 was primarily
related to the sale of excess equipment and the sale of customer
bases in certain cities based upon our determination that it was no
longer cost effective for us to provide access services to those
cities. Cash used for principal payments on notes payable and capital
lease obligations was $236,991 and $177,107, respectively, for the
years ended December 31, 2003 and 2002. The planned expansion of our business will require significant
capital to fund capital expenditures, working capital needs, debt
service and the cash flow deficits generated by operating losses. Our
principal capital expenditure requirements will include:  
    
    mergers and acquisitions and
    
    further development of operations support systems and other automated back office systems Because our cost of developing new networks and services,
funding other strategic initiatives, and operating our business
depend on a variety of factors (including, among other things, the
number of subscribers and the service for which they subscribe, the
nature and penetration of services that may be offered by us,
regulatory changes, and actions taken by competitors in response to
our strategic initiatives), it is almost certain that actual costs
and revenues will materially vary from expected amounts and these
variations are likely to increase our future capital requirements.
Our cash balances on March 26, 2004 will not be sufficient to fund
our current business plan beyond a few months. As a consequence, we
are currently focusing on revenue enhancement and cost cutting
opportunities as well as working to sell non-core assets and to
extend vendor payment terms. We continue to seek additional
convertible debt or equity financing as well as the placement of a
credit facility to fund our liquidity needs. There is no assurance
that we will be able to obtain additional capital on satisfactory
terms or at all. In the event that we are unable to obtain additional capital or
to obtain it on acceptable terms or in sufficient amounts, we will be
required to delay the development of our network or take other
actions. This could have a material adverse effect on our business,
operating results and financial condition and our ability to achieve
sufficient cash flows to service debt requirements. Our ability to fund the capital expenditures and other costs
contemplated by our business plan and to make scheduled payments with
respect to bank borrowings will depend upon, among other things, our
ability to seek and obtain additional financing in the near term.
Capital will be needed in order to implement our business plan,
deploy our network, expand our operations and obtain and retain a
significant number of customers in our target markets. Each of these
factors is, to a large extent, subject to economic, financial,
competitive, political, regulatory, and other factors, many of which
are beyond our control. There is no assurance that we will be successful in developing
and maintaining a level of cash flows from operations sufficient to
permit payment of our outstanding indebtedness. If we are unable to
generate sufficient cash flows from operations to service our
indebtedness, we will be required to modify our growth plans, limit
our capital expenditures, restructure or refinance our indebtedness
or seek additional capital or liquidate our assets. There is no
assurance that (i) any of these strategies could be effectuated on
satisfactory terms, if at all, or on a timely basis or (ii) any of
these strategies will yield sufficient proceeds to service our debt
or otherwise adequately fund operations. Critical Accounting Policies and Estimates The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect
certain reported amounts and disclosures. In applying our accounting
principles, we must often make individual estimates and assumptions
regarding expected outcomes or uncertainties. As you might expect,
the actual results or outcomes are generally different than the
estimated or assumed amounts. These differences are usually minor
and are included in our consolidated financial statements as soon as
they are known. Our estimates, judgments and assumptions are
continually evaluated based on available information and experience.
Because of the use of estimates inherent in the financial reporting
process, actual results could differ from those estimates. 17




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We periodically review the carrying value of our intangible
assets when events and circumstances warrant such a review. One of
the methods used for this review is performed using estimates of
future cash flows. If the carrying value of our intangible assets is
considered impaired, an impairment charge is recorded for the amount
by which the carrying value of the intangible assets exceeds its fair
value. We believe that the estimates of future cash flows and fair
value are reasonable. Changes in estimates of such cash flows and
fair value, however, could affect the calculation and result in
additional impairment charges in future periods. Certain Accounting Matters During
April 2003, the FASB issued SFAS 149 - Amendment of
Statement 133 on Derivative Instruments and Hedging Activities,
effective for contracts entered into or modified after June 30, 2003,
except as stated below and for hedging relationships designated after
June 30, 2003. In addition, except as stated below, all provisions of
this Statement should be applied prospectively. The provisions of
this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June
15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, paragraphs 7(a) and 23(a),
which relate to forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be applied to both
existing contracts and new contracts entered into after June 30,
2003. We do not participate in such transactions, however, we are
evaluating the effect of this new pronouncement, if any, and will
adopt FASB 149 within the prescribed time. During
May 2003, the FASB issued SFAS 150 - Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity, effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15,
2003. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a freestanding financial instrument that is within
its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the
provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements
of Financial Statements. We are evaluating the effect of this new
pronouncement and will adopt FASB 150 within the prescribed time. During October 2003, the FASB issued Staff Position No. FIN 46
deferring the effective date for applying the provisions of FIN 46
until the end of the first interim or annual period ending after
December 31, 2003 if the variable interest was created prior to
February 1, 2003 and the public entity has not issued financial
statements reporting that variable interest entity in accordance with
FIN 46. The FASB also indicated it would be issuing a modification to
FIN 46 prior to the end of 2003. Accordingly, we have deferred the
adoption of FIN 46 with respect to VIEs created prior to February 1,
2003. We are currently assessing the impact, if any, FIN 46 may have
on us; however, we do not believe there will be any material impact
on our consolidated financial statements, results of operations or
liquidity resulting from the adoption of this interpretation. 
 Item 7. Financial Statements Our financial statements, prepared in accordance with Regulation
S-B, are set forth in this Report beginning on page F-1. 
 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure On January 30, 2004, we engaged EVANS, GAITHER & ASSOCIATES,
PLLC as our new independent accountants, commencing with the audit
for the fiscal year ended December 31, 2003, and thereby dismissed
Buxton & Cloud PC. The decision to change independent accountants was
approved by our Board of Directors. All material correcting
adjustments that were identified by EVANS, GAITHER & ASSOCIATES,
PLLC, our independent public accountants, in accordance with U.S.
generally accepted accounting principles and the rules and
regulations of the U.S. Securities and Exchange Commission were made
and are reflected in the audited financial statements included in
this Report. The report of Buxton & Cloud PC on our financial statements for
the year ended December 31, 2002 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to audit
scope or accounting principle. The report of Buxton & Cloud PC on
our financial statements for the past year ended December 31, 2002
did however contain explanatory paragraphs describing an uncertainty
about our ability to continue as a going concern. In connection with the audit for the fiscal year ended December
31, 2002 and all interim periods preceding the dismissal, there have
been no disagreements with Buxton & Cloud PC on any matter of
accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Buxton & Cloud PC, would have caused them to
make reference thereto in their report on the financial statements
for such year. 18




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During the fiscal year ended December 31, 2002 and all
subsequent interim periods and to January 30, 2004, the date of
dismissal, there have been no reportable events (as defined in
Regulation S-B Item 304(a)(1)(v)). During the fiscal year ended December 31, 2002 and all
subsequent interim periods and to January 30, 2004, we did not
consult with EVANS, GAITHER & ASSOCIATES, PLLC on any items
concerning the application of accounting principles to a specified
transaction, the type of audit opinion that might be rendered on our
financial statements, or the subject matter of a disagreement or
reportable event with the former auditor (as described in Regulation
S-B Item 304(a)(2)). 
 PART III. 
 Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act The following information is furnished as of March 25, 2004 for
each person who serves on our Board of Directors or serves as one of
our executive officers. Our Board of Directors currently consists of
two members, although we intend to increase the size of the Board in
the future. The directors serve one-year terms until their
successors are elected. Our executive officers are elected annually
by our Board. The executive officers serve terms of one year or
until their death, resignation or removal by our Board. There are no
family relationships between our directors and executive officers.
In addition, there was no arrangement or understanding between any
executive officer and any other person pursuant to which any person
was selected as an executive officer. Name
    
    Age
    
    PositionTimothy J. Kilkenny
    
    
    45
    
    
    Chairman of the Board of Directors and CEORoger P. Baresel
    
    
    48
    
    
    Director, President, Chief Financial Officer and SecretaryJason C. Ayers
    
    
    29
    
    
    Vice President of OperationsPatricia R. Shurley
    
    
    47
    
    
    Vice President of FinanceMichael D. Tomas
    
    
    31
    
    
    Vice President of TechnologyTheodore S.
Williams
    
    
    47
    
    
    Vice President of Authorized Agent Sales
 Timothy J. Kilkenny has served as our Chief Executive Officer
and Chairman of the Board of Directors since our inception in May
1995. Prior to that time, he spent 14 years in the financial planning
business as a manager for both MetLife and Prudential. Mr. Kilkenny
is a graduate of Central Bible College in Springfield, Missouri. Roger P. Baresel became one of our directors and our Chief
Financial Officer on November 9, 2000, and our President on October
13, 2003. Mr. Baresel is an accomplished senior executive and
consultant who has served at a variety of companies. While serving
as President and CFO of Advantage Marketing Systems, Inc., a
publicly-held company engaged in the multi-level marketing of
healthcare and dietary supplements, from June 1995 to May 2000,
annual sales increased from $2.5 million to in excess of $22.4
million and annual earnings increased from $80,000 to more than $l.2
million. Also, during this period Advantage successfully completed
two public offerings, four major acquisitions and its stock moved
from the over the counter bulletin board to the American Stock
Exchange. Mr. Baresel has the following degrees from Central State
University in Edmond, Oklahoma: BA Psychology, BS Accounting and MBA
Finance, in which he graduated Summa Cum Laude. Mr. Baresel is also
a certified public accountant. Jason C. Ayers has been our Vice President of Operations since
December 8, 2000 and prior to that served as President of Animus, a
privately-held web hosting company which we acquired on April 1,
1998. Mr. Ayers received a BS degree from Southern Nazarene
University in Bethany, Oklahoma in May 1996 with a triple major in
Computer Science, Math and Physics. Upon graduating, he was a
co-founder of Animus. Patricia R. Shurley has been our Vice President of Finance since
May 2001. Prior to that she served for three years as the Controller
for Advantage Marketing Systems, Inc., a publicly-held company
engaged in the multi-level marketing of healthcare and dietary
supplements. Prior to that she was self-employed and had an
accounting practice. She graduated from the University of Central
Oklahoma in Edmond, Oklahoma with a BS degree in Accounting and is a
certified public accountant. Michael D. Tomas has been our Vice President of Technology since
September 2003. Prior to that he was our Information Systems Manager
since June 1999 and our employee since July 1996. Mr. Tomas
currently is completing his studies at the University of Oklahoma for
a degree in Management Information Systems. Mr. Tomas has formal
training with Cisco, Win 3.1, Win95/98, and Windows NT 4.0 as well as
LAN/WAN setup, including experience with wireless networking and is
Lucent certified. 19




