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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB (Mark One)
 þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 000-27031 FULLNET COMMUNICATIONS, INC. (Name of small business issuer in its Charter) OKLAHOMA
    
    73-1473361(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 201 Robert S. Kerr Avenue, Suite 210 Oklahoma City, Oklahoma 73102
 (Address of principal executive offices) (405) 236-8200 (Issuers telephone number) Securities registered under Section 12(b) of the Act: None Securities registered under to Section 12(g) of the Act: Title of class  Common Stock, $0.00001 Par Value Check whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes þ No o Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be contained, to
the best of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. o The Registrants revenues for its most recent fiscal year were $2,260,768 The aggregate market value of the registrants common stock, $0.00001 par value, held
by non-affiliates of the Registrant as of March 28, 2005 was $386,677 based on the
closing price of $.07 per share on that date as reported by the OTC Bulletin Board.
As of March 28, 2005, 6,723,135 shares of the registrants common stock, $0.00001 par
value, were outstanding. Transitional Small Business Disclosure Format (check one): Yes o No þ   1




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FULLNET COMMUNICATIONS, INC.
FORM 10-KSB
For the Fiscal Year Ended December 31, 2004 TABLE OF CONTENTS PART I.Item 1. Description Of Business
    
    
    4Item 2. Description of Property
    
    
    13Item 3. Legal Proceedings
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14PART II.Item 5. Market for Common Equity and Related Stockholder Matters
    
    
    15Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    16Item 7. Financial Statements
    
    
    20Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    20Item 8A. Controls and Procedures
    
    
    20Item 8B. Other Information
    
    
    21PART III.Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act
    
    
    22Item 10. Executive Compensation
    
    
    23Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    25Item 12. Certain Relationships and Related Transactions
    
    
    26Item 13. Exhibits
    
    
    27Item 14. Principal Accountant Fees and Services
    
    
    31SIGNATURES
    
    
    32Certification Pursuant to Rule 13a-14(a)/15d-14(a) - Timothy J. KilkennyCertification Pursuant to Rule 13a-14(a)/15d-14(a) - Roger P. BareselCertification Pursuant to 18 U.S.C. Section 1350 - Timothy J. KilkennyCertification Pursuant to 18 U.S.C. Section 1350 - Roger P. Baresel
  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 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. As of September 30, 2004, there
was one Internet service provider in Oklahoma that used the FullNet brand name for
whom we provide the backbone to the Internet. There was also one Internet service
provider that used a private label brand name, for whom we are its access backbone and
provide on an outsource basis technical support, systems management and operations.
Additionally, we provide high-speed broadband connectivity, website hosting, network
management and consulting solutions to over 100 businesses in Oklahoma. 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. We completed one acquisition of an Internet service provider
during 2004. During 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 will terminate 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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Through FullTel, our wholly owned subsidiary, we are a fully licensed competitive
local exchange carrier or CLEC in Oklahoma. 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, 2004 FullTel provided us with local telephone access in approximately
229 cities. 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:  o
    Potential revenue and subscriber growth;o
    Low subscriber turnover or churn rates;o
    Density in the market as defined by a high ratio of subscribers to points of presence (POPs);o
    Favorable competitive environment;o
    Low density network platforms that can be integrated readily into our backbone network; ando
    Favorable consolidation savings. Generate Internal Sales Growth We intend to expand our customer base by increasing our marketing efforts. At
December 31, 2004, our direct sales force consisted of one individual in our Oklahoma
City office coordinating all our business-to-business solutions sales. We currently
have independent re-sellers responsible for their individual markets. Our sales force
is supported in its efforts by technical engineers and our senior management. We
intend to increase our phone directory advertising to include all cities in which we
provide local telephone access. 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. 5




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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 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: o   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. o   New Products and Services  Offer subscribers new products and
services. We recently began offering call waiting modem on hold, Postini e-mail spam
and virus protection and a dial-up accelerator. Internet Access Services Our core business is the sale of Internet access services to individual and small
business subscribers located in Oklahoma on both a retail and wholesale basis.
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: o     Private label retail and business direct dial-up connectivity to the Internet and o     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 229 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 3,300 subscribers at December
31, 2004. 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 phone directory advertising 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: o    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. o   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. 6




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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. We
have designed our network such that our users never have to worry about busy signals
due to a lack of available modems. 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 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, generally the regional Bell companies
including SBC, 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 Internet access for dail-up services in
most of Oklahoma. 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, 2004 FullTel provided us with local telephone access in approximately
229 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. 7




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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. 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 8




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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. 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 reexamined. 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 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 9




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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. The Telecommunications Act has caused fundamental changes in the markets for
local exchange services. In particular, the Telecommunications Act and the related
FCC promulgated rules 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. 10




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     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 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. We have billed, collected and are continuing to bill reciprocal
compensation. However, continuance of this revenue stream is subject to ongoing
regulation. Reciprocal compensation is unlikely to be a significant or a long-term
revenue source for us. 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 11




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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 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 C. 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 12




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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. 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 2004 and 2003, we had one customer that represented 30% and 33%, 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 has notified us that they will not renew their contract.
Therefore we will experience a loss of this revenue without a corresponding reduction
in expense. Employees As of December 31, 2004, we had 14 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 As a telecommunications company, we are effected by regulatory proceedings
in the ordinary course of our business at the state and federal levels. These include
proceedings before both the Federal Communications Commission and the Oklahoma
Corporation Commission (OCC). For example, we along with many other
telecommunications companies in Oklahoma are currently a party to one or more
proceeding before the OCC relating to the terms of our interconnection agreement with
SBC Communications and an anticipated successor to this interconnection agreement.
These proceedings were initiated due to the unreasonable changes that SBC was
proposing be incorporated in the successor interconnection agreement. The regulatory
proceeding concerning the terms of our interconnection agreement with SBC
Communication, which is based upon their standard interconnection agreement, and the
anticipated successor thereto is ongoing and is not expected to conclude until either
late this year or early next year. We cannot anticipate the outcome of this regulatory
proceeding at this time but a negative outcome with 13




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any of these regulatory proceedings could have a material adverse effect on our
business, financial condition or 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. 14




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##### Table of Contents



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. 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
    
    
    Low2004 Calendar Quarter Ended:March 31
    
    $
    .05
    
    
    $
    .05June 30
    
    
    .04
    
    
    
    .04September 30
    
    
    .05
    
    
    
    .05December 31
    
    
    .07
    
    
    
    .052003 Calendar Quarter Ended:March 31
    
    $
    .06
    
    
    $
    .06June 30
    
    
    .04
    
    
    
    .04September 30
    
    
    .05
    
    
    
    .05December 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, 2005 was approximately 109. 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. Securities Authorized for Issuance under Equity Compensation Plans The following table sets forth as of December 31, 2004, information related to
each category of equity compensation plan approved or not approved by our
shareholders, including individual compensation arrangements with our non-employee
directors. We do not have any equity compensation plans that have been approved by
our shareholders. All of our outstanding stock option grants and warrants were
pursuant to individual compensation arrangements and exercisable for the purchase of
our common stock shares. Number ofSecuritiesWeighted-
    
    
    RemainingNumber of
    
    
    Average
    
    
    Available forShares
    
    
    Exercise Price
    
    
    FutureUnderlying
    
    
    of
    
    
    Issuance underUnexercised
    
    
    Outstanding
    
    
    EquityOptions
    
    
    Options and
    
    
    CompensationPlan Category
    
    and Warrants
    
    
    Warrants
    
    
    Plans(1)Equity compensation plans approved by
our shareholders:None
    
    Not Applicable
    
    Not Applicable
    
    Not ApplicableEquity compensation plans not approved by our
shareholders:Stock option grants to non-employee directors
    
    
    
    
    
    $
    
    
    
    
    Stock options granted to employees
    
    
    3,014,700
    
    
    $
    .43
    
    
    
    Warrants and certain stock options issued to
non-employees
    
    
    402,000
    
    
    $
    .39
    
    
    
    Total
    
    
    3,416,700
    
    
    $
    .43
    
    
    
    
 15




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Recent Sales of Unregistered Securities During October 2004, we issued 10,000 shares of common stock as part of a
settlement of a note payable. This offering was pursuant to Rule 506 of Regulation D
of the Securities Act, and no commissions and fees were paid. 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, and no commissions and fees were paid. With respect to each of the foregoing common stock 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 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. 16




