UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For fiscal year ended December 31, 1999

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THESECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission File Number: 000-27031

FULLNET COMMUNICATIONS, INC.

(Exact Name of Registrant as Specified in its Charter)

OKLAHOMA 73-1473361 -------- ----------

(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

200 North Harvey, Suite 1704Oklahoma City, Oklahoma 73102

(Address of principal executive offices)

(405) 232-0958

(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Title of each class Name of each exchange on which registered

Common Stock, $0.00001 Par Value None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if there is no disclosure contained herein of delinquent filers in response to Item 405 of Regulation S-B, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

The Registrant's revenues for its most recent fiscal year were $1,122,000.

The aggregate market value of the registrant's common stock, $0.00001 par value, held by non-affiliates of the Registrant as of March 24, 2000 was $3,650,034 based on the closing bid price of $3.00 per share on that date as reported by the OTC Bulletin Board. As of March 24, 2000, 3,134,578 shares of the registrant's common stock, $0.00001 par value, were outstanding.

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

The following documents are incorporated by reference: Registrant's Proxy Statement for the 2000 Annual Meeting of Stockholders is incorporated by reference in Part III, Items 9 through 12, of this Form 10-KSB

FULLNET COMMUNICATIONS, INC.

FORM 10-KSBFor the Fiscal Year Ended December 31, 1999

TABLE OF CONTENTS

Part I.

Item 1. Description of Business............................................. 2 Item 2. Description of Property.............................................18 Item 3. Legal Proceedings...................................................18 Item 4. Submission of Matters to a Vote of Security Holders.................19

Part II.

Item 5. Market for Common Equity and Related Stockholder Matters............19 Item 6. Management's Discussion and Analysis or Plan of Operation...........20 Item 7. Financial Statements................................................23 Item 8. Changes In and Disagreements With Accountants on Accounting and

Financial Disclosure...........................................................................23

Part III.

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act........................23 Item 10. Executive

Compensation..............................................23 Item 11. Security Ownership of Certain Beneficial Owners and Management......23 Item 12. Certain Relationships and Related Transactions......................24 Item 13. Exhibits and Reports on Form 8-K....................................24

Signatures ..................................................................26

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. Properties, Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation, and Item 8. 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 Annual Report on Form 10-KSB under the caption "Item 1. Description of Business-Risk Factors," our other Securities and Exchange Commission filings and our press releases.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

FullNet Communications Inc. (the "Company") is a regional integrated communications provider ("ICP") offering integrated communications and network solutions to individuals, businesses, organizations, educational institutions, and government agencies. Through its subsidiaries, the Company provides high quality, reliable and scalable Internet, telephony, and network solutions designed to meet its customers' needs. The Company's overall strategy is to become the dominant ICP, Internet service provider ("ISP"), network solutions and broadband backbone provider for residents and small to medium-sized businesses in Oklahoma and contiguous states.

References to the Company in this Annual Report include the Company's direct and indirect subsidiaries: FullNet, Inc. ("FullNet"), FullTel, Inc. ("FullTel"), FullSolutions, Inc. ("FullSolutions") and FullWeb, Inc. ("FullWeb"). The Company's principal executive offices are located at 200 North Harvey Avenue, Suite 1704, Oklahoma City, Oklahoma 73102, and its telephone number is (405) 232-0958. We also maintain an Internet site on the World Wide Web ("WWW") at www.fullnet.net. Information contained on the Company's Web site is not, and should not be deemed to be, a part of this Annual Report on Form 10-KSB.

Company History

The Company was 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. The Company changed its name to FullNet Communications, Inc. in December 1995, and shifted its focus from offering dial-up services to providing wholesale and private label network connectivity and related services to other ISPs. During 1995 and 1996, the Company furnished wholesale and private label network connectivity services to ISPs in Bartlesville, Cushing, Durant, Perry, Tahlequah, and Tulsa. During 1996, the Company sold its ISP operations in Enid, Oklahoma and began ISP operations in Ponca City, Oklahoma.

In 1997 the Company continued its focus on being a backbone provider by upgrading and acquiring more equipment. The Company also started offering its own ISP brand access and services to its wholesale customers. As of December 31, 1999, there were five ISPs in Oklahoma that used the FullNet brand name where the Company is the backbone, including two that were subsequently acquired by the Company. There are an additional three ISPs that use a private label brand name, where the Company is their access backbone and provides their technical support, managing and operating their systems on an outsource basis. In February 2000 the Company acquired one of the private label ISPs. See "Item 1. Description of Business-Recent Events." Additionally, the Company provides high-speed broadband connectivity, website hosting, network management and consulting solutions to over 50 businesses in Oklahoma.

In 1998 the Company's gross revenues exceeded $1,000,000 and the Company made the Metro Oklahoma City Top 50 Fastest Growing Companies list. In 1998 the Company commenced the process of organizing a competitive local exchange carrier ("CLEC") through FullTel, and acquired Animus Communications, Inc. ("Animus"), a wholesale Web-service company, thereby enabling the Company 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, the Company's current business strategy is to become the dominant ICP in Oklahoma and surrounding states. The Company expects to grow through the acquisition of ISPs and network solutions providers, as well as through a marketing campaign, the design and implementation of which is to be completed in the second quarter 2000. Since December 31, 1999, the Company has completed three separate acquisitions of ISP companies, operating in, respectively, Tahlequah, Oklahoma, Bartlesville, Oklahoma and Enid, Oklahoma.

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Recent Events

Mergers and Acquisitions

On January 25, 2000, the Company entered into an Asset Purchase Agreement with FullNet of Tahlequah, Inc., an Oklahoma corporation ("FOT"), in which the Company purchased substantially all of FOT's assets, including approximately 400 individual and business Internet access accounts. The Company paid FOT an aggregate amount of $97,735, comprised of $35,890 in cash and a note payable for $61,845. The note is payable in eighteen monthly installments and bears no interest.

On February 4, 2000, the Company entered into an Asset Purchase Agreement with David Looper, d/b/a FullNet of Bartlesville ("FOB"), an Oklahoma sole proprietorship in which the Company purchased substantially all of FOB's assets, including approximately 400 individual and business Internet access accounts. The Company paid FOB an aggregate amount of $178,400, payable in 42,744 shares of the Company's common stock (valued for purposes of the acquisition at $3.00 per share) and a note payable for $50,168. The note bears an interest rate of 8% per annum, with the principal and interest thereon payable on the earlier to occur of (a) the closing of any private equity placement in excess of $351,000, (b) the closing of any underwritten offering of the Company's common stock, or (c) one year from the closing date of the Asset Purchase Agreement.

On February 29, 2000, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Harvest Communications, Inc., ("Harvest") an Oklahoma corporation, pursuant to which Harvest merged with and into FullNet. Harvest had approximately 2,500 individual and business dial up Internet access accounts, 15 wireless Internet access accounts and 35 Web hosting accounts. Pursuant to the terms of the Merger Agreement, the Company paid the shareholders of Harvest an aggregate amount of $1,912,500 payable in 537,500 shares of the Company's common stock (valued for purposes of the merger at $3.00 per share), a note payable for $175,000 and $125,000 in cash. The note bears an interest rate of 8% per annum, with the principal and interest thereon payable on the earlier to occur of (a) the closing of any single funding (whether debt or equity) obtained by the Company subsequent to the date of the Merger Agreement in an aggregate amount of at least $2,000,000, (b) the closing of any underwritten offering of the Company's common stock, or (c) March 6, 2001.

These acquisitions were accounted for as purchases. The aggregate purchase price will be allocated to the underlying assets purchased on their fair market values at the respective acquisition date. Prior to the acquisitions, each of FOT, FOB and Harvest was a customer of the Company's ISP access services.

Financing Activities

In February 2000, the Company obtained a bridge loan for $275,000 through the issuance of 14% promissory notes to 10 accredited investors. The terms of the financing additionally provided for the issuance of warrants to purchase an aggregate of 137,500 shares of the Company's common stock at $0.01 per share, and provided for certain registration rights. The promissory notes each bear an interest rate of 14% per annum and require monthly interest payments. The loan term is for six months, and is extendible for two 90-day periods upon issuance of an additional warrant for 137,500 shares exercisable at $0.01 per share for each extension.

In March 2000, the Company obtained a bridge loan for $500,000 through the issuance of 14% promissory notes to two accredited investors. The terms of the financing additionally provided for the issuance of warrants to purchase 100,000 shares of the Company's common stock at $0.01 per share, and provided for certain registration rights. The promissory notes each bear an interest rate of 14% per annum and require quarterly interest payments. The loan term is for six months, and is extendible for two 90 day periods upon issuance of additional warrants for an aggregate 10,000 shares exercisable at $0.01 per share for each extension. On March 8, 2000, both of the bridge loan investors exercised their warrants and purchased 100,000 shares of common stock of the Company at an aggregate exercise price of $1,000.

In February 2000, the Company raised an aggregate $135,600 in an offering of its common stock. The offering was made pursuant to an exemption from the registration requirements of the Securities Act pursuant to Rule 504 of Regulation D of such act. Pursuant to the 504 offering, 45,200 shares of common stock were issued.

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Proceeds of the two bridge loans and the 504 offering were used for acquisitions, working capital and general corporate purposes.

Industry Overview

The Internet Access and Services Market

The Internet has emerged as a significant global communications medium, enabling millions of people to communicate, publish and retrieve information and conduct business electronically. Regardless of the hardware and software used, Internet Protocol or "IP" enables Internet communication by providing a common inter-networking standard. Due to increased public awareness, lower prices for access devices, increased functionality and improving content, International Data Corporation estimates that the number of users accessing the World Wide Web will increase from approximately 97 million at the end of 1998 to approximately 320 million by the end of 2002. Total ISP revenues in the Untied States are projected to grow from $10.7 billion in 1998 to $37.4 billion in 2003.

Internet access services are the means by which ISPs interconnect either businesses or individual consumers to the Internet's resources or to corporate intranets and extranets. Access services include dial-up access for individuals and small businesses and high-speed dedicated access designed primarily for mid-sized and larger organizations. Users currently accessing the Internet do so primarily by means of dial-up services. Access to the Internet using dial-up services requires the user to have access to a local telephone line, the use of a modem and an ISP account, such as a FullNet Internet account. However, new ways of connecting to the Internet are becoming more common, particularly those that take advantage of higher speed and broader bandwidth capacity.

The rapid development and growth of the Internet has resulted in a highly fragmented industry of over 5,000 national and local ISPs in the U.S. ISPs vary widely in geographic coverage, customer focus and levels of Internet access provided to subscribers. For example, access providers may concentrate on certain types of subscribers (such as businesses or individuals) that differ substantially in the type of service and support required by the relevant customer constituency. Often, large national ISPs do not offer individual customers the level of support desired and many smaller regional ISPs do not have the resources necessary to offer adequate customer support. Because user-friendly software and responsive customer service and technical support are the foundation of the Company's business, the Company believes that it is poised to capitalize on the growth in the Internet access and Internet services segments of the telecommunications market.

The number of businesses and consumers accessing the Internet is expected to increase significantly in the foreseeable future. According to Forrester Research, the market for providing access to the Internet for businesses and consumers in the United States will grow from $5.8 billion in 1997 to $38.1 billion in 2002. Additionally, as businesses and consumers are developing greater levels of comfort in the use of the Internet for electronic commerce, businesses are increasingly implementing sophisticated electronic commerce solutions that, in turn, require significantly greater bandwidth and other business services. In response, an increasing number of Internet service providers are attempting to augment their basic Internet access services with a wide range of business services, such as Web hosting and Internet security services. In addition, as more businesses evolve from establishing an Internet presence to utilizing secure connectivity between geographically-dispersed locations, remote access to corporate networks and business-to-business commerce solutions, the demand for high quality Internet connectivity and value-added services is expected to grow. International Data Corporation predicts that enhanced Internet services, such as Web hosting, security, e-commerce, virtual private networks and advanced Internet applications are expected to grow from approximately $352 million in 1997 to over $7 billion in 2000.

Internet service providers that offer both Internet access to broad segments of the population and that offer a broad selection of business services are positioned to attain greater economies of scale through lower network expansion and marketing costs on a per-subscriber basis. The Company believes that it is uniquely positioned, among purely local or regional ISPs, to benefit from this continued growth. Specifically, the Company believes that a window of opportunity currently exists within the state of Oklahoma. Currently, competition from the national ISPs, such as America Online, Prodigy, CompuServe, has had only minimal impact on the Oklahoma ISP market due to the lack of local dial-up Internet presence in rural Oklahoma and too many busy signals. In addition, the local Oklahoma education ISP, OneNet, is also not a factor due to the limits placed on it by the Oklahoma legislature. With the demand for Internet access consistently exceeding all projections, the Company believes that its target area, rural Oklahoma, is grossly underserviced. Accordingly, the Company believes that a real opportunity exists for the Company and its subsidiaries to establish a stronghold on the Oklahoma Internet market, given the local infrastructure that it already has in place as well as its multi-pronged marketing strategy.

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Telecommunications Industry

The telephone and data transmission segment of the communications industry is currently undergoing widespread changes brought about by three main factors. First were the decisions of federal and state regulators that opened the monopoly of local telephone markets to competition. Second was the ensuing transformation of the previously monopolistic communications market controlled by heavily regulated incumbents into a consumer-driven competitive service industry. Third was the need for higher speed, higher capacity networks to meet the increasing consumer demand for expanded communications services, including broader video choices, and high speed data and Internet services. The convergence of these trends has created opportunities for new types of communications companies capable of providing a wide range of voice, video and data services. Hence, companies have developed concentrations in various niche segments of the industry involving (1) high-speed wireless, (2) DSL, (3) fiber broadband, (4) long distance only, (5) local telephone only, and (6) combinations of these services.

The passage of the Telecommunications Act of 1996 (the "Telecommunications Act") codified the pro-competitive policies on a national level, requiring both the FCC and the state regulatory commissions to adopt significant changes in their rules and regulations in furtherance of these policies. This act obligates regulators to remove market entry barriers, enabling companies to become full service providers of local and long distance telephone service by, among other things, mandating the incumbent local exchange carrier ("ILEC") to provide interconnection and competitively priced network facilities to competitors. In addition, the Telecommunications Act requires the Regional Bell Operating Companies ("RBOCs") to offer wholesale access to their switching and existing technology, thus permitting others to compete.

The Company intends to provide traditional long distance and local telephone service, as well as other communications services, in order to position ourselves as a single source supplier for all the communication needs of the customer. In 1999 the Oklahoma Corporation Commission granted the request of FullTel, the Company's wholly owned subsidiary, to become a CLEC. The Company's intention is to provide IP telephony services and CLEC services to subscribers in the State of Oklahoma.

The Company's Business Strategy

As an ICP, the Company intends to increase shareholder value by continuing to build scale through both acquisitions and internal growth and then leveraging increased revenues over its fixed costs base. The Company's strategy is to meet the customer service requirements of retail, business, educational and government Internet users in its target markets, while benefiting from the scale advantages enjoyed through being a fully integrated backbone and broadband provider. The key elements of the Company's overall strategy with respect to its principal business operations are as follows:

Internet Access Services

Target Strategic Acquisitions

The goal of the Company's acquisition strategy is to accelerate market penetration by acquiring ISPs in Oklahoma communities with a population of 5,000 or more and to acquire strategic ISPs in Oklahoma City and Tulsa. Additionally, the Company will continue to build upon its core competencies and expand its technical, customer service staff and sales force in Oklahoma communities. The Company evaluates acquisition candidates based on their fit with the Company's overall business plan of penetrating rural and outlying markets as well as Oklahoma City and Tulsa. When a candidate is acquired, the Company will integrate its 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 its own dealer sales force to continue to increase market share. The types of acquisitions targeted by the Company include ISPs located in markets into which the Company wants to expand, or to which it may already provide "private-label" Internet connectivity. Other types of targeted acquisitions include local business only ISPs in markets where the Company has 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 the Company's network utilization. When determining which ISPs to acquire, the Company focuses on the following criteria:

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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 the

Company's backbone network o Favorable consolidation savings

Since December 31, 1999, the Company has completed three separate acquisitions of ISP companies, operating in, respectively, Tahlequah, Oklahoma, Bartlesville, Oklahoma and Enid, Oklahoma.

Generate Internal Sales Growth

The Company intends to expand its customer base by significantly increasing its direct and indirect regional sales forces as well as its marketing efforts. As of December 31, 1999, the Company's direct sales force consisted of two persons in two regional sales offices in Oklahoma City and Tulsa coordinating all business to Business ("B2B") solutions sales of the Company. The Company currently has one individual responsible state wide to manage the consumer ISP market, with dealers and independent sales representatives responsible for their individual markets. The Company's sales force is supported in their efforts by technical engineers and, in some instances, senior management of the Company. The Company intends to increase the number of its sales offices through expanding the size of its direct sales force with the goal of having an effective selling presence in all major communities in the state of Oklahoma. In addition, the Company is exploring other strategies to grow its direct sales force, including developing an inside sales center and other marketing partners such as electric cooperatives. The Company currently has two of the twenty local Oklahoma electric cooperatives as marketing partners.

Develop the Dominant Regional Brand

FullNet seeks to support internal growth by converting each local acquired ISP to its regional FullNet brand supported by community based marketing programs. This strategy includes two components:

o Regional branding. Change strong local brands to a regional FullNet brand. The Company intends to change these brands on a market by market basis as it implements enhancements to improve customer satisfaction.

o Community based marketing. The Company intends to continue to build goodwill through community involvement, such as providing free services to libraries and educational institutions, sponsoring local sports teams and other community organizations and furthering relationships with local retailers to promote the Company's' products and services in their stores.

Develop Strategic Relationships

The Company aims to develop strategic relationships with advertisers and content providers, capitalizing on opportunities to sell value-added products and services to its local subscribers.

Grow Subscriber Base

The Company intends to grow its subscriber base through a combination of internal and acquisition driven growth. This growth will help to increase the density of the subscriber base on a subscriber-per-POP basis, which should allow the Company to leverage its cost structure, particularly those costs associated with network operations, customer support, back office functions and management overhead. The Company expects its 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.

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Increase Rural Area Market Share

The Company believes that rural areas of Oklahoma and surrounding states are underserved by ISPs, and that significant, profitable growth can be achieved by entering such markets and providing reliable Internet connectivity at a reasonable cost to the residents and businesses located in such areas. The Company believes it can obtain a significant ISP and B2B market share in Oklahoma. To that end, the Company, through its wholly owned subsidiary, FullTel, became a licensed CLEC in the state of Oklahoma and intends to pursue such licensing in neighboring states. As a CLEC in any particular state, FullTel will be able to offer local telephone numbers for Internet access.

Cross-Sell Value Added Services

The Company intends to capitalize on its existing customer base and future customers by aggressively cross selling its value-added services through a referral system that has every local retail ISP sales representative referring B2B customers to the FullSolutions division. The Company is committed to offering its customers reliable value-added network services necessary to address their Internet, communications and network management requirements. Based on the Company's existing network infrastructure and expertise, it is able to offer these services continuously, reliably and on a cost-effective basis.

Enhance Subscribers' Online Experience

FullNet intends to maintain its high subscriber retention rates and add new subscribers by enhancing its services in the following ways:

o Ease of Use - The Company intends to develop and implement 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 Local Content - Source local, customized, community specific content, such as weather, traffic, crop reports, business club meetings and high school and college sports information, through national providers of local content or partnerships with businesses and organizations in the subscribers' local communities.

o New Products and Services - Offer subscribers new products and services, such as Internet telephony or audio and visual streaming, as the technologies supporting these products and services become standardized, stable and profitable.

o Co-marketing Opportunities - Develop affinity based marketing programs to offer products and services, such as calling cards and long distance telephone service, to the Company's subscribers in exchange for fee based revenues.

Network Solutions

Provide a Broad Array of Network Solutions and Communications Services

Based on the Company's belief that a growing number of businesses and consumers will demand that one company provide all of their communications needs, the Company plans to continue to add products and services to its portfolio.

The fragmentation among Internet, intranet/extranet and other corporate internal network service providers has resulted in users often faced with an overwhelming array of providers and services from which to choose. Most importantly, because of the pace of change, most companies already have inferior non-integrated services and small business is falling behind rapidly in keeping pace technologically. For example, it is typical for a user to purchase local loop connectivity from a RBOC or a CLEC, to purchase Internet or other wide area network connectivity from a separate Internet or other network service provider, and to purchase network services, like remote management, systems integration and network security, from one or more other companies.

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The Company believes a total B2B integrated Internet, intranet, and internal network service provider model is evolving towards providers who are capable of providing a comprehensive solution by bundling several or all of these functions efficiently, reliably and on a cost effective basis. As the Company believes that it is the only ICP based in Oklahoma, it hopes to become the preferred provider of network solutions statewide.

Effect Geographical Expansion

The Company's strategic plan for its network solutions business includes the geographic expansion of its integrated communications and network solutions to businesses, educational institutions, non-profit organizations and government throughout Oklahoma. This will be accomplished by having the internal and external ISP sales force refer B2B network and broadband solutions to the regional sales manager in Oklahoma City or Tulsa so that the Company can provide turnkey solutions to that local customer. The Company currently has over 50 business network solution clients and believes this business will expand rapidly in the future as the Company's total solutions ability is offered in every community where the Company has retail ISP customers, whether through its dealers or its corporate sales representative. Management believes this market is underserved in Oklahoma.