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Theodore S. Williams has been our Vice President of Authorized
Agent Sales since June 2003. Prior to that he spent over five years
in the wireless industry as Account Manager for both AT&T and Sprint
and one year with American Staffcorp as Director of Marketing and
Sales. Audit Committee Financial Expert Because our board of directors only consists of two directors,
each of whom does not qualify as an independent director; our board
performs the functions of an audit committee. Our board of directors
has determined that Roger P. Baresel, our President and Chief
Financial Officer qualifies as a financial expert. This
determination was based upon Mr. Baresels      understanding of generally accepted accounting principles and
financial statements;      ability to assess the general application of generally accepted
accounting principles in connection with the accounting for
estimates, accruals and reserves;      experience preparing, auditing, analyzing or evaluating financial
statements that present the breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
our financial statements, or experience actively supervising one or
more persons engaged in such activities;      understanding of internal controls and procedures for financial reporting; and      understanding of audit committee functions. Mr. Baresels experience and qualification as a financial expert
were acquired through the active supervision of a principal financial
officer, principal accounting officer, controller, public accountant,
auditor or person performing similar functions and overseeing or
assessing the performance of companies or public accountants with
respect to the preparation, auditing or evaluation of financial
statements. Mr. Baresel is not an independent director. We have been unable
to attract a person to serve as one of our directors and that would
qualify both as an independent director and as a financial expert
because of inability to compensate our directors and provide
liability insurance protection. Compliance with Section 16(a) of the Exchange Act, Beneficial
Ownership Reporting Requirements Section 16(a) of the Securities and Exchange Act of 1934, as
amended, requires our directors and executive officers and any
persons who own more than 10% of a registered class of our equity
securities to file with the Securities and Exchange Commission
(SEC) and each exchange on which our securities are listed, reports
of ownership and subsequent changes in ownership of our common stock
and our other securities. Officers, directors and greater than 10%
stockholders are required by SEC regulation to furnish us with copies
of all Section 16(a) forms they file. Based solely on review of the
copies of such reports furnished to us or written representations
that no other reports were required, we believe that during 2003 all
filing requirements applicable to our officers, directors and greater
than 10% beneficial owners were met, except for the late filing of
one Form 4 by each of the following: Jason C. Ayers, Roger P.
Baresel, Timothy J. Kilkenny, and Patricia R. Shurley. Code of Ethics On March 25, 2003, our board of directors adopted our code of
ethics that applies to all of our employees and directors, including
our principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing
similar functions. A copy of the portion of this code of ethics that
applies to our principal executive officer, principal financial
officer, principal accounting officer or controller, and persons
performing similar functions may be obtained by written request
addressed to Mr. Roger P. Baresel, Corporate Secretary, Fullnet
Communications, Inc., 201 Robert S. Kerr, Suite 210, Oklahoma City,
Oklahoma 73102. 
 Item 10. Executive Compensation The following table sets forth, for the last three fiscal years,
the cash compensation paid by us to our Chairman and Chief Executive
Officer (the Named Executive Officer). None of our executive
officers earned annual compensation in excess of $100,000 during
fiscal 2003. 20




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Long-TermAnnual Compensation
    
    CompensationSecuritiesUnderlyingOptions andFiscal
    
    
    
    
    
    Other
    
    WarrantsName and Principal Position
    
    Year
    
    Salary
    
    Compensation
    
    (#) (1)Timothy J. Kilkenny
    
    
    2003
    
    
    $
    80,717
    (2)
    
    $
    14,986
    (3)
    
    
    452,000Chairman and CEO
    
    
    2002
    
    
    
    75,000
    (2)
    
    
    12,614
    (4)
    
    
    80,0002001
    
    
    
    75,000
    (2)
    
    
    7,748
    (5)
    
    
    132,000
  (1)
    
    Options are granted with an exercise price equal to the
fair market value of our common stock on the date of the grant.(2)
    
    Includes $25,000 of deferred compensation.(3)
    
    Represents $8,400 of expense reimbursement for business use
of Mr. Kilkennys automobile, $1,030 of expense reimbursement
for Mr. Kilkennys Internet connection and cell phone, and
$5,556 of insurance premiums paid by us for the benefit of Mr.
Kilkenny.(4)
    
    Represents $6,331 of expense reimbursement for business use
of Mr. Kilkennys automobile and $6,283 of insurance premiums
paid by us for the benefit of Mr. Kilkenny. We also provided
use of an automobile to Mr. Kilkenny for a portion of the year,
the value of which is not greater than $5,000 annually.(5)
    
    Represents $360 of expense reimbursement for business use
of Mr. Kilkennys automobile and $7,388 of insurance premiums
paid by us for the benefit of Mr. Kilkenny. We also provide use
of an automobile to Mr. Kilkenny, the value of which is not
greater than $5,000 annually. Stock Options Granted We do not have a written stock option plan. However, the Board
of Directors granted to our employees stock options exercisable for
the purchase of 1,478,948 shares of our common stock during 2003. The
following table shows stock options granted to Mr. Kilkenny during
2003. Individual GrantsNumber of
    
    % of TotalSecurities
    
    Options Granted
    
    Exercise orUnderlying
    
    To Employees in
    
    Base price
    
    ExpirationName
    
    Options Granted
    
    Fiscal Year
    
    ($/sh)
    
    DateTimothy J. Kilkenny
Chairman and CEO
    
    
    452,000
    (1)
    
    
    30.6%
    (2)
    
    $
    .04
    
    
    
    10/09/13
  (1)
    
    Options were granted pursuant to an individual stock option
agreement. Of these options, 120,000 were immediately
exercisable, 182,000 will become exercisable on November 16,
2004, and 150,000 are subject to a three year vesting schedule
and one-third will become exercisable on October 9 of each of
2004, 2005 and 2006. The options expire on October 9, 2013 and
have an exercise price of $.04 per share, which was the fair
value per share price of our common stock on the grant date.(2)
    
    All options granted during 2003 are nonqualified stock
options. During 2003, an aggregate of 1,478,948 options were
granted outside of a formal plan to employees. Options granted
generally become exercisable in part after one year from the
date of grant and generally have a term of ten years following
the date of grant, unless sooner terminated in accordance with
the terms of the stock option agreement. 2003 Year End Option Values The following table sets forth information related to the
exercise of stock options during 2003 and the number and value of
options held by the following Named Executive Officer at December 31,
2003. During 2003, the Named Executive Officer did not exercise any
options, nor did we reprice any outstanding options. For the purposes
of this table, the value of an option is the difference between the
estimated fair market value at December 31, 2003 of the shares of
common stock subject to the option and the aggregate exercise price
of such option. 21




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Number of Unexercised
    
    Value of Unexercised In-the-Options at
    
    Money Options atDecember 31, 2003
    
    December 31, 2003 (1)Name
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableTimothy J. Kilkenny
Chairman and CEO
    
    
    344,668
    
    
    
    369,332
    
    
    $
    1,200
    
    
    $
    3,320
 (1) Based on the December 31, 2003 estimated fair value of our
common stock of $.05 per share. Director Compensation During the fiscal year ended December 31, 2003, our directors
did not receive any compensation for serving in such capacities. Employment Agreements and Lack of Key man Insurance On July 31, 2002, we entered into employment agreements with
Timothy J. Kilkenny and Roger P. Baresel. Each agreement is
effective January 1, 2002, and has a term of two years; however, the
term is automatically extended for additional one-year terms, unless
we or the employee gives six-month advance notice of termination.
These agreements provide, among other things, (i) an annual base
salary of at least $75,000 for Mr. Kilkenny (of which he has
voluntarily agreed to defer $25,000) and $65,000 for Mr. Baresel (of
which he has voluntarily agreed to defer $15,000), (ii) bonuses at
the discretion of the Board of Directors, (iii) entitlement to fringe
benefits including medical and insurance benefits as may be provided
to our other senior officers; and (iv) eligibility to participate in
our incentive, bonus, benefit or similar plans. These agreements
require the employee to devote the required time and attention to our
business and affairs necessary to carry out his responsibilities and
duties. These agreements may be terminated under certain
circumstances and upon termination provide for (i) the employee to be
released from personal liability for our debts and obligations, and
(ii) the payment of any amounts we owe the employee. We do not maintain any key man insurance covering the death or
disability of our executive officers. However, Mr. Kilkennys life
insurance carries a death benefit which would pay the three bank
notes payable totaling $394,600 at December 31, 2003, which he
personally guaranteed. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management Security Ownership The following table sets forth information as of March 25, 2004,
concerning the beneficial ownership of our Common Stock by each
person (other than our directors and executive officers) who is known
by us to own more than 5% of the outstanding shares of our Common
Stock. The information is based on Schedules 13D or 13G filed by the
applicable beneficial owner with the Securities and Exchange
Commission or other information provided to us by the beneficial
owner or our stock transfer agent. Common StockNumber of
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    Class (1)Generation Capital Associates (2)
    
    
    707,608
    
    
    
    9.9
    %Rupinder Sidu (3)
    
    
    628,685
    
    
    
    9.0
    %Peter Rettman (4)
    
    
    522,389
    
    
    
    7.4
    %Laura L. Kilkenny (5)
    
    
    465,000
    
    
    
    6.9
    %Rene Miville (6)
    
    
    441,518
    
    
    
    6.6
    %
  (1)
    
    Percent of class for any stockholder listed is calculated
without regard to shares of common stock issuable to others upon
exercise of outstanding stock options. Any shares a stockholder
is deemed to own by having the right to acquire by exercise of
an option or warrant are considered to be outstanding solely for
the purpose of calculating that stockholders ownership
percentage. We computed the percentage ownership amounts in
accordance with the provisions of Rule 13d-3(d), which includes
as beneficially owned all shares of common stock which the
person or group has the right to acquire within the next 60
days, based upon 6,713,135 outstanding shares of common stock as
of March 25, 2004.(2)
    
    Generation Capital Associates address is 1085 Riverside
Trace, Atlanta, GA 30328. Generation Capital Associates holds
267,608 shares of our common stock. The number of shares
includes 440,000 shares of our common stock that are subject to
currently exercisable common stock purchase warrants. Amounts
shown do not include 150,000 shares of our common stock that are
subject to common stock purchase warrants that are not currently
exercisable because they contain a provision prohibiting their
exercise to the extent that they would increase Generation
Capital Associates percentage ownership beyond 9.9% of our
outstanding shares of common stock.(3)
    