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##### Table of Contents



Results of Operations The following table sets forth certain statement of operations data as a
percentage of revenues for the years ended December 31, 2004 and 2003: For the Years Ended December 31,2004
    
    
    2003Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentRevenues:Access service revenues
    
    $
    898,973
    
    
    
    40.0
    %
    
    $
    990,769
    
    
    
    46.7
    %Co-location and other revenues
    
    
    1,361,795
    
    
    
    60.0
    
    
    
    1,131,113
    
    
    
    53.3Total revenues
    
    
    2,260,768
    
    
    
    100.0
    
    
    
    2,121,882
    
    
    
    100.0Cost of access service revenues
    
    
    231,274
    
    
    
    10.2
    
    
    
    518,049
    
    
    
    24.4Cost of co-location and other revenues
    
    
    114,517
    
    
    
    5.1
    
    
    
    109,914
    
    
    
    5.2Selling, general and administrative expenses
    
    
    1,279,779
    
    
    
    56.6
    
    
    
    1,140,905
    
    
    
    53.8Loss (gain) on sale of assets
    
    
    4,253
    
    
    
    .2
    
    
    
    (30,218
    )
    
    
    (1.4
    )Depreciation and amortization
    
    
    403,209
    
    
    
    17.8
    
    
    
    467,483
    
    
    
    22.0Total operating costs and expenses
    
    
    2,033,032
    
    
    
    89.9
    
    
    
    2,206,133
    
    
    
    104.0Income (loss) from operations
    
    

    227,736
    
    
    
    10.1
    
    
    
    (84,251
    )
    
    
    (4.0
    )Gain on debt forgiveness
    
    
    163,380
    
    
    
    7.2
    
    
    
    
    
    
    
    Interest expense
    
    
    (165,110
    )
    
    
    (7.3
    )
    
    
    (594,357
    )
    
    
    (28.0
    )Income (loss) before income taxes
    
    
    226,006
    
    
    
    10.0
    
    
    
    (678,608
    )
    
    
    ( 32.0
    )Income tax expense (benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    226,006
    
    
    
    10.0
    %
    
    $
    (678,608
    )
    
    
    ( 32.0
    )%
 Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenues Access service revenues decreased $91,796 or 9.3% to $898,973 for the year 2004
from $990,769 for the year 2003 primarily due to a 28% decline in the number of
customers including the sale of approximately 5% of our customers in 2003. The
decline was offset by the purchase of approximately 1,300 customers on July 30, 2004. Co-location and other revenues increased $230,682 or 20.4% to $1,361,795 for the
year 2004 from $1,131,113 for the year 2003. This increase was primarily attributable
to the addition of new customers. In addition we recorded approximately $77,000 of
reciprocal compensation revenue. In June 2004, we billed SBC approximately $97,000
for reciprocal compensation (fees for terminating SBC customers local calls onto our
network). This is the first reciprocal compensation billing that we presented to SBC
and it covered the period March 1, 2003 through May 31, 2004. Subsequent to June
2004, and without explanation SBC failed to pay approximately $38,000 of the billing.
We are pursuing SBC for the balance due, however there is significant uncertainty as
to whether or not it will be successful. Consequently, we have established a reserve
of $38,000 and have not recorded any revenue associated with the reserve. Upon the
ultimate resolution of our challenge, we will recognize the associated revenue, if
any. On a going forward basis we do not believe that reciprocal compensation revenues
will be material. We recorded $18,000 in revenue for the period of June 1, 2004
through December 31, 2004 and expect to submit this billing to SBC during April 2005. Operating Costs and Expenses Cost of access service revenues decreased $286,775 or 55.4% to $231,274 for the
year 2004 from $518,049 for the year 2003. This decrease was primarily due to the
restructuring of our network in order to operate in a more cost effective manner.
During 2003 we received approximately $76,000 in back billings from SBC. During 2004,
we received a credit on these billings of approximately $13,000. On September 30,
2004 we signed a settlement agreement with SBC and recorded a gain on debt settlement
of $55,099. 17




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Cost of co-location and other revenues remained relatively stable at $114,517 for
the year 2004 compared to $109,914 for the year 2003. Cost of co-location and other
revenues as a percentage of co-location and other revenues decreased to 8.4% from 9.7%
primarily as a result of being able to generate more revenue from our existing
co-location facility. Selling, general and administrative expenses increased $138,874 or 12.2% to
$1,279,779 for the year 2004 from $1,140,905 for the year 2003. This increase was
primarily due to an increase in employee costs. Employee costs increased $102,204 for
the year 2004 from 2003. This increase was primarily due to increases in health
insurance costs and annual wage increases $26,937 and $44,285, respectively. During
2004, the Board of Directors approved a modification of the vacation policy to provide
for the accumulation of unused vacation hours earned by the executive officers. The
amount of unused vacation recorded during 2004 was $20,977. Selling, general and
administrative expenses as a percentage of total revenues increased to 56.6% during
2004 from 53.8% during 2003. During 2004, we recorded a loss on sale of assets of $4,253 that was primarily
attributable to the trade-in of equipment. During 2003 we recorded a gain on sale of
assets of $30,218 primarily attributable to the sale of a block of our access service
revenue business located in a part of Oklahoma that was outside our primary geographic
area of focus. Depreciation and amortization expense decreased $64,274 or 13.7% to $403,209 for
the year 2004 from $467,483 for the year 2003. In January 2002, upon initially
applying SFAS 142 we reassessed useful lives and we began amortizing our intangible
assets over their estimated useful lives and in direct relation to any decreases in
the acquired customer bases to which they relate. Amortization expense for the years
ended December 31, 2004 and 2003 relating to intangible assets was $150,914 and
$236,791, respectively. Gain on Debt Forgiveness During the year 2004, we negotiated and settled the following liabilities for
less than their carrying values. Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainNotes payable including accrued interest
    
    $
    96,208
    
    
    $
    36,536
    
    
    $
    59,672Accounts payable
    
    
    115,519
    
    
    
    17,474
    
    
    
    98,045Accrued liabilities
    
    
    5,663
    
    
    
    
    
    
    
    5,663Total
    
    $
    217,390
    
    
    $
    54,010
    
    
    $
    163,380
 Interest Expense Interest expense decreased $429,247 or 72.2% to $165,110 for the year ended
December 31, 2004 from $594,357 for the year 2003. This decrease was primarily
attributable to the decrease in amortization of the discount on our convertible
promissory notes payable. 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 and 2004. Reductions in conversion price were 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. The majority of
these convertible promissory notes matured in 2003 and the remaining note matured in
March 2004. Therefore no additional interest from these conversion prices will be
recognized. Liquidity and Capital Resources As of December 31, 2004, we had $12,226 in cash and $2,211,348 in current
liabilities, including $187,194 of deferred revenues that will not require settlement
in cash. At December 31, 2004, we had a deficit working capital of $2,058,101, while at
December 31, 2003 we had a deficit working capital of $2,300,220. 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, 2004, $310,029 of the $317,378 we owed to our trade creditors
was past due. We have no formal agreements regarding payment of these amounts. At
December 31, 2004, we had outstanding principal and interest owed on matured notes
totaling $1,131,244. We have not made payment or negotiated an extension of the notes
and the lenders have not made any demands. We are currently developing a plan to
satisfy these notes on terms acceptable to the note holders. In addition, during the years ended December 31, 2004 and 2003, we had one
customer that comprised approximately 30% and 33%, respectively, of total revenues.
The contract pursuant to which we provide services to this customer expires on 18




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December 31, 2005. This customer has notified us that they will not renew their
contract. Therefore, we will experience a loss of this revenue without a
corresponding reduction in expense. For the Years Ended December 31,2004
    
    
    2003Net cash flows provided by operations
    
    $
    608,208
    
    
    $
    209,413Net cash flows (used in) provided by
investing activities
    
    
    (252,362
    )
    
    
    12,103Net cash flows used in financing activities
    
    
    (355,100
    )
    
