SKYWAY COMMUNICATIONS HOLDING CORP - SWYC Annual Report (Small Business Issuers) (10KSB) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is an excerpt from a 10KSB SEC Filing, filed by SKYWAY COMMUNICATIONS HOL ... on 7/30/2004.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

SkyWay Communications Holding Corp. ("Parent"), formerly known as i-TeleCo.com Inc. and Mastertel Communications Corp., was organized under the laws of the State of Florida on December 16, 1998. In April 2003, Parent changed its name to SkyWay Communications Holding Corp.

On May 30, 2003, Parent and Sky Way Aircraft Inc. ("Subsidiary") entered into an Agreement and Plan of Merger. On June 19, 2003, Parent and Subsidiary entered into an Amended and Restated Agreement and Plan of Merger (which closed on June 21, 2003) whereby Parent agreed to acquire 100% of Subsidiary in a stock for stock exchange. The agreement called for Parent to issue 1,000,000 shares of Series B convertible preferred stock to the former shareholders of Subsidiary for 100% of the outstanding shares of Subsidiary's common stock and for Parent to issue 1,000,000 shares of Series A convertible preferred stock to the holder of $1,564,015 in debt of the Subsidiary. Voting control of the Company passed to the former shareholders of Subsidiary. The Company has accounted for the acquisition as a recapitalization of Subsidiary in a manner similar to a reverse purchase. Accordingly, the equity transactions have been restated to reflect the recapitalization of Subsidiary and the operations of Parent prior to the date of acquisition have been eliminated. At the date of acquisition the Parent had no assets and $161,295 in liabilities. The financial statements reflect the operations of Subsidiary from its inception. Prior to the recapitalization of Subsidiary, Parent had 46,819,507 shares of common stock previously outstanding. An additional 2,680,493 shares of common stock were issued as finder's fees in the transaction.

All references to the number of shares and par value in the accompanying consolidated financial statements have been adjusted for all periods presented to reflect the recapitalization of Subsidiary and to reflect a 1.8516-for-1 forward stock split that Subsidiary affected on March 11, 2003 (See Note 6).

SkyWay Communications Holding Corp. and Subsidiary ("the Company") plan to provide security and other services for the airline industry through applications of their licensed high-speed, broadband wireless communications technology. The Company has not yet generated any significant revenues from their planned principal operations and is considered a development stage company as defined in Statement of Financial Accounting Standards No.7. The Company has, at the present time, not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.

Reclassification

The financial statements for periods prior to April 30, 2004 have been reclassified to conform to the headings and classifications used in the April 30, 2004 financial statements.

Consolidation

The consolidated financial statements include the accounts of Parent and Parent's wholly owned Subsidiary. All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make. Actual results could differ significantly from our estimates.

Financial Instruments

We believe the book value of our cash, receivables, accounts payable and accrued and other liabilities approximates their fair values due to their short-term nature. In addition, we believe the book values of our notes payable approximates their fair values as the interest rates on such obligations approximates rates at which similar types of arrangements could be currently negotiated by us.

Concentrations of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and receivables. With respect to cash, during the year ended April 30, 2004, we maintained our cash in deposit accounts with two financial institutions, which deposit accounts at times have exceeded federally insured limits. We have not experienced any losses in such accounts.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Revenue Recognition

The Company's primary source of operating revenue at this time is earned from wireless connection services which are recorded at the completion of the services. For contracts which exceed one month, revenue is recognized on a straight-line basis over the term of the contract as services are provided. Revenues applicable to future periods are classified as deferred revenue until earned.

Accounts Receivable

Accounts receivable represent amounts billed for services provided that have not yet been collected.

Allowance for Doubtful Accounts

The Company evaluates the allowance for doubtful accounts on a regular basis through periodic reviews of the collectibility of the receivables in light of historical experience, adverse situations that may affect the customer's ability to repay, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Property and Equipment

Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets of three to seven years. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company periodically reviews their property and equipment for impairment.

Intangible Assets

The Company accounts for their intangible assets in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 establishes three classifications for intangible assets including definite-life intangible assets, indefinite-life intangible assets and goodwill and requires different accounting treatment and disclosures for each classification. In accordance with SFAS No. 142, the Company periodically reviews their intangible assets for impairment. During the year ended April 30, 2004, impairment was recorded for $1,000,000 paid in 2004 and the $23,800, originally recorded, for the acquisition of certain intellectual property rights.

Long-Lived Assets

Statement of Financial Accounting Standards 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" requires that long-lived assets, including certain identifiable intangibles, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets in question may not be recoverable. At April 30, 2004 we evaluated our long-lived assets and determined that $235,750 of our assets were impaired and were written off.