Business Units

The Company has built a portfolio of products, services and skill sets to develop and deliver comprehensive Internet communications solutions to both business and residential customers. These products and services are organized under two divisions: Internet Access Services and Network Solutions. Internet Access Services includes local dial-up and dedicated Internet connectivity as well as Internet telephony, while Network Solutions includes the design, implementation and administration of enterprise network solutions, Web page design and hosting, server co-location, e-commerce and, in the near future, Internet domain name registration.

Internet Access Services

The Company's core business is the sale of Internet access services to individual and small business subscribers located in Oklahoma. Through FullNet, the Company provides its 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 and Internet telephony. FullNet's full range of services include:

o Private label retail and business direct dial-up connectivity to the Internet

o Secure private networks through the Company's backbone network o Internet telephony services

The Company's branded and private label Internet access services are provided through a statewide network with POPs in 23 communities throughout the state of Oklahoma. POPs are local telephone numbers through which subscribers can access the Internet. The Company's business services consist of high speed Internet access services and other services that enable wholesale customers to outsource their Internet and electronic commerce activities. The Company had approximately 1,300 subscribers at December 31, 1999. Additionally, FullNet sells Internet access to other ISPs, which then resell Internet access to their own customers under their private label or under the "FullNet" brand name.

The Company intends to expand its subscriber base through a marketing campaign and through acquisitions. The Company is focusing its acquisition efforts on companies with forward-looking sales and marketing, high-quality customer service and a solid local market dominance. Since December 31, 1999, the Company has completed three separate acquisitions of ISP companies, operating in, respectively, Tahlequah, Oklahoma, Bartlesville, Oklahoma and Enid, Oklahoma. See Item 1. Description of Business - Recent Events". Additionally, the Company is expanding its sales and marketing staff in an effort to increase the Company's subscriber base in the markets in which it currently operates.

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Currently, the Company offers the following three 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. The Company supports these users through the use of sophisticated modem banks at the POP that send data through a router and out to the Internet. The Company supports the higher speed 56K and ISDN connections with state-of-the-art digital modems. With a dial-up connection, a user can gain access to the Internet for e-mail, WWW, file transfer protocol ("FTP"), news groups, and a variety of other useful applications.

o Dedicated Dial-Up Connections

For the user who needs to be connected immediately to the Internet 100% of the time, the Company offers dedicated dial-up connections. This service basically sets aside one dial-up modem for the customer, guaranteeing that the customer can always get a connection when needed.

o Leased Line Connections

Many businesses and some individuals have a need for more bandwidth to the Internet in order to support an entire network of users or a busy Web site. The Company has 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 through the POP. The leased line solution comes at greater expense to the user, who must lease a specially dedicated line from its location to the POP. These lines are leased through the telephone companies at a high installation and monthly fee. It is the Company's preference to offer the customer a two-way wireless connection, thus capturing telephone company revenue and saving the customer money.

Additionally, the Company is in the process of implementing operations as a CLEC, which will enable it to offer a variety of additional Internet access services, including broadband digital subscriber line ("DSL") service, with speeds of 60 to 100 times faster than analog modems. See "Item 1. Description of Business-Business Units-CLEC Operations." DSL is a new technology being deployed by telephone companies and CLECs that permits high speed digital transmission over the existing copper wiring of regular telephone lines. Through FullTel, the Company's CLEC, the Company plans to offer DSL service in 2000, as well as offering local dial-up internet access in each of such communities so served.

FullTel's DSL services will be targeted to small to medium sized businesses, telecommuter and consumer markets. The "dedicated access feature" of DSL services combined with its high speed and low flat rate pricing are designed to appeal to the large installed base of integrated services digital network ("ISDN") users. Pricing for the service is low relative to traditional dedicated access services, making it attractive to small to medium sized businesses, while at the same time broadening the market to reach small businesses who previously could not justify the expense of dedicated Internet service.

Pricing is based on the bandwidth of the DSL circuit, and varies depending on the service speed. FullTel intends to provide complete installation services, including all customer equipment necessary to provide the DSL service.

The Company believes that its business model offers attractive economics. Through the use of current DSL technology, the Company can effectively leverage existing telephone network copper infrastructure to deploy service more quickly and at lower costs than technologies such as cable modems.

In addition to offering DSL services, the Company intends on deploying wireless data networks for high speed Internet access in approximately 11 cities in Oklahoma during 2000.

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The Company believes that its Internet access services provide customers with the following benefits:

Fast and Reliable Internet Access-The Company has implemented a network architecture providing exceptional quality and consistency in Internet services, making the Company the recognized backbone leader in the Oklahoma ISP industry. The Company offers unlimited, unrestricted and reliable Internet access at a low monthly price. A user-to-modem ratio of 8:1 assures access without busy signals. Dial-up access is available for the following modem speeds: 14.4K, 28.8K, 33.6K, K56Flex, 56K V.90, ISDN 64K and ISDN 128K. The Company's dial-up access supports all major platforms and operating systems, including MS Windows, UNIX(R), Mac OS, OS/2 and LINUX. This allows simplified access to all Internet applications, including the WWW, email, news and FTP.

Cost-Effective Access-The Company offers 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, the Company offers pre-bundled access services packages under monthly or prepaid plans.

Superior Customer Support-The Company provides superior customer service and support, with customer care and technical personnel available by telephone and on-line.

CLEC Operations

Through FullTel, the Company's wholly owned subsidiary, the Company is a fully licensed CLEC in the State of Oklahoma. CLECs are new phone companies born out the Telecommunications Act, which requires the ILECs, such as the regional Bell companies, to provide CLECs access to their local facilities, and to compensate CLECs for traffic originated by ILECs and terminated on the CLEC's network. By adding its own telephone switch and infrastructure to the existing telephone network, the Company will be able to offer local services in most of Oklahoma, including local dial-up and DSL for the Internet access services provided by the Company. As a CLEC, the Company may subscribe to and resell all forms of local telephone service in the State of Oklahoma. The Company intends to build its own network infrastructure, which it believes will eliminate its current reliance upon the infrastructures of the ILECs. The Company believes that its CLEC status, combined with the efficiencies inherent in operating its own network, should result in lower overhead costs and a more predictable infrastructure, both of which should be to the benefit of the Company's customers.

While Internet access is the core focus of growth for the Company, the Company plans to also provide traditional telephone service throughout Oklahoma and contiguous states. The Company intends to seek approval to operate as a CLEC in additional states as it expands into such areas.

A core piece of the Company's marketing strategy is the "cross pollination" between the Company's Internet activities and FullTel's local dial-up service. By organizing and funding FullTel, the Company expects to gain local dial-up Internet access to approximately 80% of the State of Oklahoma when the Company's telephone switch is installed in its data center. In return, FullTel will gain immediate access to the Company's entire ISP customer base.

The installation of the FullTel data center telephone switching equipment currently is anticipated to be completed in the third quarter of 2000. Upon completion, FullTel will extend local access telephone numbers to every city in which the Company will market, sell and operate its retail FullNet ISP brand and its B2B network design, connectivity, domain and Web hosting businesses. It is anticipated that initially, FullTel will provide FullNet with local telephone access in 35-40 targeted cities where the Company will either already own ISP operations or have commenced sales and marketing. Also, it is anticipated that by the end of 2000, the Company will have up to 11 cities where it will have installed high-speed bandwidth wireless or DSL delivery technology for its FullNet and FullSolutions divisional sales systems. During 2000, FullTel expects to conclude the planning and development for the delivery of local and long distance telephone service for Oklahoma. It is anticipated that the services will be launched in 2001.

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Network Solutions

Through FullSolutions, a wholly owned subsidiary of the Company, the Company assists clients with the design, implementation and administration of enterprise network solutions, Web hosting, Web page design, dedicated B2B Internet connectivity and e-commerce solutions. FullSolutions offers a broad array of services to assist its customers in operating reliable networks with high integrity. These services include design, activation, network management and optimization, and ongoing support, repair and maintenance. FullSolutions also offers a broad selection of enhanced business services that are focused on the practical needs of businesses to support their Internet operations. Finally, FullSolutions offers technological expertise in groupware, e-mail, networking and database applications.

FullSolutions provides tailored, value-added IP based network services for enterprises and consumers. To provide these services, FullSolutions utilizes its low/fixed latency, high throughput network, employing its advanced network architecture and the Internet. FullSolutions' service offerings for enterprises include virtual private networks ("VPNs"), remote access and Web design. These services enable enterprises to take advantage of standard Internet tools such as browsers and high performance servers for customized data communications within an enterprise and between an enterprise and its suppliers, partners and customers. These services combine the cost advantages, national access and standard protocols of public networks with the customization, high performance, reliability and security of private networks.

FullSolutions provides integrated Intranet and Internet network solutions for its clients. Computer networks are continuing to be key to the flow of information within corporations and are mission critical to the Company's customers. The Company is committed to providing the latest up to date training and certifications for its personnel, thus providing its subscribers with assurances of top level expertise. The Company's networking engineers specialize in the development of wide area networks ("WAN"), metropolitan, and local area networks ("LAN"), including network integration of all computer systems platforms.

Corporate experience includes in-depth working knowledge of various broadband technologies, including T-1 lines and wireless, as well as routing and switching technology, including Lucent Technologies, Cisco Systems, Nortel Networks and Hybrid Networks. Employees have skills in dealing with the design and layout of LAN and WAN environments. In fact, FullSolutions has developed and installed LAN/WAN environments utilizing large-scale deployments of major LAN network operating systems.

Both directly and through the Company's global reseller network, FullSolutions also offers customers a broad range of affordable Web hosting service plans including Web page design, advanced E-commerce, managed dedicated server, server co-location and dedicated network connectivity solutions. Web hosting is in essence the rental of space on a server that has a continuous connection to the Internet. As part of the Company's Web hosting services, the Company assigns a virtual domain name (www.yourcompany.com) for its customers. Once the domain name is registered, the Company reserves a portion of hard disk space on one of its servers, to which the customer can upload the Web site. The site has its own Web address and can be reached by anyone on the Internet at anytime, or it may be password protected for access by selected persons. Virtual hosting allows companies to assign e-mail addresses with their own domain name.

FullSolutions operates a separate subsidiary, FullWeb, which is an accredited Internet domain name registrar. On July 8, 1999, the Internet Corporation for Assigned Names and Numbers ("ICANN") announced that FullWeb, formerly Animus, was one of only approximately 50 initial companies from around the world which have been approved to act as registrars for the .com, .net and .org Internet domains. The assignment of Internet domain names for a fee will complement the current services offered by the Company and give it an opportunity for tremendous growth in a business that was previously conducted by only one company. FullWeb has not yet received its registrar license and agreement with Network Solutions, Inc., which will enable it to begin offering registration services. FullWeb expects to be able to offer domain name registrations during 2000.

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Sales and Marketing

Although the Company expects that the bulk of its new subscribers will come through acquisition of ISPs, the Company's expanded local sales system is also an integral part of the Company's growth plan. Local sales and marketing will give the Company brand name recognition that will lead to an increase in Company sales.

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 the Company's 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. The Company believes that it has significant opportunities for acquisition and internal sales growth in these market areas.

The Company focuses on marketing its 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, the Company is able to utilize its network infrastructure more cost effectively.

Competition

The market for Internet connectivity and related services is extremely competitive. The Company anticipates 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 different industries. The Company believes that a reliable network, knowledgeable salespeople and the quality of technical support currently are the primary competitive factors in its targeted market and that price is usually secondary to these factors.

The Company's current and prospective competitors include, in addition to other national, regional and local ISPs, long distance and local exchange telecommunications companies, cable television, direct broadcast satellite, wireless communications providers and online service providers. While the Company believes that its network, products and customer service distinguish it from these competitors, most of these competitors have significantly greater market presence, brand recognition, financial, technical and personnel resources than the Company.

ISPs

According to industry sources, there were over 6,700 ISPs in the United States and Canada in 1998, consisting of national, regional and local providers. The Company's current primary competitors include other ISPs with a significant national presence which focus on business customers, such as UUNet Technologies, Inc., GTE Internetworking (formerly BBN), Concentric Network and DIGEX. While the Company believes that its level of customer service and support and target market focus distinguish it from these competitors, such competitors have greater market share, brand recognition, financial, technical and personnel resources than the Company. The Company also competes with unaffiliated regional and local ISPs in its targeted geographic regions.

Telecommunications Carriers

The major long distance companies, also known as interexchange carriers, including AT&T, MCI WorldCom, Cable & Wireless/IMCI and Sprint, offer Internet access services and compete with the Company. Reforms in the federal regulation of the telecommunications industry have created greater opportunities for ILECs, including the RBOCs, and other CLECs, to enter the Internet connectivity market. In order to address the Internet connectivity requirements of the business customers of long distance and local carriers, the Company believes 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 ISPs. 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 recent purchase of IBM's global communications network are indicative of this trend. Accordingly, the Company expects that it will experience increased competition from the traditional telecommunications carriers. These telecommunications carriers, in addition to their greater network coverage, market presence, financial, technical and personnel resources also have large existing commercial customer bases.

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Cable Companies, Direct Broadcast Satellite and Wireless Communications Companies

Many of the major cable companies have announced that they are exploring the possibility of offering Internet connectivity, relying on the viability of cable modems and economical upgrades to their networks. Media One and Time Warner Cablevision, Inc., Tele-Communications, Inc. ("TCI") and At Home Corporation ("@Home") have announced trials to provide Internet cable service to their residential customers in select areas. Cable companies, however, are faced with large-scale upgrades of their existing plant equipment and infrastructure in order to support connections to the Internet backbone via high-speed cable access devices. Additionally, their current subscriber base and market focus is residential, which requires that they partner with business focused providers or undergo massive sales and marketing and network development efforts in order to target the business sector. Several announcements also recently have been made by other alternative service companies approaching the Internet connectivity market with various new fiber broadband delivery to businesses in major cities, wireless, DSL and satellite based service technologies.

The companies that own these broadband networks could prevent the Company from delivering Internet access through the wire and cable connections that they own. Cable television companies are not currently required to allow ISPs to access their broadband facilities and the availability and terms of ISP access to broadband local telephone company networks are under regulatory review. The Company's 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 FCC declined to take any action to mandate or otherwise regulate access by ISPs 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 regulations, and whether they will be successful in establishing their authority to do so. Similarly, the FCC is considering proposals that could limit the right of ISPs to connect with their customers over broadband local telephone lines. In addition to competing directly in the ISP market, both cable and television facilities operators are also aligning themselves with certain ISPs 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 the Company is unable to gain access to these facilities on reasonable terms, its 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 Prodigy, Inc., have all entered the Internet access business by engineering their current proprietary networks to include Internet access capabilities. The Company competes to a lesser extent with these service providers, which currently are primarily focused on the consumer marketplace and offer their own content, including chat rooms, news updates, searchable reference databases, special interest groups and shopping.

However, America Online's recent announced merger with Time-Warner, its acquisition of Netscape Communications Corporation and related strategic alliance with Sun Microsystems will enable it to offer a broader array of IP-based services and products that could significantly enhance its ability to appeal to the business marketplace and, as a result, compete more directly with the Company. CompuServe has also announced that it will target Internet connectivity for the small to medium sized business market.

The Company believes that its ability to attract business customers and to market value-added services is a key to its future success. However, there can be no assurance that the Company's competitors will not introduce comparable services or products at similar or more attractive prices in the future or that the Company will not be required to reduce its prices to match competition. Recently, many competitive ISPs have shifted their focus from individual customers to business customers.

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Moreover, there can be no assurance that more of the Company's competitors will not shift their focus to attracting business customers, resulting in even more competition for the Company. There can be no assurance that the Company will be able to offset the effects of any such competition or resulting price reductions. Increased competition could result in erosion of the Company's market share and could have a material adverse effect on its 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 ISP 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 the Company's businesses operate. The Company cannot predict the outcome of these proceedings or their impact upon the ISP and telecommunications industries or upon the Company's 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 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.

The Company's 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 ISPs. Although in an April 1998 Report, the FCC determined that ISPs should not be treated as telecommunications carriers and therefore should not be regulated, it is expected that future ISP 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 IP telephony, may be functionally indistinguishable from traditional telecommunications service offerings, and their non-regulated status may have to be re-examined.

Changes in the regulatory structure and environment affecting the Internet access market, including regulatory changes that directly or indirectly affect telecommunications costs or increase the likelihood of competition from RBOC's or other telecommunications companies, could have an adverse effect on the Company's business. Although the FCC has decided not to allow local telephone companies to impose per-minute access charges on ISPs, and that decision has been upheld by the reviewing court, 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 the Company's costs of serving dial-up customers and could have a material adverse effect on the Company's business, financial condition and results of operations.

In addition to the Company's ISP operations, the Company has recently focused attention on acquiring telecommunications assets and facilities, which is a regulated activity. Fulltel, the Company's wholly owned subsidiary, has received CLEC certification in the State of Oklahoma, and an important part of the Company's growth strategy is obtaining CLEC certification in certain other states. The Telecommunications Act requires CLEC's not to prohibit or unduly restrict resale of their services; to provide dialing parity, number portability, and nondiscriminatory access to telephone numbers, operator services, directory assistance, and directory listings; to afford access to poles, ducts, conduits, and rights-of-way; and to establish reciprocal compensation arrangements for the transport and termination of telecommunications traffic. In addition to federal regulation of CLEC's, the states also impose regulatory obligations upon CLEC's. While these obligations vary from state to state, most states require CLEC's to file a tariff for their services and charges; require CLEC's 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, the Company could become subject to further regulation by the FCC and/or another regulatory agency, including state and local entities.

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The Telecommunications Act has caused fundamental changes in the markets for local exchange services. In particular, the Telecommunications Act and the FCC rules issued pursuant to it mandate competition in local markets and require that ILEC's interconnect with CLEC's. 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.

An important issue for CLEC's is the right to receive reciprocal compensation for the transport and termination of Internet traffic. The Company believes that, under the Telecommunications Act, CLEC's are entitled to receive reciprocal compensation from ILEC's. However, some ILEC's have disputed payment of reciprocal compensation for Internet traffic, arguing that ISP traffic is not local traffic. Most states have required ILEC's to pay CLEC's reciprocal compensation. However, in October 1998, the FCC determined that dedicated DSL 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 ISP traffic is jurisdictionally interstate. The FCC also concluded that its jurisdictional decision does not alter the exemption from access charges currently enjoyed by ISPs. 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 ILEC's to the CLEC's may be asked by the ILEC's 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 the Company's position. An unfavorable result may have an adverse impact on the Company's potential future revenues as a CLEC.

As the Company becomes a competitor in local exchange markets, it will become subject to state requirements regarding provision of intrastate services. This may include the filing of tarriffs containing rates and conditions. As a new entrant, without market power, the Company expects to face a relatively flexible regulatory environment. Nevertheless, it is possible that some states could require the Company 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 its property used to provide intrastate services.

Risk Factors

This Annual Report includes "forward looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although the Company believes that its plans, intentions and expectations reflected in such forward looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Important factors that could cause actual results to differ materially from the Company's forward looking statements are set forth below and elsewhere in this Annual Report. All forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth below.

Limited Operating History. The Company has a relatively limited operating history upon which an evaluation of the Company's prospects can be made. Consequently, the likelihood of success of the Company 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. The Company's ability to achieve profitability and growth will depend on successful development and commercialization of its current and proposed services. No assurance can be given that the Company will be able to introduce its proposed services or market its services on a commercially successful basis.

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Necessity of Additional Financing. In order for the Company to have any opportunity for significant commercial success and profitability, it must successfully obtain additional financing, either through borrowings, additional private placements or an initial public offering, or some combination thereof. Although the Company is actively pursuing a variety of funding sources, there can be no assurance that it will be successful in such pursuit.

Limited Marketing Experience. The Company has limited experience in developing and commercializing new services based on innovative technologies, and there is limited information available concerning the potential performance of its hardware or market acceptance of its proposed services. There can be no assurance that unanticipated expenses, problems or technical difficulties will not occur which would result in material delays in product commercialization or that the Company's efforts will result in successful product commercialization.

Uncertainty of Products/Services Development. Although considerable time and financial resources were expended in the development of the Company's services and products, there can be absolutely no assurance that problems will not develop which would have a material adverse effect on the Company. The Company will be required to commit considerable time, effort and resources to finalize such development and adapt its 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 the Company will be able to successfully adapt its 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 the Company's products/services may contain errors which become apparent subsequent to commercial use. Remedying such errors could delay the Company's plans and cause it to incur substantial additional costs.

New Concept; Uncertainty of Market Acceptance and Commercialization Strategy. The Company's proposed entry into IP telephony represent a new business concept. 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 the Company to create awareness and demand by consumers. The Company's 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 the Company's marketing efforts, changes in market conditions (including the emergence of potentially significant related market segments for applications of the Company's technology), the nature of possible license and distribution arrangements which may or may not become available to it in the future and economic, regulatory and competitive factors. There can be no assurance that the Company's strategy will result in successful product commercialization or that the Company's efforts will result in initial or continued market acceptance for the Company's proposed products.

Competition; Technological Obsolescence. The markets that the Company intends 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. The Company will face competition from numerous sources, certain of which may have substantially greater financial, technical, marketing, distribution, personnel and other resources than the Company, 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 the Company's proposed products/services are characterized by rapidly changing technology and evolving industry standards which could result in product obsolescence or short product life cycles. Accordingly, the ability of the Company to compete will be dependent upon the Company's ability to complete development and introduce its product and/or services into the marketplace in a timely manner, to continually enhance and improve its software and to successfully develop and market new products. There can be no assurance that the Company will be able to compete successfully, that competitors will not develop technologies or products that render the Company's products and/or services obsolete or less marketable or that the Company will be able to successfully enhance its products or develop new products and/or services.