    
    (236,991
    )
 Cash used for the purchases of equipment was $205,112 and $45,159,
respectively, for the years ended December 31, 2004 and 2003. Cash provided by the
sales of surplus equipment and furniture was $8,670 for 2004. 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. Cash used for the CWIS asset purchase was $55,920 during
2004. Cash used for principal payments on notes payable and capital lease obligations
was $355,100 and $236,991, respectively, for the years ended December 31, 2004 and
2003. The planned expansion of our business will require significant capital to fund
capital expenditures, working capital needs, and debt service. Our principal capital
expenditure requirements will include:  o
    mergers and acquisitions ando
    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 current cash balances 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 or on terms that will not dilute our
shareholders interests. 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 further
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 19




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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. 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 In December 2004, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R  Share-Based Payment.
The standard amends SFAS No. 123  Accounting for Stock Based Compensationand
supersedes APB No. 25  Accounting for Stock Issued to Employees.SFAS No. 123R
requires entities to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. FAS No. 123R eliminates the alternative to
use APB Opinion No. 25s intrinsic value method of accounting that was provided in
Statement 123 as originally issued. FAS No. 123R will be effective for us for the
first interim or annual reporting period beginning after December 31, 2005. As
permitted by SFAS No. 123, we currently account for share-based payments to employees
using the APB No. 25 intrinsic value method and recognize no compensation cost for
employee stock options. Accordingly, the provisions of FAS No. 123R will reduce
earnings upon adoption. We will adopt FAS No. 123R within the prescribed time and are
currently reviewing the provisions to determine its impact on the financial
statements. 
 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. 
 Item 8A. 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 Chief 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 20




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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. 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. 
 Item 8B. Other Information As of the date of this report, we do not have any information required to be
reported on Form 8-K during the three months ended December 31, 2004. 21




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PART III. 
 Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with
Section 16(a) of the Exchange Act The following information is furnished as of March 25, 2005 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
    
    
    46
    
    
    Chairman of the Board of Directors and CEORoger P. Baresel
    
    
    49
    
    
    Director, President, Chief Financial Officer and SecretaryJason C. Ayers
    
    
    30
    
    
    Vice President of OperationsPatricia R. Shurley
    
    
    48
    
    
    Vice President of FinanceMichael D. Tomas
    
    
    32
    
    
    Vice President of Technology
 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 owned 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 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. 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  o  understanding of generally accepted accounting principles and financial statements;o  ability to assess the general application of generally accepted accounting
principles in connection with the accounting for estimates, accruals and reserves; 22




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o  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;o  understanding of internal controls and procedures for financial reporting; ando  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 2004 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 Jason C.
Ayers. 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 2004. Long-TermAnnual Compensation
    
    
    CompensationSecuritiesUnderlyingOptions andFiscal
    
    
    
    
    
    
    Other
    
    
    WarrantsName and Principal Position
    
    Year
    
    
    Salary
    
    
    Compensation
    
    
    (#) (1)Timothy J. Kilkenny
    
    
    2004
    
    
    $
    81,413
    (2)
    
    $
    17,130
    (4)
    
    
    Chairman and CEO
    
    
    2003
    
    
    
    80,717
    (3)
    
    
    14,986
    (5)
    
    
    452,0002002
    
    
    
    75,000
    (3)
    
    
    12,614
    (6)
    
    
    80,000
   (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 $20,833 of deferred compensation.(3)
    
    Includes $25,000 of deferred compensation.(4)
    
    Represents $8,400 of expense reimbursement for business use of Mr.
Kilkennys automobile, $1,995 of expense reimbursement for Mr. Kilkennys
Internet connection and cell phone, and $6,735 of insurance premiums paid by us
for the benefit of Mr. Kilkenny. 23




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(5)
    
    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.(6)
    
    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. 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 118,000 shares
of our common stock during 2004. No stock options were granted to Mr. Kilkenny during
2004. All options granted during 2004 are nonqualified stock options. During 2004, an
aggregate of 118,000 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. 2004 Year End Option Values The following table sets forth information related to the exercise of stock
options during 2004 and the number and value of options held by the following Named
Executive Officer at December 31, 2004. During 2004, 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, 2004 of the shares of common stock subject to the option
and the aggregate exercise price of such option. Number of Unexercised
    
    
    Value of Unexercised In-the-Options at
    
    
    Money Options atDecember 31, 2004
    
    
    December 31, 2004 (1)Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableTimothy J. Kilkenny
    
    
    614,000
    
    
    
    100,000
    
    
    $
    12,160
    
    
    $
    3,000Chairman and CEO
   (1)
    
    Based on the December 31, 2004 estimated fair value of our common stock of
$.07 per share. Director Compensation During the fiscal year ended December 31, 2004, our directors did not receive any
compensation for serving in such capacities. Employment Agreements and Lack of Keyman 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 keyman 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 $291,390 at December 31, 2004,
each of which he personally guaranteed. 24




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Item 11. Security Ownership of Certain Beneficial Owners and Management Security Ownership The following table sets forth information as of March 25, 2005, 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
    %Karen Gustafson & Greg Kusnick(5)
    
    
    503,981
    
    
    
    7.2
    %Greg Lowney & Maryanne Snyder (6)
    
    
    503,981
    
    
    
    7.2
    %Laura L. Kilkenny (7)
    
    
    465,000
    
    
    
    6.9
    %Rene Miville (8)
    
    
    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 6,723,135 outstanding shares of common stock as of March 25, 2005.(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.(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)
    
    Karen Gustafson & Greg Kusnicks address is P.O. Box 22443, Seattle, WA
98112. Ms. Gustafson & Mr. Kusnick hold 155,129 shares of our common stock.
The number of shares includes 93,750 shares of our common stock that are subject
to currently exercisable common stock purchase warrants and 255,102 shares of our
common stock that are subject to a currently convertible promissory note.(6)
    
    Greg Lowney & Maryanne Snyders address is 15207 N.E. 68th
Street, Redmond, WA 98052. Mr. Lowney & Ms. Snyder hold 155,129 shares of our
common stock. The number of shares includes 93,750 shares of our common stock
that are subject to currently exercisable common stock purchase warrants and
255,102 shares of our common stock that are subject to a currently convertible
promissory note.(7)
    
    Laura L. Kilkennys address is 3160 Long Dr., Newcastle, OK 73065. Ms.
Kilkenny is the ex-wife of Timothy J. Kilkenny, our Chairman of the Board and
Chief Executive Officer. Ms. Kilkenny holds 415,000 shares of our common stock.
The number of shares includes 50,000 shares of our common stock that are subject
to currently exercisable common stock purchase options.(8)
    
    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, 2005, 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 25




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##### Table of Contents



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)
    
    
    1,629,000
    
    
    
    22.3
    %Roger P. Baresel* (2)(4)
    
    
    537,862
    
    
    
    7.6
    %Jason C. Ayers (2)(5)
    
    
    252,795
    
    
    
    3.7
    %Patricia R. Shurley (2)(6)
    
    
    242,000
    
    
    
    3.5
    %Michael D. Tomas (2)(7)
    
    
    210,000
    
    
    
    3.1
    %All executive officers and directors as a group (5 persons)
    
    
    2,871,657
    
    
    
    40.2
    %
   *
    
    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 6,723,135 shares being outstanding at March 25, 2005.(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 614,000 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 100,000 shares of our common
stock exercisable at $.04 per share beginning October 9, 2005.(4)
    
    Roger P. Baresel and Judith A. Baresel, husband and wife, hold 34,408 and
92,659 shares of our common stock, respectively. They hold 31,250 shares of our
common stock as joint tenants. The number of shares includes 148,745 shares of
our common stock subject to currently exercisable stock options held by Mr.
Baresel, 218,300 shares of our common stock subject to currently exercisable
stock options held by Mrs. Baresel, and 12,500 currently exercisable common stock
purchase warrants held jointly. Amounts shown do not include options, held by
Mr. Baresel, to purchase 50,000 shares of our common stock exercisable at $.04
per share beginning October 9, 2005.(5)
    
    Jason C. Ayers holds 25,865 shares of our common stock. The number of
shares includes 226,930 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 3,000 shares exercisable at $.08 per
share beginning June 4, 2005, 50,000 shares of our common stock exercisable at
$.04 per share beginning June 27, 2005 and 100,000 shares of our common stock
exercisable at $.05 per share beginning December 21, 2005.(6)
    
    The number of shares includes 242,000 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 50,000 shares of our
common stock exercisable at $.04 per share beginning May 16, 2006.(7)
    
    The number of shares includes 210,000 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 50,000 shares of our common
stock exercisable at $.04 per share beginning October 9, 2005. 
 Item 12. Certain Relationships and Related Transactions We are in default on an operating lease for certain equipment which is
leased from one of our significant shareholders who also holds a $320,000 interim loan
which is also in default (see Note E  Notes Payable). The original lease was dated
November 21, 2001 and the terms were $6,088 per month for 12 months with a fair market
purchase option at the end of the lease. Upon default on the lease, we were allowed
to continue leasing the equipment on a month-to-month basis at the same monthly rate
as the original lease. We have been unable to make the month-to-month payments and at
December 31, 2004 had recorded $145,921 in unpaid lease payments. The lessor has not
made any demands. 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 26




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##### Table of Contents



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  (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)
    
    #4.1
    
    Specimen Certificate of Registrants Common Stock (filed as Exhibit 4.1 to the Companys Form
10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference).
    