Advertising Costs

Advertising costs, except for costs associated with direct-response advertising, are charged to operations when incurred. The costs of direct-response advertising are capitalized and amortized over the period during which future benefits are expected to be received. Advertising costs for the twelve months ended April 30, 2004 and 2003 amounted to $50,790 and $0, respectively.

Research and Development

Research and development costs are expensed as incurred. The Company expensed $1,494,263 and $473,355 in research and development costs during the years ended April 30, 2004 and 2003, respectively.

Debt Extinguishment

The Company accounts for extinguishment of debt in accordance with Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 rescinds the requirement that gains and losses from extinguishment of debt be classified as an extraordinary item.

Income Taxes

The Company computes income taxes in accordance with Financial Accounting Standards Statement No. 109 "Accounting for Income Taxes". Under SFAS 109, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the tax bases of assets and liabilities and their financial statement carrying amounts. Also, the effect on deferred taxes of a change in tax rates is recognized in income in the period that included the enactment date. Temporary differences between financial and taxable reporting arise primarily from certain stock based compensation arising from the grant of certain options, and differences in providing for bad debts and depreciation.

Stock-Based Compensation

The Company has adopted Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure". This statement amends FASB statement No. 123, "Accounting for Stock Based Compensation". It provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for employee stock based compensation. It also amends the disclosure provision of FASB statement No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. As permitted by SFAS No. 123 and amended by SFAS No. 148, we continue to apply the intrinsic value method under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," to account for our stock-based employee compensation arrangements.

Net Loss per Share

The Company has adopted SFAS No. 128 "Earnings per Share". Basic loss per share is computed by dividing the loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed in a manner similar to the basic loss per share, except that the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible debt and other such convertible instruments. Diluted earnings per share contemplate a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share. Since the Company has incurred net losses for all periods, basic loss per share and diluted loss per share are the same.

Recent Pronouncements

We have reviewed all new accounting pronouncements issued through the date of our independent auditor's report and have determined that none of them would have a material impact on our consolidated financial condition or results of operations other than as previously described.

NOTE 2 - GOING CONCERN

Our consolidated financial statements were prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. We have incurred significant losses since our inception, have negative working capital and have experienced and continue to experience negative operating margins and negative cash flows from operations. In addition, we expect to have ongoing requirements for additional capital investment to implement our business plan. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of the Company's common stock. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at:

April 30, 2004

Machinery and equipment $ 545,514 Furniture and fixtures 21,692 Aircraft 36,607 Vehicles 394,306 998,119 Less: accumulated depreciation (91,576)

Net property and equipment $ 906,543

Depreciation expense for the years ended April 30, 2004 and 2003 amounted to $104,626 and $20,876, respectively.

NOTE 4 - OTHER ASSETS

Intangible Assets

On March 11, 2003, the Company signed an Amended and Restated Software License and Services Agreement with SkyWay Global ("SWG"), an entity under common control, to replace the Company's Licensing Agreement entered into during 2002. Under this new agreement, the Company issued 1,360 shares of common stock valued at $23,800 to obtain the rights for indefinite use of certain high-speed, broadband wireless technology for the aircraft industry and other related uses. This agreement was replaced by a License Agreement signed June 23, 2003. This new

agreement exclusively and irrevocably assigns virtually all of SWG's rights to certain patented technology in exchange for a royalty of 3% of the Company's net revenues.

In February 2004, the Company agreed, and made a deposit of $1,000,000, to purchase the Intellectual Property from SWG. This acquisition provides the Company with all rights to certain patented technology previously under SWG ownership. The license agreements with SWG will be cancelled upon completion of purchase. At April 30, 2004 management determined that this intellectual property was impaired. The $1,000,000 and $23,800, originally recorded, were written off.

Property and Equipment in Progress

Given the development stage of the Company's operations, certain costs relative to property and equipment that have not yet been completed or put into service have been accumulated and included in other assets. At April 30, 2004 these accumulated costs are summarized as follows:

DC-9 Aircraft $ 2,556,101 Telephone System 109,822 Data Center 986,283 Clearwater Tower 124,043 $ 3,776,249

On January 16, 2004, the Company signed a promissory note in the amount of $1,500,000 with United Bank and Trust for a used Boeing DC-9. The note was initially for a six month term with an initial rate of 5.49% which will vary based upon the Bank Prime Rate plus 0.5%. The loan is guaranteed by the President of the Company, two other shareholders of the Company and a company controlled by one of the shareholders. In connection with the guarantee of the loan by one of our shareholders, a company related to this guarantor-shareholder is listed as the co-owner of the asset. This co-ownership is only effective for the period of the guarantee. The Company has voting control of all matters related to the aircraft. In July, the Company received a six month extension until January 2005.