    Rupinder Sidus address is 10229 Tavistock Road, Orlando,
FL 32827. Mr. Sidu holds 344,018 shares of our common stock.
The number of shares includes 284,667 shares of our common stock
that are subject to currently exercisable common stock purchase
warrants. 22




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##### Table of Contents



(4)
    
    Peter Rettmans address is 3700 W. Lawton Street, Seattle,
WA 98199. Mr. Rettman holds 163,078 shares of our common stock.
The number of shares includes 206,250 shares of our common
stock that are subject to currently exercisable common stock
purchase warrants and 153,061 shares of our common stock that
are subject to a currently convertible promissory note.(5)
    
    Laura L. Kilkennys address is 2721 Southwest 123rd
Street, Oklahoma City, OK 73170. Ms. Kilkenny is the ex-wife of
Timothy J. Kilkenny, our Chairman of the Board and Chief
Executive Officer. Ms. Kilkenny holds 415,000 shares of our
common stock. The number of shares includes 50,000 shares of
our common stock that are subject to currently exercisable
common stock purchase options.(6)
    
    Rene Mivilles address is 17081 Captive Drive, P.O. Box 9,
Captiva Island, FL 33924. Ms. Miville holds 441,518 shares of
our common stock. The following table sets forth information as of March 25, 2004,
concerning the beneficial ownership of our Common Stock by each of
our directors, each executive officer named in the table under the
heading Item 9. Directors and Executive Officers, Promoters and
Control Persons and all of our directors and executive officers as a
group. There are no family relationships amongst our executive
officers and directors. Unless otherwise indicated, the beneficial
owner has sole voting and investment power with respect to such
stock. Common StockBeneficially OwnedNumber of
    
    Percent ofBeneficial Owner (1)
    
    Shares
    
    Class (1)Timothy J. Kilkenny* (2)(3)
    
    
    1,386,334
    
    
    
    19.6
    %Roger P. Baresel* (2)(4)
    
    
    393,750
    
    
    
    5.7
    %Jason C. Ayers (2)(5)
    
    
    139,795
    
    
    
    2.1
    %Patricia R. Shurley (2)(6)
    
    
    132,000
    
    
    
    2.0
    %Michael D. Tomas (2)(7)
    
    
    100,000
    
    
    
    1.5
    %Theodore S. Williams (2)(8)
    
    
    25,000
    
    
    
    0.4
    %All executive officers and
directors as a group (6 persons)
    
    

    2,176,879
    
    
    
    28.4
    %
  *
    
    Director(1)
    
    Percent of class for any stockholder listed is calculated
without regard to shares of common stock issuable to others upon
exercise of outstanding stock options. Any shares a stockholder
is deemed to own by having the right to acquire by exercise of
an option or warrant are considered to be outstanding solely for
the purpose of calculating that stockholders ownership
percentage. We computed the percentage ownership amounts in
accordance with the provisions of Rule 13d-3(d), which includes
as beneficially owned all shares of common stock which the
person or group has the right to acquire within the next 60
days, based upon 6,713,135 shares being outstanding at March 25,
2004.(2)
    
    Address is c/o 201 Robert S. Kerr Avenue, Suite 210,
Oklahoma City, Oklahoma 73102.(3)
    
    Timothy J. Kilkenny holds 1,015,000 shares of our common
stock. The number of shares includes 371,334 shares of our
common stock that are subject to currently exercisable stock
options held by Mr. Kilkenny. Amounts shown do not include
options, held by Mr. Kilkenny, to purchase 150,000 shares of our
common stock exercisable at $.04 per share beginning October 9,
2004, 10,666 shares of our common stock exercisable at $.11 per
share beginning November 16, 2004, and 182,000 shares of our
common stock exercisable at $.04 per share beginning November
16, 2004.(4)
    
    Roger P. Baresel and Judith A. Baresel, husband and wife,
each hold 34,408 and 92,659 shares of our common stock,
respectively. They hold 31,250 shares of our common stock as
joint tenants. The number of shares includes 115,830 shares of
our common stock subject to currently exercisable stock options
held by Mr. Baresel, 107,103 shares of our common stock subject
to currently exercisable stock options held by Mrs. Baresel, and
12,500 currently exercisable common stock purchase warrants held
jointly. Amounts shown do not include options, held by Mr.
Baresel, to purchase 75,000 shares of our common stock
exercisable at $.04 per share beginning October 9, 2004 and
7,915 shares of our common stock exercisable at $.11 per share
beginning November 16, 2004. Amounts shown also do not include
options, held by Mrs. Baresel, to purchase 20,000 shares of
common stock exercisable at $.05 per share beginning June 3,
2004 and 91,197 shares of our common stock exercisable at $.04
per share beginning November 16, 2004.(5)
    
    Jason C. Ayers holds 25,865 shares of our common stock.
The number of shares includes 113,930 shares of our common stock
that are subject to currently exercisable common stock options
held by Mr. Ayers. Amounts shown do not include options, held
by Mr. Ayers, to purchase 2,500 shares of our common stock
exercisable at $.11 per share beginning November 16, 2004,
82,500 shares of our common stock exercisable at $.04 per share
beginning November 16, 2004, 6,000 shares exercisable at $.08
per share beginning June 4, 2004, and 75,000 shares of our
common stock exercisable at $.04 per share beginning June 27,
2004.(6)
    
    The number of shares includes 132,000 shares of our common
stock that are subject to currently exercisable common stock
purchase options held by Ms. Shurley. Amounts shown do not
include options to purchase 2,500 shares of our common stock
exercisable at $.11 per share beginning November 16, 2004,
82,500 shares of our common stock exercisable at $.04 per share
beginning November 16, 2004 and 75,000 shares of our common
stock exercisable at $.04 per share beginning May 16, 2005. 23




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##### Table of Contents



(7)
    
    The number of shares includes 100,000 shares of our common
stock that are subject to currently exercisable common stock
purchase options held by Mr. Tomas. Amounts shown do not
include options to purchase 2,500 shares of our common stock
exercisable at $.11 per share beginning November 16, 2004,
82,500 shares of our common stock exercisable at $.04 per share
beginning November 16, 2004 and 75,000 shares of our common
stock exercisable at $.04 per share beginning October 9, 2004.(8)
    
    The number of shares includes 25,000 shares of our common
stock that are subject to currently exercisable common stock
purchase options held by Mr. Williams. 
 Item 12. Certain Relationships and Related Transactions In connection with his employment, during October 2003, we issued
stock options exercisable for the purchase of 452,000 shares of our
common stock to Timothy J. Kilkenny, our Chairman of the Board and
Chief Executive Officer, of which 120,000 were 100% vested and
exercisable immediately, 182,000 which vest and become exercisable on
November 16, 2004 and 150,000 which one-third vest and become
exercisable on each of the first three anniversary dates of the
issuance. These options had an exercise price of $.04 per share and
expire during October 2013. In connection with his employment, during October 2003, we issued
stock options exercisable for the purchase of 370,848 shares of common
stock to Roger P. Baresel, our President and Chief Financial Officer,
of which 34,651 were 100% vested and exercisable immediately, 261,197
which vest and become exercisable on November 16, 2004 and 75,000
which one-third vest and become exercisable on each of the first three
anniversary dates of the issuance. These options had an exercise
price of $.04 per share and expire during October 2013. In connection with his employment, during December 2003, we
issued stock options exercisable for the purchase of 50,000 shares of
common stock to Roger P. Baresel, our President and Chief Financial
Officer that were 100% vested and exercisable immediately. These
options had an exercise price of $.04 per share and expire during
March 2012. Subsequently, Mr. Baresel exercised these options for
$2,000. In connection with his employment, during March 2002, we issued
stock options exercisable for the purchase of 80,000 shares of our
common stock to Timothy J. Kilkenny, our Chairman of the Board and
Chief Executive Officer, which were one-third vested and exercisable
immediately and will vest and become exercisable one-third on each
annual anniversary of the issue. The options have an exercise price
of $.05 per share and expire during March 2012. In connection with his employment, during March 2002, we issued
stock options exercisable for the purchase of 60,000 shares of our
common stock to Roger P. Baresel, our Chief Financial Officer that
were one-third vested and exercisable immediately and will vest and
become exercisable one-third on each annual anniversary of the issue.
These options have an exercise price of $.05 per share and expire
during March 2012. On August 2, 2000, we obtained a short-term loan of $100,000 from
Timothy J. Kilkenny, our Chairman of the Board and Chief Executive
Officer, through the issuance of a 14% promissory note. The terms of
the financing additionally provided for the issuance of five-year
warrants to purchase 50,000 shares of our common stock at $.01 per
share, and provided for certain registration rights. The promissory
note required monthly interest payments, matured on the earlier of (i)
the date which is within five days of receipt of funds by us of any
offering raising gross proceeds to us of at least $1,000,000 or (ii)
in three months, and was extendible for two 90-day periods upon
issuance of additional warrants exercisable for the purchase of 50,000
shares of our common stock for $.01 per share for each extension. In
the fourth quarter of 2000, our founder and CEO agreed to reduce the
interest rate on the promissory note to 9% and waive the warrant
provisions relating to extensions of the loan. We repaid $50,000 on
this note and the note was due in May 2001. In May 2001 Mr. Kilkenny
agreed to a replacement note with an interest rate of 8.5% with
monthly principal and interest payments and the note will mature in
May 2006. 
 Item 13. Exhibits and Reports on Form 8-K (a) The following exhibits are filed as part of this Report: ExhibitNumber
    
    Exhibit3.1
    
    Certificate of Incorporation, as amended (filed as Exhibit 2.1 to Registrants Registration
Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).
    
    #3.2
    
    Bylaws (filed as Exhibit 2.2 to Registrants Registration Statement on Form 10-SB, file number
000-27031 and incorporated herein by reference)
    
    #
 24




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##### Table of Contents



ExhibitNumber
    
    Exhibit4.1
    
    Specimen Certificate of Registrants Common Stock (filed as Exhibit 4.1 to the Companys Form
10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference).
    
    #4.2
    
    Certificate of Correction to the Amended Certificate of Incorporation and the Ninth Section of
the Certificate of Incorporation (filed as Exhibit 2.1 to Registrants Registration Statement
on form 10-SB, file number 000-27031 and incorporated by reference).
    
    #4.3
    
    Certificate of Correction to Articles II and V of Registrants Bylaws (filed as Exhibit 2.1 to
Registrants Registration Statement on Form 10-SB, file number 000-27031 and incorporated
herein by reference).
    
    #4.4
    
    Form of Warrant Agreement for Interim Financing in the amount of $505,000 (filed as Exhibit
4.1 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #4.5
    
    Form of Warrant Certificate for Florida Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.2 to Registrants Quarterly Report on Form 10-QSB for the Quarter
ended March 31, 2000 and incorporated herein by reference).
    