    #4.2
    
    Certificate of Correction to the Amended Certificate of Incorporation and the Ninth Section of
the Certificate of Incorporation (filed as Exhibit 2.1 to Registrants Registration Statement
on form 10-SB, file number 000-27031 and incorporated by reference).
    
    #4.3
    
    Certificate of Correction to Articles II and V of Registrants Bylaws (filed as Exhibit 2.1 to
Registrants Registration Statement on Form 10-SB, file number 000-27031 and incorporated
herein by reference).
    
    #4.4
    
    Form of Warrant Agreement for Interim Financing in the amount of $505,000 (filed as Exhibit
4.1 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #4.5
    
    Form of Warrant Certificate for Florida Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.2 to Registrants Quarterly Report on Form 10-QSB for the Quarter
ended March 31, 2000 and incorporated herein by reference).
    
    #
 27




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ExhibitNumber
    
    Exhibit4.6
    
    Form of Promissory Note for Florida Investors for Interim Financing in the amount of $505,000
(filed as Exhibit 4.3 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended
March 31, 2000 and incorporated herein by reference).
    
    #4.7
    
    Form of Warrant Certificate for Georgia Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.4 to Registrants Quarterly Report on Form 10-QSB for the Quarter
ended March 31, 2000 and incorporated herein by reference).
    
    #4.8
    
    Form of Promissory Note for Georgia Investors for Interim Financing in the amount of $505,000
(filed as Exhibit 4.5 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended
March 31, 2000 and incorporated herein by reference).
    
    #4.9
    
    Form of Warrant Certificate for Illinois Investors for Interim Financing in the amount of
$505,000 (filed as Exhibit 4.6 to Registrants Quarterly Report on Form 10-QSB for the Quarter
ended March 31, 2000 and incorporated herein by reference).
    
    #4.10
    
    Form of Promissory Note for Illinois Investors for Interim Financing in the amount of $505,000
(filed as Exhibit 4.7 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended
March 31, 2000 and incorporated herein by reference).
    
    #4.11
    
    Form of Warrant Agreement for Interim Financing in the amount of $500,000 (filed as Exhibit
4.8 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #4.12
    
    Form of Warrant Certificate for Interim Financing in the amount of $500,000 (filed as Exhibit
4.9 to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #4.13
    
    Form of Promissory Note for Interim Financing in the amount of $500,000 (filed as Exhibit 4.10
to Registrants Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and
incorporated herein by reference).
    
    #4.14
    
    Form of Convertible Promissory Note for September 29, 2000, private placement (filed as
Exhibit 4.13 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000 and
incorporated herein by reference).
    
    #4.15
    
    Form of Warrant Agreement for September 29, 2000, private placement (filed as Exhibit 4.13 to
Registrants Form 10-KSB for the fiscal year ended December 31, 2000 and incorporated herein
by reference).
    
    #4.16
    
    Form of 2001 Exchange Warrant Agreement (filed as Exhibit 4.16 to Registrants Form 10-QSB for
the quarter ended June 30, 2001 and incorporated herein by reference)
    
    #4.17
    
    Form of 2001 Exchange Warrant Certificate (filed as Exhibit 4.17 to Registrants Form 10-QSB
for the quarter ended June 30, 2001 and incorporated herein by reference)
    
    #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).
    
    #
 28




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.5
    
    Registrar Accreditation Agreement effective February 8, 2000, by and between Internet
Corporation for Assigned Names and Numbers and FullWeb, Inc. d/b/a FullNic f/k/a Animus
Communications, Inc. (filed as Exhibit 10.1 to Registrants Quarterly Report on Form 10-QSB
for the Quarter ended March 31, 2000 and incorporated herein by reference).
    
    #10.6
    
    Master License Agreement For KMC Telecom V, Inc., dated June 20,2000, by and
between FullNet Communications, Inc. and KMC Telecom V, Inc. (filed as Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and
incorporated herein by reference).
    
    #10.7
    
    Domain Registrar Project Completion Agreement, dated May 10, 2000, by and between FullNet
Communications, Inc., FullWeb, Inc. d/b/a FullNic and Think Capital (filed as Exhibit 10.2 to
Registrants Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and
incorporated herein by reference).
    
    #10.8
    
    Amendment to Financial Advisory Services Agreement between Registrant and National Securities
Corporation, dated April 21, 2000 (filed as Exhibit 10.3 to Registrants Quarterly Report on
Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by reference).
    
    #10.9
    
    Asset Purchase Agreement dated June 2, 2000, by and between FullNet of Nowata and FullNet
Communications, Inc. (filed as Exhibit 99.1 to Registrants Form 8-K filed on June 20, 2000
and incorporated herein by reference).
    
    #10.10
    
    Asset Purchase Agreement dated February 4, 2000, by and between FullNet of Bartlesville and
FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrants Form 8-K filed on February
18, 2000 and incorporated herein by reference).
    
    #10.11
    
    Agreement and Plan of Merger Among FullNet Communications, Inc., FullNet, Inc. and Harvest
Communications, Inc. dated February 29, 2000 (filed as Exhibit 2.1 to Registrants Form 8-K
filed on March 10, 2000 and incorporated herein by reference).
    
    #10.12
    
    Asset Purchase Agreement dated January 25, 2000, by and between FullNet of Tahlequah, and
FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrants Form 8-K filed on February
9, 2000 and incorporated herein by reference).
    
    #10.13
    
    Promissory Note dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.13 to
Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.14
    
    Warrant Agreement dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.14
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.15
    
    Warrant Certificate dated August 2, 2000 issued to Timothy J. Kilkenny (filed as Exhibit 10.15
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.16
    
    Stock Option Agreement dated December 8, 2000, issued to Timothy J. Kilkenny (filed as Exhibit
10.16 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #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).
    
    #
 29




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##### Table of Contents



ExhibitNumber
    
    Exhibit10.22
    
    Stock Option Agreement dated April 14, 2000, issued to Jason C. Ayers (filed as Exhibit 10.22
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.23
    
    Stock Option Agreement dated May 1, 2000, issued to B. Don Turner (filed as Exhibit 10.23 to
Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.24
    
    Form of Stock Option Agreement dated December 8, 2000, issued to Jason C. Ayers, Wesdon C.
Peacock, B. Don Turner and Wallace L. Walcher (filed as Exhibit 10.24 to Registrants Form
10-KSB for the fiscal year ended December 31, 2000).
    
    #10.25
    
    Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.25
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.26
    
    Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.26
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.27
    
    Warrant Certificate Dated December 29, 2000, issued to Roger P. Baresel (filed as Exhibit
10.27 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.28
    
    Stock Option Agreement dated October 13, 2000, issued to Roger P. Baresel (filed as Exhibit
10.28 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.29
    
    Stock Option Agreement dated October 12, 1999, issued to Travis Lane (filed as Exhibit 10.29
to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.30
    
    Promissory Note dated January 5, 2001, issued to Generation Capital Associates (filed as
Exhibit 10.30 to Registrants Form 10-KSB for the fiscal year ended December 31, 2000).
    