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Risks Relating to the Internet. Use of the Internet by consumers is in a relatively early state, and market acceptance of the Internet as a medium for telephone service is subject to uncertainty. The rapid growth of global commerce and the exchange of information on the Internet and other online networks is relatively new and still evolving, making it difficult to predict whether the Internet will prove to be a viable commercial marketplace generally. The Company believes that its future success will depend on its ability to significantly increase revenues, which, in turn, will be materially dependent upon the development and widespread acceptance of the Internet and online services as a medium for telephone service. The Internet may not prove to be a viable commercial marketplace because of 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, the viability of the Internet may prove uncertain due to 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 use of the Internet does not continue to grow, or if the necessary Internet infrastructure or complementary services are not developed to effectively support growth that may occur, the Company's business, results of operations and financial condition would be materially adversely affected.

Potential Government regulations. The Company is subject to state commission, FCC and court decisions as they relate to the interpretation and implementation of the Telecommunications Act, the interpretation of CLEC interconnection agreements in general and the Company's interconnection agreements in particular. In some cases, the Company may be deemed to be bound by the results of ongoing proceedings of these bodies or the legal outcomes of other contested interconnection agreements that are similar to agreements to which the Company is a party. The results of any of these proceedings could have a material adverse effect on the Company's business, prospects, financial condition and results of operations.

Dependence on Key Personnel. The success of the Company depends in large part upon the continued successful performance of its current executive officers and key employees, Messrs. Timothy J. Kilkenny, Travis Lane, Wallace L. Walcher, Roger Laubhan, Jason Ayers and Keith Frye, for the continued research, development, marketing and operation of the Company. Although the Company has employed, and will employ in the future, additional qualified employees as well as retaining consultants having significant experience, if Messrs. Kilkenny, Lane, Walcher, Laubhan, Ayers or Frye fail to perform any of their duties for any reason whatsoever, the ability the Company to market, operate and support its products/services will be adversely affected. While the Company is located in areas where the available pool of people is substantial, there is also significant competition for qualified personnel.

Limited Public Market. During the month of February 2000, trading of the Company's common stock began trading on the OTC Bulletin Board under the symbol FULO. When a stock begins to trade on the OTC Bulletin Board, it initially has a single market maker. Although many stocks have several market makers, while the Company's common stock trades on the OTC Bulletin Board, there can be no assurance as to whether additional market makers will quote the common stock. Hence, there can be no assurance that stockholders will be able to sell their shares should they desire to do so. 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 price may be volatile.

No Payment of Dividends on Common Stock. The Company has not paid any dividends on its common stock. For the foreseeable future, the Company anticipates that all earnings, if any, that may be generated from the Company's operations will be used to finance the growth of the Company and that cash dividends will not be paid to holders of the common stock.

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Penny Stock Regulation. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, those persons with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse), must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that is or becomes subject to the penny stock rules. If the Company's securities are or become subject to the penny stock rules, the Company's stockholders may find it more difficult to sell their shares.

Customers

In 1999, no customer represented in excess of 10% of the Company's gross revenues.

Employees

As of December 31, 1999, the Company had 15 employees employed in engineering, sales, marketing, customer support and related activities and general and administrative functions. None of the Company's employees is represented by a labor union, and the Company considers its relations with its employees to be good. The Company also engages consultants from time to time with respect to various aspects of its business.

Item 2. Description of Property

The Company currently is headquartered in facilities consisting of approximately 2,500 square feet in Oklahoma City which is leased on a month-to-month basis. The Company has negotiated a ten year lease agreement for approximately 13,600 square feet in another facility in Oklahoma City which will become the principal executive offices of the Company. The lease agreement provides for monthly payments starting at approximately $3,300 per month commencing in January 2000 and increasing to approximately $14,200 per month in the tenth year of the lease agreement. Completion of the new space is expected by the end of the second quarter 2000.

The Company also leases space in a number of private facilities in which the Company's equipment is housed. The monthly lease payments for such private facilities are approximately $685.

Item 3. Legal Proceedings

The Company is not currently engaged in any material legal proceedings. It is, however, subject to state commission, FCC and court decisions as they relate to the interpretation and implementation of the Telecommunications Act, the interpretation of CLEC interconnection agreements in general and the Company's interconnection agreements in particular. In some cases, the Company may be deemed to be bound by the results of ongoing proceedings of these bodies or the legal outcomes of other contested interconnection agreements that are similar to agreements to which the Company is a party. The results of any of these proceedings could have a material adverse effect on the Company's business, prospects, financial condition and results of operations.

In March 1999, the Company entered into a financial advisory services agreement with a financial advisory firm, pursuant to which the Company's common stock and stock options were to be issued to such entity as partial compensation for services to be performed by the financial advisor. The agreement was the subject of a dispute between the Company and the financial advisor. This dispute, which was never the subject of a pending legal proceeding, was resolved in December 1999 through a settlement agreement that provides for (i) the issuance of 104,320 shares of the Company's common stock to the financial advisory firm, (ii) the granting of options to the financial advisory firm for the purchase of an aggregate of 34,830 shares of the Company's common stock at an exercise price of $1.00 per share, and (iii) the granting of additional options to such firm to purchase an aggregate 57,375 shares of the Company's common stock at an exercise price of $1.25 per share, which become exercisable on October 7, 2000 and expire on December 29, 2002. Subsequent to the execution of the settlement agreement, the financial advisory firm exercised its option to purchase 34,830 shares of the Company's common stock at an aggregate exercise price of $34,830.

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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.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

As of December 31, 1999, there was no public trading market for the Company's common stock. On February 9, 2000, the Company's common stock began trading on the OTC Bulletin Board under the ticker symbol FULO.

Number of stockholders

The number of beneficial holders of record of the common stock of the Company as of the close of business on March 10, 2000 was approximately 100.

Dividend Policy

To date, the Company has declared no cash dividends on its common stock, and does not expect to pay cash dividends in the next term. The Company intends to retain future earnings, if any, to provide funds for operations and the continued expansion of its business.

Recent Sales of Unregistered Securities

During February 1999, the Company issued convertible notes payable totaling $50,000 to two accredited investors. During April 1999, these notes were converted into 71,428 shares of common stock pursuant to the terms of the note agreement. The issuance of the shares was effected pursuant to Section 4(2) of the Securities Act.

In April 1999, the Company completed an offering of its common stock effected pursuant to Rule 504 of Regulation D of the Securities Act. Pursuant to the 504 offering, 648,500 shares of common stock were sold for aggregate gross proceeds of $648,500. Net proceeds were approximately $494,000, after payment of placement fees and commissions totaling $64,850 and other offering expenses. Subsequent to the offering, the Company determined that it and/or others may have inadvertently failed to comply with certain exemptive and/or broker-dealer registration requirements in certain of the states in which the common stock was sold. Consequently, in July 1999, the Company extended rescission offers to certain of its stockholders who acquired Common Stock in the 504 offering and who were residents of Florida and Oklahoma. As a result of the rescission offer, the Company repurchased 11,000 shares for an aggregate repurchase price of $11,000 plus interest.

19

Item 6. Management's Discussion and Analysis or Plan of Operation

The following discussion should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included in Part II, Item 7 of this Annual 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 risk factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors" in Item 1 of this Annual Report and the Company's other periodic reports and documents filed with the Securities and Exchange Commission.

The following discussion of the results of operations and financial condition of FullNet Communications, Inc. and its consolidated subsidiaries (the "Company") should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report.

Year Ended December 31, 1999 vs. Year Ended December 31, 1998

Revenues

Access service revenues increased $130,000 from $400,000 for the year ended December 31, 1998 to $530,000 for the year ended December 31, 1999. This increase was due to an increase in the number of dial-up customers of the Company and of the Company's ISP resellers.

Network solutions and other revenues decreased $10,000 from $602,000 for the year ended December 31, 1998 to $592,000 for the year ended December 31, 1999. The Company historically has not actively marketed its network solutions sales, and has typically made such sales only to its existing customer base.

Operating Costs and Expenses

Cost of access service revenues increased $24,000 from $174,000 for the year ended December 31, 1998 to $198,000 for the year ended December 31, 1999, due to the increase in the number of dial-up customers of the Company and of the Company's resellers. Costs did not increase commensurate with revenues due to lower negotiated contract rates for the Company's backbone expense.

Cost of network solutions and other revenues increased $31,000 from $217,000 for the year ended December 31, 1998 to $248,000 for the year ended December 31, 1999, due to an increase in equipment cost of sales of $23,000 over the prior year.

Selling, general and administrative expenses increased $369,000 from $635,000 for the year ended December 31, 1998 to $1,004,000 for the year ended December 31, 1999. The increase was comprised of an increase in payroll costs of $181,000 related to a June 1999 stock grant approved by the Board of Directors and approximately $57,000 related to the hiring of additional personnel, as well as $35,000 of financial advisory service fees incurred pursuant to an agreement entered into by the Company with an investment banker in September 1999 and an increase in accounting, consulting and legal fees of $75,000 in 1999 over 1998.

Depreciation and amortization expense increased $39,000 from $106,000 for the year ended December 31, 1998 to $145,000 for the year ended December 31, 1999. This increase was attributable to less than a full year of goodwill amortization in 1998 relating to the purchase of Animus (now FullWeb) in March 1998 and a change in estimated lives of goodwill and intangible assets effective October 1, 1999, which resulted in $43,000 more expense in 1999 than in 1998.

20

Other Expense

Other expense increased $59,000 from $8,000 for the year ended December 31, 1998 to $67,000 for the year ended December 31, 1999. This increase was attributable to start up costs of $67,000 incurred related to the Company's CLEC operations.

Liquidity and Capital Resources

The Company used $243,000 and $31,000 of cash for operating activities for the years ended December 31, 1999 and 1998, respectively, as a result of a net loss for the periods. As of December 31, 1999, the Company had $13,000 in cash and $277,000 in current liabilities, including $75,000 of deferred revenues that will not require settlement in cash. Capital expenditures relating primarily to the purchase of computer equipment amounted to $13,000 and $30,000 for the years ended December 31,1999 and 1998, respectively. In addition, the Company acquired FullWeb in March 1998 for $175,000 cash and issuance of $175,000 in notes payable. The notes payable were repaid in 1999.

Net cash provided by financing activities was $268,000 and $237,000 for years ended December 31, 1999 and 1998, respectively. The cash provided in 1999 was due primarily to the sale of equity securities pursuant to Rule 504 of Regulation D of the Securities Act. In the second quarter of 1999, the Company received net proceeds of $483,000 from the 504 offering. Of these proceeds, $175,000 was used to repay two debt obligations of the Company. During the first quarter 1999, the Company also received $50,000 in proceeds from bridge financing for working capital. This bridge financing was converted to 71,428 shares of common stock in the second quarter 1999. Net cash provided in 1998 is comprised of proceeds of $353,000 obtained through the issuance of term notes payable.

The planned expansion of the Company's business will require significant capital to fund capital expenditures, working capital needs, debt service and the cash flow deficits generated by operating losses. The Company's principal capital expenditure requirements will include:

o the completion of the Company's Network Operations Center o the purchase and installation of telephone switches in Oklahoma,

Arkansas and Kansas o purchase and installation of wireless and DSL Internet access

equipment o mergers and acquisitions o further development of operations support systems and other automated

back office systems o domain name registration startup costs

The Company expects to make capital outlays of between $3 million and $4 million during 2000 in order to continue activities called for in its current business plan and to fund expected operating losses. As the Company's cost of developing new networks and services, funding other strategic initiatives and operating its business will 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 the Company, regulatory changes, and actions taken by competitors in response to the Company's strategic initiatives), it is almost certain that actual costs and revenues will vary from expected amounts, very likely to a material degree, and that such variations are likely to affect the Company's future capital requirements. Current cash balances will not be sufficient to fund the Company's current business plan beyond the next year. As a consequence, the Company intends to seek additional debt and/or equity financing to fund the Company's liquidity. There can be no assurance that the Company will be able to raise additional capital on satisfactory terms or at all.

In the event that the Company is unable to obtain such additional capital or to obtain it on acceptable terms or in sufficient amounts, the Company will be required to delay the development of its network or take other actions. This could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service debt requirements.

21

The ability of the Company to fund the capital expenditures and other costs contemplated by its business plan and to make scheduled payments with respect to bank borrowings will depend upon, among other things, its ability to seek and obtain additional financing within the next year. Capital will be needed in order to implement its business plan, deploy its network, expand its operations and obtain and retain a significant number of customers in its 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 the Company's control.

No assurance can be given that the Company will be successful in developing and maintaining a level of cash flow from operations sufficient to permit it to pay the principal of, and interest and any other payments on, outstanding indebtedness. If the Company is unable to generate sufficient cash flow from operations to service its indebtedness, it may have to modify its growth plans, limit its capital expenditures, restructure or refinance its indebtedness or seek additional capital or liquidate its assets. There can be no assurance (i) that any of these strategies could be effected on satisfactory terms, if at all, or (ii) that any such strategy would yield sufficient proceeds to service the Company's debt or otherwise adequately fund operations.

Certain Accounting Matters

In July 1998, the Financial Accounting Standards Board issued SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and is effective for 2001. The Company will adopt SFAS No. 133 by the required effective date. The Company has not determined the impact on its financial statements from adopting the new standard.

In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 - Revenue Recognition ("SAB No. 101"). SAB No. 101 provides guidance on recognition, presentation, and disclosure of revenue in financial statements. The Company believes that it currently complies with SAB No. 101.

Other Matters

Employee Stock Grant

Pursuant to a stock bonus approved by the Board of Directors and granted in June 1999, Roger S. Laubhan and Jason C. Ayers, officers of the Company, and two other employees were granted 181,055 shares of common stock equal to 3%, 1%, 2% and 1%, respectively, of the fully diluted common shares outstanding at such date. Such shares were not issued until January 2000. The Company recognized $181,055 as compensation expense in 1999 relating to the grant of common stock to these employees.

Financial Advisory Services Agreements

The Company has entered into two separate agreements with an investment banker ("Investment Banker") for investment banking and financing services. A summary of the details of these two agreements follows.

The first agreement is for financing services and has a one-year term commencing September 1, 1999. If the Investment Banker completes a private placement for the Company, it will receive 8.5% of the dollar value of the transaction. If the Investment Banker closes a debt financing for the Company, it will receive a 5% transaction fee. As of December 31, 1999, no such transactions had been completed.

The second agreement is for financial advisory and merger/acquisition services and also has a one-year term commencing September 1, 1999. The fee for the advisory services is $5,000 per month plus expenses and 100,000 shares of common stock. Additionally, this agreement calls for merger/acquisition services. The cost for this service is $2,500 per month plus expenses and a scaled percentage of any completed acquisition. No such mergers/acquisitions had occurred as of December 31, 1999.

22

Year 2000 Issue

Prior to entering the year 2000, or Y2K, the Company developed plans for implementing, testing and completing any necessary modifications to its key computer systems and equipment with embedded chips to ensure that they were Y2K compliant. Subsequent to entering the year 2000, the Company has tested its key computer systems and to date, it has not encountered any material Y2K related disruptions or failures of its systems or services, nor has it been notified of any disruptions or failures in the systems of any of its third parties with whom it deals. There is an ongoing risk that Y2K related problems could still occur and the Company will continue to evaluate these risks. However, the Company believes that the Y2K issue will not pose any significant operational problems for it.

Item 7. Financial Statements

The consolidated financial statements of the Company are incorporated by reference from pages F-1 through F-21 of the attached Appendix, and include the following:

Consolidated Financial Statements of FullNet Communications, Inc.

(1) Reports of Independent Auditors (2) Consolidated Balance Sheets as of December 31, 1999 and 1998 (3) Consolidated Statements of Operations for Years Ended

December 31, 1999 and 1998 (4) Consolidated Statements of Stockholders' Deficit for Years

Ended December 31, 1999 and 1998 (5) Consolidated Statements of Cash Flows for Years Ended

December 31, 1999 and 1998 (6) Notes to Consolidated Financial Statements for Years Ended

December 31, 1999 and 1998

Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

On October 29, 1999, the Registrant's Board of directors engaged the accounting firm of Grant Thornton LLP as its independent certifying accountants for Registrant's fiscal year ending December 31, 1999 to replace the accounting firm of Cross & Robinson, who was dismissed on October 25, 1999. Cross & Robinson's reports on the financial statements of the Registrant for the past two fiscal years ended December 31, 1998 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles. There have been no disagreements with Cross & Robinson on any matter of accounting principles or practices, financial statement disclosure, auditing scope or procedure, or any reportable events as defined in Item 304(a)(1)(iv) of Regulation S-B.

PART III.

Item 9. Directors, Executive Officers, Promoters and control Persons, Compliance With Section 16(a) of the Exchange Act

The information required will be contained in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 10. Executive Compensation

The information required will be contained in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The information required will be contained in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein by reference.

23

Item 12. Certain Relationships and Related Transactions

The information required will be contained in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 13. Exhibits and Reports on Form 8-K

(a) The following documents are filed as part of this report:

(1) Financial Statements are attached hereto as Appendix A and included herein on pages F-1 through F-21:

(2) The exhibits set forth on the following Exhibit Index are filed with this Report or are incorporated by reference as set forth therein.

Exhibit Number Exhibit Page

3.1 Certificate of Incorporation, as amended (filed as Exhibit 2.1 to the Company'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 the Company's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).............................. #

* 4.1 Specimen Certificate of the Company's Common Stock.......................................................... 53

4.2 See the Company's Certificate of Correction to the Amended Certificate of Incorporation and the Ninth Section of the Certificate of Incorporation and Articles II and V of the Company's Bylaws (filed as Exhibits 2.1 and 2.2 to the Company's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference)................ #

*10.1 Financial Advisory Services Agreement between the Company and National Securities Corporation, dated September 17, 1999........................................................... 55

*10.2 Lease Agreement between the Company and BOK Plaza Associates, LLC, dated December 2, 1999........................ 64

10.3 Interconnection agreement between Registrant and Southwestern Bell dated March 19, 1999 (filed as Exhibit 6.1 to the Company'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 the Company's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference).......................... #

16.1 Letter on change in certifying accountant (filed as Exhibit 16.1 to the Company's Form 8-K dated November 1, 1999 and incorporated herein by reference).............................. #

*21.1 Subsidiaries of the Company.................................... 86

*27.1 Financial Data Schedule........................................ 87

24

_____________________________

# Incorporated by reference. * Filed herewith.

(b) Reports on Form 8-K

A report on Form 8-K was filed by the Company on November 1, 1999, reporting under "Item 4 - Change in Registrant's Certifying Accountant" the Company's change in certified public accountant.

A report on Form 8-K was filed by the Company on December 1, 1999, reporting under "Item 5 - Other Events a letter that was mailed to all shareholders regarding the quarterly report for the period ending September 30, 1999.

25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

REGISTRANT: FULLNET COMMUNICATIONS, INC.

Date: March 28, 2000 By: /s/ TIMOTHY J. KILKENNY

Timothy J. Kilkenny President and Chief Executive Officer

Date: March 28, 2000 By: /s/ TRAVIS LANE

Travis Lane Vice President, Chief Financial and Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Date: March 28, 2000 By: /s/ TIMOTHY J. KILKENNY

Timothy J. Kilkenny, Chairman of the Board and Director

Date: March 28, 2000 By: /s/ LAURA L. KILKENNY

Laura L. Kilkenny, Director

26

APPENDIX A

Consolidated Financial Statements

FullNet Communications, Inc. and Subsidiaries

Years ended December 31, 1999 and 1998with Report of Independent Auditors

27

[THIS PAGE LEFT BLANK INTENTIONALLY]

28

FullNet Communications, Inc.

Consolidated Financial Statements

Years ended December 31, 1999 and 1998

Contents

Report of Independent Certified Public Accountants...........................F-1 Independent Auditor's Report.................................................F-2

Consolidated Financial Statements

Consolidated Balance Sheet...................................................F-3 Consolidated Statements of Operations........................................F-4 Consolidated Statements of Stockholders' Deficit.............................F-5 Consolidated Statements of Cash Flows........................................F-6 Notes to Consolidated Financial Statements...................................F-8

29

Report of Independent Certified Public Accountants

Board of Directors FullNet Communications, Inc.

We have audited the accompanying consolidated balance sheet of FullNet Communications, Inc. (an Oklahoma corporation) and Subsidiaries, as of December 31, 1999, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FullNet Communications, Inc. and Subsidiaries, as of December 31, 1999, and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with generally accepted accounting principles.

GRANT THORNTON LLP

Oklahoma City, Oklahoma January 21, 2000 (except for Note N, as to which

the date is March 13, 2000)

F-1

Independent Auditor's Report

Board of Directors Fullnet Communications, Inc.

We have audited the accompanying consolidated balance sheet of Fullnet Communications, Inc. and its wholly-owned subsidiaries Animus Communications, Inc. and Fulltel, Inc. (Oklahoma corporations) as of December 31, 1998 and the related consolidated statements of operations, shareholder's deficit and cash flow for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FullNet Communications, Inc. and its subsidiaries Animus Communications, Inc. and FullTel, Inc. as of December 31, 1998, and the results of their operations and their cash flow for the year then ended in conformity with generally accepted accounting principles.