NOTE 5 - NOTES PAYABLE

Notes payable consist of the following at April 30, 2004:

Amounts

18% unsecured demand note payable to ECI Communications, Inc. $ 25,000

United States Bank Prime Rate plus 0.5% secured note payable to a United Bank and Trust 1,500,000

11% unsecured demand note payable to Romano Ltd. 3,600

$ 1,528,600

For the years ended April 30, 2004 and 2003, interest expense amounted to $27,300 and $0, respectively.

NOTE 6 - EQUITY

Preferred Stock

The Company has authorized 10,000,000 shares of preferred stock, $.0001 par value, with such rights, preferences and designations and to be issued in such series as determined by the Company's Board of Directors. In June 2003, the Board of Directors designated 1,000,000 shares as Series A and 1,000,000 shares as Series B. In October 2003, the Board of Directors designated 2,812,000 shares as Series C and 85,000 shares as Series D.

Series A Convertible Preferred Stock

Each share of Series A convertible preferred stock has a stated value of $15, has the voting rights of 100 shares of common stock and is convertible at the shareholder's option into 100 shares of common stock. Series A convertible preferred shareholders must approve any dividend payments and are entitled to share in common stock dividends as if their preferred stock had been converted into common stock. Upon liquidation of the Company, Series A convertible preferred shareholders are entitled to receive an amount equal to the stated value plus one percent per annum from the date of issuance. The Company may redeem all or part of the Series A convertible preferred stock within one year of the date of issuance by paying an amount equal to the stated value plus five percent.

In June 2003, in connection with an Amended and Restated Agreement and Plan of Merger, the Company issued 1,000,000 shares of their previously authorized but unissued Series A convertible preferred stock for all 1,000,000 shares of Subsidiary's preferred stock which had been issued to SWG for debt relief of $1,564,015 or approximately $1.564 per share.

Series B Convertible Preferred Stock

Each share of Series B convertible preferred stock has a stated value of $15, and has no voting, liquidation or dividend rights. Within three years of the date of issuance, each share of Series B convertible preferred stock will be converted, upon the occurrence of certain events, automatically into 200 shares of the Company's common stock if certain conditions are met. The Company may redeem all or part of the Series B convertible preferred stock within one year of the date of issuance by paying an amount equal to the stated value plus five percent. Any shares of Series B convertible preferred stock which remain outstanding three years following the date of issuance will be automatically cancelled.

In June 2003, in connection with an Amended and Restated Agreement and Plan of Merger, the Company issued 1,000,000 shares of their previously authorized but unissued Series B convertible preferred stock for all 10,000,000 shares of Subsidiary's common stock.

Series C Convertible Preferred Stock

Each share of Series C convertible preferred stock has a $.0001 stated value and no voting rights. Through December 31, 2013 each share is convertible, upon the occurrence of certain events, into 10 shares of common stock. Upon liquidation of the Company, Series C convertible preferred shareholders are entitled to receive an amount equal to the stated value per share.

In October 2003, the Company issued 2,812,000 shares of Series C Convertible Preferred Stock to 42 employees and consultants. The Holders shall, upon the occurrence of certain events, have the right in their sole and absolute discretion to convert the shares of Convertible Preferred Stock - Series C

issued by the Corporation into 28,120,000 common shares of the Corporation on a one share for ten share basis. The value of these shares has been estimated at $4,385,600 and has been recoded as deferred stock compensation is being amortized to expense over the estimated period the services are to be provided of one year.

Series D Convertible Preferred Stock

Each share of Series D convertible preferred stock has a $.0001 stated value and no voting rights. Each share is convertible, upon the occurrence of certain events, into 100 shares of common stock. Upon liquidation of the Company, Series D convertible preferred shareholders are entitled to receive an amount equal to the stated value per share.

In October 2003, the Company issued 85,000 shares of Series D Convertible Preferred Stock to one entity providing consulting services. The Holders shall have the right in their sole and absolute discretion to convert the shares of Convertible Preferred Stock - Series D issued by the Corporation into 8,500,000 common shares of the Corporation on a one share for one hundred share basis. The value of these shares has been estimated at $1,317,500 and has been recoded as deferred stock compensation which will be amortized to expense over the estimated period the services are to be provided of one year.

Common Stock

The Company has authorized 2,500,000,000 shares of common stock with a par value of $.0001.

During the periods covered by these financial statements the Company issued shares of common stock without registration under the Securities Act of 1933. Although the Company believes that the sales did not involve a public offering of its securities and that the Company did comply with the "safe harbor" exemptions from registration, it could be liable for rescission of the sales if such exemptions were found not to apply and this could have a material negative impact on the Company's financial position and results of operations.

The Company has filed the following S-8 registration statements for the issuance common stock and warrants to various consultants for services. The issuances and agreements are described in various sections below.