    #10.31
    
    Placement Agency Agreement dated November 8, 2000 between FullNet Communications, Inc. and
National Securities Corporation (filed as Exhibit 10.31 to Registrants Form 10-KSB for the
fiscal year ended December 31, 2000).
    
    #10.32
    
    Promissory Note dated January 25, 2000, issued to Fullnet of Tahlequah, Inc.
    
    #10.33
    
    Promissory Note dated February 7, 2000, issued to David Looper
    
    #10.34
    
    Promissory Note dated February 29, 2000, issued to Wallace L. Walcher
    
    #10.35
    
    Promissory Note dated June 2, 2000, issued to Lary Smith
    
    #10.36
    
    Promissory Note dated June 15, 2001, issued to higganbotham.com L.L.C.
    
    #10.37
    
    Promissory Note dated November 19, 2001, issued to Northeast Rural Services
    
    #10.38
    
    Promissory Note dated November 19, 2001, issued to Northeast Rural Services
    
    #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
    
    #10.43
    
    Form 8-K dated January 30, 2003 reporting the change in certifying accountant
    
    #10.44
    
    Form 8-K dated January 30, 2004 reporting the change in certifying accountant
    
    #22.1
    
    Subsidiaries of the Registrant
    
    #31.1
    
    Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Timothy J. Kilkenny
    
    *
 30




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##### Table of Contents



ExhibitNumber
    
    Exhibit31.2
    
    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-KNone. 
 Item 14. Principal Accountant Fees and Services 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. The following table sets forth
the aggregate fees, including expenses, billed to us for the years ended December 31,
2004 and 2003 by our principal accountant. 2004
    
    
    2003Audit Fees  Evans, Gaither & Associates, PLLC
    
    $
    33,160
    
    
    $
    23,625Audit Fees  Buxton & Cloud PC
    
    
    
    
    
    
    6,071Audit Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    
 The audit fees include services rendered by our principal accountant for the
audit of our financial statements, review of financial statements included in our
quarterly reports and other fees that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements. Because our Board of
Directors only consists of two directors, each of whom does not qualify as an
independent director, our Board of Directors performs the functions of an audit
committee. It is our policy that the Board of Directors pre-approve all audit, tax
and related services. All of the services described above in this Item 14 were
approved in advance by our Board of Directors. No items were approved by the Board of
Directors pursuant to paragraph (c)(7)(ii)(C) of Rule 2-01 of Regulation S-X. 31




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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: April 15, 2005
    
    By:
    
    /s/ TIMOTHY J. KILKENNYTimothy J. KilkennyChief Executive OfficerDate: April 15, 2005
    
    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: April 15, 2005
    
    By:
    
    /s/ TIMOTHY J. KILKENNYTimothy J. Kilkenny,Chairman of the Board and DirectorDate: April 15, 2005
    
    By:
    
    /s/ ROGER P. BARESELRoger P. Baresel, Director
 32




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Report of Independent Certified Public Accountants Board of Directors
FullNet Communications, Inc. We have audited the accompanying consolidated balance sheets of FullNet Communications, Inc. (an
Oklahoma corporation) and Subsidiaries, as of December 31, 2004 and 2003 and the related
consolidated statements of operations, stockholders deficit, and cash flows for the years 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 audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of FullNet Communications, Inc. and Subsidiaries, as of
December 31, 2004 and 2003 and the results of their operations and their cash flows for the years
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s current liabilities exceeded
its current assets by $2,058,101 and its total liabilities exceeded its total assets by $1,294,497.
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 2004 financial statements do not include any
adjustments that might result from the outcome of this uncertainty. /s/ Evans, Gaither & Associates, PLLC Oklahoma City, Oklahoma
March 31, 2005 F-1




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FullNet Communications, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2004
    
    
    2003ASSETSCURRENT ASSETSCash
    
    $
    12,226
    
    
    $
    11,480Accounts receivable, net
    
    
    59,212
    
    
    
    29,510Prepaid expenses and other current assets
    
    
    81,809
    
    
    
    60,163Total current assets
    
    
    153,247
    
    
    
    101,153PROPERTY AND EQUIPMENT, net
    
    
    990,863
    
    
    
    995,730INTANGIBLE ASSETS, net
    
    
    160,010
    
    
    
    269,482OTHER ASSETS
    
    
    5,250
    
    
    
    6,771TOTAL
    
    $
    1,309,370
    
    
    $
    1,373,136LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable  trade
    
    $
    317,378
    
    
    $
    464,903Accrued and other current liabilities
    
    
    725,190
    
    
    
    548,027Notes payable, current portion
    
    
    968,825
    
    
    
    1,184,845Capital lease obligations, current portion
    
    
    12,761
    
    
    
    31,722Deferred revenue
    
    
    187,194
    
    
    
    171,876Total current liabilities
    
    
    2,211,348
    
    
    
    2,401,373NOTES PAYABLE, less current portion
    
    
    205,070
    
    
    
    330,322CAPITAL LEASE OBLIGATIONS, less current portion
    
    
    18,825
    
    
    
    17,325OTHER
    
    
    168,624
    
    
    
    145,329STOCKHOLDERS DEFICITCommon stock  $.00001 par value; authorized, 10,000,000
shares; issued and outstanding, 6,652,878 shares in 2004
and 6,642,878 shares in 2003
    
    
    66
    
    
    
    66Common stock issuable, 70,257 shares in 2004 and 2003
    
    
    57,596
    
    
    
    57,596Additional paid-in capital
    
    
    8,328,004
    
    
    
    8,327,294Accumulated deficit
    
    
    (9,680,163
    )
    
    
    (9,906,169
    )Total stockholders deficit
    
    
    (1,294,497
    )
    
    
    (1,521,213
    )TOTAL
    
    $
    1,309,370
    
    
    $
    1,373,136
 See accompanying notes to financial statements. F-2




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2004
    
    
    2003REVENUESAccess service revenues
    
    $
    898,973
    
    
    $
    990,769Co-location and other revenues
    
    
    1,361,795
    
    
    
    1,131,113Total revenues
    
    
    2,260,768
    
    
    
    2,121,882OPERATING COSTS AND EXPENSESCost of access service revenues
    
    
    231,274
    
    
    
    518,049Cost of co-location and other revenues
    
    
    114,517
    
    
    
    109,914Selling, general and administrative expenses
    
    
    1,279,779
    
    
    
    1,140,905Loss (gain) on sale of assets
    
    
    4,253
    
    
    
    (30,218
    )Depreciation and amortization
    
    
    403,209
    
    
    
    467,483Total operating costs and expenses
    
    
    2,033,032
    
    
    
    2,206,133INCOME (LOSS) FROM OPERATIONS
    
    
    227,736
    
    
    
    (84,251
    )GAIN ON DEBT FORGIVENESS
    
    
    163,380
    
    
    
    INTEREST EXPENSE
    
    
    (165,110
    )
    
    
    (594,357
    )INCOME (LOSS) before income taxes
    
    
    226,006
    
    
    
    (678,608
    )Income tax expense (benefit)
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    226,006
    
    
    $
    (678,608
    )Net income (loss) per common shareBasic
    
    $
    .03
    
    
    $
    (.10
    )Assuming dilution
    
    $
    .03
    
    
    $
    (.10
    )Weighted average number of common shares outstandingBasic
    
    
    6,715,718
    
    
    
    6,665,218Assuming dilution
    
    
    7,799,796
    
    
    
    6,665,218
 See accompanying notes to financial statements. F-3




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT Years ended December 31, 2004 and 2003 CommonCommon stock
    
    
    stock
    
    
    Additional
    
    
    AccumulatedShares
    
    
    Amount
    
    
    issuable
    
    
    paid-in capital
    
    
    deficit
    
    
    TotalBalance at January 1, 2003
    
    
    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
    )Intrinsic value of beneficial conversion feature
on debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    210Stock issued on debt settlement
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    500Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    226,006
    
    
    
    226,006Balance at December 31, 2004
    
    
    6,652,878
    
    
    $
    66
    
    
    $
    57,596
    
    
    $
    8,328,004
    
    
    $
    (9,680,163
    )
    
    $
    (1,294,497
    )
 See accompanying notes to financial statements. F-4




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    226,006
    
    
    $
    (678,608
    )Adjustments to reconcile net loss to net cash provided by operating activitiesDepreciation and amortization
    