CROSS AND ROBINSON

/S/ Cross and Robinson

Certified Public Accountants Tulsa, Oklahoma

May 21, 1999

F-2

FullNet Communications, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,

ASSETS 1999 1998 ----------- -----------CURRENT ASSETS Cash $ 12,671 $ 198 Accounts receivable (note E) 70,306 105,809 Prepaid and other current assets 15,491 337 ----------- -----------

Total current assets 98,468 106,344

PROPERTY AND EQUIPMENT, net (notes C, E and H) 117,262 176,999

COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, net of accumulated amortization of $93,512 in 1999 and $23,359 in 1998 (note D) 295,084 367,393

OTHER ASSETS Deferred income taxes (note F) 17,500 17,500 Deferred offering costs (note N) 30,899 -- Other 5,000 -- ----------- ----------- 53,399 17,500 ----------- -----------

$ 564,213 $ 668,236 =========== ===========

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES Accounts payable - trade $ 100,684 $ 129,577 Accrued liabilities 42,424 8,797 Notes payable, current portion (note E) 58,949 5,424 Capital lease obligations (note H) -- 9,039 Note payable Animus purchase (note J) -- 122,405 Cash overdraft -- 8,061 Deferred revenue 74,720 97,379 Due to related party (note I) -- 43,891 ----------- -----------

Total current liabilities 276,777 424,573

NOTES PAYABLE, less current portion (note E) 586,922 697,926

CAPITAL LEASE OBLIGATIONS, less current portion (note H) -- 1,153

STOCKHOLDERS' DEFICIT (note G) Common stock - $.00001 par value and 10,000,000 shares authorized (1999); $1 par value and 50,000 shares authorized (1998) 21 500 Common stock issuable, 318,709 shares 318,709 -- Additional paid-in capital 429,295 -- Accumulated deficit (1,047,511) (455,916) ----------- ----------- (299,486) (455,416)

----------- -----------

$ 564,213 $ 668,236 =========== ===========

The accompanying notes are an integral part of these statements.

F-3

FullNet Communications, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Year ended December 31,

1999 1998

REVENUES Access service revenues $ 530,003 $ 400,016 Network solution and other revenues 591,951 601,771

1,121,954 1,001,787

OPERATING EXPENSES Cost of access service revenues 198,399 173,951 Cost of network solution and other revenues 248,415 216,517 Selling, general, and administrative expenses 1,004,266 643,848 Depreciation and amortization 144,670 105,594

1,595,750 1,139,910

Loss from operations (473,796) (138,123)

OTHER INCOME (EXPENSE) Interest expense (77,871) (75,398) Other (39,928) 4,387

NET LOSS $ (591,595) $ (209,134)

BASIC AND DILUTED LOSS PER COMMON SHARE $ (.30) $ (.15)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,994,548 1,380,000

The accompanying notes are an integral part of these statements.

F-4

FullNet Communications, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

Years ended December 31, 1999 and 1998

Common stock Common Additional ------------------------ stock paid-in Accumulated Shares Amount issuable capital deficit Total ----------- ----------- ----------- ----------- ----------- -----------Balance at January 1, 1998 500 $ 500 $ -- $ -- $ (244,008) $ (243,508)

Distributions of previous Subchapter S earnings -- -- -- -- (2,774) (2,774)

Net loss -- -- -- -- (209,134) (209,134) ----------- ----------- ----------- ----------- ----------- -----------

Balance at December 31, 1998 500 500 -- -- (455,916) (455,416)

Stock split 2,760-for-1, par value reduced from $1.00 per share to $.00001 per share (note G) 1,379,500 (486) -- 486 -- --

Common stock issued, net of offering expenses (note G) 637,500 6 -- 483,130 -- 483,136

Common stock issuable relating to services per- formed for offering, 104,320 shares (note G) -- -- 104,320 (104,320) -- --

Common stock issuable for employee bonuses, 181,055 shares (note G) -- -- 181,055 -- -- 181,055

Conversion of debt to equity (note G) 71,428 1 -- 49,999 -- 50,000

Common stock issuable in exchange for services, 33,334 shares (note G) -- -- 33,334 -- -- 33,334

Net loss -- -- -- -- (591,595) (591,595) ----------- ----------- ----------- ----------- ----------- -----------

Balance at December 31, 1999 2,088,928 $ 21 $ 318,709 $ 429,295 $(1,047,511) $ (299,486) =========== =========== =========== =========== =========== ===========

The accompanying notes are an integral part of this statement.

F-5

FullNet Communications, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,

1999 1998 --------- ---------Increase (Decrease) in Cash

Cash flows from operating activities Net loss $(591,595) $(209,134) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 144,670 105,594 Common stock issuable for services 214,389 -- Net (increase) decrease in Accounts receivable 35,503 (56,778) Prepaid and other current assets (15,154) 18,439 Other assets (5,000) -- Net increase (decrease) in Accounts payable - trade (28,893) 30,049 Accrued and other liabilities 25,566 11,207 Deferred revenue (22,659) 69,323 --------- ---------

Net cash used in operating activities (243,173) (31,300)

Cash flows from investing activities Purchase of property and equipment (12,624) (30,393) Acquisition of subsidiary -- (175,000) --------- ---------

Net cash used in investing activities (12,624) (205,393)

Cash flows from financing activities Deferred offering costs (30,899) -- Proceeds from borrowings under notes payable 1,088 352,720 Payments on borrowings under notes payable (58,567) (60,718) Payments on borrowings related to purchase of subsidiary (122,405) (37,055) Principal payments on capital lease obligations (10,192) (18,059) Proceeds from borrowings under convertible notes payable 50,000 -- Payments on notes to related party (43,891) -- Issuance of stock, net of offering costs 483,136 -- --------- ---------

Net cash provided by financing activities 268,270 236,888 --------- ---------

NET INCREASE IN CASH 12,473 195

Cash at beginning of year 198 3 --------- ---------

Cash at end of year $ 12,671 $ 198 ========= =========

F-6

FullNet Communications, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

Year ended December 31,

1999 1998

Supplemental cash flow information:

Cash paid for interest $ 78,000 $ 75,000

Noncash investing and financing activities:

Conversion of debt to equity $ 50,000 $ --

Common stock issuable relating to services performed for offering $ 104,320 $ --

Debt issued as investment in subsidiary $ -- $ 175,000

Acquisition of subsidiary fixed assets $ -- $ 28,251

Acquired lease obligations of subsidiary $ -- $ (28,251)

The accompanying notes are an integral part of these statements.

F-7

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999 and 1998

NOTE A - ORGANIZATION AND NATURE OF OPERATIONS

FullNet Communications, Inc. and Subsidiaries (the Company) is a regional integrated communications provider (ICP) offering communications and network solutions to individuals, businesses, organizations, educational institutions, as well as government agencies. Through its four subsidiaries: FullNet, Inc. (FullNet), FullTel, Inc. (FullTel), and FullSolutions, Inc. (FullSolutions) and its subsidiary FullWeb, Inc. (FullWeb), the Company provides Internet, telephone, and network solutions designed to meet customer needs. Services include:

o Dial up and direct high-speed connectivity to the Internet through the FullNet brand name

o Backbone services to private label Internet services providers (ISP) and businesses

o Local telephone access (expected to be operational by the end of the year 2000)

o Network design, activation, management, optimization, and ongoing support and maintenance

o Web page design, hosting, co-location and e-commerce solutions o Domain name registration (expected to be operational by the end of the

second quarter of 2000)

The Company operates and grants credit, on an uncollateralized basis, to customers in Oklahoma and surrounding states. 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.

The Company's business plan includes, among other things, expansion of its Internet access services through mergers and acquisitions, the development of its local telephone access services, and development of its domain name registration services. This business plan will require significant capital to fund capital expenditures, working capital needs, debt service and operationg cash flow deficits. To achieve the objectives of this business plan, the Company will be required to seek additional debt and/or equity financing; however, there can be no assurance that the Company will be able to raise additional debt and/or equity financing on satisfactory terms or at all.

Management believes that, given its cash position and debt structure after the transactions discussed in Note N, operations at the current level can be sustained through the end of 2000. However, if the Company is unable to raise additional debt and/or equity financing on satisfactory terms, it will be required to delay the implementation of its business plan. This could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow for service debt requirements.

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.

1. Consolidation

The consolidated financial statements include the accounts of FullNet Communications, Inc. and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated.

2. Revenue Recognition

Access service revenues are recognized on a monthly basis over the life of each contract. Contract periods range from monthly to yearly. Deferred revenues are calculated for those contracts that continue subsequent to the current year end. Network solution revenues are recognized after services are performed.

F-8

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED

3. Accounts Receivable

Management considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. Amounts considered to be uncollectible are charged to operations when that determination is made.

4. Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the double-declining balance method over the estimated useful lives of the related assets as follows:

Computers and equipment 5 years Furniture and fixtures 7 years

5. Cost in Excess of Net Assets of Businesses Acquired

Cost in excess of net assets of businesses acquired is being amortized using the straight-line method over estimated periods to be benefited. Prior to October 1, 1999, the estimated amortization period was fifteen years. Effective October 1, 1999, management changed this estimated remaining useful life to six months for the Tulsa acquisition and to 41 months for the Animus acquisition to more closely reflect the estimated periods benefited (see Note D). The effect of this change for the year ended December 31, 1999 was to increase amortization expense and net loss by approximately $43,000 and to increase basic and diluted loss per share by $.02.

6. Long-Lived Assets

All long-lived assets to be held and used, including cost in excess of net assets of businesses acquired, are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses are recognized based upon the estimated fair value of the asset. No such events or changes occurred during the years ended December 31, 1999 or 1998.

7. Income Taxes

Prior to April 8, 1999, income taxes on net earnings of FullNet Communications, Inc. were payable personally by the stockholders pursuant to an election as an S corporation under the Internal Revenue Code (IRC). Effective April 8, 1999, the number of stockholders exceeded the allowable number under IRC guidelines, the S election was terminated, and the Company became a C corporation and adopted the liability method of accounting for income taxes. The Company's subsidiaries are C corporations and have followed the liability method of accounting for income taxes for all periods presented.

F-9

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE B - SUMMARY OF ACCOUNTING POLICIES - CONTINUED

7. Income Taxes - Continued

Under the liability method, deferred income taxes are provided on temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements and carryforwards that will result in taxable or deductible amounts in future years. Deferred income tax assets or liabilities are determined by applying the presently enacted tax rates and laws. Additionally, the Company provides a valuation allowance on deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

8. Loss Per Common Share

Loss per common share is calculated based on the weighted average number of shares outstanding during the year, including common shares issuable without additional consideration. Basic and diluted loss per share are the same for the years ended December 31, 1999 and 1998 as the effect of outstanding stock options (see Note K) would be antidilutive.

9. Employee Stock Options

The Company applies the intrinsic method in accounting for its employee stock options. Accordingly, compensation expense is only recognized for grants of options which include an exercise price less than the market price of the stock at the date of the grant.

10. 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, 1999 and 1998 was $30,399 and $42,088, respectively.

11. Reclassifications

Certain reclassifications have been made to the 1998 financial statements to conform to the 1999 presentation.

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.

F-10

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE C - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

1999 1998

Computers and equipment $363,370 $350,747 Furniture and fixtures 5,785 5,785

369,155 356,532 Less accumulated depreciation 251,893 179,533

$117,262 $176,999

Depreciation expense for the years ended December 31, 1999 and 1998 was $72,360 and $84,566, respectively.

NOTE D - COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED

Cost in excess of net assets of businesses acquired consists of the 1997 purchase of certain business operations in Tulsa, Oklahoma (the Tulsa acquisition) and the 1998 purchase of Animus (the Animus acquisition) (see Note J) as follows:

December 31,

1999 1998

Tulsa acquisition, net of accumulated amortization of $40,355 and $6,998 at December 31, 1999 and 1998, respectively $ 29,645 $ 63,002

Animus acquisition, net of accumulated amortization of $53,157 and $16,361 at December 31, 1999 and 1998, respectively 265,439 304,391

$ 295,084 $ 367,393

Amortization expense for the years ended December 31, 1999 and 1998 was $72,310 and $21,028, respectively.

F-11

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE E - NOTES PAYABLE

Notes payable consist of the following at December 31:

1999 1998

Note payable to bank, payable in monthly installments of $8,768, including interest at 9.5%, matures September 2008; collateralized by property and equipment, accounts receivable, and Company common stock owned by the President of the Company; guaranteed by the President of the Company $564,063 $616,107

Note payable to bank, payable in monthly installments of $444, including interest at 11.5%, matures September 2008; collateralized by property and equipment, accounts receivable, and common stock owned by the President of the Company; guaranteed by the President of the Company 29,826 31,048

Note payable to bank, payable in monthly installments of $798, including interest at 11%, matures September 2008; collateralized by property and equipment, accounts receivable, and common stock owned by the President of the Company; guaranteed by the President of the Company 51,982 56,195

645,871 703,350 Less current portion 58,949 5,424

$586,922 $697,926

Aggregate future maturities of notes payable are as follows:

Year ending December 31 2000 $ 58,949 2001 65,179 2002 71,865 2003 79,239 2004 87,268 Thereafter 283,371

$ 645,871

F-12

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE F - INCOME TAXES

Due to net losses, no provision for income taxes was necessary for 1999 or 1998.

The Company's effective income tax rate differed from the federal statutory rate of 34% as follows at December 31:

1999 1998

Income taxes at federal statutory rate $(201,142) $ (71,106) Change in valuation allowance 179,335 20,500 Nondeductible expenses 12,980 -- Exclusion of Subchapter S loss 48,733 55,917 State income taxes, net of federal benefit (15,476) (5,311) Adjustment of prior year estimates (24,430) --

Total tax expense $ -- $ --

The components of deferred income tax assets were as follows at December 31:

1999 1998

Deferred income tax assets Basis difference in intangible assets $ 10,617 $ --Deferred revenue 28,196 -- Net operating loss 178,522 38,000 Valuation allowance (199,835) (20,500)

Net deferred income tax asset $ 17,500 $ 17,500

Increase in valuation allowance $ 179,335 $ 20,500

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, 1999, the Company has a net operating loss carryforward of approximately $473,000 which will expire at various dates through 2019. As such carryforward can only be used to offset future taxable income of the Company, management has provided a partial valuation allowance until it is more likely than not that taxable income will be generated.

F-13

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE G - STOCKHOLDERS' DEFICIT

On February 15, 1999, the Company's Board of Directors approved an amendment to the Company's certificate of incorporation to increase authorized common shares from 50,000 to 10,000,000 shares and to effect a 2760-for-1 stock split with a reduction in par values from $1.00 to $0.00001. Basic and diluted loss per share amounts have been restated for all periods presented to reflect this stock split.

During April 1999, the Company raised $483,136 (net of offering expenses of approximately $154,000) in an offering of its common stock exempt from registration requirements of the Securities Act of 1933 (the Securities Act) pursuant to Rule 504 of Regulation D (504d Offering). Under this offering, shares were sold at a price of $1.00 per share. In connection with this 504d Offering, the Company entered into a financial advisory services agreement (the Agreement) with a financial advisory firm, pursuant to which a maximum of 200,000 shares of common stock and 90,000 common stock options were to be issued to such entity as partial compensation for service performed. The Agreement became the subject of a dispute between the Company and the financial advisor; however, during December 1999, in settlement of this dispute, the Company agreed to issue 104,320 shares of common stock and 92,205 stock options to the financial advisory firm. Because the 104,320 shares were issuable for services performed in conjunction with the 504d Offering, an increase in common stock issuable and a corresponding reduction in additional paid-in capital was recorded in the accompanying financial statements based on an estimated fair market value of $1 per share. Additionally, the terms of the stock options were as follows:

Exercise price

Shares per share Vesting date Expiration date

34,830 $1.00 December 29, 1999 February 15, 2000 57,375 $1.25 October 7, 2000 December 29, 2002

92,205

Because these options were issued in connection with the 504d Offering, any value assigned and credited to additional paid-in capital would result in an equal reduction of additional paid-in capital from the 504d Offering, therefore, no accounting recognition has been given to these options.

During February 1999, the Company issued convertible notes payable to individuals totaling $50,000. During April 1999, these notes were converted into 71,428 shares of common stock pursuant to the note agreements.

During June 1999, 181,055 shares of common stock were approved for issuance to employees as a bonus. Compensation expense of $181,055 was recorded based on an estimated fair market value of $1 per share.

F-14

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE G - STOCKHOLDERS' DEFICIT - CONTINUED

OnSeptember 1, 1999, the Company entered into a financial advisory services agreement with an investment banker (see Note L). Pursuant to this advisory agreement, 100,000 shares (estimated fair value of $100,000) are to be issued to this entity as partial compensation for services performed. Such shares have not been issued as of December 31, 1999; however, the earned portion of such shares ($33,334 and 33,334 shares) is recorded in the stockholders' deficit section as common stock issuable.

At December 31, 1999, 318,708 shares of common stock are issuable without additional consideration.

NOTE H - CAPITAL LEASE OBLIGATIONS

Due to the purchase of Animus during 1998 (see Note J), certain capital lease obligations were acquired by the Company. Property held under capital leases consists of the following at December 31, 1998:

Machinery and equipment - computers $ 28,251 Less accumulated depreciation 10,145

Property and equipment under capital leases, net $ 18,106

Capital lease obligations consist of the following at December 31, 1998:

Noncancelable equipment lease, payable in monthly installments aggregating $6,314, including imputed interest at 10%; secured by certain equipment $ 6,059

Noncancelable equipment lease, payable in monthly installments aggregating $4,836, including imputed interest at 22.92%; secured by certain equipment 4,133

10,192 Less current portion of capital lease obligations 9,039

Long-term capital lease obligations, net $ 1,153

NOTE I - RELATED PARTY TRANSACTIONS

The Company had an outstanding obligation of $43,891 at December 31, 1998 to a stockholder for advances made in connection with the Animus acquisition (see Note J).

F-15

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE J - PURCHASE OF ANIMUS

On March 26, 1998, the Company purchased 100% of the outstanding common stock of Animus Communications, Inc. (now FullWeb), an Oklahoma corporation engaged in the business of providing web hosting services, server co-locations selling computer equipment, and providing configuration and maintenance of the equipment.

As a result of the purchase of Animus, the stockholders of Animus received cash and a note totaling $350,000. An initial cash payment of $175,000 was paid at closing with the note due over the period of one year without an interest charge. The financial statements reflect an imputed interest rate of 11% on the note balance resulting in a total discounted purchase of $334,460.

On September 31, 1998, the Company made a payment of $45,825 on the noninterest-bearing note with the balance of $129,175 paid on April 1, 1999. Since the note payable has been discounted, the principal balance at December 31, 1998 is reflected in the financial statements as $122,405. This note was paid off during 1999.

The consolidated financial statements reflect the excess of the purchase price ($334,460) over the net assets of the company purchased ($15,863) as well as the amount of amortization for the year ended December 31, 1998 ($15,930). Such excess was being amortized using the straight-line method over fifteen years through September 30, 1999 (see Note A).

The consolidated pro forma results of operations which follow assume that the acquisition had occurred at the beginning of the period presented. The calculations include adjustments for depreciation, amortization, and interest. The pro forma statements may not be indicative of the results that would have occurred if the acquisition had been effective on the date indicated or of the results that may be obtained in the future.

1998

Revenues $1,079,480

Net loss $ (197,370)

Net loss per common share $ (.14)

F-16

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE K - STOCK OPTIONS

During 1999, the Company issued employee stock options accounted for under APB Opinion No. 25 and related interpretations. 120,000 shares were issued to the President of the Company, vest in October 2000, have an exercise price of $1.15, and expire during October 2003. The other employee options have terms of ten years when issued and generally vest 33% each year for three years beginning at the date of grant. The exercise prices of these options are $1.25 per share and all Company options are not to be issued below the market price of the Company's stock on the date of grant. However, because the Company's stock is not actively traded, the market price is determined in good faith by the Board of Directors. Accordingly, no compensation expense has been recognized for employee stock options.

Had compensation cost for the Company's employee stock options been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net loss and loss per share in 1999 would have been as follows:

Net loss As reported $ (591,595) Pro forma (599,748)

Basic and diluted loss per share As reported $ (.30) Pro forma $ (.30)

The fair value of each option grant is estimated on the date of grant using the minimum value method because there was no public trading market for the Company's securities. Assumptions used were as follows: no dividend yield; risk-free interest rate of 6%; and expected lives of 8 and 3 years.

A summary of the status of the Company's outstanding stock options, including options issued to a financial advisory firm (see Note G), as of December 31, 1999 and changes during the year then ended is presented below.

Weighted average Shares exercise price

Outstanding at beginning of year - $ - Granted 369,839 1.19 Exercised - - Forfeited -

Outstanding at end of year 369,839

Options exercisable at year end 34,830

Weighted average fair value of employee options granted during the year $ .28

F-17

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE K - STOCK OPTIONS - CONTINUED

Options outstanding Options exercisable ---------------------------------- ---------------------- Weighted- average Weighted- Weighted- Number remaining average Number average outstanding contractual exercise exercisable exercise at 12/31/99 life price at 12/31/99 price ----------- ----------- --------- ----------- --------- Exercise prices $1.00 34,830 .12 years $1.00 34,830 $1.00 $1.15 120,000 3.83 years $1.15 - - $1.25 215,009 8.13 years $1.25 - - ----------- -----------

369,839 $1.19 34,830 $1.00 =========== ===========

NOTE L - COMMITMENTS AND CONTINGENCIES

Advisory Agreements

The Company has entered into two separate agreements with an investment banker for investment banking and financial services. A summary of the details of these two agreements follows.