    #4.6
    
    Form of Promissory Note for Florida Investors for Interim Financing in the amount of $505,000
(filed as Exhibit 4.3 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended
March 31, 2000 and incorporated herein by reference).
    
    #4.7
    
    Form of Warrant Certificate for Georgia Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.4 to Registrants Quarterly Report on Form 10-QSB for the Quarter
ended March 31, 2000 and incorporated herein by reference).
    
    #4.8
    
    Form of Promissory Note for Georgia Investors for Interim Financing in the amount of $505,000
(filed as Exhibit 4.5 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended
March 31, 2000 and incorporated herein by reference).
    
    #4.9
    
    Form of Warrant Certificate for Illinois Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.6 to Registrants Quarterly Report on Form 10-QSB for the Quarter
ended March 31, 2000 and incorporated herein by reference).
    
    #4.10
    
    Form of Promissory Note for Illinois Investors for Interim Financing in the amount of $505,000
(filed as Exhibit 4.7 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended
March 31, 2000 and incorporated herein by reference).
    
    #4.11
    
    Form of Warrant Agreement for Interim Financing in the amount of $500,000 (filed as Exhibit
4.8 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and

incorporated herein by reference).
    
    #4.12
    
    Form of Warrant Certificate for Interim Financing in the amount of $500,000 (filed as Exhibit
4.9 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #4.13
    
    Form of Promissory Note for Interim Financing in the amount of $500,000 (filed as Exhibit 4.10
to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #4.14
    
    Form of Convertible Promissory Note for September 29, 2000, private placement (filed as
Exhibit 4.13 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000 and
incorporated herein by reference).
    
    #4.15
    
    Form of Warrant Agreement for September 29, 2000, private placement (filed as Exhibit 4.13 to
Registrants Form 10-KSB for the fiscal year ended December 31, 2000 and incorporated herein
by reference).
    
    #4.16
    
    Form of 2001 Exchange Warrant Agreement (filed as Exhibit 4.16 to Registrants Form 10-QSB for
the quarter ended June 30, 2001 and incorporated herein by reference)
    
    #
 25




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ExhibitNumber
    
    Exhibit4.17
    
    Form of 2001 Exchange Warrant Certificate (filed as Exhibit 4.17 to Registrants Form 10-QSB
for the quarter ended June 30, 2001 and incorporated herein by reference)
    
    #10.1
    
    Financial Advisory Services Agreement between the Company and National Securities Corporation,
dated September 17, 1999 (filed as Exhibit 10.1 to Registrants Form 10-KSB for the fiscal
year ended December 31, 1999, and incorporated herein by reference).
    
    #10.2
    
    Lease Agreement between the Company and BOK Plaza Associates, LLC, dated
December 2, 1999 (filed as Exhibit 10.2 to Registrants Form 10-KSB for the fiscal year ended
December 31, 1999, and incorporated herein by reference).
    
    #10.3
    
    Interconnection agreement between Registrant and Southwestern Bell dated March 19, 1999 (filed
as Exhibit 6.1 to Registrants Registration Statement on Form 10-SB, file number 000-27031 and
incorporated herein by reference).
    
    #10.4
    
    Stock Purchase Agreement between the Company and Animus Communications, Inc. (filed as Exhibit
6.2 to Registrants Registration Statement on Form 10-SB, file number 000-27031 and
incorporated herein by reference).
    
    #10.5
    
    Registrar Accreditation Agreement effective February 8, 2000, by and between Internet
Corporation for Assigned Names and Numbers and FullWeb, Inc. d/b/a FullNic f/k/a Animus
Communications, Inc. (filed as Exhibit 10.1 to Registrants Quarterly Report on Form 10-QSB
for the Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #10.6
    
    Master License Agreement For KMC Telecom V, Inc., dated June 20, 2000, by and between FullNet
Communications, Inc. and KMC Telecom V, Inc. (filed as Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by
reference).
    
    #10.7
    
    Domain Registrar Project Completion Agreement, dated May 10, 2000, by and between FullNet
Communications, Inc., FullWeb, Inc. d/b/a FullNic and Think Capital (filed as Exhibit 10.2 to
Registrants Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and
incorporated herein by reference).
    
    #10.8
    
    Amendment to Financial Advisory Services Agreement between Registrant and National Securities
Corporation, dated April 21, 2000 (filed as Exhibit 10.3 to Registrants Quarterly Report on
Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by reference).
    
    #10.9
    
    Asset Purchase Agreement dated June 2, 2000, by and between FullNet of Nowata and FullNet
Communications, Inc. (filed as Exhibit 99.1 to Registrants Form 8-K filed on June 20, 2000
and incorporated herein by reference).
    
    #10.10
    
    Asset Purchase Agreement dated February 4, 2000, by and between FullNet of Bartlesville and
FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrants Form 8-K filed on February
18, 2000 and incorporated herein by reference).
    
    #10.11
    
    Agreement and Plan of Merger Among FullNet Communications, Inc., FullNet, Inc. and Harvest
Communications, Inc. dated February 29, 2000 (filed as Exhibit 2.1 to Registrants Form 8-K
filed on March 10, 2000 and incorporated herein by reference).
    
    #10.12
    
    Asset Purchase Agreement dated January 25, 2000, by and between FullNet of Tahlequah, and
FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrants Form 8-K filed on February
9, 2000 and incorporated herein by reference).
    
    #10.13
    
    Promissory Note dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.13 to
Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.14
    
    Warrant Agreement dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.14
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.15
    
    Warrant Certificate dated August 2, 2000 issued to Timothy J. Kilkenny (filed as Exhibit 10.15
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #
 26




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.16
    
    Stock Option Agreement dated December 8, 2000, issued to Timothy J. Kilkenny (filed as Exhibit
10.16 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.17
    
    Warrant Agreement dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.17
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.18
    
    Warrant Agreement dated December 29, 2000, issued to Roger P. Baresel (filed as Exhibit 10.18
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.19
    
    Stock Option Agreement dated February 29, 2000, issued to Wallace L Walcher (filed as Exhibit
10.19 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.20
    
    Stock Option Agreement dated February 17, 1999, issued to Timothy J. Kilkenny (filed as
Exhibit 3.1 to Registrants Registration Statement on Form 10-SB, file number 000-27031 and
incorporated herein by reference).
    
    #10.21
    
    Stock Option Agreement dated October 19, 1999, issued to Wesdon C. Peacock (filed as Exhibit
10.21 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.22
    
    Stock Option Agreement dated April 14, 2000, issued to Jason C. Ayers (filed as Exhibit 10.22
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.23
    
    Stock Option Agreement dated May 1, 2000, issued to B. Don Turner (filed as Exhibit 10.23 to
Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.24
    
    Form of Stock Option Agreement dated December 8, 2000, issued to Jason C. Ayers, Wesdon C.
Peacock, B. Don Turner and Wallace L. Walcher (filed as Exhibit 10.24 to Registrants Form
10-KSB for the fiscal year ended December 31, 2000).
    
    #10.25
    
    Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.25
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.26
    
    Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.26
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.27
    
    Warrant Certificate Dated December 29, 2000, issued to Roger P. Baresel (filed as Exhibit
10.27 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.28
    
    Stock Option Agreement dated October 13, 2000, issued to Roger P. Baresel (filed as Exhibit
10.28 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.29
    
    Stock Option Agreement dated October 12, 1999, issued to Travis Lane (filed as Exhibit 10.29
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.30
    
    Promissory Note dated January 5, 2001, issued to Generation Capital Associates (filed as
Exhibit 10.30 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.31
    
    Placement Agency Agreement dated November 8, 2000 between FullNet Communications, Inc. and
National Securities Corporation (filed as Exhibit 10.31 to Registrants Form 10-KSB for the
fiscal year ended December 31, 2000).
    
    #10.32
    
    Promissory Note dated January 25, 2000, issued to Fullnet of Tahlequah, Inc.
    
    #10.33
    
    Promissory Note dated February 7, 2000, issued to David Looper
    
    #10.34
    
    Promissory Note dated February 29, 2000, issued to Wallace L. Walcher
    
    #10.35
    
    Promissory Note dated June 2, 2000, issued to Lary Smith
    
    #10.36
    
    Promissory Note dated June 15, 2001, issued to higganbotham.com L.L.C.
    
    #10.37
    
    Promissory Note dated November 19, 2001, issued to Northeast Rural Services
    
    #
 27




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.38
    
    Promissory Note dated November 19, 2001, issued to Northeast Rural Services
    
    #10.39
    
    Form of Convertible Promissory Note dated September 6, 2002
    
    #10.40
    
    Employment Agreement with Timothy J. Kilkenny dated July 31, 2002
    
    #10.41
    
    Employment Agreement with Roger P. Baresel dated July 31, 2002
    
    #10.42
    
    Letter from Grant Thornton LLP to the Securities and Exchange Commission dated January 30, 2003
    
    #22.1
    
    Subsidiaries of the Registrant
    
    #31.1
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Timothy J. Kilkenny
    
    *31.2
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Roger P. Baresel
    
    *32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Timothy J. Kilkenny
    
    *32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 by Roger P. Baresel
    
    *
   #
    
    Incorporated by reference.*
    
    Filed herewith.  (b)
    
    Reports on Form 8-KForm 8-K dated January 30, 2004 reporting change in certifying
accountant to Evans, Gaither & Associates, PLLC commencing with
the audit for the fiscal year ended December 31, 2003. 
 Item 14. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer are
responsible primarily for establishing and maintaining disclosure
controls and procedures designed to ensure that information required
to be disclosed in our reports filed or submitted under the Securities
Exchange Act of 1934, as amended (the Exchange Act) is recorded,
processed, summarized and reported within the time periods specified
in the rules and forms of the U.S. Securities and Exchange Commission.
These controls and procedures are designed to ensure that information
required to be disclosed in our reports filed or submitted under the
Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Furthermore, our Chief Executive Officer and Chief Financial
Officer are responsible for the design and supervision of our internal
controls over financial reporting that are then effected by and
through our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. These policies and procedures (i) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets; (ii)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations
of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a
material effect on our financial statements. Our Executive Officer and Chief Financial Officer, based upon
their evaluation of the effectiveness of our disclosure controls and
procedures and the internal controls over financial reporting as of
the last day of the period covered by this report, concluded that our
disclosure controls and procedures and internal controls over
financial reporting were fully effective during and as of the last day
of the period covered by this report and reported to our auditors and
the audit committee of our board of directors that no change in our
disclosure controls and procedures and internal control over financial
reporting occurred during the period covered by this report that would
materially affected or is reasonably likely to materially affect our
disclosure controls and procedures or internal control over financial
reporting. In conducting their evaluation of our disclosure controls
and procedures and internal controls over financial reporting, these
executive officers did not discover any fraud that involved management
or other employees who have a significant role in our disclosure
controls and procedures and internal controls over financial
reporting. 28