    
    403,209
    
    
    
    467,483Warrants issued related to financing
    
    
    
    
    
    
    2,403Options and warrants issued for compensation and services
    
    
    
    
    
    
    213Amortization of discount and costs relating to financing
    
    
    1,757
    
    
    
    404,960Accrued interest converted to equity
    
    
    
    
    
    
    Gain on debt forgiveness
    
    
    (163,380
    )
    
    
    Loss (gain) on sale of assets
    
    
    4,253
    
    
    
    (30,218
    )Provision for uncollectible accounts receivable
    
    
    60,592
    
    
    
    15,822Net (increase) decrease inAccounts receivable
    
    
    (51,669
    )
    
    
    (10,593
    )Prepaid expenses and other current assets
    
    
    (21,646
    )
    
    
    (25,547
    )Other assets
    
    
    1,521
    
    
    
    8,742Net increase (decrease) inAccounts payable  trade
    
    
    (49,480
    )
    
    
    26,731Accrued and other liabilities
    
    
    209,240
    
    
    
    169,871Deferred revenue
    
    
    (12,195
    )
    
    
    (141,846
    )Net cash provided by operating activities
    
    
    608,208
    
    
    
    209,413CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (205,112
    )
    
    
    (45,159
    )Proceeds from sale of assets, net of closing costs
    
    
    8,670
    
    
    
    57,262Acquisition of CWIS assets
    
    
    (55,920
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (252,362
    )
    
    
    12,103CASH FLOWS FROM FINANCING ACTIVITIESPrincipal payments on borrowings under notes payable
    
    
    (272,118
    )
    
    
    (173,046
    )Principal payments on note payable to related party
    
    
    (10,529
    )
    
    
    (9,674
    )Principal payments on capital lease obligations
    
    
    (72,453
    )
    
    
    (54,271
    )Net cash used in financing activities
    
    
    (355,100
    )
    
    
    (236,991
    )NET INCREASE (DECREASE) IN CASH
    
    
    746
    
    
    
    (15,475
    )Cash at beginning of year
    
    
    11,480
    
    
    
    26,955Cash at end of year
    
    $
    12,226
    
    
    $
    11,480SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid for interest
    
    $
    76,735
    
    
    $
    91,826NONCASH INVESTING AND FINANCING ACTIVITIESAssets acquired through issuance of capital lease
    
    
    54,992
    
    
    
    2,723Assets acquired through issuance of note payable
    
    
    
    
    
    
    202,200
 See accompanying notes to financial statements. F-5




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##### Table of Contents



FullNet Communications, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004 and 2003 NOTE A  ORGANIZATION AND NATURE OF OPERATIONS FullNet Communications, Inc. and Subsidiaries
(the Company) is an integrated communications provider (ICP) offering integrated communications,
Internet connectivity and data storage to individuals, businesses, organizations, educational
institutions and governmental agencies. Through its subsidiaries, FullNet, Inc., FullTel, Inc. and
FullWeb, Inc., the Company provides high quality, reliable and scalable 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 prior to 2004. In addition, at December 31, 2004
current liabilities exceeded current assets by $2,058,101 and total liabilities exceeded total
assets by $1,294,497. 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 and debt service. 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 focusing on revenue enhancement and cost cutting opportunities as well as
working to sell non-core assets and to extend vendor payment terms. The Company continues to seek
additional convertible debt 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 obtain
additional capital on satisfactory terms, or at all, or on terms that will not dilute the
shareholders interests. 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-6




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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 The Company recognizes revenue in
accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No.
104, 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.
Carrier-neutral telecommunications co-location revenues are recognized on a monthly basis over the
life of the contract as services are provided. Revenue that is billed in advance of the services
provided is deferred until the services are provided by the Company. Revenue related to set up
charges is also deferred and amortized over the life of the contract. In June 2004, the Company billed SBC approximately $97,000 for reciprocal compensation (fees for
terminating SBC customers local calls onto our network). This is the first reciprocal
compensation billing that the Company presented to SBC and it covered the period March 1, 2003
through May 31, 2004. Subsequent to June 2004, and without explanation SBC failed to pay
approximately $38,000 of the billing. The Company is pursuing SBC for the balance due, however
there is significant uncertainty as to whether or not it will be successful. Consequently, the
Company has established a reserve of $38,000 and has not recorded any revenue associated with the
reserve. Upon the ultimate resolution of its challenge, the Company will recognize the associated
revenue, if any. On a going forward basis the Company does not believe that reciprocal compensation revenues will be
material. The Company recorded $18,000 in revenue for the period of June 1, 2004 through December
31, 2004 and expects to submit this billing to SBC during April 2005. 3. Accounts Receivable Accounts receivable consist of the following as of December 31: 2004
    
    
    2003Accounts receivable
    
    $
    144,685
    
    
    $
    54,393Less allowance for doubtful accounts
    
    
    (85,473
    )
    
    
    (24,883
    )$
    59,212
    
    
    $
    29,510
 Accounts receivable, other than certain large customer accounts which are evaluated individually,
are considered past due for purposes of determining the allowance for doubtful accounts as follows: 1  29 days
    
    
    1.5
    %30  59 days
    
    
    30
    %60  89 days
    
    
    50
    %> 90 days
    
    
    100
    %
 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: F-7




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##### Table of Contents



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 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: 2004
    
    
    2003Accrued interest
    
    $
    303,058
    
    
    $
    226,874Accrued deferred compensation
    
    
    305,086
    
    
    
    261,515Accrued other liabilities
    
    
    117,046
    
    
    
    59,638$
    725,190
    
    
    $
    548,027
 Accrued net deferred compensation consists of the following as of December 31, 2004: Accrued in:2004
    
    $
    43,5712003
    
    
    56,7932000-2002
    
    
    204,722$
    305,086
 All of the Companys executive officers have voluntarily agreed to defer a portion of their
compensation. This compensation is vested and is subject to payment based upon improvement in the
Companys financial condition. F-8




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##### Table of Contents



During 2004, the Board approved a modification of the vacation policy to provide for the
accumulation of unused vacation hours earned by the executive officers. At December 31, 2004 the
amount of unused vacation earned and payable is $20,977 and is included in accrued other
liabilities. 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 carry forwards 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. Income (loss) per share Income (loss) per share  basic is calculated by dividing net income (loss) by the weighted average
number of shares of stock outstanding during the period, including shares issuable without
additional consideration. Income per share  assuming dilution is calculated by dividing net
income by the weighted average number of shares outstanding during the period adjusted for the
effect of dilutive potential shares calculated using the treasury stock method. 2004
    
    
    2003Numerator:Net income (loss)
    
    $
    226,006
    
    
    $
    (678,608
    )Denominator:Weighted average shares outstanding  basic
    
    
    6,715,718
    
    
    
    6,665,218Effect of dilutive stock options
    
    
    244,932
    
    
    
    Effect of dilutive warrants
    
    
    839,146
    
    
    
    Weighted average shares outstanding 
assuming dilution
    
    
    7,799,796
    
    
    
    6,665,218Net income (loss) per share  basic
    
    $
    .03
    
    
    $
    (.10
    )Net income (loss) per share  assuming dilution
    
    $
    .03
    
    
    $
    (.10
    )
 Stock options exercisable for the purchase of 1,554,588 common stock shares at exercise prices
ranging from $.05 to $3.00 per share were outstanding for the year ended December 31, 2004, but
were not included in the calculation of income per share  assuming dilution because the options
were not dilutive. Warrants exercisable for the purchase of 1,053,248 common stock shares at exercise prices ranging
from $.05 to $2.77 per share were outstanding for the year ended December 31, 2004, but were not
included in the calculation of income per share  assuming dilution because the warrants were not
dilutive. Convertible promissory notes convertible into 1,036,992 common stock shares at conversion prices
ranging from $.15 to $.51 per share were outstanding for the year ended December 31, 2004, but were
not included in the calculation of income per share  assuming dilution because the convertible
notes were not dilutive. Basic and diluted loss per share were the same for the year ended December 31, 2003 because the
outstanding convertible promissory notes, stock options and warrants were not dilutive. F-9