The first agreement is for financial services and has a term of September 1, 1999 through August 31, 2000. If the investment banker completes a private placement for the Company, it will receive 8.5% of the dollar value of the transaction (see Note M related to January private placement). If the investment banker closes a debt financing for the Company, it will receive a 5% transaction fee. As of December 31, 1999, no such transactions had been completed.

The second agreement is for financial advisory and merger/acquisition services and also has a term of September 1, 1999 through August 31, 2000. The fee for the advisory services is $5,000 per month plus expenses (up to $5,000 per month) and 100,000 shares of common stock. See Note G for discussion of the stock transaction. Additionally, this agreement calls for merger/acquisition services. The cost for this service is $2,500 per month plus expenses (up to $5,000 per month) and a scaled percentage of any completed acquisition. See Note M related to acquisitions after year end. No such mergers/acquisitions had occurred as of December 31, 1999.

F-18

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE L - COMMITMENTS AND CONTINGENCIES - CONTINUED

Operating Leases

The Company leases certain office facilities, equipment, and phone lines used in its operations under operating leases expiring at various dates through 2009 which provide for payments as follows:

Year ending December 31 2000 $ 145,076 2001 135,334 2002 163,798 2003 129,496 2004 136,270 Thereafter 783,553

$1,493,527

Rental expense for all operating leases for the years ended December 31, 1999 and 1998 was $192,316 and $28,010, respectively.

NOTE M - 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.

1999

Carrying Fair amount value

Financial liabilities Notes payable $646,000 $638,000

NOTE N - SUBSEQUENT EVENTS

Mergers and Acquisitions

On January 25, 2000, the Company entered into an asset purchase agreement with FullNet of Tahlequah, Inc., an Oklahoma corporation, (FOT) in which FullNet purchased substantially all of FOT's assets, including approximately 400 individual and business Internet access accounts. The Company paid FOT approximately $98,000, including approximately $36,000 in cash and a note payable for approximately $62,000. The note is payable in eighteen monthly installments and does not bear interest.

F-19

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE N - SUBSEQUENT EVENTS - CONTINUED

Mergers and Acquisitions - Continued

On February 4, 2000, the Company entered into an asset purchase agreement with David Looper, d/b/a FullNet of Bartlesville (FOB), an Oklahoma sole proprietorship in which the Company purchased substantially all of FOB's assets, including approximately 400 individual and business Internet access accounts. The Company paid FOB approximately $178,000, including $128,000 in Company common stock (42,744 shares), and a note payable for approximately $50,000. The note bears an interest rate of 8% per annum with the principal and interest thereon payable on the earlier to occur of (a) the Company's closing of any private equity placement in excess of $351,000, (b) the closing of any underwritten offering of the Company's common stock, or (c) one year from the closing date of the asset purchase agreement.

On February 29, 2000, the Company entered into an agreement and plan of merger (Merger Agreement) with Harvest Communications, Inc. (Harvest), an Oklahoma corporation, pursuant to which Harvest merged with and into FullNet, Inc., a wholly owned subsidiary of the Company. Harvest had approximately 2,500 individual and business dial-up Internet access accounts, fifteen wireless Internet access accounts, and 35 web-hosting accounts. Pursuant to the terms of the Merger Agreement, the Company paid Harvest approximately $1,900,000, including $1,600,000 in Company common stock (537,500 shares), a note payable for $175,000, and $125,000 in cash. The note bears an interest rate of 8% per annum, with the principal and interest thereon payable on the earlier to occur of (a) the closing of any single funding (whether debt or equity) obtained by the registrant subsequent to the date of the Merger Agreement in an aggregate amount of at least $2,000,000, (b) the closing of any underwritten offering of Company common stock, or (c) March 6, 2001.

These transactions will be accounted for as purchases. The purchase price will be allocated to the underlying net assets purchased based on their fair market values at the respective acquisition date. Additionally, prior to acquisition, FOT, FOB, and Harvest were customers of the Company's ISP access services.

Financing

During February 2000, the Company raised an aggregate $135,600 in a private offering of its common stock exempt from the registration requirements of the Securities Act pursuant to Rule 504 of Regulation D. Pursuant to this offering, 45,200 shares were issued at a price of $3.00 per share. At December 31, 1999, related offering costs of approximately $11,000 have been deferred and will be charged against the gross proceeds of the offering in 2000.

On February 29, 2000, the Company entered into an agreement with certain individuals of a firm that provides financial advisory services to the Company pursuant to which the Company obtained a bridge loan of $275,000. The agreement provides for the issuance of warrants to purchase 137,500 shares of the Company's common stock at $.01 per share, and provides for certain registration rights. The loan bears an interest rate of 14% per annum and requires monthly interest payments. The loan term is for six months, and is extendable for two ninety-day periods with issuance of an

additional warrant for 137,500 shares exercisable at $.01 per share for each extension.

F-20

FullNet Communications, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

December 31, 1999 and 1998

NOTE N - SUBSEQUENT EVENTS - CONTINUED

Financing - Continued

During March 2000, the Company entered into two agreements with third-party individuals pursuant to which the Company obtained bridge loans for $500,000. The agreements provide for the issuance of warrants to purchase 100,000 shares of the Company's common stock at $.01 per share, and provide for certain registration rights. The loans bear interest at 14% per annum and require quarterly interest payments. The loan terms are for six months, and are extendable for two ninety-day periods with issuance of an additional warrant for 10,000 shares at $.01 per share for each extension.

The Company has not yet determined the value of the warrants associated with these loans. Any value assigned to these warrants will result in a discount on the loans and increase their effective interest rate.

During January through March 13, 2000, the Company issued 235,400 stock options to employees subject to generally the same terms discussed in Note K. These options all have an exercise price of $3.00 per share.

F-21

EXHIBIT 4.1

[Logo] FULLNET COMMUNICATIONS, INC. CUSIP 359851 10 2

INCORPORATED UNDER THE LAWS OF THE STATE OF OKLAHOMA

COMMON STOCK

SEE REVERSE FOR CERTAIN DEFINITIONS

NUMBER SHARES

This certifies that

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.00001 PAR VALUE, OF FULLNET COMMUNICATIONS, INC.

(HERINAFTER CALLED THE "Corporation"), transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of the Certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all provisions of the Certificate of Incorporation, as amended, and the Bylaws of the Corporation, as amended (copies of which are on file at the office of the Transfer Agent), to all of which the holder of this Certificate by acceptance hereof assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and register. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

DATE:

/s/ TIMOTHY J. KILKENNY Countersigned: PRESIDENT SECURITIES TRANSFER CORPORATION

[SEAL] P.O. BOX 701629 Dallas, Tx. 75370

By: /s/ LAURA L. KILKENNY SECRETARY /s/

TRANSFER AGENT - AUTHORIZED SIGNATURE

FULLNET COMMUNICATIONS, INC.

TRANSFER FEE $15.00 PER NEW CERTIFICATE ISSUED

A FULL STATEMENT OF THE RELATIVE RIGHTS, INTEREST, PREFERENCES AND RESTRICTIONS OF EACH CLASS OF STOCK WILL BE FURNISHED BY THE

CORPORATION TO ANY SHAREHOLDER UPON WRITTEN REQUEST, WITHOUT CHARGE.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM - as tenants in common UNIF GIFT MIN ACT --------Custodian--------- TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to

survivorship and not as Minors Act---------------- tenants in common (State)

Additional abbreviations may also be used though not in the above list.

For value received, ......................hereby sell, assign and transfer unto Please Insert Social Security or other identifying number of assignee.

[GRAPHIC OMITTED] ...........................................................................

................................................................................ Please print or typewrite name and address including postal zip code of assignee

................................................................................

................................................................................

..........................................................................Shares of the Common Stock represented by the within Certificate, and do hereby

irrevocably constitute and appoint..............................................

................................................................................ Attorney to transfer the said stock on the books of the within-named Corporation with all power of substitution in the premises.

Dated............................

Signature:

X................................................................

X................................................................

Signature Guarantee:

THE SIGNATURE(S) SHOULD BE MEDALLION STAMP GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION PURSUANT TO S.E.C. RULE 17AD-15

signature(s) guaranteed by:

X NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement, or any change whatever.

EXHIBIT 10.1

September 17, 1999

FullNet Communications, Inc. 200 North Harvey Street Suite 1704 Oklahoma City, OK 73102

Attention: Timothy J. Kilkenny, President and Chief Executive Officer

Re: Engagement Agreement: Financial Advisory Services

Dear Tim:

This agreement ("Agreement") commences effective September 1, 1999 between FullNet Communications, Inc., an Oklahoma corporation (the "Company"), and National Securities Corporation, a registered broker/dealer ("National"). Pursuant to this Agreement, National will provide services to the Company as set forth below:

1. Purpose.

The Company hereby retains National on an exclusive basis during the Engagement Period (as herein after defined) to render financial advisory services to the Company relating to investment banking, shareholder value and merger and acquisitions matters (as more fully described in Section 3 below), upon the terms and conditions as set forth herein (provided, however, National acknowledges the pre-existing relationship between the Company and William & Waddell, Inc., and agrees that the existence of such relationship shall not be deemed to be a breach of this Section 1). In performance of these duties, National shall provide the Company with the benefits of its best judgment and efforts. It is understood and acknowledged by the parties that the value of National's advice is not measurable in any quantitative manner, and that National shall not be obligated to spend any specific amount of time performing duties hereunder.

2. Engagement Period.

The term of this agreement shall be for twelve months commencing effective September 1, 1999 and terminating as of August 31, 2000, unless extended by mutual agreement of National and the Company or earlier terminated as provided in sections 10 and 14(b) hereof (the "Engagement Period").

3. Financial Advisory Services.

A. Services.

National will provide such of the following advisory services to the Company as are appropriate and as the Company may request:

(i) Provide general financial and strategic advice to assist the Company in increasing shareholder value;

(ii) Advise the Company in developing and implementing a financial/public relations strategy;

FullNet Communications, Inc. September 17, 1999 Page 2

(iii) When deemed appropriate by National, advise the Company on exchange listing issues;

(iv) Advise on capitalization structure and capital needs of the Company;

(v) Advise on the Company's quarterly forecasting and financial reporting;

(vi) Advise on the Company's acquisition models, analysis and purchase procedures;

(vii) Advise in the preparation and/or modification of the Company's business plan; and

(viii) Provide general corporate finance, capital planning and strategic advice to the Company.

B. Compensation.

(i) For serving as financial advisor, the Company agrees to pay National a financial advisory fee of $5,000 upon execution of this Agreement and $5,000 monthly due on or before the 1st day of each month during the Engagement Period (collectively, the "Financial Advisory Fees"). Should a sale of the Company occur during the Engagement Period, all unpaid Financial Advisory Fees shall be due and payable. Additionally, the Company shall issue to National or its designees, promptly upon notification by National of the names of its designees, if any, and the respective share amounts to be issued to such persons, an aggregate 100,000 shares (the "Shares") of its common stock ("Common Stock"). Such Shares shall be "restricted," as such term is defined under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), and shall contain a restrictive legend restricting the transferability thereof. Compensation payable to National under this Agreement shall be in addition to the amounts payable under the separate Engagement Agreement relating to Private Placement/Financings dated the date of this Agreement (the "Private Placement/Financings Agreement"); provided, however, to the extent that a Business Combination is consummated by the Company, and a Business Combination Transaction Fee is payable to National pursuant to Section 4(B) of this Agreement, no Financing Fees or Placement Fees (as such terms are defined in the Private Placement/Financings Agreement), shall be payable to National under the Private Placement/Financings Agreement in respect of such transaction unless a separate Private Placement or Debt Financing (as such terms are defined in the Private Placement/Financings Agreement) is consummated in connection with the Business Combination.

(ii) If the Company at any time proposes to register any shares of its Common Stock under the Securities Act, whether or not for sale for its own account, other than an offering primarily or exclusively to employees, and the registration form to be used may also be used for the registration of Common Stock (a "Piggyback Registration") owned by National or its designees (collectively, the "National Group"), the Company shall at such time notify the National Group at least 30 days prior to the filing of any registration statement with respect thereto. Upon the receipt of a written request of any member of the National Group made within ten (10) days after such notice (which request shall specify the Common Stock intended to be registered), the Company will use its best efforts, subject to the limitations set

forth below, to include in such registration the Shares. For the purposes of this Section 3(B)(ii), best efforts shall not require the Company to reduce the amount or sale price of the securities it proposes to register. Each such request shall also contain an undertaking from the participating member(s) of the National Group to provide all such information and material and to take all actions as may be required by the Company in order to permit the Company to comply with all applicable federal and state securities laws. Notwithstanding any other provision of this Section 3(B)(ii), in the case of an underwritten public offering, if the managing underwriter determines that market factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit, or exclude entirely, the number of shares (including those of the participating members of the National Group) to be included in such Piggyback Registration. If limited, the Shares of the participating members of the National Group will be registered pro rata with any other holders of Common Stock or Common Stock equivalents having registration rights.

FullNet Communications, Inc. September 17, 1999 Page 3

The participating members of the National Group shall pay all sales commissions or other similar selling charges with respect to Common Stock sold by them pursuant to a registration. The Company shall pay all registration and filing fees, fees and expenses of compliance with federal and state securities laws, printing expenses, messenger and delivery expenses, and the fees and disbursements of the Company's counsel and accountants, unless the applicable state securities laws require that stockholders whose securities are being registered pay their pro rata share of such fees, expenses and disbursements, in which case each stockholder (including the participating members of the National Group) participating in the registration shall pay its pro rata share of all such fees, expenses and disbursements based on its pro rata share of the total number of shares being registered.

4. Merger/Acquisition Services.

A. Services.

During the Engagement Period, the Company and National agree as follows: National will advise the Company with respect to the structure and financial analysis of potential mergers, exchanges of capital stock, asset acquisitions or other similar business combinations, including equity investment in another company (each, a "Business Combination") in which the Company may participate. National may also introduce the Company to persons or entities (each, a "Target Business") with whom the Company may effect a Business Combination. The parties acknowledge and agree that the Company previously has engaged in discussions relating to a possible Business Combination with the entities identified on Schedule A, attached hereto (each, a "Company-identified Business"), and that none of such entities shall be considered a Target Business for purposes of this Agreement.

B. Compensation.

(i) In compensation for the services set forth in 4 (A), the Company agrees to pay National $2,500 monthly due on or before the 1st day of each month during the Engagement Period (the "Business Combination Advisory Fee.")

(ii) Additionally, the Company agrees that if (a) a Business Combination is consummated with a Target Business, National shall be entitled to a cash fee equal to a percentage of the value of consideration paid for such Business Combination as follows: 5% on the first $1,000,000 of consideration; 4% of the second $1,000,000 of consideration; 3% of the third $1,000,000 of consideration; 2% of the fourth $1,000,000 of consideration; and 1% of the consideration over $4,000,000, and (b) a Business Combination is consummated with a Company-identified Business, National shall be entitled to a cash fee equal to the greater of $5,000 and a percentage of the value of consideration paid for such Business Combination as follows: 2 1/2% on the first $1,000,000 of consideration, 2% of the second $1,000,000 of consideration, 1 1/2% of the third $1,000,000 of consideration, 1% of the fourth $1,000,000 of consideration, and .5% of the consideration over $4,000,000 (any cash fee payable under (a) or (b), collectively, the "Business Combination Transaction Fee").

FullNet Communications, Inc. September 17, 1999 Page 4

(iii) If the consideration paid by or to the Company in connection with any Business Combination is in securities, the closing price of such securities on the last trading date immediately prior to the closing of the Business Combination shall be deemed to be the value of the consideration as hereinabove used. If the securities are not publicly traded, the value shall be the fair market value of the securities. The monies shall be payable by wire transfer to National at the closing of such Business Combination, except that any Business Combination Transaction Fee in respect of any contingent consideration shall be payable whenever such consideration is paid.

(iv) For any Business Combination for which National has introduced a Target Business during the Engagement Period, National shall be entitled to receive the Business Combination Transaction Fee with respect to any such Business Combination which is completed by the Company at any time from the date hereof until a period ending twelve months after the termination of the Engagement Period.

5. Relationships with Others; Confidentiality.

The Company acknowledges that National or its affiliates are in the business of providing investment banking financial advisory and consulting services to others. Nothing herein contained shall be construed to limit or restrict National in conducting such business with respect to others, or in rendering such advise to others. In connection with the rendering of services hereunder, National has been or will be furnished with confidential information concerning the Company including, but not limited to, financial statements and information, cost and expense data, production data, trade secrets, marketing and customer data, and such other information not generally obtained from public or published information or trade sources. Such information shall be deemed "Confidential Material" and, except as specifically provided herein, shall not be disclosed by National without prior written consent of the Company. In the event National is required by applicable law or legal process to disclose any of the Confidential Material, it is agreed that National will deliver to the Company prompt notice of such requirement prior to disclosure of same to permit the Company to seek an appropriate protective order and/or waive compliance of this provision. If, in the absence of a protective order or receipt of written waiver, National is nonetheless, in the written opinion of counsel, compelled to disclose any Confidential Material, National may do so without liability hereunder provided that notice of such prospective disclosure is delivered to the Company prior to actual disclosure. Following the termination of this Agreement, National shall deliver to the Company all Confidential Material.

6. Financial Advisor's Liability.

In the absence of gross negligence or willful misconduct on the part of National, National shall not be liable to the Company or to any officer, director, employee, agent, representative, stockholder or creditor of the Company for any action or omission of National or any of its officers, directors, employees, agents, representatives or stockholders in the course of, or in connection with, rendering or performing any services hereunder.

FullNet Communications, Inc. September 17, 1999 Page 5

7. Limitation Upon the Use of Advice and Services.

(a) No person or entity, other than the Company or any of its subsidiaries or directors or officers of each of the foregoing, shall be entitled to make use of or rely upon the advice of National to be given hereunder, and the Company shall not transmit such advice to, or encourage or facilitate the use or reliance upon such advice by others without the prior consent of National.

(b) It is clearly understood that National, for services rendered under this Agreement, makes no commitment whatsoever to recommend or advise its clients to purchase the securities of the Company. Research reports or corporate finance reports that may be prepared by National will, when and if prepared, be done solely on the merits or judgment of analysts of National or any corporate finance personnel of National.

(c) It is clearly understood that National, for services rendered under this Agreement, makes no commitment whatsoever to make a market in any of the Company's securities on any stock exchange or in any electronic marketplace. Any decision by National to make a market in any of the Company's securities shall be based solely on the independent judgment of National's management, employees, and agents.

(d) Use of the National's name in annual reports or any other report of the Company or releases by the Company must have the prior approval of National unless the Company is required by law to include National's name in such annual reports, other report or release of the Company, in which event National will be furnished with copies of such annual reports or other reports or releases using National's name in advance of publication by the Company.

8. Indemnification.

Since National shall be acting on behalf of the Company, the Company agrees to indemnify National in accordance with the provisions of Annex A hereto, which is incorporated by reference and made a part hereof.

9. Expenses.

The Company shall reimburse National for all of its reasonable actual out-of-pocket expenses, including but not limited to travel, legal fees, printing, and other expenses, incurred in connection with the provision of services hereunder; provided, however, National agrees not to accrue or incur expenses in any monthly period in excess of $5,000 without the consent of the Company. National will not bear any of the Company's legal, accounting, printing or other expenses in connection with any transaction considered or consummated hereby. It also is understood that neither National, nor the directors, employees and agents of National, will be responsible for any fees or commissions payable to any finder or to any other financial or other advisor utilized or retained by the Company. The Company shall deposit herewith $1,000 for reimbursable expenses, such expenses to be billed on a monthly basis and be paid within ten days of receipt.

FullNet Communications, Inc. September 17, 1999 Page 6

10. Termination.

This Agreement may be terminated by National or the Company at any time by written notice to the other party, without liability or continuing obligation except as set forth in the following sentence. No termination shall affect: (a) any Financial Advisory Fees or Business Combination Advisory Fees earned by National up to the date of termination, (b) the issuance of the Shares pursuant to Section 3(B)(i) hereof, (c) any Business Combination Transaction Fees payable to National after termination pursuant to Section 4(B)(ii) hereof, (d) the reimbursement of expenses as described in Section 9 hereof, (e) all obligations of the Company under Section 8 hereof, and (f) the Indemnification Provisions attached hereto as Annex A which are incorporated herein, all of which shall remain operative and in full force and effect.

11. Limitation of Liability.

The liability of National pursuant to this Engagement Letter shall be limited to the aggregate fees received by National hereunder, which shall not include any liability for incidental, consequential or punitive damages

12. Discretion.

Nothing contained herein shall require the Company to enter into any transaction presented to it by National, which decision shall be at the Company's sole discretion.

13. Severability.

Every provision of this Agreement is intended to be severable. If any term or provision hereof is deemed unlawful or invalid for any reason whatsoever, such unlawfulness or invalidity shall not affect the validity of this Agreement.