Common Shares Warrants Date filed Registered Registered June 20, 2003 4,700,000 - July 3, 2003 2,300,000 10,000,000 September 8, 2003 12,000,000 - January 9, 2004 5,000,000 10,000,000

In connection with the closing of the Agreement and Plan of Merger (Note
1), the Company agreed to certain anti-dilution provisions in connection with a capital raise or financing in the aggregate amount of up to $1,000,000, to our common stockholders on the date of the closing date of the merger. Those stockholders would be entitled to the issuance of additional shares, on a pro rata basis, equal to the number of shares of common stock or preferred stock issued in connection with the financing. Under these provisions, approximately 9,193,212 additional shares of common stock would have to be issued; however, we currently do not intend to issue these shares due to issues associated with the merger transaction.

In the fourth quarter of 2004, the Company issued 17,119,617 shares of common stock (including the exercise of warrants) at prices of $.13-$.48 per share for cash of $5,211,140.

In the third quarter of 2004, the Company issued 35,316,289 shares of common stock (including the exercise of warrants) at prices of $.13-$.20 per share for cash of $4,799,696 and services (for the exercise of warrants) of $524,281 including a warrant receivable of $10,923.

In the second quarter of 2004, the Company issued 7,772,631 shares of common stock (including the exercise of warrants) at prices of $.04-$.25 per share for cash of $1,247,341

In the first quarter of 2004, the Company issued 4,000,000 shares of common stock (including the exercise of warrants) at prices of $.10 per share for cash of $400,000.

In January 2004, the Company entered into six-month Consulting Agreements with Aran Strategic Finance, Bruce Baker and Fred Geffon to provide consulting services and issued 5,000,000 shares of common stock for services pursuant to consulting agreements valued at $950,000 (based on the market price of the shares at the date of issuance), which has been expensed. In connection with these services, the Company also issued options to purchase 10,000,000 shares of common stock (see "Stock warrants" below").

In September 2003, the Company entered into one-year Consulting Agreements with Doug Dahms and William Craig to provide consulting services in exchange for a total of 12,000,000 shares (6,000,000 shares each) of the Company's common stock. The Company has recorded $3,120,000 of the services (based on the market price of the shares at the date of issuance) as deferred compensation. At April 30, 2004, the Company has expensed $2,080,000 of the services for the current year.

In March 2003, the Company issued 1,360 shares of common stock at $17.50 per share for an amended license agreement valued at $23,800.

In July 2003, the Company entered into a nine-month Consultant Services Plan with Beadros Asare to provide consulting services valued at $18,000 (based on the market price of the shares at the date of issuance) in exchange for 50,000 shares of common stock. As of April 30, 2004, the Company has expensed the entire amount of the services.

In July 2003, the Company entered into a six-month Consulting Agreement with Bruce Baker to provide consulting services in exchange for 1,000,000 shares of common stock valued at $308,000 (based on the market price of the shares at the date of issuance). In connection with these services, the Company also issued options to purchase 4,000,000 shares of common stock (see "Stock warrants" below"). As of April 30, 2004, the Company has expensed the entire amount of the services.

In July 2003, the Company entered into a six-month Consulting Agreement, as amended in August 2003, with Michael Farkas, a shareholder of the Company, to provide consulting services in exchange for 1,150,000 shares of common stock valued at $322,000 (based on the market price of the shares at the date of issuance). In connection with these services, the Company also issued options to purchase 6,000,000 shares of common stock (see "Stock warrants" below"). As of April 30, 2004, the Company has expensed the entire amount of the services.

In June 2003, the Company entered into an Engagement Agreement with Michael Williams to provide legal services through December 31, 2003 valued at $380,000 (based on the market price of the shares at the date of issuance) in exchange for 2,000,000 shares of common stock. As of April 30, 2004, the Company has expensed the entire amount of the services.

In June 2003, the Company entered into an Investment Banking/Advisory Agreement with Atlas Capital Services, LLC ("Atlas"), an entity controlled by a shareholder of the Company. The agreement provided for Atlas to assist the Company in finding an acquisition candidate and the Company was to issue 2,680,493 shares of common stock upon consummation of an acquisition. In June 2003, Parent acquired Subsidiary and issued 2,680,493 shares of common stock to Atlas for services rendered valued at $442,794 (based on the market price of the shares at the date of issuance). The agreement also provides for Atlas to assist the Company in obtaining financing and the Company will pay 10% of the proceeds received from any such financing.

In May 2003, the Company issued 500,000 shares of common stock for services valued at $45,000 (based on the market price of the shares at the date of issuance).

In the fourth quarter of 2002, in connection with their organization, the Company issued 13,887,000 shares of their previously authorized but unissued common stock at approximately $.00054 per share for payment of organization costs of $1,870 and non-cash services valued at $5,630 including $2,100 which was classified as stock offering costs and $3,530 which was classified as general and administrative expense.