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##### Table of Contents



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 income (loss) and
income (loss) per share in 2004 and 2003 would have changed to the pro forma amounts indicated
below: 2004
    
    
    2003Net income (loss)As reported
    
    $
    226,006
    
    
    $
    (678,608
    )Pro forma
    
    $
    178,616
    
    
    $
    (805,030
    )Basic income (loss) per shareAs reported
    
    $
    .03
    
    
    $
    (.10
    )Pro forma
    
    $
    .03
    
    
    $
    (.12
    )Diluted income (loss) per shareAs reported
    
    $
    .03
    
    
    $
    (.10
    )Pro forma
    
    $
    .02
    
    
    $
    (.12
    )
 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 values 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: 2004
    
    2003Risk free interest rate
    
    4.5%
    
    4.3%Expected lives (in years)
    
    5
    
    5Expected volatility
    
    122.5%
    
    132.5%Dividend yield
    
    0%
    
    0%
 The following table summarizes the Companys employee stock option activity for years ended
December 31, 2004 and 2003: Weighted Average
    
    
    
    
    
    
    Weighted Average2004
    
    
    Exercise Price
    
    
    2003
    
    
    Exercise PriceOptions outstanding, beginning of year
    
    
    2,903,366
    
    
    $
    .45
    
    
    
    1,589,252
    
    
    $
    .80Options granted during the year
    
    
    118,000
    
    
    
    .05
    
    
    
    1,478,948
    
    
    
    .04Options exercised during the year
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    .04Options cancelled during the year
    
    
    (6,666
    )
    
    
    .04
    
    
    
    (114,834
    )
    
    
    .16Options outstanding, end of year
    
    
    3,014,700
    
    
    $
    .43
    
    
    
    2,903,366
    
    
    $
    .45Options exercisable at end of year
    
    
    2,528,535
    
    
    $
    .51
    
    
    
    1,549,258
    
    
    $
    .79Weighted average fair value of options
granted during the year
    
    
    
    
    
    $
    .05
    
    
    
    
    
    
    $
    .04
 F-10




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##### Table of Contents



The following table summarizes information about employee stock options outstanding at
December 31, 2004: Options outstanding
    
    
    Options exercisableWeighted-Number
    
    
    average
    
    
    Weighted-
    
    
    Number
    
    
    Weighted-Range of exercise
    
    
    outstanding
    
    
    remaining
    
    
    average exercise
    
    
    exercisable at
    
    
    average exerciseprices
    
    
    at 12/31/04
    
    

contractual life
    
    
    price
    
    
    12/31/2004
    
    
    price$
    0.01 - $    0.70
    
    
    
    2,219,277
    
    
    8.27 years
    
    $
    0.12
    
    
    
    1,733,112
    
    
    $
    0.14$
    1.00 - $    1.50
    
    
    
    671,290
    
    
    5.85 years
    
    $
    1.07
    
    
    
    671,290
    
    
    $
    1.07$
    1.81 - $    3.00
    
    
    
    124,133
    
    
    5.32 years
    
    $
    2.62
    
    
    
    124,133
    
    
    $
    0.513,014,700
    
    
    7.61 years
    
    $
    0.43
    
    
    
    2,528,535
    
    
    $
    0.51
 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, 2004 and 2003 follows: Common stock warrants and certain stock options exercisable for 82,375 shares of common stock
expired during 2004 (weighted average exercise price $1.71 per share). Common stock warrants and certain stock options exercisable for 50,000 shares of common stock were
issued during 2003 in connection with financing (weighted average exercise price $.01 per share). Outstanding common stock purchase warrants and certain stock options issued to non-employees
outstanding at December 31, 2004 are as follows: Numberof shares
    
    
    Exerciseprice
    
    

Expirationyear10,000
    
    
    
    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
    
    
    
    20122,119,306
 F-11




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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, 2004 and 2003: Weighted Average
    
    
    
    
    
    
    Weighted Average2004
    
    
    Exercise Price
    
    
    2003
    
    
    Exercise PriceWarrants and certain stock options outstanding, beginning of year
    
    
    2,201,681
    
    
    $
    .68
    
    
    
    2,151,681
    
    
    $
    .68Warrants and certain stock options issued during the year
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    .01Warrants and certain stock options expired during the year
    
    
    (82,375
    )
    
    
    1.71
    
    
    
    
    
    
    
    Warrants and certain stock options outstanding, end of year
    
    
    2,119,306
    
    
    $
    .62
    
    
    
    2,201,681
    
    
    $
    .66
 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, 2004 and 2003 was $33,218 and $15,546, 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 In December 2004, the Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 123R  Share-Based Payment.The standard amends SFAS
No. 123  Accounting for Stock Based Compensationand supersedes APB No. 25  Accounting for Stock
Issued to Employees.SFAS No. 123R requires entities to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. FAS No. 123R eliminates the alternative to use APB
Opinion No. 25s intrinsic value method of accounting that was provided in Statement 123 as
originally issued. FAS No. 123R will be effective for the Company for the first interim or annual
reporting period beginning after December 31, 2005. As permitted by SFAS No. 123, the Company
currently accounts for share-based payments to employees using the APB No. 25 intrinsic value
method and recognizes no compensation cost for employee stock options. Accordingly, the provisions
of FAS No. 123R will reduce earnings upon adoption. The Company will adopt FAS No. 123R within the
prescribed time and is currently reviewing the provisions to determine its impact on the financial
statements. 14. Reclassifications Certain reclassifications have been made to the 2003 financial statements to conform to the 2004
presentation. F-12




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##### Table of Contents



NOTE C  PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31: 2004
    
    
    2003Computers and equipment
    
    $
    1,172,768
    
    
    $
    972,866Leasehold improvements
    
    
    930,861
    
    
    
    921,827Software
    
    
    56,512
    
    
    
    50,187Furniture and fixtures
    
    
    19,153
    
    
    
    19,1532,179,294
    
    
    
    1,964,033Less accumulated depreciation
    
    
    (1,188,431
    )
    
    
    (968,303
    )$
    990,863
    
    
    $
    995,730
 Depreciation expense for the years ended December 31, 2004 and 2003 was $252,295 and $238,728,
respectively. NOTE D  INTANGIBLE ASSETS Intangible assets consist primarily of acquired customer bases and covenants not to compete and
relate to the purchases of certain business operations as follows: December 31,2004
    
    
    2003CWIS acquisition
    
    $
    41,442
    
    
    $
    LAWTONNET 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
    
    
    
    70,0003,113,372
    
    
    
    3,071,930Less accumulated amortization
    
    
    (2,953,362
    )
    
    
    (2,802,448
    )$
    160,010
    
    
    $
    269,482
 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. Amortization expense for the years ended December 31, 2004 and 2003 relating to intangible assets
was $150,914 and $228,755, respectively. F-13




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##### Table of Contents



NOTE E  NOTES PAYABLE During the year ended December 31, 2004, the Company negotiated and settled a note obligation
(including accrued interest) in the amount of $28,193. The Company paid $10,000 in cash and issued
10,000 shares of common stock valued at $500. This settlement generated $17,693 of forgiveness of
debt income. Notes payable consist of the following: December 31,
    
    
    December 31,2004
    
    
    2003Three 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
    
    $
    291,390
    
    
    $
    394,600Interim 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 are matured at December 31, 2004
($510,636 face amount less unamortized
discount of $1,439 for 2003);
(convertible into approximately
1,003,659 shares at December 31, 2004
and December 31, 2003) (2)
    
    
    510,636
    
    
    
    509,197Note payable to an individual, payable
in monthly installments of $1,277
until paid in full, including interest
at a variable rate (prime plus 2.25%;
7.4% at December 31, 2004), matures
September 2014; collateralized by
substantially all assets acquired in
conjunction with the acquisition of
Harvest Communications, Inc.
    