14. Miscellaneous.

(a) Any notice or communication between parties hereto shall be sufficiently given if sent by certified or registered mail, postage prepaid, or faxed and confirmed as follows:

If to the Company, addressed to it at:

FullNet Communications, Inc. 200 North Harvey Street, Suite 1704 Oklahoma City, OK 73102 Attention: Timothy J. Kilkenny, President and Chief Executive Officer

Facsimile number: (405) 236-8201

FullNet Communications, Inc. September 17, 1999 Page 7

With copies to:

Jeanette C. Timmons, Esq. Day Edwards Federman Propester & Christensen, P.C. 210 Park Ave., Suite 2900 Oklahoma City, OK 73102

Facsimile number: (405) 236-1012

Or, if to National, addressed to it at:

National Securities Corporation 1001 Fourth Avenue, Suite 2200 Seattle, Washington 98154 Attention: ___________________

Facsimile number: (206) 343-6106

With copies to:

Such notice or other communication shall be deemed to be given on the date of receipt.

(a) If National shall cease to do business, the provisions hereof relating to duties of National and compensation by the Company as it applies to National shall thereupon cease to be in effect, except for the Company's obligation of payment for services rendered prior thereto. This Agreement shall survive any merger of, acquisition of, or acquisition by National and after any such merger or acquisition shall be binding upon the Company and the corporation surviving such merger or acquisition.

(b) This Agreement embodies the entire agreement and understanding between the Company and National and supersedes any and all negotiations, prior discussions and preliminary and prior agreements and understandings related to the subject matter hereof, and may be modified only by a written instrument duly executed by each party.

(c) This Agreement has been duly authorized, executed and delivered by and on behalf of the Company and National.

(d) This Agreement shall be construed and interpreted in accordance with the laws of the State of Washington, without giving effect to conflicts of laws.

(e) There is no relationship of partnership, agency, employment, franchise or joint venture between the parties. Neither party has the authority to bind the other or incur any obligation on its behalf.

FullNet Communications, Inc. September 17, 1999 Page 8

(f) This Agreement and the rights hereunder may not be assigned by either party (except by operation of law) and shall be binding upon and inure to the benefit of the parties and their respective permitted successors, assigns and legal representatives.

If you are in agreement with the foregoing, please execute and return one copy of this letter to National, along with a check or wire transfer made payable to National Securities Corporation in the amount of $13,500 in accordance with Sections 3, 4, and 9 above (consisting of the sum of $5,000 due upon execution of this agreement, the $7,500 initial monthly payment and the $1,000 deposit due pursuant to paragraph nine above).

Sincerely,

National Securities Corporation

By:/s/ Steven A. Rothstein

Name: Steven A. Rothstein Title: Chairman

Agreed to and accepted this 17th day of September, 1999.

FullNet Communications, Inc.

By:/s/ Timothy J. Kilkenny

Name: Mr. Timothy J. Kilkenny Title: President and Chief Executive Officer

FullNet Communications, Inc. September 17, 1999 Page 9

ANNEX AINDEMNIFICATION

Recognizing that transactions of the type contemplated in this engagement sometimes result in litigation and that National Securities Corporation's ("National") role is advisory, FullNet Communications, Inc. (the "Company") agrees to indemnify and hold harmless National, its affiliates and their respective officers, directors, employees, agents and controlling persons (collectively, the "Indemnified Parties"), from and against any losses, claims, damages and liabilities, joint or several, related to or arising in any manner out of any transaction, proposal or any other matter (collectively, the "Matters") contemplated by the engagement of National hereunder, and will promptly reimburse the Indemnified Parties for all expenses (including reasonable fees and expenses of legal counsel) as incurred in connection with the investigation of, preparation for, or defense of any pending or threatened claim related to or arising in any manner out of any Matter contemplated by the engagement of National hereunder, or any action or proceeding arising therefrom (collectively, "Proceedings"), whether or not such Indemnified Party is a formal party to any such Proceeding. Notwithstanding the foregoing, the Company shall not be liable in respect of any losses, claims, damages, liabilities or expenses that a court of competent jurisdiction shall have determined by final judgment resulted solely from the gross negligence or willful misconduct of an Indemnified Party. The Company further agrees that it will not, without the prior written consent of National, settle compromise or consent to the entry of any judgment in any pending or threatened Proceeding in respect of which indemnification may be sought hereunder (whether or not National or any Indemnified Party is an actual or potential party to such Proceeding), unless such settlement, compromise or consent includes an unconditional release of National and each other Indemnified Party hereunder from all liability arising out of such Proceeding.

The Company agrees that if any indemnification or reimbursement sought pursuant to this letter were for any reason not to be available to any Indemnified Party or insufficient to hold it harmless as and to the extent contemplated by this letter, then the Company shall contribute to the amount paid or payable by such Indemnified Party in respect of losses, claims, damages and liabilities in such proportion as is appropriate to reflect the relative benefits to the Company and its stockholders on the one hand, and National on the other, in connection with the Matters to which such indemnification or reimbursement relates or, if such allocation is not permitted by applicable law, not only such relative benefits but also the relative faults of such parties as well as any other equitable considerations. It is hereby agreed that the relative benefits to the Company and/or its stockholders and to National with respect to National's engagement shall be deemed to be in the same proportion as (i) the total value paid or received or to be paid or received by the Company and/or its stockholders pursuant to the Matters (whether or not consummated) for which National is engaged to render services bears to (ii) the fees paid to National in connection with such engagement. In no event shall the Indemnified Parties contribute or otherwise be liable for an amount in excess of the aggregate amount of fees actually received by National pursuant to such engagement (excluding amounts received by National as reimbursement of the expenses).

The Company further agrees that no Indemnified Party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with National's engagement hereunder except for losses, claims, damages, liabilities or expenses that a court of competent jurisdiction shall have determined by final judgment resulted solely from the gross negligence or willful misconduct of such Indemnified Party. The indemnity, reimbursement and contribution obligations of the Company shall be in addition to any liability which the Company may otherwise have and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company or an Indemnified Party.

The indemnity, reimbursement and contribution provisions set forth herein shall remain operative and in full force and effect regardless of (i) any withdrawal, termination or consummation of or failure to initiate or consummate any Matter referred to herein, (ii) any investigation made by or on behalf of any party hereto or any person controlling (within the meaning of Section 15 of the Securities Act of 1933 as amended, or Section 20 of the Securities Exchange Act of 1934, as amended) any party hereto, (iii) any termination or the completion or expiration of this letter of National's engagement and (iv) whether or not National shall, or shall not be called upon to, render any formal or informal advice in the course of such engagement.

EXHIBIT 10.2

LEASE AGREEMENT

LEASE AGREEMENT ("Lease"), entered into as of this 2nd day of December, 1999, by and between BOK Plaza Associates, L.L.C., having an address at 330 Garfield Street, Suite 200, Santa Fe, New Mexico ("Landlord") and Fullnet Communications, Inc., an Oklahoma Corporation having an address at 201 Robert S. Kerr, Suite 210, Oklahoma City, OK 73102 ("Tenant").

WITNESSETH:

Premises 1. Landlord, for and in consideration of the payments hereinafter stipulated to be made by Tenant and the covenants and agreements hereinafter contained to be kept and performed by Tenant, hereby leases unto Tenant, and Tenant hereby leases from Landlord Suite 210. containing approximately 13,627 rentable square feet on the 2nd floor ("Premises"), as shown on the drawing attached hereto as Exhibit A and made a part hereof, in the building located at 201 Robert S Kerr Avenue, Oklahoma City, OK 73102 and known as Bank of Oklahoma Plaza ("Building").

Term 2. The term ("Term") of this Lease shall be for 10 years (unless sooner terminated as herein provided), commencing on the 1st day of January, 2000 ("Commencement Date"), and ending on the 31st day of December, 2009. In the event Landlord is unable to deliver possession of the Premises at the commencement of the Term, Landlord shall not be liable for any damage thereby nor shall this Lease be void or voidable nor shall the expiration date be extended but Tenant shall not be liable for any rent until the earlier to occur of either (i) the day Tenant's personnel first occupy all or any portion of the Premises or (ii) the day on which Landlord gives to Tenant notice that the Premises are ready for occupancy by Tenant.

Rent 3. Tenant shall pay as fixed minimum rent for the Premises without prior demand and without offset or deduction the sum of One Million Two Hundred Ninety One Thousand One Hundred Fifty Eight and No/100 Dollars ($1,291,158.00) throughout the term and further detailed in Article 34. Monthly installments detailed in Article 34 shall be paid in advance on the first day of each calendar month of the Term and additional rent as hereinafter set forth. All rent and additional rent payments shall be made payable to BOK Plaza Associates, L.L.C., and delivered to Landlord at c/o Grubb & Ellis/Beffort Brooks Malherbe, 101 N. Robinson, Suite 700, Oklahoma City, Oklahoma 73102 or such other address as Landlord may from time to time designate. The first full month's installment of fixed minimum rent due hereunder shall be paid by Tenant to Landlord upon the execution of this Lease. If the tenancy commences on a day other than the first day of any calendar month, Tenant shall pay the pro rata share of fixed minimum rent due for the unexpired time in the month in addition to the fixed minimum rent for the first full month upon the execution of this Lease. All other payments and charges hereunder shall be additional rent and subject to collection I n the same manner as fixed minimum rent.

Security Deposit 4. Tenant will deposit with Landlord the sum of $5,000.00 as

security for the faithful performance by Tenant of all the terms, covenants and conditions of this Lease. Said deposit shall be held by Landlord, without liability for interest, and may be applied by Landlord, in whole or part, for the payment of any past due fixed minimum rent, additional rent, or other money. damage or loss which may be sustained by Landlord because of a default by Tenant. In the event of any such application by Landlord, Tenant shall, upon the written demand of Landlord, promptly remit to Landlord a sufficient amount of cash to restore the security to the original sum deposited. Said deposit shall be returned to Tenant after termination of Tenant's occupancy hereunder and after delivery of the entire possession of the Premises to Landlord in full accordance with tine terms of this Lease, provided Tenant has complied with all of the terms,

covenants and conditions of this Lease, including those relating to the condition in which the Premises shall be left by Tenant. Landlord may deliver such deposit to any purchaser or other transferee of Landlord's interest in the Building, and thereupon Landlord shall be discharged from any further liability with respect to such deposit.

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Use; Compliance with Laws 5. Tenant shall use and occupy the Premises for office space as a

telecommunications and internet data center and general office and for no other purposes without the prior written consent of the Landlord. Tenant shall use the Premises for no unlawful purpose or act; shall not commit nor permit waste or damage to the Premises; shall, at its sole cost and expense, comply with and obey all present and future laws, regulations, or orders of any governmental authority, agency, department, commission, board or any other body which shall impose any violation, order or duty upon Landlord or Tenant with respect to the Premises, or, if arising out of Tenant's use or manner of use of the Premises, with respect to the Building; shall comply with and obey all directions of the Landlord, including Rules and Regulations attached hereto as Exhibit B and made a part hereof, as changed or modified from time to time by Landlord on reasonable notice to Tenant; shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them; shall not place a load on any portion of the floor of the Premises in excess of the floor load per square foot which it was designed to carry; and shall not do or permit anything to be done which will invalidate or increase the rate of insurance upon tine Building. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of the Rules and Regulations.

Condition of Premises 6. (a) Tenant has inspected the Premises and agrees to accept the

same "as is" without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements.

(b) Any construction, alterations or improvements to the Premises shall be performed by Tenant using contractors selected by Tenant and approved by Landlord and shall be governed in all respects by the provisions of Section 8(a) (b) and (c) of this Lease. In any and all events the Commencement Date shall not be postponed or delayed if the improvements to the Premises are incomplete on the Commencement Date for any reason whatsoever. Any delay I the completion of the initial improvements to the Premises shall not subject Landlord to any liability for any loss or damage resulting therefrom.

Services 7. (a) As long as Tenant is not in default under any terms or covenants in this Lease, Landlord will furnish such elevator and electricity service as in its judgernent is reasonably necessary for the comfortable use of the Premises during normal business hours on all generally recognized business days, but no failure to furnish any service, except as the result of time willful neglect of Landlord, and no interruption or suspension of any such service when necessary by reason of governmental regulations, civil commotion or riot, accident or emergency, or for repairs. alterations or improvements considered desirable or necessary by Landlord, shall be construed as an eviction of Tenant or an abatement or diminution of rent or render Landlord liable for damages either to person, business or property suffered by Tenant, its employees, licensees, or invitees by reason of any such failure, or release Tenant from any of its obligations under this Lease. Tenant shall be responsible for providing its own janitorial services to the Premises.

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(b) Tenant shall not install nor connect any device, including, without limitation, air conditioning equipment. electric driven motor or any electrical, gas or water appliance, machine or equipment other than customary office equipment, without Landlord's prior written consent; such consent shall not relieve Tenant of its obligation to restore the Premises to the condition existing prior to the installation of said device, including the removal of any or all ducts, wiring, piping or similar apparatus and the repair and replacement of all damage caused by such removal. Landlord may, at its option, retain all such apparatus excluding any supplemental air conditioning system and generator installed by Tenant, and require the delivery of time Premises in the condition as changed as the result of the installation of such apparatus. (c) Landlord shall, at Tenant's sole cost and expense, install sub-meters to measure Tenant's utility consumption in the Premises (including but not limited to electricity, gas and water) and to charge the Tenant as additional rent (or such utility consumption at the then applicable rate for the sub-metered utilities plus five percent (5%) for administrative expenses promptly upon demand therefor. In the event no such rate is promulgated, then Landlord shall bill Tenant and Tenant shall pay Landlord for Tenant's utility consumption at the same rates and frequency that Tenant would be obligated to pay the local utility company furnishing the applicable utility service if it were metered directly, and all such sums shall be collectible as additional tent payable hereunder.

Alterations; Mechanics' Liens 8. (a) Tenant shall not make any changes, alterations or

additions in or to the Premises of any nature ("Alterations") without Landlord's prior written consent. In the event any Alterations are made upon written request by Tenant approved by Landlord, such Alterations shall be made at the sole expense of Tenant by a contractor approved by Landlord, or if mutually agreed between Landlord and Tenant, Landlord shall perform such work at a price of cost plus 20%. Tenant shall not display any signs or similar placards in or on the Building, the windows of the Premises or the interior hallways; nor shall any curtain or other window treatment be hung or installed at the Premises without Landlord's prior written consent. Tenant shall reimburse Landlord promptly upon demand for any expenses incurred by Landlord in connection with its review of Tenant's request for Landlord's consent.

(b) Any Alterations made by Tenant, excepting only furniture and trade fixtures, shall at Landlord's option remain on the Premises as the property of the Landlord without compensation to Tenant, or shall be removed therefrom and the Premises restored to their original condition at cost to Tenant, at the expiration or sooner termination of this Lease. The Tenant shall, at its own expense. repair any damage caused by the removal of furniture and trade fixtures and restore the Premises to their original condition at its own expense. The terms of this Article 8 shall survive the termination or expiration of this Lease.

(c) Landlord shall not be liable for any labor or materials furnished or to be furnished to Tenant on credit, and no mechanic's or other lien for any such labor or materials shall attach to or affect the reversion or other estate or interest of Landlord in and to the Premises. Tenant shall indemnify and save Landlord and/or its agents harmless from and against any liability, damages. claims or costs arising from the imposition of any such lien Tenant shall obtain and deliver to Landlord, prior to the commencement of any work performed at the Premises,

written and unconditional waivers of mechanics liens upon the Premises and Building for all work labor and services to be performed and materials to be furnished in connection with such work, signed by all contractors, subcontractors. materialmen and laborers to become involved in such work. Notwithstanding the foregoing, any mechanic's lien filed against the Premises or the Building for work claimed to have been done for or materials claimed to have been furnished to Tenant shall be discharged by Tenant at its expense within 15 days after such filing, by payment or filing of the bond required by law. Failure to comply with these provisions will constitute a material default by Tenant under this Lease, entitling Landlord to exercise any or all of the remedies provided in this Lease in the event of Tenant's default.

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Repair 9. (a) Landlord shall maintain the exterior and structure of the Building in a manner compatible with good quality office space as deemed necessary by Landlord. Tenant shall, at Tenant's sole cost and expense, promptly make all repairs and replacements as and when needed to keep the Premises, the fixtures and appurtenances therein and every part thereof (including, without limitation, the window treatment contained therein) in good working order and condition. All damage or injury to the Premises or any part of the Building, its fixtures, equipment, and appurtenances, caused by or resulting from the actions, omissions or negligence of Tenant, its servants, agents, contractors, employees, visitors or licensees, shall be repaired promptly at Tenant's sole cost and expense to Landlord's satisfaction. All repairs and replacements made by or on behalf of Tenant shall be at least equal in quality to the original work or installation.

(b) If Tenant fails to make any repairs it is required to make in accordance with the terms of this Lease, the same may be made by Landlord after 5 days' notice to Tenant (except in the event of emergency, in which case no notice shall be required) at the expense of Tenant and such expense shall be collectible as additional rent and shall be paid by Tenant within 10 days after rendition of a bill thereof. No failure of Landlord to make repairs required to be made by it hereunder, except as a result of willful neglect, shall be construed as an eviction of Tenant or entitle Tenant to an abatement or diminution of rent or render Landlord liable for damages either to person, business or property suffered by Tenant, its servants, agents, contractors, employees, visitors or licensees by reason of such failure, or release Tenant from any of its obligations under this Lease.

Landlord's Lien 10. Intentionally omitted.

Assignment and Subletting 11. (a) Tenant shall not (i) transfer or assign this Lease or any

interest hereunder, nor permit any assignment hereof by operation of law, (ii) sublet the Premises or any part thereof nor (iii) permit the use of the Premises by desk tenants or any parties other than the Tenant or its agents, without in each case first obtaining the written consent of Landlord which consent shall not be unreasonably withheld. Should Tenant wish to obtain Landlord's consent to an assignment or subletting, it shall make such request in written form detailing the proposed sub-rent, term, sub-tenant or assignee, compensation to be received by Tenant, name and financial data of proposed sub-tenant or assignee and such other information as Landlord may request. Landlord may, in its sole discretion, either (i) give its approval (ii) not give its approval, or (iii) cancel and terminate this Lease, or if proposed subletting or assignment is for less than all the Premises, cancel and terminate this Lease with respect to such portion (with the rent and all other charges payable hereunder equitably apportioned). Tenant shall not pledge or mortgage its leasehold interest or any part thereof and any such pledge or mortgage shall, at Landlord's option, render this Lease void.

(b) For purposes of this Article 11, (i) the merger, transfer of a majority of the issued and outstanding capital stock or any corporate tenant or subtenant or transfer of a major partnership interest of any tenant or subtenant that is a partnership, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Lease, or of such sublease, as the case may be, (ii) a takeover, management or succession agreement shall be deemed a transfer of this Lease and (iii) a modification,

amendment or extension without Landlord's prior written consent of an assignment or a sublease previously consented to by Landlord shall be deemed a new assignment or sublease.

(c) Landland may assign this Lease or any part thereof or right thereunder. Upon such assignment, Landlord shall have no further obligations with respect hereto and Tenant shall look solely to such assignee for the performance of Landlord's obligations.

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Property Loss; Liability 12. Landlord or its agents shall not be liable for any injury,

loss or damage to persons or property resulting from any cause whatsoever unless specifically and solely caused by the gross negligence of Landlord. Landlord or its agents shall not be liable for any such injury, loss, or damage caused by other tenants or persons in or about the Building. Tenant shall maintain sufficient "contents" insurance against theft or casually to its property for all risks including difference in conditions and including. without limitation, water damage.

Indemni- ficaton 13. (a.) Tenant shall indemnify, defend and hold harmless

Landlord and its officers, directors, partners, employees, attorneys and agents (collectively, the "Tenant Indemnities") from and against any and all liability, claims, demands, causes of action, judgments, costs. expenses. and all losses and damages for bodily injury, death and property damage arising from any activity in the Premises even if resulting from the negligent act or omission of any of the Tenant indemnities, and from all costs, attorney fees and disbursements, and liabilities incurred in the defense of any such claim. Upon notice from Landlord. Tenant shall defend any such claim, demand, cause of action or suit at Tenant's expenses by counsel satisfactory to Landlord in its reasonable discretion. The provisions of this subsection (a) shall survive the expiration or earlier termination of this Lease.

` (b) Landlord shall indemnify, defend and hold harmless Tenant and its officers, directors, partners, employees, attorneys and agents (collectively, the "Landlord Indemnities") from and against any and all liability, claims, demands, causes of action, judgments, costs, expenses, and all losses and damages for bodily injury, death and property damage arising front any activity in or about the Building (other than the Premises) even if resulting from the negligent act or omission of any of Landlord Indemnities and from all costs, attorney fees and disbursements, and liabilities incurred in the defense of any such claim. Upon notice from Tenant, Landlord shall defend any such claim, demand, cause of action or suit at Landlord's expense by counsel satisfactory to Tenant in its reasonable discretion. The provisions of this subsection (b) shall survive the expiration or earlier termination of this Lease.

Insurance 14. Tenant shall, in addition to the insurance required pursuant to Article 12 hereof, at its sole cost and expense, carry comprehensive public liability insurance with respect to the Premises (and the adjacent common areas) and the operations conducted therein against any liability for bodily injury, death and property damage, including blanket contractual liability, with a combined single limit of $1,000,000. All policies of insurance required hereunder shall name Landlord as additional insured as its interests may appear and as Loss payee. Tenant shall deliver to Landlord, within 30 days after the date hereof, certificates evidencing such insurance and shall cause all such policies to provide for 30 days' prior written notice to Landlord of any cancellation, reduction in amount or material change in coverage. Tenant and Landlord agree that insurance carried by either of them against loss or damage by fire or other casualty shall contain a clause whereby the insurer waives its rights of subrogation against the other party. Upon request each party agrees to furnish evidence of such waiver to the other party.