Stock Cancellation and Contingency

In March 2003, Subsidiary's Board of Directors approved the cancellation of 3,888,360 shares of Subsidiary's common stock that had been accounted for as issued to consultants in April 2002. Management claims that consideration was not received for the stock. Although the certificates representing these shares were not delivered, the possibility exists that the consultants may demand delivery of the shares pursuant to agreements with the Company.

Stock Split

On March 11, 2003, Subsidiary affected a 1.8516-for-1 forward stock split. The financial statements for all periods presented have been restated to reflect the stock split.

Abandoned Proposed Stock Offering

The Company was proposing to make a public offering of 5,000,000 shares of their previously authorized but unissued common stock which was to be registered with the Securities and Exchange Commission on Form SB-2. An offering price of $17.50 per share was arbitrarily determined by the Company and offering costs were estimated to be approximately $73,000. In April 2003, the Company abandoned their proposed stock offering and wrote off the deferred stock offering costs of $46,303 directly to general and administrative expense.

Stock Warrants

In July 2003, the Company issued five-year warrants to purchase 10,000,000 shares of common stock for services valued at $1,810,000 using the Black-Scholes option pricing model. The warrants were issued to purchase shares of common stock at the following exercise prices: 1,000,000 at $.10 per share, 2,000,000 at $.15 per share, 1,000,000 at $.30 per share, 1,000,000 at $.55 per share, 1,000,000 at $1.00 per share, 2,000,000 at 80% of market value with a $.20 per share minimum, 1,000,000 at 85% of market value with a $.20 per share minimum and 1,000,000 at 90% of market value with a $.20 per share minimum. In July 2003, warrants to purchase 1,000,000 shares of common stock at $.10 per share, were exercised. In August 2003, warrants to purchase 666,667 shares of common stock at $.15, were exercised. In December 2003, warrants to purchase 4,000,000 shares of common stock at $.20, were exercised. At April 30, 2004, warrants to purchase 4,333,333 shares of common stock under this issuance were still outstanding.

In September 2003, the Company issued five-year warrants, at various prices per share ranging from $0.35 to $1.50, to purchase 10,000,000 shares of restricted common stock for services valued at $860,000 using the Black-Scholes option pricing model. The warrants were issued to purchase shares of restricted common stock at the following exercise prices: 2,000,000 at $.35 per share, 2,000,000 at $ .50 per share, 2,000,000 at $.70 per share, 2,000,000 at $1.25 per share, and 2,000,000 at $1.50 per share. At April 30, 2004, warrants to purchase 10,000,000 shares of restricted common stock under this issuance were still outstanding.

In January 2004, the Company issued five-year warrants, at various prices per share ranging from $0.15 to $1.15, to purchase 10,000,000 shares of common stock for services valued at $840,000 using the Black-Scholes option pricing model. The warrants were issued to purchase shares of common stock at the following exercise prices: 2,000,000 at $.15 per share, 2,000,000 at $ .30 per share, 2,000,000 at $.55 per share, 2,000,000 at $1.00 per share, 1,000,000 at $1.10 per share, and 1,000,000 at $1.15 per share. In March 2004, warrants to purchase 3,119,945 shares of common stock at $.15 - $.30, were exercised. In April 2004, warrants to purchase 301,760 shares of common stock at prices from $.15-$.30, were exercised. At April 30, 2004, warrants to purchase 6,578,295 shares of common stock under this issuance were still outstanding.

In April 2004, the Company issued one year warrants at $.60 to purchase 100,000 shares of common stock for services valued at $38,000 using the Black-Scholes option pricing model. As of April 30, 2004 all the warrants remained outstanding.

Stock Options

In November 2003, Company granted options to purchase 625,000 shares of common stock at $.16 per share as additional compensation to an officer of the Company. The options vest over three years with 208,333 vesting on November 1, 2004, 208,333 vesting on November 1, 2005 and 208,334 vesting on November 1, 2006. The options are exercisable for five years following vesting. As of July 19, 2004, both the 208,333 options that vest on November 1, 2005 and November 1, 2006 were cancelled. Since the exercise price of the options was the same as the market price of the Company's common stock on the grant date, the Company has recorded no compensation cost for the options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".

In June 2003, Company granted options to purchase 420,000 shares of common stock at $.19 per share as additional compensation to two officers of the Company. The options vest over three years with 140,000 vesting on June 20, 2004, 140,000 vesting on June 20, 2005 and 140,000 vesting on June 20, 2006. The options are exercisable for three years following vesting. Since the exercise price of the options was the same as the market price of the Company's common stock on the grant date, the Company has recorded no compensation cost for the options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".