    
    9,580
    
    
    
    23,775Note payable to the Companys founder
and CEO, payable in monthly
installments of $1,034 including
interest at 8.5%, maturing May 2006;
unsecured
    
    
    16,289
    
    
    
    26,818Note 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)
    
    
    
    
    
    
    122,818Other notes payable
    
    
    26,000
    
    
    
    117,9591,173,895
    
    
    
    1,515,167Less current portion
    
    
    968,825
    
    
    
    1,184,845$
    205,070
    
    
    $
    330,322
 F-14




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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. Each of the Notes may be converted by the holder at any time at
$1.00 per common stock share and by the Company upon registration and when the closing
price of the Companys common stock has been at or above $3.00 per share for three
consecutive trading days. Additionally, the Notes 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,
2004 for failure to register under the Securities Act of 1933, as amended, the common
stock underlying the convertible promissory notes and underlying warrants on February
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, 2004, the outstanding principal and interest of the
convertible promissory notes was $691,047. 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. In November and December 2003 and March 2004, $455,000, $50,000 and $5,636,
respectively, of these convertible promissory notes matured. The Company has not made
payment nor negotiated an extension of these notes, and the lenders have not made any
demands. The Company is currently developing a plan to satisfy these notes 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. Aggregate future maturities of notes payable at December 31, 2004 are as follows: Year ending December 312005
    
    $
    968,8252006
    
    
    107,6212007
    
    
    96,0702008
    
    
    1,3792009
    
    
    $
    1,173,895
 F-15




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##### Table of Contents



NOTE F  LEASE AGREEMENTS Capital Lease The Company has one capital lease for equipment. The lease term is for 36 months and the annual
lease rental payment including applicable taxes is $17,976. The property and equipment accounts include $50,000 and $138,428 for leases that have been
capitalized at December 31, 2004 and 2003, respectively. Related accumulated amortization amounted
to $8,333 and $56,095 at December 31, 2004 and 2003, respectively. The schedule of future minimum lease payments below reflects all payments under the capital lease
in effect at December 31, 2004. Year ending December 312005
    
    $
    16,5842006
    
    $
    16,5842007
    
    
    4,146Total minimum lease payments
    
    $
    37,314Less amount representing interest
    
    
    5,728Present value of net minimum lease payments
    
    $
    31,586Less current portion
    
    
    12,761Long-term capital lease obligations
    
    $
    18,825
 Operating Leases The Company leases certain office facilities used in its operations under
non-cancelable operating leases expiring in 2009. Future minimum lease payments required at
December 31, 2004 under non-cancelable operating leases that have initial lease terms exceeding one
year are presented in the following table: Year ending December 312005
    
    $
    170,2842006
    
    
    176,8072007
    
    
    183,3302008
    
    
    189,8532009
    
    
    196,376$
    916,650
 Rental expense for all operating leases for the years ended December 31, 2004 and 2003 was
approximately $159,774 and $163,125, 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
$84,727 and $82,103 at December 31, 2004 and 2003, 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. In addition to the base rent payments the Company pays a
monthly allocation of the buildings operating expenses. F-16




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##### Table of Contents



NOTE G  INCOME TAXES The Companys effective income tax rate on net loss differed from the federal statutory rate of 34%
as follows at December 31: 2004
    
    
    2003Income taxes at federal statutory rate
    
    $
    79,000
    
    
    $
    (230,000
    )Change in valuation allowance
    
    
    (70,000
    )
    
    
    101,000Nondeductible expenses
    
    
    3,000
    
    
    
    155,000State income taxes, net of federal benefit
    
    
    9,000
    
    
    
    (38,000
    )Effect of graduated rates
    
    
    (5,000
    )
    
    
    Other
    
    
    (16,000
    )
    
    
    12,000Total tax expense
    
    $
    
    
    
    $
    
 The components of deferred income tax assets were as follows at December 31: 2004
    
    
    2003Deferred income tax assetsBasis difference in property and equipment and intangible assets
    
    $
    364,000
    
    
    $
    318,000Deferred revenue
    
    
    71,000
    
    
    
    137,000Net operating loss
    
    
    1,001,000
    
    
    
    1,090,000Deferred compensation and other
    
    
    148,000
    
    
    
    109,000Valuation allowance
    
    
    (1,584,000
    )
    
    
    (1,654,000
    )Net deferred income tax asset
    
    $
    
    
    
    $
    Change in valuation allowance
    
    $
    (70,000
    )
    
    $
    101,000
 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, 2004, the Company
has a net operating loss carry forward of approximately $2,600,000 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In September 2004, as part of a settlement of a $28,193 note payable (including
accrued interest), the Company issued 10,000 shares of common stock. Options for 50,000 shares of the Companys common stock were exercised in December 2003 for $2,000. NOTE I  RELATED PARTY TRANSACTIONS The Company is in default on an operating lease for certain equipment which is leased from one of
its significant shareholders who also holds a $320,000 interim loan which is also in default (see
Note E  Notes Payable). The original lease was dated November 21, 2001 and the terms were $6,088
per month for 12 months with a fair market purchase option at the end of the lease. Upon default
on the lease, the Company was allowed to continue leasing the equipment on a month-to-month basis
at the same monthly rate as the original lease. The Company has been unable to make the
month-to-month payments and at December 31, 2004 had recorded $145,921 in unpaid lease payments.
The lessor has not made any demands. F-17




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##### Table of Contents



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
vested and became exercisable in November 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
vested and became exercisable in November 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 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. F-18




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##### Table of Contents



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. 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fairamount
    
    
    value
    
    
    amount
    
    
    valueFinancial liabilitiesNotes payable
    
    $
    1,174,000
    
    
    $
    1,088,000
    
    
    $
    1,515,000
    
    
    $
    1,406,000
 NOTE M  SIGNIFICANT CUSTOMER During the years ended December 31, 2004 and 2003, the Company had one customer that comprised
approximately 30% and 33%, respectively, of total revenues. The contract pursuant to which the
Company provides services to this customer expires on December 31, 2005. The customer has notified
the Company that they will not renew their contract. Therefore the Company will experience a loss
of this revenue without a corresponding reduction in expense. NOTE N  CREDITOR SETTLEMENTS AND DEBT FORGIVENESS During the year ended December 31, 2004, the Company negotiated and settled the following
liabilities for less than their carrying values. The basic and diluted per share amount of the
aggregate gain on debt forgiveness for the year ended December 31, 2004 was $.02. Carrying
    
    
    SettlementValue
    
    
    Amount
    
    
    GainNotes payable including accrued interest
    
    $
    96,208
    
    
    $
    36,536
    
    
    $
    59,672Accounts payable
    
    
    115,519
    
    
    
    17,474
    
    
    
    98,045Accrued liabilities
    
    
    5,663
    
    
    
    
    
    
    
    5,663Total
    
    $
    217,390
    
    
    $
    54,010
    
    
    $
    163,380
 NOTE O  ACQUISITION On July 30, 2004, the Company purchased approximately 1,300 of the dial-up Internet access
customers of CWIS Internet Services, Inc. (CWIS), an Oklahoma corporation. In addition to paying
$25,000 at closing, the Company will pay CWIS an amount based upon the future collected revenues
received from all active CWIS customers transferred at the time of closing for eighteen months
following the closing. The aggregate purchase price has been allocated to the underlying net
assets purchased, including an intangible asset, which consists of the acquired customer base,
based on their estimated fair values at the acquisition date. The intangible asset is being
amortized based on decreases of the acquired customer base. As of December 31, 2004 an additional
$30,920 had been paid based on collected revenues and was recorded as an increase to the intangible
asset. NOTE P  CONTINGENCIES As a telecommunications company, the Company is affected by regulatory proceedings in the ordinary
course of its business at the state and federal levels. These include proceedings before both the
Federal Communications Commission and the Oklahoma Corporation Commission (OCC). For example, the
Company along with many F-19




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##### Table of Contents



other telecommunications companies in Oklahoma is currently a party to one or more proceeding
before the OCC relating to the terms of its interconnection agreement with SBC Communications and
an anticipated successor to this interconnection agreement. These proceedings were initiated due to
the unreasonable changes that SBC was proposing be incorporated in the successor interconnection
agreement. The regulatory proceeding concerning the terms of the Companys interconnection
agreement with SBC Communication, which is based upon their standard interconnection agreement, and
the anticipated successor thereto is ongoing and is not expected to conclude until early next year.
The Company cannot anticipate the outcome of this regulatory proceeding at this time but a negative
outcome with any of these regulatory proceedings could have a material adverse effect on its
business, financial condition or results of operations. F-20