Holding Over 15. If Tenant should remain in possession of the Premises alter

the expiration of the Term without the execution by Landlord and Tenant of a new lease, Tenant shall be deemed to be occupying the Premises as a tenant-at-sufferance, subject to all the covenants and obligations of this Lease and at a monthly rental of twice the per monthly fixed minimum rent and additional rent paid by Tenant immediately prior to the expiration hereof, computed on the basis of a 30 day month.

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Estoppel Certificate 16. Tenant shall, from time to time and whenever Landlord so

requests, within 10 days after Landlord's request, sign and deliver to Landlord a certificate stating: whether this Lease is in full force and effect; whether any amendments or modifications exist; whether there are any defaults hereunder; the then current rent; and such other information as may be reasonably requested.

Rights Reserved to Landlord 17. Landlord reserves and shall at all times have the right to

reenter the Premises in any emergency and to inspect the same, and to alter, improve, remodel or repair the Premises and any portion of the Building including, without limitation, installation of pipes, conduits or new building mechanical systems, without abatement of fixed minimum or additional rent and without incurring any liability to Tenant herefor. Tenant hereby waives as against Landlord any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises and any other loss occasioned thereby. Throughout the Term, Landlord shall have the right to enter the Premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the Building, and during the last 6 months of the Term for the purposes of showing the premises to prospective tenants, and may, during said 6 month period, place upon the Premises "To Let" and "For Sale" notices.

Default

Damages 18. (a) Each of the following acts or omissions of Tenant or occurrences shall constitute an "Event of Default": (i) failure or refusal by Tenant to pay fixed minimum rent, additional rent or other payments hereunder when due; (ii) failure to perform or observe any other covenant or condition of this Lease by Tenant to be performed or observed upon the expiration of a period of 10 days following written notice to Tenant of such failure; (iii) abandonment or vacating of the Premises or any significant portion thereof; and (iv) the filing or execution or occurrence of: a petition in bankruptcy or other insolvency proceeding by or against Tenant; a petition or answer seeking relief under any provision of the Bankruptcy Act or like law; an assignment for the benefit of creditors or composition; a petition or other proceeding by or against Tenant for the appointment of a trustee, receiver or liquidator of Tenant or any of Tenant's property; or a proceeding by an governmental authority for the dissolution or liquidation of Tenant.

(b) Upon or at any time after the occurrence of any Event of Default, Landlord may, at Landlord's option, upon five days written notice, in addition to any other remedy or right given hereunder or by law or equity, do any one of more of the following: (i) terminate this Lease, in which event Tenant shall immediately surrender possession of the Premises to Landlord; (ii) enter upon and take possession of the Premises and expel or remove Tenant and any other occupant therefrom, with or without having terminated the Lease; and (iii) alter locks and other security devices at the Premises.

(c) The exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance or surrender of the Premises by Tenant, whether by agreement or by operation of law, it being understood that such surrender can effected only by the written agreement of Landlord and Tenant. The termination by Landlord of this Lease shall in no way exhaust any other rights hereunder or under law

or in equity. No alienation of security devices and no removal or other exercise of dominion by Landlord over the property of Tenant or others at the Premises shall constitute a conversion. All claims for damages by reason of such reentry repossession or alteration of locks or other security devices are hereby waived, as are all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceedings or other legal process. Tenant agrees that any reentry by Landlord may be pursuant to judgement obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise. If Tenant shall move from the Premises at any time prior to the termination of this Lease~ Landlord shall have the right to enter upon the Premises for the purpose of decorating the same or making alterations or changes therein, without such entry in any manner affecting the obligations of the Tenant hereunder.

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(d) If Landlord elects to terminate the Lease or if Landlord shall reenter the Premises without having terminated the Lease, then notwithstanding such termination or reentry, Tenant shall be liable for and shall pay to Landlord, the sum of all fixed minimum rents, additional rents and other indebtedness accrued to the date of such termination or reentry, as the case may be, and Landlord may declare the fixed minimum rent and additional rent for the balance of the Term immediately due and payable.

(e) All items of additional rent set forth in Subparagraph 18(d) above relating to a period after termination or reentry shall be conclusively presumed to be the highest average monthly additional rent paid by Tenant during the Term, except that additional rent on account of Taxes and Expenses (as hereinafter defined) shall be conclusively presumed to increase at the average of the rates of increase thereof during the period prior to such termination. Nothing in this Article 18 shall be construed to limit or preclude recovery by Landlord against Tenant for any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant.

(f) In case of any Event of Default, Tenant shall also be liable for and shall pay to Landlord, in addition to any sum required to be paid above, all expenses as Landlord may incur in connection with such Event of Default of re-letting, including, without limitation: advertising costs; brokers' fees; the costs of removing and storing Tenant's or other occupant's property; the costs of repairing, altering, remodeling or otherwise putting the Premises into condition acceptable to a new tenant or tenants; and all reasonable expenses incurred by Landlord in enforcing Landlord's remedies, including attorneys' fees. For all purposes of this Lease, and in addition to any other charge herein contained, past due fixed minimum and additional rent and other past due payments shall bear interest from the date due, at twelve percent per annum until paid.

(g) In the event of termination or repossession of the Premises for an Event of Default, Landlord shall not have any obligation to re-let or attempt to re-let the Premises, or any portion thereof, or to collect rental after re-letting; and in the event of re-letting Landlord may re-let the whole or any portion of the Premises for any period, to any tenant, at any rent, and for any use and purpose.

(h) If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the Premises for such purpose), and thereupon Tenant shall pay to Landlord as additional rent, upon demand, all costs, expenses and disbursements (including attorney's fees) incurred by Landlord in taking such remedial action.

(i) Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws if Tenant is evicted or dispossessed for any cause or if Landlord obtains possession of the Premises by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. Tenant hereby further waives and renounces any and all homestead exemption rights it may now or hereafter have.

(j) In the event of any default by Landlord, Tenant's exclusive remedy shall be an action for damages (Tenant hereby waiving the benefit of any laws granting it a lien upon the property of Landlord and/or upon rent due Landlord), but prior to any such action Tenant will give Landlord written notice specifying such default with particularity, and Landlord shall

thereupon have thirty (30) days in which to cure any such default. Unless and until Landlord fails to commence to cure a default after such notice, Tenant shall not have any remedy or cause of action by reason thereof. No obligation of Landlord hereunder will be construed as a condition, and all Landlord's obligations will be binding upon Landlord only during the period of its possession of the Building and not thereafter.

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Fire or Other Casualty 19. If at any time during the Term, the Premises or any portion

thereof or any portion of the Building should be damaged or destroyed by fire or other casualty, then Tenant shall have no right to terminate this Lease unless Tenant's operations center (as shown on Exhibit `A') is destroyed and the Landlord is not able to provide alternative Premises in the Building within thirty days, then Tenant shall have the right to terminate this Lease. In the case of such damage or destruction, Landlord shall have the election to terminate this Lease or to repair and reconstruct the Premises if Tenant does not terminate this Lease as provided above and Building to substantially the condition in which they existed immediately prior to such damage and destruction. In any of the aforesaid circumstances, unless such fire or damage shall have resulted form the negligence, acts or omissions of Tenant or its agents, contractors, employees, visitors or licensees, fixed minimum and additional rent shall abate proportionately during the period to the extent that the Premises are unfit for use by Tenant in the ordinary course of its business; provided, however, that should Tenant reoccupy a portion of the Premises prior to the date the whole Premises are made tenantable, fixed minimum and additional rent allocable to such portion shall be payable by Tenant from the date of such reoccupancy. If Landlord has elected to repair and restore the Premises, this Lease shall continue in full force and effect and such repairs will be made within a reasonable time thereafter, subject to delays arising from shortage of labor or materials and Acts of God, war or other conditions beyond Landlord's reasonable control. In the event that this Lease is terminated as herein permitted, Landlord shall refund to Tenant the prepaid rent, if any (unaccrued as of the date of damage or destruction), less any sum then owing Landlord by Tenant. If Landlord has elected to repair and reconstruct the Premises, then the Lease Term shall be extended for a period of time equal to the period of such repair or reconstruction. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or

property or annoyance arising from any termination.

Condemnation 20. If the entire Premises shall be lawfully condemned or taken in any manner for any public or quasi-public use, this Lease shall terminate as of the date of vesting of title. If only a part of the Premises shall be so condemned or taken, then, effective as of the date of the vesting of title, the fixed minimum rent and additional rent shall be abated proportionately according to the reduction in the area of the Premises resulting from such condemnation or taking. If only a part of the Building shall be so condemned or taken, then Landlord (whether or not the premises be affected) may, at Landlord's option, terminate this Lease as of the date of such vesting of title. In the event of termination of this Lease as hereinbefore provided, this Lease and the Term and estate hereby granted, shall expire as of the date of such termination with the same effect as if that were the expiration date originally set forth herein, and the fixed minimum rent and additional rent payable hereunder shall be apportioned as of such date. In the event of any condemnation or taking of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this Lease in Tenant. Tenant hereby expressly assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof, and agrees that it shall not be entitled to receive any part of such award.

Surrender of Premises 21. At the end of the Term or any renewal thereof or other sooner

termination of this Lease, Tenant shall peaceably deliver up to Landlord possession of the Premises in broom clean condition, together with all improvements or additions upon or belonging to the same, by whomsoever made, in the same condition as received, or first installed, ordinary wear and tear excepted. Upon the termination of this Lease, Tenant shall indemnify the Landlord against any loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such delay. The terms of this Article shall survive the termination or expiration of this Lease.

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Waiver 22. The failure by Landlord to enforce any term, covenant or condition herein contained shall not be deemed to be a waiver of such term. covenant, or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The acceptance of any payment hereunder by Landlord shall not be deemed to be a waiver of any preceding breach of Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to make the particular payment so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such payment. The delivery of keys to Landlord, its employees or agents shall not of itself operate as a termination of this Lease or surrender of the Premises. No endorsement or statement on any check or any letter accompanying any check or payment shall be deemed an accord and satisfaction; and Landlord may accept any such check or payment without prejudice to Landlord's right to recover the balance of such payment or pursue any other remedy provided in this Lease or otherwise.

Moving Tenant 23. Intentionally omitted.

Storage 24. If Tenant shall fail to remove all property from the Premises upon termination of this Lease which it is required to remove pursuant to the terms of this Lease, for any cause whatsoever, Landlord may at its option remove the same in any manner that Landlord shall choose and store said property without liability to Landlord for loss thereof or damage thereto, and Tenant agrees to pay Landlord on demand any and all expenses incurred in such removal, including court costs, attorneys' fees and storage charges on said property for any length of time the same shall be in Landlords possession, or Landlord may at its option without notice sell said property or any pan thereof at private sale and without legal process for such price as Landlord may obtain, and apply the proceeds of such sale upon any amounts due under this Lease from Tenant to Landlord and upon the expense incident to the removal and sale of said property. The terms of this Article 24 shall survive the termination or expiration of this Lease.

Subordination 25. This Lease is subject and subordinate in all ground leases and/or mortgages which may now or hereafter affect the Building or any portion thereof, and to all renewals, refinancings, modifications, consolidations, replacements and extensions of any such ground leases and/or mortgages. This clause shall be self-operative and no further instrument of subordination shall be required. Tenant shall promptly execute any certificate that Landlord may request in confirmation of such subordination, and Tenant hereby constitutes and appoints Landlord to be Tenant's attorney-in-fact, irrevocably and coupled with an interest, to execute and deliver any such instrument for an on behalf of Tenant.

Quiet Enjoyment 26. Landlord agrees that Tenant, upon paying the rent and

complying with the terms, covenants and conditions contained herein, shall and may peaceably and quietly have, hold and enjoy the Premises for the Term.

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Late Charge 27. Tenant hereby acknowledges that late payment by Tenant to

Landlord of rent or other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such Costs include, but are not limited to processing and accounting charges and late charges which may be imposed upon Landlord by terms of any mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days of the date such amount is due, then the Tenant shall pay to Landlord a late charge equal to the maximum amount permitted by law (and in the absence of any governing law, ten (10%) percent of such overdue amount), plus any attorney's fees incurred by Landlord by any reason of Tenant's failure to pay rent and/or other charges when due hereunder. The parties hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of late payment by Tenant. Acceptance of such late charges by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder.

Adjustments 28. (a) Taxes:

(i) Tenant shall pay to Landlord as additional rent, its pro rata share of the excess of (x) real estate, ad valorem and property taxes and special assessments ("Taxes") levied upon all or part of the Building and/or the land of which the Building is a part ("Land") for each tax year during the Term ("Tax Year") over (y) Taxes for the Tax Year during which the Term commences. Tenant's pro rata share shall be 5.74%. Said payment shall be made, without demand, in equal monthly installments on the first day of each month in accordance with invoices that Landlord shall furnish from time to time. If there shall be any change in Taxes, Landlord shall furnish a revised invoice to Tenant, and Tenant's tax payment shall be adjusted within 10 days thereafter in the same manner as provided in Subparagraph 28(b)(ii) below.

(ii) Tenant shall pay before delinquency any and all taxes and assessments, and license, sales, business, occupancy or other taxes, fees or charges levied, assessed or

imposed upon it or its operations at the Premises.

(b) Operating Expenses:

(i) For purposes hereof the following definitions shall apply: "Expense Base Year" shall be the calendar year prior to the calendar year in which the Term commences. "Operating Year" shall be each calendar year which includes any part of the Term. "Initial Operating Year" shall be the calendar year in which the Term commences. "Succeeding Operating Year" shall be each Operating Year subsequent to the Initial Operating Year. "Tenant's Expense Share" shall be 5.74%. "Expenses" shall mean the total of all the costs and expenses (and taxes thereon, if any) incurred by Landlord with respect to the repair, operation and maintenance of the Land and/or Building, and the services provided to Tenants of the Building including, without limitation, the costs and expenses of: water; payroll and benefits; consultants and specialists; security; advertising; office and administration; equipment, materials and supplies; management fees; insurance; contracts to third parties to provide services; and capital expenditures designed to reduce Expenses

for the Building amortized over their useful lives. In determination of Expenses for any year including but not limited to the Initial Operating Year, Succeeding Operating Year, or Expense Base Year. Expenses shall exclude cleaning, electricity,

gas, air-conditioning, ventilation and heating. (ii) If the expenses for any Operating Year exceed

the Expenses in the Expense Base Year, Tenant shall pay to Landlord as additional rent for such Operating Year an amount equal to Tenant's Expense Share of said excess ("Tenant's Expense Payment") as follows:

(A) After the expiration of the Initial Operating Year, Landlord shall furnish to Tenant an Escalation Statement setting forth Tenant's Expense Payment for the Initial Operating Year. Tenant shall pay to Landlord, within 10 days after Landlord submits such Escalation Statement, Tenant's Expense Payment set forth therein.

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(B) Landlord shall furnish to Tenant an Escalation Statement setting forth Landlord's estimate of Tenant's Expense Payment for each Succeeding Operating Year. Tenant shall pay to Landlord on the first day of each month during such Succeeding Operating Year, without demand, an amount equal to one-twelfth of Landlord's estimate of Tenant's Expense Payment for such Succeeding Operating Year. (C) After the expiration of each Succeeding Operating Year, Landlord may submit to Tenant a revised Escalation Statement setting forth the Expenses for such Succeeding Operating Year and the balance of Tenant's Expense Payment, if any, due to Landlord from Tenant for such Succeeding Operating Year. If such Escalation Statement shall show that the sums paid by Tenant hereunder exceeded Tenant's Expense Payment for such Succeeding Operating Year, Tenant shall be entitled to a credit in the amount of such excess against its next succeeding payment(s) of fixed minimum rent hereunder. If such Escalation Statement shall show that the sums so paid by Tenant were less than Tenant's Expense Payment for such Succeeding Operating Year, Tenant shall pay the amount of such deficiency to the Landlord within 10 days after being furnished with such

Escalation Statement. (D) Landlord may at any time and from time to time furnish to Tenant a revised estimate of Tenant's Expense Payment for a particular Operating Year, and Tenant's Expense Payment for such Operating Year shall be adjusted and paid or credited, as applicable, in the same manner as provided in Subparagraph (C) above.

(c) If the Term shall commence on a day other than the first day of a Tax Year or an Operating Year or shall expire or terminate on a day other than the Last day of a Tax Year or an Operating Year, then Tenant's payments under this Article 28 shall be equitably adjusted based on the portion of such Tax Year or Operating Year falling within the Term.

(d) In no event shall the fixed minimum rent ever be reduced by operation of this Article. The rights and obligations of Landlord and Tenant under the provisions of this Article shall survive the termination of this Lease, and payments shall be made pursuant to this Article notwithstanding the fact that an invoice for Taxes or an Escalation Statement is furnished to Tenant after the expiration or other termination of the Term.

(e) Landlord's failure to render an invoice for taxes air tin Escalation Statement with respect to any Tax Year or Operating Year shall not prejudice Landlord's right to thereafter render an invoice for Taxes or Escalation Statement with respect thereto or with respect to any subsequent Tax Year or Operating Year.

Brokerage 29. Tenant represents and warrants that it has had no dealings or negotiations with any broker or agent other than Grubb & Ellis|Beffort Brooks Malherbe in connection with the consummation of this Lease, and Tenant agrees to pay, hold harmless and indemnify Landlord from and against any and all costs, expenses (including attorneys' fees and court costs), loss and liability

for any compensation, commissions or charges claimed by any broker or agent with respect to this Lease or the negotiations thereof if such claim or claims by any such broker or agents are based in whole or in part on dealings with Tenant or its representatives.

Miscellaneous 30. Landlord and Tenant covenant with each other that: (a) All rights and remedies of Landlord under this Lease shall be cumulative, and none shall exclude any other rights and remedies allowed by law.

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(b) The word "Landlord" and "Tenant" wherever used herein shall be construed to mean Landlords and Tenants in all cases where there is more than one Landlord or Tenant, and the necessary grammatical changes required to make the provisions hereof apply either to corporations or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. The term "Landlord" shall mean only the owner, for the time being, of the Building, and in the event of the transfer by such owner of its interest in the Building, such owner shall thereupon be released and discharged from all covenants and obligations of the Landlord thereafter accruing, but such covenants and obligations shall be binding during the Term upon each new owner for the duration of such owner's ownership. (c) Tenant will pay all attorneys' fees and expenses Landlord incurs in enforcing any obligation of Tenant under this Lease, whether in any litigation or negotiation. (d) Any charge against Tenant by Landlord for supplies, services or work done on the Premises shall be considered as rent due and shall be included in any lien for rent due and unpaid. (e) All covenants, conditions, agreements and undertakings in this Lease shall extend to, and be binding on, the respective heirs, executors, administrators, successors and assigns or the respective parties hereto as if they were in every case named. (f) This Lease embodies the entire agreement of the parties hereto and may not be altered, changed or amended except by an instrument in writing executed by both parties. (g) This Lease shall be interpreted in accordance with the laws of the State in which the Premises are located. (h) If any clause or provision hereof should be determined to be illegal, invalid or unenforceable under present or future laws effective during the Term or any renewal term hereof, then (i) it is the express intention of the parties hereto that in lieu of each clause or provision of this Lease which may be determined to be illegal, invalid or unenforceable, there may be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be legal, valid and enforceable and (ii) the remainder of this Lease shall not be affected thereby and each provision of this Lease shall be valid and enforced to the fullest extent permitted by law. (i) Landlord has not made any statement, promise or agreement whatever, verbally or in writing, in conflict with the terms of this Lease or than in any way modifies, varies, alters, enlarges or invalidates any of its provisions and no obligation of Landlord shall be implied in addition to the obligations herein stated. (j) Neither this Lease nor a memorandum thereof may be recorded, and any such recordation shall render the Lease voidable by Landlord. (k) In no event shall any payment required to be made by Tenant ever be reduced by a recalculation of the square footage of the Premises. (l) All obligations of Tenant in this Lease shall be construed as covenants and agreements by Tenant to perform such obligations. (m) Tenant shall give to Landlord or its agent prompt written notice of any accident or damage to, or defects in the water pipes, gas pipes, air conditioning apparatus or other mechanical system in or around the Premises. (n) Periodical replacement of fluorescent tubes and bulbs will be provided by Landlord, but the cost of such replacement tubes will

be borne by Tenant promptly upon demand thereof.(o) All rights and remedies accruing to Landlord under this Lease shall survive the termination or expiration of this Lease. (p) Landlord may, at its option, have the Premises remeasured

(based on BOMA rentable area) and if such remeasurement indicates a larger area than as shown in Paragraph 1 hereof, Tenant shall, at Landlord's request, reexecute this Lease with the revised measurement shown in Paragraph 1; provided, however, that nothing herein contained shall increase Tenant's rental obligations or in any other way modify the Lease.