A summary of the status of the options granted under the Company's stock-based employee compensation plan is presented below.

For the Years For the period Ended April 30, April 24, 2002 _______________________________ date of inception) 2004 2003 to April 20, 2004

Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price

Outstanding at beginning of period 420,000 $ .19 - $ - - $ - Granted 625,000 .16 - - - - Exercised - - - - - - Forfeited 416,666 .16 - - - - Expired - - - - - -

Outstanding at end of period 628,334 .19 - - - -

Options Outstanding Options Exercisable
Range of Weighted-Average Weighted-Average Weighted-Average Exercise Number Remaining Exercise Number Exercise Price Outstanding Contractual Life Price Exercisable Price

$.16 -.19 628,334 4.0 years $.18 - $ -

Under the Company's stock option plan each of the options expires on the earlier of the date specified in the option agreement, or the tenth anniversary of the date of grant. Any incentive option not subject to this provision is designated as being a non-statutory option. Whenever an outstanding option is terminated (other than by exercise), the shares of common stock relating to such option are to be restored to the Plan and be available for the grant of other options under the Plan.

We account for our stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Had our compensation expense for stock-based compensation plans been determined based upon fair values at the grant dates for awards under this plan in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our net loss and pro forma net loss per share amounts would have increased as follows:

2004 2003 Net loss:
As reported $ (21,818,320) $ (1,276,293) Deduct: total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (60,722) -

Pro forma net loss $ (21,879,042) $ (1,276,293)

Loss per share, basic and diluted:
As reported $ (.26) $ (.10)

Pro forma $ (.26) $ (.10)

The weighted average minimum value of options granted during 2004 (none were granted during 2003), estimated on the date of grant using the Black-Scholes option-pricing model, ranged from approximately $.16 - $.65 per option. The minimum value of options granted was estimated on the dates of the grants using the following approximate assumptions: dividend yield of 0 %, expected volatility of 176.1%, risk-free interest rate of 3.5%, and expected lives of 4-6 years.

Estimated Fully Diluted Equity Information

As of April 30, 2004, the company has the following number of potentially convertible shares of common stock related to convertible preferred stock, warrants, and stock options:

For conversion of series A preferred stock 100,000,000

For conversion of series B preferred stock 200,000,000 For conversion of series C preferred stock 28,120,000 For conversion of series D preferred stock 8,500,000 Outstanding Warrants 21,011,628 Outstanding Options 628,334 Common shares issuable upon conversions and exercises 358,259,962

Shares outstanding as of April 30, 2004 135,408,537

Estimated common shares after conversions and exercises 493,668,499

NOTE 7 - INCOME TAXES

We recognized losses for both financial and tax reporting purposes during each of the periods in the accompanying consolidated statements of operations. Accordingly, no provisions for income taxes and/or deferred income taxes payable have been provided for in the accompanying consolidated financial statements.

Since our incorporation, we have incurred net operating losses for income tax purposes of approximately $17,018,000 (the significant difference between this amount, and our deficit of approximately $6,000,000, arises primarily from certain stock based compensation that is considered to be a permanent difference). Because the transaction discussed at Note 1 triggered certain "change in control" provisions of the Internal Revenue Code, a portion of these net operating loss carry forwards will be limited as they expire in various years through the year ended April 30, 2024. However, we have established a valuation allowance to fully reserve the related deferred income tax asset as such asset did not meet the required asset recognition standard established by SFAS 109.

At April 30, 2004 we had no deferred tax liabilities and our non-current deferred income tax asset (assuming an effective, combined federal and state, income tax rate of approximately 20%) consisted of the following:

Non-current deferred income tax asset: Amounts

Net operating loss carry forwards $ 3,228,000 Depreciation, amortization and impairments 89,000 Stock compensation 99,000 Less valuation allowance (3,416,000)

Total $ -

The income tax benefit consists of the following for the years ended April 30, 2004 and 2003:

2004 2003

Current $ - $ - Deferred 3,165,000 251,000 Change in valuation allowance (3,165,000) (251,000) $ - $ -

NOTE 8- OTHER COMMITMENTS AND CONTINGENCIES

Escrow and Lease Agreements

In January 2003, the Company signed an Escrow Agreement with ECI Telecom, Inc. ("ECI") and Klein & Heuchan ("KH") to rent office space for the month of February 2003 while a long-term lease was finalized. The agreement called for the Company to deposit $105,000 with KH and for rent of $16,000 to accrue for February. In March 2003, the Company signed an Extension of Escrow Agreement with ECI and KH to provide for the Company to continue to occupy the rented office space through April 30, 2003. In May 2003, the Company signed a Lease Agreement with ECI to replace the escrow agreements. The lease provides for a five-year term beginning February 1, 2003 and the lease is renewable for one additional five-year term. The lease requires payments of approximately $63,127 (including taxes) per month beginning June 2003 and skipping January 2004. The lease payments will increase 3% each February 1 and the Company will pay additional expenses for upkeep of the building. The lease continues the $92,500 security deposit of the escrow agreement. The Company paid $15,000 required under the lease in order for the Company to have the option to purchase the leased office space for $4,750,000 by August 1, 2003, $4,900,000 by November 1, 2003 or $5,000,000 by May 1, 2004. The lease is guaranteed by Sky Way Global, LLC, an entity under common control. For the years ended April 30, 2004 and 2003, total rent expense amounted to $753,583 and $0, respectively.