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##### Table of Contents



Furthermore, there were no significant changes in our disclosure
controls and procedures, internal controls over financial reporting,
or other factors that could significantly affect our disclosure
controls and procedures or internal controls over financial reporting
subsequent to the date of their evaluation. Because no significant
deficiencies or material weaknesses were discovered, no corrective
actions were necessary or taken to correct significant deficiencies
and material weaknesses in our internal controls and disclosure
controls and procedures. 29




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized. REGISTRANT:
FULLNET COMMUNICATIONS, INC. Date: March 29, 2004
    
    By:
    
    /s/ TIMOTHY J. KILKENNYTimothy J. KilkennyChief Executive OfficerDate: March 29, 2004
    
    By:
    
    /s/ ROGER P. BARESELRoger P. BareselPresident and Chief Financial and Accounting Officer
 Pursuant to the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Date: March 29, 2004
    
    By:
    
    /s/ TIMOTHY J. KILKENNYTimothy J. Kilkenny,
Chairman of the Board and DirectorDate: March 29, 2004
    
    By:
    
    /s/ ROGER P. BARESELRoger P. Baresel, Director
 30




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##### Table of Contents



Report of Independent Certified Public Accountants Board of Directors
FullNet Communications, Inc. We have audited the accompanying consolidated balance sheet of FullNet
Communications, Inc. (an Oklahoma corporation) and Subsidiaries, as of December
31, 2003 and the related consolidated statements of operations, stockholders
deficit, 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 auditing standards generally accepted
in the United States of America. 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
presents fairly, in all material respects, the financial position of FullNet
Communications, 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 accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $678,680 for the year ended
December 31, 2003 and, as of that date, the Companys current liabilities
exceeded its current assets by $2,300,220. These factors, among others, as
discussed in Note A to the financial statements, raise substantial doubt about
the Companys ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note A. The 2003 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Evans, Gaither & Associates, PLLC
Edmond, Oklahoma
March 19, 2004 F-1




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##### Table of Contents



Report of Independent Certified Public Accountants Board of Directors
FullNet Communications, Inc. We have audited the accompanying consolidated balance sheet of FullNet
Communications, Inc. (an Oklahoma corporation) and Subsidiaries, as of December
31, 2002 and the related consolidated statements of operations, stockholders
(deficit) 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 auditing standards generally accepted
in the United States of America. 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
presents fairly, in all material respects, the financial position of FullNet
Communications, Inc. and Subsidiaries, as of December 31, 2002 and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America. The accompanying 2002 financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred a net loss of $822,980 for the year ended
December 31, 2002 and, as of that date, the Companys current liabilities
exceeded its current assets by $1,929,308. These factors, among others, as
discussed in Note A to the financial statements, raise substantial doubt about
the Companys ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note A. The 2002 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. BUXTON & CLOUD, P.C.
Oklahoma City, Oklahoma
March 14, 2003 F-2




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2003
    
    2002ASSETSCURRENT ASSETSCash
    
    $
    11,480
    
    
    $
    26,955Accounts receivable, net
    
    
    29,510
    
    
    
    34,739Prepaid expenses and other current assets
    
    
    60,163
    
    
    
    36,137Total current assets
    
    
    101,153
    
    
    
    97,831PROPERTY AND EQUIPMENT, net
    
    
    995,730
    
    
    
    978,249INTANGIBLE ASSETS, net
    
    
    269,482
    
    
    
    506,273OTHER ASSETS
    
    
    6,771
    
    
    
    28,323TOTAL
    
    $
    1,373,136
    
    
    $
    1,610,676LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable  trade
    
    $
    464,903
    
    
    $
    413,037Accrued and other current liabilities
    
    
    548,027
    
    
    
    382,677Notes payable, current portion
    
    
    1,184,845
    
    
    
    865,057Capital lease obligations, current portion
    
    
    31,722
    
    
    
    52,646Deferred revenue
    
    
    171,876
    
    
    
    313,722Total current liabilities
    
    
    2,401,373
    
    
    
    2,027,139NOTES PAYABLE, less current portion
    
    
    330,322
    
    
    
    435,386CAPITAL LEASE OBLIGATIONS, less current portion
    
    
    17,325
    
    
    
    47,949OTHER
    
    
    145,329
    
    
    
    142,808STOCKHOLDERS DEFICITCommon stock
- $.00001 par value; authorized, 10,000,000
shares; issued and outstanding, 6,642,878 shares in 2003
and 6,592,878 shares in 2002
    
    
    66
    
    
    
    66Common stock issuable, 70,257 shares in 2003 and in 2002
    
    
    57,596
    
    
    
    57,596Additional paid-in capital
    
    
    8,327,294
    
    
    
    8,127,293Accumulated deficit
    
    
    (9,906,169
    )
    
    
    (9,227,561
    )Total stockholders deficit
    
    
    (1,521,213
    )
    
    
    (1,042,606
    )TOTAL
    
    $
    1,373,136
    
    
    $
    1,610,676
 See accompanying notes to financial statements. F-3




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2003
    
    2002REVENUESAccess service revenues
    
    $
    990,769
    
    
    $
    1,421,699Co-location and other revenues
    
    
    1,131,113
    
    
    
    1,003,317Total revenues
    
    
    2,121,882
    
    
    
    2,425,016OPERATING COSTS AND EXPENSESCost of access service revenues
    
    
    518,049
    
    
    
    834,338Cost of co-location and other revenues
    
    
    109,914
    
    
    
    98,371Selling, general and administrative expenses
    
    
    1,140,905
    
    
    
    1,315,827Gain on sale of assets
    
    
    (30,218
    )
    
    
    (33,827
    )Depreciation and amortization
    
    
    467,483
    
    
    
    660,870Total operating costs and expenses
    
    
    2,206,133
    
    
    
    2,875,579LOSS FROM OPERATIONS
    
    
    (84,251
    )
    
    
    (450,563
    )INTEREST EXPENSE
    
    
    (594,357
    )
    
    
    (372,417
    )NET LOSS
    
    $
    (678,608
    )
    
    $
    (822,980
    )Net loss per common share
Basic and diluted
    
    $
    (.10
    )
    
    $
    (.12
    )Weighted average number of common shares outstanding
Basic and diluted
    
    
    6,665,218
    
    
    
    6,661,205
 See accompanying notes to financial statements. F-4




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT Years ended December 31, 2003 and 2002 Common stock
    
    Commonstock
    
    Additional
    
    AccumulatedShares
    
    Amount
    
    issuable
    
    paid-in capital
    
    deficit
    
    TotalBalance at January 1, 2002
    
    
    6,592,878
    
    
    $
    66
    
    
    $
    45,781
    
    
    $
    7,964,091
    
    
    $
    (8,404,581
    )
    
    $
    (394,643
    )Intrinsic value of beneficial conversion feature
on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,564
    
    
    
    
    
    
    
    157,564Common stock issuable in exchange for debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    105Common stock issuable in payment of accrued interest
    
    
    
    
    
    
    
    
    
    
    11,815
    
    
    
    
    
    
    
    
    
    
    
    11,815Options and warrants issued in exchange
for compensation and services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,533
    
    
    
    
    
    
    
    5,533Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (822,980
    )
    
    
    (822,980
    )Balance at December 31, 2002
    
    
    6,592,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,127,293
    
    
    $
    (9,227,561
    )
    
    $
    (1,042,606
    )Intrinsic value of beneficial conversion feature
on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195,385
    
    
    
    
    
    
    
    195,385Warrants issued related to financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,403
    
    
    
    
    
    
    
    2,403Options issued in exchange for compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213
    
    
    
    
    
    
    
    213Options exercise
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    2,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (678,608
    )
    
    
    (678,608
    )Balance at December 31, 2003
    
    
    6,642,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,327,294
    
    
    $
    (9,906,169
    )
    
    $
    (1,521,213
    )
 See accompanying notes to financial statements. F-5




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (678,608
    )
    
    $
    (822,980
    )Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization
    
    
    467,483
    
    
    
    660,870Warrants issued related to financing
    
    
    2,403
    
    
    
    Options and warrants issued for compensation and services
    
    
    213
    
    
    
    5,533Amortization of discount and costs relating to financing
    
    
    404,960
    
    
    
    178,568Accrued interest converted to equity
    
    
    
    
    
    
    11,815Gain on sale of assets
    
    
    (30,218
    )
    
    
    (33,827
    )Provision for uncollectible accounts receivable
    
    
    15,822
    
    
    
    (812
    )Net (increase) decrease in
Accounts receivable
    
    
    (10,593
    )
    
    
    (16,891
    )Prepaid expenses and other current assets
    
    
    (25,547
    )
    
    
    51,839Other assets
    
    
    8,742
    
    
    
    (2,645
    )Net increase (decrease) in
Accounts payable  trade
    
    
    26,731
    
    
    
    (105,269
    )Accrued and other liabilities
    
    
    165,871
    
    
    
    128,690Deposits
    
    
    4,000
    
    
    
    (14,540
    )Deferred revenue
    
    
    (141,846
    )
    
    
    17,410Net cash provided by operating activities
    
    
    209,413
    
    
    
    57,761CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (45,159
    )
    
    
    (8,288
    )Proceeds from sale of assets, net of closing costs
    
    
    57,262
    
    
    
    93,014Net cash provided by investing activities
    
    
    12,103
    
    
    
    84,726CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on borrowings under notes payable
    
    
    (173,046
    )
    
    
    (94,579
    )Principal payments on note payable to related party
    
    
    (9,674
    )
    
    
    (8,888
    )Principal payments on capital lease obligations
    
    
    (54,271
    )
    
    
    (73,640
    )Proceeds from issuance of convertible note payable
    
    
    
    
    
    
    5,000Net cash used in financing activities
    
    
    (236,991
    )
    
    
    (172,107
    )NET DECREASE IN CASH
    
    
    (15,475
    )
    
    
    (29,620
    )Cash at beginning of year
    
    
    26,955
    
    
    
    56,575Cash at end of year
    
    $
    11,480
    
    
    $
    26,955SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    91,826
    
    
    $
    67,574NONCASH INVESTING AND FINANCING ACTIVITIESAssets acquired through issuance of capital lease
    
    
    2,723
    
    
    