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Notices 31. All notices, demands and consents which may or are required to be given by either party to the other hereunder shall be in writing and shall be sent by United States certified or registered mail, return receipt requested, postage prepaid, addressed to Tenant at the Premises, or if the Landlord to the Building Office in the Building. Such addresses may be changed from time to time by either party by giving written notice as provided above. Notices shall be deemed given two days after being deposited in the United States certified mail, return receipt requested, postage prepaid to the respective address given above. At Landlord's option, Landlord may deliver any notice or document required or permitted to be delivered by Landlord to Tenant hereunder, by personal delivery to Tenant. In such event, said notice shall be deemed to be delivered on the date of personal delivery to Tenant. An additional notice shall be given by each party to the other party at the following address:

IF TO LANDLORD: BOK Plaza Associates, L.L.C. c/o BGK Equities, Inc. 330 Garfield Street, Suite 200 Santa Fe, New Mexico 87501

with a copy to:

Attn: Property Manager Grubb & Ellis|Beffort Brooks Malherbe 101 N. Robinson, Suite 700 Oklahoma City, OK 73102

IF TO TENANT: Fullnet Communications, Inc. 201 Robert S. Kerr, Ste. 210 Oklahoma City, OK 73102

with copy to:

Elaine Arnold, Attorney at Law Speed Professional Building 501 N. Mustang Rd. Mustang, OK 73064

Landlord's

Liability 32. Tenant agrees that the liability of the Landlord under this Lease and all matters pertaining to or arising out of the tenancy and the use and occupancy of the Premises including, but not limited to, all matters or claims of whatsoever nature arising out of or caused by the negligence of the Landlord, its agents, servants or employees, shall be limited to Landlord's interest in the Building and in no event shall Tenant bring any action or make any claim against, recover any money judgement from, or seek to impose any personal liability upon any principal, officer, shareholder, director, general or limited partner of the Landlord

or any principal for whom Landlord may be acting.

Tenant's Covenants Regarding Harzardous

Materials 33. (a) Tenant has reviewed and executed the attached Asbestos Notice Rider, Rider Number 1 to Office Lease.

(b) Compliance with Environmental Laws: Tenant shall at all times and in all respects comply with all federal, state, and local laws, ordinances and regulations; ("Hazardous Materials Law") relating to industrial hygiene, environmental protection or

the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any oil, flammable explosives, asbestos, urea formaldehyde, radioactive materials or waste or other hazardous toxic, contaminated, or polluting materials, substances, or waste, including, without limitations, any "hazardous substances", "hazardous wastes", "hazardous materials", or "toxic substances" under any such laws, ordinances or regulations (collectively, "Hazardous Materials").

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(c) Hazardous Materials Handling: Tenant shall at its own expense, procure, maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Tenant's use of the Premises including, without limitation, discharge of (appropriately treated) materials or wastes into or through any sanitary sewer serving the Premises. Except as discharged into the sanitary sewer in strict accordance and conformity with all applicable Hazardous Materials Laws, Tenant shall cause any and all Hazardous Materials removed from the Premises to be removed and transported solely by duly licensed haulers to duly licensed facilities for final disposal of such materials and wastes. Tenant shall in all respects handle, treat, deal with and manage any and all Hazardous Materials in, on, under, or about the Premises in total conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding management of such Hazardous Materials. All reporting obligations imposed by Hazardous Materials Laws are strictly the responsibility of Tenant. Tenant is "in charge" of Tenant's "facility" as such terms are used in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986. Upon expiration or earlier termination of the term of this Lease, Tenant shall cause all Hazardous Materials to be removed from the Premises and transported for use, storage, or disposal in accordance and compliance with all applicable Hazardous Materials Laws. Tenant shall not take any remedial action in response to the present of any Hazardous Materials in or about the Premises or any Building, nor enter into any settlement agreement, consent decree, or other compromise in respect to any claims relating to any Hazardous Materials in any way connected with the Premises or any Building, without first notifying Landlord of Tenant's intention to do so and affording Landlord ample opportunity to appear, intervene, or otherwise appropriately assert and protect Landlord's interest with respect thereto. In addition, at Landlord's request, Tenant shall remove any tanks or fixtures which contain, contained or are contaminated with Hazardous Materials.

(d) Notices: Tenant shall immediately notify Landlord in writing of: (i) any enforcement, cleanup, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (ii) any claim made or threatened by any person against Tenant, the Premises or Building relating to damage, contribution, cost recovery compensation, loss or injury resulting fro or claimed to result from any Hazardous Materials; and (iii) any reports made to any environmental agency arising out of or in connection with Hazardous Materials in, on, or removed from the Premises or Building, including any complaints, notices, warnings, reports or asserted violations in connection therewith. Tenant shall also supply to Landlord as promptly as possible, and in any event within five (5) business days after Tenant first receives or sends the same, with copies of all claims, reports, complaints, notices, warnings, asserted violations relating in any way to the Premises, Building or Tenant's use thereof. Tenant shall promptly deliver to Landlord copies of Hazardous Waste manifests reflecting the legal and proper disposal of all Hazardous Materials removed from the Premises.

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(e) Tenant shall indemnify, defend (by counsel acceptable to Landlord) Landlord and each of Landlord's partners, employees, agents, attorneys, successors and assigns, free and harmless from and against any and all claims, liabilities, penalties, forfeitures, losses, or expenses (including attorney's fees) for death of or injury to any person or damage to any property whatsoever (including water tables and atmosphere) arising from or caused in whole or in part, directly or indirectly, by (i) the presence in, on, under, or about the Premises or Building or discharge in or from the Premises or Building of any Hazardous Materials from and after Tenant's occupancy of the Premises, or Tenant's use, analysis, storage, transportation, disposal, release, threatened release, discharge, or generation of Hazardous Materials to, in, on, under, about, or from the Premises or any closure, remedial action, or other required plans in connection therewith, and shall survive the expiration or earlier termination of the term of this Lease. For purposes of the release and indemnity provision hereof, any acts or omissions of Tenant, or by employees, agents, assignees, contractors, or subcontractors of Tenant or others acting for or on behalf of Tenant (whether or not they are negligent, intentional, willful, or unlawful), shall be strictly attributable to Tenant.

(f) If at any time it reasonably appears to Landlord that Tenant is not maintaining sufficient insurance or other means of financial capacity to enable Tenant to fulfill its obligation to Landlord hereunder, whether or not then accrued, liquidated, conditional, or contingent, Tenant shall procure and thereafter maintain in full force and effect such insurance or other form of financial assurance, with or from companies or persons and in forms reasonably acceptable to Landlord, as Landlord may from time to time reasonably request. Landlord may procure such insurance if Tenant fails to meet its obligations hereunder and

the cost thereof shall be passed through to Tenant.(g) Landlord shall have the right to require Tenant, at

Landlord's cost, to undertake and submit to Landlord a periodic environmental audit from an environmental company approved by Landlord, which audit shall cover Tenant's compliance with this Section. Tenant shall promptly comply with all requirements of such audit and, if Tenant, its employees, agents, assignees, contractors or subcontractors or others acting for or on behalf of Tenant, are found to have introduced Hazardous Materials in, on, under, about or from the Premises, Tenant shall cure all matters raised therein at Tenant's sole cost, including

reimbursing Landlord for the cost of the audits.

Rent 34. Tenant shall pay as fixed minimum rent for the Premises the following sums ("Fixed Minimum Rent"):

Lease Year Per Sq. Ft. Annually Monthly ---------- ----------- -------- ------- 1/1/00 - 12/31/00 $2.94 $40,063.38 $3,338.62 1/1/01 - 12/31/01 $5.81 $79,172.87 $6,597.74 1/1/02 - 12/31/02 $9.00 $122,643.00 $10,220.25 1/1/03 - 12/31/03 $9.50 $129,456.50 $10,788.04 1/1/04 - 12/31/04 $10.00 $136,270.00 $11,355.83 1/1/05 - 12/31/05 $10.50 $143,083.50 $11,923.63 1/1/06 - 12/31/06 $11.00 $149,897.00 $12,491.42 1/1/07 - 12/31/07 $11.50 $156,710.50 $13,059.21 1/1/08 - 12/31/08 $12.00 $163,524.00 $13,627.00 1/1/09 - 12/31/09 $12.50 $170,337.50 $14,194.79

Option to Renew 35. Provided Tenant has not committed an Event of Default under

this Lease, Tenant shall have the option, exercisable only upon

180 days prior written notice delivered to Landlord by certified or registered mail, return receipt requested, postage prepaid, at the address provided in Article 31, to renew this Lease for two five (5) year periods with all the terms and conditions to remain the same except that the Fixed Minimum Rent shall be the greater of: (i) current market rent charged for comparable space in the Building at the time of renewal, or (ii) the Fixed Minimum Rent charged to Tenant during the last year of the initial Lease Term. The Landlord shall not be required to provide any improvements to the Premises should Tenant exercise its Option to Renew described above unless agreed to as part of the proposed renewal.

Generator 36. Tenant will have the right to install a Generator in the Building under the following terms and conditions:

(a) The Generator will be installed on the low roof of the Building as noted on the attached Exhibit "A" (the "Generator Space"). Wherever the term "Premises" is used throughout the Lease, it will include the Generator Space.

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(b) The Generator shall be used only for backup purposes when an electrical shutdown of the entire building takes place for more than one minute. When electricity is restored, the Generator will be reversed for back up purposes.

(c) Utilities shall be installed and maintained at the sole expense of Tenant. Tenant shall be responsible for the installation, completion, and the cost of all action required to comply with any and all permits, statutes, rules, regulations, zoning codes, and building codes. Any testing of the Generator shall be done between the hours of 5:00 p.m. and 6:00 a.m. Monday through Friday, or anytime Saturday or Sunday.

(d) The Generator shall be installed at the sole expense of Tenant and only in accordance with plans and specifications that have been previously submitted to and approved in writing by Landlord. Tenant shall pay Landlord a one time access fee for the Generator of One Thousand and No/100 Dollars ($1000.00) prior to the installation of the Generator. The Generator will be installed within the Generator Space only. After the initial installation of the Generator and the improvements to the Generator Space are made, no alterations or physical additions in or to the Generator or the Generator Space may be made without Landlord's prior written consent. Approval by Landlord of Tenant's plans and specifications prepared in connection with the installation of the Generator and improvements to the Generator Space shall not constitute a representation or warranty as to the adequacy or sufficiency of such plans and specifications, for any use, purpose, or condition, but such approval shall merely constitute the consent of Landlord as required hereunder. Tenant shall be responsible for the installation, completion and the cost of all action required to comply with any and all statutes, rules, regulations, zoning codes, building codes and the requirements of the Americans with Disabilities Act of 1990 (the "ADA") in connection with the installation of the Generator and improvements to the Generator space.

(e) Any area including the rood that is destroyed or damaged during the installation or ongoing maintenance of the Generator will be restored to its original condition at Tenant's expense after the Generator is installed.

(f) At the expiration or earlier termination of the Lease, Tenant will remove the Generator at its expense and completely restore the Generator Space, roof and surrounding area to its original condition.

(g) Paragraph 14, Insurance, of the Lease is amended to provide for a combined single limit of at least $2,000,000 per occurrence and a general annual aggregate limit of at least $2,000,000 which shall include explosion hazard coverage and environmental contamination coverage. In all other respects, Paragraph 14 shall remain in full force and effect.

Co-locate Rights 37. Tenant shall have the right to allow Tenant's customers to

locate equipment within the Premises for the purpose of connecting to Tenant's telecommunications network. Tenant shall at its sole cost and expense supply Landlord with an engineering/structural report confirming such equipment will not affect the structural integrity of Premises or Building prior to

installation of any such equipment. If such equipment affects the structural integrity of the Premises or Building or will require modifications to the mechanical or electrical systems of the Building, then Tenant or Tenant's customers shall not install such equipment without the Landlord's prior written approval of the plans and specifications of such modifications. Such placement does not constitute a conveyance of real estate requiring Landlord's consent as provided in paragraph 11, Assignment and Subletting, except Tenant's customer shall adhere to all the terms and conditions of the Lease as if the they were the Tenant including, but not limited to, paragraph 5, Use; paragraph 8, Liens; and paragraph 13, indemnification.

Stem Wall Access 38. Tenant shall have the right to penetrate the stem wall of the

Building for the purpose of installing one four inch (4")

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conduit to run fiber optic cable from Southwestern Bell to the Premises. The design, engineering, and installation of the conduit shall be at the sole cost and expense of Tenant and only in accordance with plans and specifications that have been previously submitted to and approved in writing by Landlord. Tenant, at its sole cost and expense, shall also be responsible for the maintenance of the conduit and the removal of the conduit and the restoration of the areas of the Building affected by the installation upon termination of Lease. Approval by Landlord of Tenant's plans and specifications prepared in connection with the installation of the conduit shall not constitute a representation or warranty as to the adequacy or sufficiency of such plans and specifications, for any use, purpose, or condition, but such approval shall merely constitute the consent of Landlord as required hereunder. Tenant shall pay Landlord Two Hundred Fifty and No/100 Dollars ($250.00) per month for this conduit run through the stem wall.

Roof Access for Antenna Location 39. Tenant shall have the right to install one (1) antenna on the

roof of the Building subject to Landlord's prior review and written approval of the plans and specifications for the installation of the antenna and subject to Landlord and Tenant entering into a written agreement containing the terms and conditions relating to the installation of the antenna and Tenant's future roof access rights for additional antennas. Tenant, at its sole cost and expense, shall be responsible for the design, engineering, installation and maintenance of the antenna. Tenant, at its sole cost and expense, shall also be responsible for the removal of the antenna and the restoration of the areas of the Building affected by the installation of the antenna upon termination of the Lease. Tenant shall pay Landlord Five Hundred and No/100 Dollars ($500.00) per month with five percent (5%) annual increase for the use of the roof for one (1) antenna.

IN WITNESS WHEREOF, the parties have executed this Lease Agreement in multiple counterparts, together with Exhibits A and B, and the Asbestos Rider, each of which shall have the force and effect of an original as of the date first hereinabove written.

LANDLORD: BOK Plaza Associate, L.L.C., By: BGK Equities, Inc., Managing Member 330 Garfield Street, Suite 200 Santa Fe, New Mexico 87501

By: /s/ Cheryl S. Willoughby

Cheryl S. Willoughby Senior Vice President

TENANT: Fullnet Communications, Inc. an Oklahoma Corporatoin

By: /s/ Timothy J. Kilkenny

Name: Timothy J. Kilkenny

Title: CEO

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EXHIBIT A

This Exhibit is attached to and made a part of the Lease dated the 2nd day of December, 1999, by and between BOK Plaza Associates, L.L.C., ("Landlord") and Fullnet Communications, Inc. ("Tenant").

Actual Premises shall be attached hereto after completion of plans approved by Landlord and Tenant.

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EXHIBIT B

BANK OF OKLAHOMA PLAZARULES AND REGULATIONS

DEFINITIONS Wherever in these Rules and Regulations the word "Tenant" is used, it shall be taken to apply to and include Tenant and its agents, employees, invitees, licensees, subtenants and contractors, and is to be deemed of such number and gender as the circumstances require. The word "Landlord" shall be taken to include the employees and agents of Landlord.

CONSTRUCTION The streets, sidewalks, entrances, halls, passages, elevators, stairways and other common area provided by Landlord shall not be obstructed by Tenant, or used by Tenant for any other purpose than for ingress and egress.

WASHROOMS Toilet rooms, water closets and other water apparatus shall not be used for any purpose other than those for which they were constructed.

INSURANCE REGULATIONS Tenant shall not do anything in the Premises, or bring or keep anything therein, which will in any way increase or tend to increase the risk of fire or the rate of fire insurance, or which will conflict with the regulations of the Fire Department or the fire laws, or with any insurance policy on the Building or any part thereof, or with any law, ordinance, rule or regulation effecting the occupancy and use of the Premises, now existing or hereafter enacted or promulgated by any public authority or by the Board of Fire Underwriters.

GENERAL PROHIBITIONS In order to insure proper use and care of the Premises, Tenant shall not:

a) Permit smoking of cigarettes or other tobacco products in the common areas of the Building such as, but not limited to, hallways, lobbies and restrooms.

b) Permit the carrying of concealed weapons in the Building or in the Premises.

c) Keep animals or birds in the Premises, unless such animal's occupancy is required due to a

disability of Tenant.

d) Use the Premises as sleeping quarters.

e) Except as allowed in the Lease, allow any sign, advertisement or notice to be fixed to the Building, inside or outside, without Landlord's

prior written consent.

f) Make improper noises or disturbances of any kind: sing, play or operate any musical instrument, radio or television, which activity disturbs other tenant(s) in the Building, or

otherwise do anything to disturb other tenant(s) or which would tend to injure the reputation of the Building.

g) Mark or defile elevators, water closets, toilet rooms, walls, windows, doors or any other part of the Building.

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h) Place anything on the outside of the Building, including roof setbacks, window ledges and other projections; or drop anything from the windows, stairways, or parapets; or place trash or other matter in the halls, stairways, elevators or light

wells of the Building.

i) Cover or obstruct any window, skylight, door or transom that admits light.

j) Fasten any article, drill holes, drive nails or insert screws into the walls, floors, woodwork, or partitions; nor shall the same be painted, papered or otherwise covered or in any way marked or broken without prior written consent of Landlord.

k) Interfere with the Building's heating or cooling apparatus.

l) Leave the Premises without locking doors, turning off the power of all office machines, and extinguishing all lights.

m) Install any shades, blinds, or awnings without the prior written consent of Landlord.

n) Use any electrical heating device without the prior written consent of Landlord.

o) Install call boxes or any kind of wire in or on the Building without Landlord's prior written

consent and direction.

p) Manufacture any commodity, or prepare or dispense any foods, beverages, tobacco, drugs, flowers or other commodities or articles without the prior written consent of Landlord.

q) Secure duplicate keys for the Premises or washrooms, except from Landlord.

r) Use desk chairs on carpeted areas without protective floor pads.

s) Place any weights in any portion of the Building beyond the safe carrying capacity of the structure.

t) Place door mats in public corridors without the prior written consent of Landlord.

u) Grant Tenant's employees or other persons permission to go upon the roof of the Building without the prior written consent of Landlord.

PUBLICITY Landlord reserves the right to designate the time when and the method whereby freight, small office equipment, furniture, safes and other like articles may be brought into, moved, or removed from the Building or the Premises, and to designate the location for temporary disposition of such items. In no event shall any of the foregoing items be taken from the Premises for the

purposes of removing same from the Building without the express written consent of both

Landlord and Tenant.

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CHANGES TO THE RULES AND REGULATIONS Landlord shall have the right to amend these and

to make such other and further reasonable rules and regulations as in the judgment of Landlord, may from time to time be needful for the safety, appearance, care and cleanliness of the Building or for the preservation of good order therein. Landlord shall not be responsible to Tenant for any violation of these rules and regulations by other tenants of the Building.

PUBLIC ENTRANCE Landlord reserves the right to exclude the general public from the Building upon such days and at such hours as in Landlord's judgment will be for the best interest of the Building and its tenants. Persons entering the Building after 6:00 p.m. Monday through Friday (holidays excepted), after 1:00 p.m. on Saturdays and at all times on Sundays and holidays must sign the lobby register maintained for that purpose.

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ASBESTOS NOTICE RIDER

RIDER NO. 1 TO OFFICE LEASE

This Rider No 1 is made and entered into by and between BOK Plaza Associates, L.L.C., ("Landlord") and Fullnet Communications, Inc. (`Tenant"), as of the day and year of the Lease between Landlord and Tenant to which this Rider is attached. Landlord and Tenant hereby agree that, notwithstanding anything contained in the Lease to the contrary, the provisions set forth below shall be deemed to be part of the Lease. All references in the Lease and in this Rider to the "Lease" shall be construed to mean the Lease (and all exhibits attached thereto), as amended and supplemented by this Rider. All capitalized terms now defined in this Rider shall have the same meaning as set forth in the Lease.

Tenant has received notification that asbestos containing building materials (ACBM) exist within the Bank of Oklahoma Plaza Building. Past inspections by two independent consulting firms to determine the location, amount, and type of ACBM concluded that the ACBM was in generally good condition and posed no health hazard unless disturbed. Landlord may engage in future asbestos abatement within the Bank of Oklahoma Plaza Building. As a result, Tenant understands that there may be temporary inconveniences caused by such abatement activities in adjoining or nearby leased premises. In addition, in order to avoid potential hazards caused by unauthorized disturbance of ACBM within the building, Tenant agrees that it will not allow of contract for any construction activities within the Bank of Oklahoma Plaza Building that involve removal of ceiling panels, or any form of penetrations above the ceiling or into building columns, without requiring the persons or entities performing such work to obtain clearance for such activities through a written permit application with the Bank of Oklahoma Plaza Building Manager. Tenant shall take necessary measures to insure staff compliance with these requirements pertaining to asbestos management within the Bank of Oklahoma Plaza Building. Tenant shall further report immediately to Landlord any observed evidence or indication of unauthorized or accidental disturbance of ACBM.

LANDLORD: TENANT: BOK Plaza Associates, L.L.C., Fullnet Communications, Inc. By: BGK Equities, Inc., Managing Member an Oklahoma Corporation

/s/ Cheryl S. Willoughby By: /s/ Timothy J. Kilkenny

Cheryl S. Willoughby Name: Timothy J. Kilkenny

Senior Vice President Title: CEO

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EXHIBIT 21.1

Subsidiaries of FullNet Communications, Inc.

Name State of Incorporation

FullNet, Inc. Oklahoma FullTel, Inc. Oklahoma FullSolutions, Inc. Oklahoma *Full Web, Inc. Oklahoma

* A wholly owned subsidiary of FullSolutions, Inc.