The company has notified the lessor of the building of their intent to purchase the building and deposited $200,000 under the terms of the lease agreement. The company is actively pursuing financing at this time.

Minimum future rental payments under the lease agreement for the twelve-month periods ended and in aggregate are:

April 30, Amount

2005 $ 581,834 2006 598,982 2007 613,337 2008 469,678 $ 2,263,831

Services Agreement

In February 2003, the Company entered into a three-year Services Agreement with XO Communications, Inc. ["XO"]. The agreement calls for XO to provide internet services to the Company and the term of the agreement does not begin until XO has completed installation of the internet connection. The agreement requires the Company to purchase a minimum of $4,600 of services per month with annual minimum purchases of $55,200 for the first year, $110,400 for the second year and $165,600 for the third year. At July 31, 2003, XO had not yet complete installation of the internet connection and no amount has been accrued in the accompanying financial statements for the payments required under this agreement. Company has subsequently cancelled the agreement but is subject to litigation and a claim for approximately $170,000.

Lease Agreements

The Company has various lease agreements related to its tower and wireless sites utilized for its network. The lease terms for these agreements range from month-to-month to 60 months, have renewal terms ranging from annual renewals to four five-year terms, and require monthly payments of $100 to $900, excluding utilities.

Minimum future rental payments under the lease agreements for the twelve- month periods ended and in aggregate are:

April 30, Amount

2005 $ 36,360 2006 33,030 2007 29,430 2008 18,063 2009 15,300 $ 132,183

Employment Agreements and Management Compensation>

In June 2003, the Company entered into a three-year Employment Agreement with the Company's President to pay a salary of $150,000 per year increased annually by 10%. The agreement also required the Company to grant options to purchase 210,000 shares of common stock and to pay $750 per month as a non-accountable automobile allowance. The June 2003 Employment Agreement replaced an April 2003 five-year Employment Agreement which required a salary of $150,000 per year increased annually by 10%. During the years ended April 30, 2004 and 2003, respectively, the Company expensed $150,000 and $150,000 as compensation to the Company's President. At April 30, 2004, the Company owed $6,923 in accrued salary to the Company's President.

In June 2003, the Company entered into a three-year Employment Agreement with the Company's Chief Executive Officer to pay a salary of $150,000 per year increased annually by 10%. This agreement was subsequently amended to reflect an annual salary of $175,000, beginning July 1, 2003. The agreement also required the Company to grant options to purchase 210,000 shares of common stock and to pay $750 per month as a non-accountable automobile allowance. The June 2003 Employment Agreement replaced an April 2003 five-year Employment Agreement which required a salary of $175,000 per year increased annually by 10%. During the years ended April 30, 2004 and 2003, respectively, the Company expensed $150,000 and $12,500 as compensation to the Company's Chief Executive Officer. At April 30, 2004, the Company owed $8,077 in accrued salary to the Company's Chief Executive Officer.

Luxury Suite License Agreement

In March 2004, the Company entered into a 10 year lease on a Sky Box at the Raymond James Stadium for a fee of $80,000 per year. In addition, the agreement required a security deposit of $80,000. The license allows the company to have up to 16 people to attend the Tampa Bay Buccaneers football games. The costs listed above only includes the license fee for the Suite and does not include other costs associated such as food, beverages or other forms of entertainment.

Automobile Commitment

In April 2004, the Company committed to purchase four (4) vehicles for $222,800. In July 2004 the Company traded in two Company owned vehicles and took delivery of two of these vehicles. As of July 28, 2004 the Company owes $111,400 for the two remaining vehicles for which is hasn't received.

NOTE 9 - OTHER RELATED PARTY TRANSACTIONS

Advances from SkyWay Global and Note Payable

Prior to June 19, 2003, SkyWay Global, LLC ("SWG") made payments on behalf of the Company and made cash advances to the Company totaling $1,564,015. The advances bore no interest and were due on demand. On June 19, 2003, the Company converted the amounts owed to SWG into a promissory note. The note bore no interest and was due on demand. On June 21, 2003, the Company issued 1,000,000 shares of its preferred stock to SWG as repayment of the note and advances.