    Assets acquired through issuance of note payable
    
    
    202,200
    
    
    
    88,005
 See accompanying notes to financial statements. F-6




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003 and 2002 NOTE A - ORGANIZATION AND NATURE OF OPERATIONS FullNet Communications, Inc. and
Subsidiaries (the Company) is an integrated communications provider (ICP)
offering communications, connectivity and data storage to individuals,
businesses, organizations and educational institutions, as well as governmental
agencies. Through its subsidiaries, FullNet, Inc., FullTel, Inc. and FullWeb,
Inc., the Company provides Internet solutions designed to meet customer needs.
Services offered include:  
    
    Dial-up and direct high-speed connectivity to the Internet through the FullNet brand name;  
    
    Backbone services to private label Internet services providers (ISPs) and businesses;  
    
    Carrier-neutral telecommunications premise co-location; and  
    
    Web page hosting and server co-location. The Company operates and grants credit, on an uncollateralized basis.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Companys customer base and
their dispersion across different industries. However, the Company has one
primary customer for its carrier-neutral telecommunications premise co-location
services. The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has sustained substantial net
losses in 2003 and 2002. In addition, at December 31, 2003 current liabilities
exceed current assets by $2,300,220. In view of the matters described in the preceding paragraph, the ability of the
Company to continue as a going concern is dependent upon continued operations
of the Company that in turn is dependent upon the Companys ability to meet its
financing requirements on a continuing basis, to maintain present financing, to
achieve the objectives of its business plan and to succeed in its future
operations. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should the Company be
unable to continue in existence. The Companys business plan includes, among other things, expansion of its
Internet access services through mergers and acquisitions and the development
of its web hosting and co-location services. Execution of the Companys
business plan will require significant capital to fund capital expenditures,
working capital needs, debt service and the cash flow deficits generated by
operating losses. Current cash balances will not be sufficient to fund the
Companys current business plan beyond the next few months. As a consequence,
the Company is currently seeking additional convertible debt and/or equity
financing as well as the placement of a credit facility to fund the Companys
liquidity. There can be no assurance that the Company will be able to raise
additional capital on satisfactory terms or at all. NOTE B - SUMMARY OF ACCOUNTING POLICIES A summary of the significant accounting
policies consistently applied in the preparation of the accompanying
consolidated financial statements follows. F-7




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##### Table of Contents



1.
    
    Consolidation The consolidated financial statements include the accounts of
FullNet Communications, Inc. and its wholly owned subsidiaries. All material
inter-company accounts and transactions have been eliminated.  2.
    
    Revenue Recognition Access service revenues are recognized on a monthly basis over the
life of each contract as services are provided. Contract periods range from
monthly to yearly. Deferred revenues are calculated for those contracts that
require prepayment and continue subsequent to the current year-end.
Carrier-neutral telecommunications co-location revenues are recognized on a
monthly basis over the life of the contract as services are provided.  3.
    
    Accounts Receivable Accounts receivable consist of the following as of
December 31: 2003
    
    2002Accounts receivable
    
    $
    54,393
    
    
    $
    43,800Less allowance for doubtful accounts
    
    
    (24,883
    )
    
    
    (9,061
    )$
    29,510
    
    
    $
    34,739
  4.
    
    Property and Equipment Property and equipment are stated at cost.
Depreciation is computed primarily using the straight-line method over the
estimated useful lives of the related assets as follows: Software
    
    3 yearsComputers and equipment
    
    5 yearsFurniture and fixtures
    
    7 yearsLeasehold improvements
    
    Shorter of estimated life of improvement or the lease term
  5.
    
    Intangible Assets Intangible assets consist primarily of acquired customer
bases and covenants not to compete and are carried net of accumulated
amortization. Upon initial application of SFAS 142 as of January 1, 2002, the
Company reassessed useful lives and began amortizing these intangible assets
over their estimated useful lives and in direct relation to any decreases in
the acquired customer bases to which they relate. Management believes that
such amortization reflects the pattern in which the economic benefits of the
intangible asset are consumed or otherwise used up.  6.
    
    Long-Lived Assets The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets in determining impairment losses on long-term
assets. All long-lived assets held and used by the Company, including
intangible assets, are reviewed to determine whether any events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company bases its evaluation on such impairment indicators as
the nature of the assets, the future economic benefit of the assets, any
historical or future profitability measurements, as well as other external
market conditions or factors that may be present. If such impairment
indicators are present or other factors exist that indicate that the carrying
amount of the asset may not be recoverable the Company determines whether an
impairment has occurred through the use of an undiscounted cash flows analysis
of the asset. If an impairment F-8




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##### Table of Contents



has occurred, the Company recognizes a loss for the difference between the
carrying amount and the estimated value of the asset.  7.
    
    Accrued and Other Current Liabilities Accrued and other current liabilities consist of the following as of December
31: 2003
    
    2002Accrued interest
    
    $
    226,874
    
    
    $
    131,035Accrued deferred compensation
    
    
    261,515
    
    
    
    204,721Accrued other liabilities
    
    
    59,638
    
    
    
    46,921$
    548,027
    
    
    $
    382,677
  8.
    
    Income Taxes The Company follows the liability method of accounting for
income taxes. Under the liability method, deferred income taxes are provided
on temporary differences between the tax basis of an asset or liability and its
reported amount in the consolidated financial statements and carryforwards that
will result in taxable or deductible amounts in future years. Deferred income
tax assets or liabilities are determined by applying the presently enacted tax
rates and laws. Additionally, the Company provides a valuation allowance on
deferred tax assets if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  9.
    
    Loss Per Common Share Loss per common share is calculated based on
the weighted average number of shares outstanding during the year, including
common shares issuable without additional consideration. Basic and diluted
loss per share were the same for the years ended December 31, 2003 and 2002
because the following were not dilutive: 2003
    
    2002Common shares attributable to convertible promissory notes
    
    
    1,003,659
    
    
    
    810,535Employee common stock options
    
    
    2,903,366
    
    
    
    1,589,252Other common stock options and warrants
    
    
    2,201,681
    
    
    
    2,151,6816,108,706
    
    
    
    4,551,468
  10.
    
    Stock Options and Warrants The Companys employee stock options are accounted for under APB Opinion No. 25
and related interpretations. Had compensation cost for the Companys stock
options been determined based on the fair value at the grant dates consistent
with the method of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Companys net loss and loss per
share in 2003 and 2002 would have been increased to the pro forma amounts
indicated below: F-9




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##### Table of Contents



2003
    
    2002Net loss
As reported
    
    $
    (678,608
    )
    
    $
    (822,980
    )Pro forma
    
    $
    (805,031
    )
    
    $
    (1,074,967
    )Basic and diluted loss per share
As reported
    
    $
    (.10
    )
    
    $
    (.12
    )Pro forma
    
    $
    (.12
    )
    
    $
    (.16
    )
 The fair value of each option grant prior to February 2000 was estimated on the
date of grant using the minimum value method because there was no public
trading market for the Companys securities. During February 2000, the
Companys common stock began trading on the NASD Electronic Bulletin Board
under the symbol FULO. The fair value of the options granted subsequent to
February 2000 have been estimated at the date of grant using the Black-Scholes
option pricing model. The following weighted average assumptions were used: 2003
    
    2002Risk free interest rate
    
    
    4.3
    %
    
    
    5.1
    %Expected lives (in years)
    
    
    5
    
    
    
    5Expected volatility
    
    
    132.5
    %
    
    
    143.2
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 For warrants issued with debt, a portion of the proceeds received is allocated
to the warrants based on the relative fair values of the warrants, determined
using the Black-Scholes valuation model, and the debt. The resulting discount
on the debt is amortized to interest expense over the life of the debt. Other issuances of stock options and warrants are valued using the
Black-Scholes valuation model and accounted for based on the consideration
received.  11.
    
    Advertising The Company expenses advertising production costs as they are
incurred and advertising communication costs the first time the advertising
takes place. Advertising expense for the years ended December 31, 2003 and
2002 was $15,546 and $9,224, respectively.  12.
    
    Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures;
accordingly, actual results could differ from those estimates.  13.
    
    Recently Issued Accounting Standards During April 2003, the
FASB issued SFAS 149 - Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, effective for contracts entered
into or modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of this Statement should be applied prospectively. The
provisions of this Statement that relate to Statement 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, paragraphs 7(a) and 23(a), F-10




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##### Table of Contents



which relate to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing contracts
and new contracts entered into after June 30, 2003. The Company does not
participate in such transactions, however, is evaluating the effect of this new
pronouncement, if any, and will adopt FASB 149 within the prescribed time. During May 2003, the FASB issued SFAS 150 - Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. This Statement establishes standards for how an issuer
classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a freestanding financial instrument that is within its
scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. Some of the provisions of
this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The Company is
evaluating the effect of this new pronouncement and will adopt FASB 150 within
the prescribed time. During October 2003, the FASB issued Staff Position No. FIN 46 deferring the
effective date for applying the provisions of FIN 46 until the end of the first
interim or annual period ending after December 31, 2003 if the variable
interest was created prior to February 1, 2003 and the public entity has not
issued financial statements reporting that variable interest entity in
accordance with FIN 46. The FASB also indicated it would be issuing a
modification to FIN 46 prior to the end of 2003. Accordingly, the Company has
deferred the adoption of FIN 46 with respect to variable interest entities
created prior to February 1, 2003. Management is currently assessing the
impact, if any, FIN 46 may have on the Company; however, management does not
believe there will be any material impact on its consolidated financial
statements, results of operations or liquidity resulting from the adoption of
this interpretation.  14.
    