Advance from SkyWay Global

For the period July 2003 through April 30, 2004, the Company received cash and non cash advances totaling $424,895 from SWG. Relative to these advances, the Company made cash and non cash repayments totaling $166,026. The net advance due to SWG at April 30, 2004 is $258,869. The advance bears no interest and is due on demand.

Advances from Related Party

During the third quarter of 2004, the Company borrowed funds from its President to meet their short-term cash needs. These amounts were advanced without interest and are due on demand. At April 30, 2004 the Company owed the President $5,078.

Receivable due from Related Party

In connection with the acquisition of the aircraft discussed in Note 4, the Company overpaid, by $10,833, a guarantor-shareholder for the deposit associated with the purchase. This amount was still outstanding as of April 30, 2004.

Office Space

The Company shares office space with SWG. In May 2003, due to the reduced operations of SWG, the Company stopped charging rent to SWG but still provides an office, equipment and administrative support for SWG at no cost. During the years ended April 30, 2004 and 2003, respectively, the Company billed SWG $0 and $0 in rent.

Guarantee

In January, the Company entered into a six-month financing agreement with a financial institution for the purchase of an airplane. This loan is guaranteed by three shareholders of the company. The financing on the airplane has been extended by the Company paying a $650 extension fee on July 28, 2004 for an additional six months through January 16, 2005, by United Bank and Trust. All existing terms and conditions remained the same.

NOTE 10 - SUBSEQUENT EVENTS

Stock Issuances

From May 1, 2004 through July 17, 2004, the Company issued 268,182 shares of common stock at $.55 per share, for aggregate consideration of $147,500, from warrants previously provided through an S-8 filing.

In June 2004, the Company issued 3,626,667 shares of common stock as payment of $991,984 of accrued expenses.

Option Issuance

In July 2004 the Company entered consulting agreement with a newly appointed board member with a minimum of 1 year term starting July 1, 2004 following which either party can terminate agreement with 30 days notification. The consultant shall receive a monthly retainer for services performed in the amount of $8,334 per month, which will be paid within 14 days of receipt of invoice provided he dedicates an average of 2 to 15 hours per week supporting the Company. In addition to the monthly retainer above, he shall be awarded a total of 100,000 stock options at $ .68 per share which will vest as of July 1, 2005. The options will expire July 1, 2009.

Acquisition of Assets

On May 21, 2004 the Company purchased selected intellectual assets and rights to service contracts with one airline for use in an in-flight entertainment system. The cost of this transaction was 1,150,000 shares of the Company's common stock valued at $1,044,000 (based on the market price of shares at the date of acquisition) $100,000 for three parties to the transaction and 550,000 warrants, at a price of $.93 per share, exercisable within two (2) years of closing date. The total cost of the transaction is $1,144,000 and has been expensed in the first quarter as "in process research and development."

In May 2004, the Company entered into a month to month lease for office space in Grapevine, Texas. The monthly rental is $4,000. The Company expects to vacate this facility in August 2004.

In June 2004, the Company entered into a lease for warehouse, repair center and office space in Grapevine, Texas for 73,000 square feet. The lease term is 7.5 years, commencing September 2004, with a 5-year renewal option. The lease requires monthly base rent and operating expense payments. Base monthly rent amounts will range as follows: Months 1-6 $0, months 7-18 $13,617, months 19-30 $16,643, months 31-60 $19,064, and months 61-90 $21,182. Monthly operating expense payments are estimated to be $8,291. The lease also requires a security deposit of $88,454 and that the base rent through month 18 will be paid in advance, in two installments, due July 2004 and August 2004 in the amount of $81,702.

Loans

In June 2004, the Company received a loan in the amount of $1,247,000 from Brent Kovar, President. The loan bears no interest and will be repaid when funds are available.

Note Receivable

In May 2004, the Company issued a note in the amount of $325,000 to Bruce Baker for prepayment of services to the company. The note bears 6% interest and is due December 31, 2004.

Airplane Commitment

In May 2004, the Company deposited $100,000 for a 747 aircraft. Terms are currently being negotiated but the estimated final price of the plane will be in the range of $10-$12 million. The plane is to be used for developing and providing a flying operations center for a Mideast customer, if the company can procure an agreement. At this time, no formal proposal exists.

Skyway Media Server

Through July 29, 2004 the Company has sold 11 SkyWay Media Servers and spares to Continential Airline for $244,145. The Company has 8 remaining shipments on order for the customer.

Advertising Contracts

The Advertising Contracts previously announced by the corporation representing approximately $806,400 of advertising revenue and 8 customers has expired as of May 17, 2004. The Company is actively pursing options to resign these customers to new agreements.