    Reclassifications Certain reclassifications have been made to the 2002 financial statements to
conform to the 2003 presentation. NOTE C - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31: 2003
    
    2002Computers and equipment
    
    $
    972,866
    
    
    $
    752,584Leasehold improvements
    
    
    921,827
    
    
    
    921,827Software
    
    
    50,187
    
    
    
    50,187Furniture and fixtures
    
    
    19,153
    
    
    
    19,1531,964,033
    
    
    
    1,743,751Less accumulated depreciation
    
    
    (968,303
    )
    
    
    (765,502
    )$
    995,730
    
    
    $
    978,249
 Depreciation expense for the years ended December 31, 2003 and 2002 was
$238,728 and $212,291, respectively. NOTE D - INTANGIBLE ASSETS Intangible assets consist primarily of acquired customer bases and covenants
not to compete and relate to the 2001 purchases of certain business operations
in Lawton, Oklahoma (the LawtonNet Communications (LAWTONNET) acquisition),
Lawton, Oklahoma (the SONET Communications (SONET) acquisition) and Oklahoma
City, Oklahoma (the IPDatacom acquisition), the 2000 purchases of certain
business operations in Tahlequah, Oklahoma (the FullNet of Tahlequah, Inc.
(FOT) acquisition), Bartlesville, Oklahoma (the FullNet of F-11




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Bartlesville (FOB) acquisition), Nowata, Oklahoma (the FullNet of Nowata (FON)
acquisition), the 2000 merger with Harvest Communications, Inc. (the Harvest
merger), the 1998 purchase of Animus (the Animus acquisition) and the 1997
purchase of certain business operations in Tulsa, Oklahoma (the Tulsa
acquisition) as follows: December 31,2003
    
    2002LAWTONNET acquisition
    
    $
    65,000
    
    
    $
    65,000SONET acquisition
    
    
    42,547
    
    
    
    42,547IPDatacom acquisition
    
    
    137,849
    
    
    
    137,849FOT acquisition
    
    
    93,649
    
    
    
    93,649FOB acquisition
    
    
    194,780
    
    
    
    194,780FON acquisition
    
    
    139,650
    
    
    
    139,650Harvest merger
    
    
    2,009,858
    
    
    
    2,009,858Animus acquisition
    
    
    318,597
    
    
    
    318,597Tulsa acquisition
    
    
    70,000
    
    
    
    70,0003,071,930
    
    
    
    3,071,930Less accumulated amortization
    
    
    (2,802,448
    )
    
    
    (2,565,657
    )$
    269,482
    
    
    $
    506,273
 In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Intangible Assets. SFAS 141 is effective for all business
combinations completed after June 30, 2001. SFAS 142 is effective for fiscal
years beginning after December 15, 2001; however, certain provisions of this
Statement apply to goodwill and other intangible assets acquired between July
1, 2001 and the effective date of SFAS 142. The provisions of 142 provide that
goodwill, as well as intangible assets with indefinite lives, acquired after
June 30, 2001, not be amortized and, effective January 1, 2002, all previously
recognized goodwill and intangible assets with indefinite lives will no longer
be subject to amortization. The statement also provides that upon initial
application the useful lives of previously recognized intangible assets be
reassessed and remaining amortization periods adjusted accordingly. The Companys previously recognized intangible assets consist primarily of
customer bases and covenants not to compete relating to those customer bases.
Upon initial application of SFAS 142 as of January 1, 2002, the Company
reassessed useful lives and began amortizing these intangible assets over their
estimated useful lives and in direct relation to any decreases in the acquired
customer bases to which they relate. Management believes that such
amortization reflects the pattern in which the economic benefits of the
intangible asset are consumed or otherwise used up. Amortization expense for the years ended December 31, 2003 and 2002 relating to
intangible assets was $236,791 and $448,579, respectively. F-12




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##### Table of Contents



NOTE E - NOTES PAYABLE Notes payable consist of the following at December 31: December 31,
    
    December 31,2003
    
    2002Three notes payable to a bank, payable in monthly
installments aggregating $10,010, including interest
ranging from 9.5% to 11.5%, maturing September 2008;
collateralized by property and equipment, accounts
receivable and Company common stock owned by the
founder and CEO of the Company; guaranteed by the
founder and CEO of the Company; partially guaranteed
by the Small Business Administration
    
    $
    394,600
    
    
    $
    474,523Interim loan, interest at 10%, requires payments
equal to 50% of the net proceeds received by the
Company from its private placement of convertible
promissory notes, matured December 2001; unsecured
(1)
    
    
    320,000
    
    
    
    320,000Convertible promissory notes; interest at 12.5% of
face amount, payable quarterly; these notes are
unsecured and $505,000 and $5,636 mature in 2003 and
2004, respectively; $510,636 face amount less
unamortized discount of $1,439 ($196,271 for 2002);
effective rate of 20% (convertible into approximately
1,003,659 and 810,535 shares at December 31, 2003 and
December 31, 2002, respectively) (2)
    
    
    509,197
    
    
    
    314,365Note payable to an individual, payable in monthly
installments of $1,277 until paid in full, including
interest at a variable rate (prime plus 2.25%; 6.5%
at December 31, 2003), matures September 2014;
collateralized by substantially all assets acquired
in conjunction with the acquisition of Harvest
Communications, Inc.
    
    
    23,775
    
    
    
    37,060Note payable to the Companys founder and CEO,
payable in monthly installments of $1,034 including
interest at 8.5%, maturing May 2006; unsecured
    
    
    26,818
    
    
    
    36,492Note payable, interest at 10%, requires monthly
installments of $9,330 for 12 months then $18,209 for
the remainder of the note, maturing August 2004,
secured by a telephone switch (3)
    
    
    122,818
    
    
    
    Other notes payable (4)
    
    
    117,959
    
    
    
    118,0031,515,167
    
    
    
    1,300,443Less current portion
    
    
    1,184,845
    
    
    
    865,057$
    330,322
    
    
    $
    435,386
 (1) This loan and accrued interest of $88,110 was past due on December 31, 2003; the Company
has not made payment or negotiated an extension of the loan and the lender has not made any
demands. F-13




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##### Table of Contents



(2) During 2000 and 2001, the Company issued 11% convertible promissory notes or converted
other notes payable or accounts payable to convertible promissory notes in an amount totaling
$2,257,624. The terms of the Notes are 36 months with limited prepayment provisions. The
Notes may be converted by the holder at any time at $1.00 per share and by the Company upon
registration and when the closing price of the Companys common stock has been at or above
$3.00 per share for three consecutive trading days. Additionally, the Notes are accompanied
by warrants exercisable for the purchase of the number of shares of Company common stock
equal to the number obtained by dividing 25% of the face amount of the Notes purchased by
$1.00. These warrants are exercisable at any time during the five years following issuance
at an exercise price of $.01 per share. Under the terms of the Notes, the Company was
required to register the common stock underlying both the Notes and the detached warrants by
filing a registration statement with the Securities and Exchange Commission within 45 days
following the Final Expiration Date of the Offering (March 31, 2001). On May 31, 2001, the
Company exchanged 2,064,528 shares of its common stock and warrants (exercisable for the
purchase of 436,748 shares of common stock at $2.00 per share) for convertible promissory
notes in the principal amount of $1,746,988 (recorded at $1,283,893) plus accrued interest of
$123,414. The warrants expire on May 31, 2006. This exchange was accounted for as an
induced debt conversion and a debt conversion expense of $370,308 was recorded. Pursuant to the provisions of the convertible promissory notes, the conversion price was
reduced from $1.00 per share on January 15, 2001 to $.49 per share on December 31, 2003 for
failure to register under the Securities Act of 1933, as amended, the common stock underlying
the convertible promissory notes and underlying warrants on December 15, 2001. Reductions in
conversion price are recognized at the date of reduction by an increase to additional paid-in
capital and an increase in the discount on the convertible promissory notes. Furthermore,
the interest rate was increased to 12.5% per annum from 11% per annum because the
registration statement was not filed before March 1, 2001. At December 31, 2003, the
outstanding principal and interest of the convertible promissory notes was $633,936. On January 1, 2002, the Company recorded 11,815 shares of common stock issuable in payment of
$11,815 accrued interest on a portion of the Companys convertible promissory notes. On November 9, 2003, $455,000 of these convertible promissory notes matured and an additional
$50,000 matured on December 1, 2003. The Company was unable to pay these notes at maturity
and are currently developing a plan to satisfy these notes which will be subject to the
approval of each individual note holder. (3) During February 2003, upon the receipt and installation of a telephone switch the Company
made a down payment of $14,950. The remaining balance of $202,200 was financed by the
supplier at 10% interest to be paid in 18 monthly payments beginning in March 2003. (4) Includes five notes with past due principal and accrued interest totaling $93,613 at
December 31, 2003. The Company has not made payment or negotiated an extension of the notes
and the lenders have not made any demands. Aggregate future maturities of notes payable at December 31, 2003 are as follows: Year ending December 312004
    
    $
    1,186,2842005
    
    
    105,8252006
    
    
    106,6822007
    
    
    109,1972008
    
    
    8,6181,516,606Less unamortized discount
    
    
    (1,439
    )$
    1,515,167
 F-14




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##### Table of Contents



NOTE F  LEASE AGREEMENTS Capital Leases The Company has various capital leases for equipment. The lease terms range
from 24 to 36 months. Additionally, annual lease rental payments for each
lease range from $1,598 to $17,112 per year. The property and equipment accounts include $138,428 and $186,436 for leases
that have been capitalized at December 31, 2003 and 2002, respectively.
Related accumulated amortization amounted to $56,095 and $46,550 at December
31, 2003 and 2002, respectively. The schedule of future minimum lease payments below reflects all payments under
capital leases in effect at December 31, 2003. Year ending December 312004
    
    $
    36,6622005
    
    
    18,243Total minimum lease payments
    
    $
    54,905Less amount representing interest
    
    
    5,858Present value of net minimum lease payments
    
    $
    49,047Less current portion
    
    
    31,722Long-term capital lease obligations
    
    $
    17,325
 Operating Leases The Company leases certain office facilities used in its
operations under non-cancelable operating leases expiring at various dates
through 2009. Future minimum lease payments required at December 31,2003 under
non-cancelable operating leases that have initial lease terms exceeding one
year are presented in the following table: Year ending December 312004
    
    $
    163,7612005
    
    
    170,2842006
    
    
    176,8072007
    
    
    183,3302008
    
    
    189,853Thereafter
    
    
    196,376$
    1,080,411
 Rental expense for all operating leases for the years ended December 31, 2003
and 2002 was approximately $163,125 and $306,759, respectively. The Companys long-term non-cancelable operating lease includes scheduled base
rental increases over the term of the lease. The total amount of the base
rental payments is charged to expense on the straight-line method over the term
of the lease. The Company has recorded a deferred credit of $82,103 and
$72,956 at December 31, 2003 and 2002, respectively, which is reflected in
Other Long-term Liabilities on the Balance Sheet to reflect the net excess of
rental expense over cash payments since inception of the lease. NOTE G - INCOME TAXES Due to net losses, no provision for income taxes was
necessary for 2003 or 2002. F-15




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##### Table of Contents



The Companys effective income tax rate on net loss differed from the federal
statutory rate of 34% as follows at December 31: 2003
    
    2002Income taxes at federal statutory rate
    
    $
    (230,000
    )
    
    $
    (280,000
    )Change in valuation allowance
    
    
    101,000
    
    
    
    159,000Nondeductible expenses
    
    
    155,000
    
    
    
    169,000State income taxes, net of federal benefit
    
    
    (38,000
    )
    
    
    (46,000
    )Other
    
    
    12,000
    
    
    
    (2,000
    )Total tax expense
    
    $
    
    
    
    $
    
 The components of deferred income tax assets were as follows at December 31: 2003
    
    2002Deferred income tax assets
Basis difference in intangible assets
    
    $
    234,000
    
    
    $
    165,000Deferred revenue
    
    
    137,000
    
    
    
    157,000Net operating loss
    
    
    1,090,000
    
    
    
    1,014,000Other
    
    
    70,000
    
    
    
    94,000Valuation allowance
    
    
    (1,531,000
    )
    
    
    (1,430,000
    )Net deferred income tax asset
    
    $
    
    
    
    $
    Increase in valuation allowance
    
    $
    101,000
    
    
    $
    159,000
 A valuation allowance is provided for deferred tax assets when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. At December 31, 2003, the Company has a net operating loss carry
forward of approximately $2,900,000 that will expire at various dates through
2021. As such carry forward can only be used to offset future taxable income
of the Company, management has provided a valuation allowance until it is more
likely than not that taxable income will be generated. NOTE H - STOCKHOLDERS DEFICIT Common StockOptions for 50,000 shares of the Companys common stock were
exercised in December 2003 for $2,000. During January 2002, the Company agreed to issue 11,815 shares valued at
$11,815 in payment of accrued interest on a portion of the Companys
convertible promissory notes. At December 31, 2003 these shares are shown as
Common Stock Issuable. During December 2002, the Company agreed to issue 1,500 shares valued at $105
in settlement of a note payable. Common Stock Options The following table summarizes the Companys employee
stock option activity for the years ended December 31, 2003 and 2002:  F-16




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##### Table of Contents



Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average2003
    
    Exercise Price
    
    2002
    
    Exercise PriceOptions outstanding, beginning of year
    
    
    1,589,252
    
    
    $
    .80
    
    
    
    1,437,196
    
    
    $
    1.08Options granted during the year
    
    
    1,478,948
    
    
    
    .04
    
    
    
    488,830
    
    
    
    .07Options exercised during the year
    
    
    (50,000
    )
    
    
    .04
    
    
    
    
    
    
    
    Options cancelled during the year
    
    
    (114,834
    )
    
    
    .16
    
    
    
    (336,774
    )
    
    
    .81Options outstanding, end of year
    
    
    2,903,366
    
    
    $
    .45
    
    
    
    1,589,252
    
    
    $
    .80Options exercisable at end of year
    
    
    1,549,258
    
    
    $
    .79
    
    
    
    1,106,090
    
    
    $
    .97Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    .04
    
    
    
    
    
    
    $
    .06
 The following table summarizes information about employee stock options
outstanding at December 31, 2003: Options outstanding
    
    Options exercisableWeighted-Number
    
    average
    
    Weighted-
    
    Number
    
    Weighted-Range of exercise
    
    outstanding
    
    remaining
    
    average exercise
    
    exercisable
    
    average exerciseprices
    
    at 12/31/03
    
    contractual life
    
    price
    
    at 12/31/03
    
    price$0.01 - $0.70
    
    
    2,107,943
    
    
    9.18 years
    
    $
    0.12
    
    
    
    755,835
    
    
    $
    0.26$1.00 - $1.50
    
    
    671,290
    
    
    6.86 years
    
    $
    1.07
    
    
    
    644,290
    
    
    $
    1.08$1.81 - $3.00
    
    
    124,133
    
    
    6.32 years
    
    $
    2.62
    
    
    
    124,133
    
    
    $
    2.622,903,366
    
    
    8.52 years
    
    $
    0.45
    
    
    
    1,524,258
    
    
    $
    0.80
 The Companys employee stock options are accounted for under APB Opinion No. 25
and related interpretations. Had compensation cost for the Companys stock
options been determined based on the fair value at the grant dates consistent
with the method of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Companys net loss and loss per
share in 2003 and 2002 would have been increased to the pro forma amounts
indicated below: 2003
    
    2002Net loss
As reported
    
    $
    (678,608
    )
    
    $
    (822,980
    )Pro forma
    
    $
    (805,031
    )
    
    $
    (1,074,967
    )Basic and diluted loss per share
As reported
    
    $
    (.10
    )
    
    $
    (.12
    )Pro forma
    
    $
    (.12
    )
    
    $
    (.16
    )
 The fair value of each option grant prior to February 2000 was estimated on the
date of grant using the minimum value method because there was no public
trading market for the Companys securities. During February 2000, the
Companys common stock began trading on the OTC Bulletin Board under the symbol
FULO. The fair value of the options granted subsequent to February 2000 have
been estimated at the date of grant using the Black-Scholes option pricing
model. F-17




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##### Table of Contents



The following weighted average assumptions were used: 2003
    
    2002Risk free interest rate
    
    
    4.3
    %
    
    
    5.1
    %Expected lives (in years)
    
    
    5
    
    
    
    5Expected volatility
    
    
    132.5
    %
    
    
    143.2
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 Common Stock Warrants and Certain Stock Options A summary of common stock
purchase warrant and certain stock option activity for the years ended December
31, 2003 and 2002 follows: Number ofsharesIssued during 2003In connection with financing (weighted average exercise price $.01 per share)
    
    
    50,000Total issued during 2003
    
    
    50,000Issued during 2002For professional services (weighted average exercise price $.08 per share)
    
    
    52,000Total issued during 2002
    
    
    52,000
 Outstanding common stock purchase warrants and certain stock options
outstanding at December 31, 2003 are as follows: Number
    
    Exercise
    
    Expirationof shares
    
    price
    
    year57,375
    
    $
    1.25
    
    
    
    200225,000
    
    
    2.77
    
    
    
    200310,000
    
    
    2.55
    
    
    
    200570,000
    
    
    1.00
    
    
    
    2005560,000
    
    
    .01
    
    
    
    2005436,748
    
    
    2.00
    
    
    
    2006311,000
    
    
    1.00
    
    
    
    200673,500
    
    
    .13
    
    
    
    2006100,000
    
    
    .11
    
    
    
    2006456,058
    
    
    .01
    
    
    
    20066,000
    
    
    .12
    
    
    
    200720,000
    
    
    .05
    
    
    
    200750,000
    
    
    .01
    
    
    
    200814,000
    
    
    .10
    
    
    
    201212,000
    
    
    .08
    
    
    
    20122,201,681
 F-18




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The following table summarizes the Companys common stock purchase warrant and
certain stock option activity for the years ended December 31, 2003 and 2002: Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average2003
    
    Exercise Price
    
    2002
    
    Exercise PriceWarrants and certain stock options outstanding, beginning of year
    
    
    2,151,681
    
    
    $
    .68
    
    
    
    2,099,681
    
    
    $
    .69Warrants and certain stock options issued during the year
    
    
    50,000
    
    
    
    .01
    
    
    
    52,000
    
    
    
    .08Warrants and certain stock options exercised during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants and certain stock options cancelled during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants and certain stock options outstanding, end of year
    
    
    2,201,681
    
    
    $
    .66
    
    
    
    2,151,681
    
    
    $
    .68
 NOTE I  RELATED PARTY TRANSACTIONS In connection with his employment, during October 2003, the Company issued
stock options exercisable for the purchase of 452,000 shares of common stock to
the founder and CEO of the Company of which 120,000 options were 100% vested
and exercisable immediately and 182,000 options will vest and become
exercisable on November 16, 2004. The remaining 150,000 options will vest and
become exercisable one-third on each of the first three anniversary dates of
the issuance. These options have an exercise price of $.04 per share and
expire during October 2013. In connection with his employment, during October 2003, the Company issued
stock options exercisable for the purchase of 370,848 shares of common stock to
the President and CFO of the Company of which 34,651 options were 100% vested
and exercisable immediately and 261,197 options will vest and become
exercisable on November 16, 2004. The remaining 75,000 options will vest and
become exercisable one-third on each of the first three anniversary dates of
the issuance. These options had an exercise price of $.04 per share and expire
during October 2013. In connection with his employment, during December 2003, the Company issued
stock options exercisable for the purchase of 50,000 shares of common stock to
the President and CFO of the Company that were 100% vested and exercisable
immediately. These options had an exercise price of $.04 per share and expire
during March 2012. Subsequently, the President and CFO exercised these options
for $2,000. In connection with his employment, during March 2002, the Company issued stock
options exercisable for the purchase of 80,000 shares of common stock to the
founder and CEO of the Company that were one-third vested and exercisable
immediately and will vest and become exercisable one-third on each annual
anniversary of the issue. These options have an exercise price of $.05 per
share and expire during March 2012. In connection with his employment, during March 2002, the Company issued stock
options exercisable for the purchase of 60,000 shares of common stock to one of
its officers and directors that were one-third vested and exercisable
immediately and will vest and become exercisable one-third on each annual
anniversary of the issue. These options have an exercise price of $.05 per
share and expire during March 2012. On August 2, 2000, the Company obtained a short-term loan of $100,000 from its
founder and CEO through the issuance of a 14% promissory note. The terms of
the financing additionally provided for the issuance of five-year warrants
exercisable for the purchase of 50,000 shares of the Companys common stock at
$.01 per share, and provided for certain registration rights. The promissory
note required monthly interest payments, matured on the earlier of (i) the date
which is within five days of receipt of funds by the Company of any offering
raising gross proceeds to the Company of at least $1,000,000 or (ii) in three
months, and was extendible for two 90-day periods upon issuance of additional
warrants exercisable for the purchase of 50,000 shares of the Companys common F-19




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##### Table of Contents



stock exercisable at $.01 per share for each extension. In the fourth quarter
of 2000, the Companys founder and CEO agreed to reduce the interest rate on
the promissory note to 9% and waive the warrant provisions relating to
extensions of the loan. The Company repaid $50,000 on this note during 2000
and the note was due in May 2001. In May 2001 the Companys founder and CEO
agreed to a replacement note with an interest rate of 8.5% with monthly
principal and interest payments and the note is due in May 2006. NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS The Companys financial
instruments are held for purposes other than trading. The estimated fair value
of notes payable is the discounted amount of future cash flows using the
estimated current rate for similar borrowings. 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    Fairamount
    
    value
    
    amount
    
    valueFinancial liabilitiesNotes payable
    
    $
    1,515,000
    
    
    $
    1,406,000
    
    
    $
    1,300,000
    
    
    $
    811,000
 NOTE M - SIGNIFICANT CUSTOMER During the years ended December 31, 2003 and 2002, the Company had one customer
that comprised approximately 33% and 27%, respectively, of total revenues. F-20