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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-QSB





(Mark One)


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended September 30, 2002





 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934





For the transition period from
                     to





Commission File No. :





YAK COMMUNICATIONS (USA), INC.


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





Florida

98-0203422(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification
No.)





55 Town Centre Court, Suite 610 Toronto, Ontario, Canada, M1P 4X4


(Address of principal executive offices)





(416) 296-7111


Issuers Telephone Number, Including Area Code:





(Former Name, Former Address and Former Fiscal Year, if changed since last report)





Indicate by a 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. x Yes  ̈ No





As of September 30, 2002, 4,792,158 shares of the issuers Common Stock, no par value per share, were outstanding.





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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





INDEX TO FORM 10-QSB





PagePART IFINANCIAL INFORMATIONItem 1.     Financial StatementsConsolidated Balance Sheets September 30, 2002 and June 30, 2002

F-1Consolidated Statements of Stockholders Equity September 30, 2002 and June 30, 2002

F-3Consolidated Statements of Operations For the Three Months Ended September 30, 2002 and September 30, 2001

F-4Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2002 and September 30, 2001

F-5Notes to the Consolidated Financial Statements

F-6Item 2.     
Managements Discussion and Analysis of Financial Condition and Results of Operations

3PART IIOTHER INFORMATIONItem 6.     
Exhibits and Reports on Form 8-K

5Signatures

6Certifications

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PART I


FINANCIAL INFORMATION





Item 1.    Financial Statements.





Immediately following the signature page in this Form 10-QSB.





|Item |  | 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations.
|---- |  | --------------------------------------------------------------------------------------------




The Managements Discussion and Analysis of Financial Condition and Results of Operations included herein
should be read in conjunction with the Consolidated Financial Statements of Yak Communications (USA), Inc. and Subsidiaries, and the related notes to the Financial Statements included in the Companys Form 10-KSB for the fiscal year ended June
30, 2002, and the Consolidated Financial Statements and the related notes to the Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-QSB. Our Financial Statements have been prepared in accordance with generally
accepted accounting principles in the U.S. and have been audited by our independent auditors.





The financial
information in Managements Discussion and Analysis of Financial Condition and Results of Operations refers to our continuing operations.





COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001





Results of Operations





Net revenue increased $2,901,929 or 55% to $8,179,105 for the three months ended September 30, 2002 from $5,277,176 for the
three months ended September 30, 2001. This increase in revenue is the result of our marketing efforts and consumer acceptance of our products, along with expansion into six new cities in Canada and two cities in the United States from 2001. Sales
in markets existing from last year increased by $2,021,000 or 38% and sales in new markets accounted for $881,000 of our revenue increase ($302,000 of which arose from our operations in the United States).





Cost of revenue increased $1,294,458 or 31% to $5,399,497 for the three months ended September 30, 2002 from $4,105,039 for the three
months ended September 30, 2001. This increase is in proportion to the increased telephone traffic volume associated with the growth in our revenues. Cost of revenue is comprised primarily of the cost of long-distance services, fees for the
processing and transporting of our calls, and fixed line access costs and variable line usage costs. The overall cost of revenue decreased to 66% of sales for the three months ended September 30, 2002, from 77% of sales for the three months ended
September 30, 2001. The majority of the cost of revenue is variable, based upon the cost of the long-distance services, processing fees and line usage costs. As our telephone traffic volume increased, our purchasing power improved
significantly; this has allowed us to lower our long-distance costs. Furthermore, as our telephone volume increases many




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costs such as line access costs will remain fixed, which allows us to improve our margins.





The costs of long-distance services has decreased to 35% for the three months ended September 30, 2002 from 47% for the three
months ended September 30, 2001. This is due to our greater purchasing power resulting from our higher volumes of traffic.





Selling, general and administrative expenses (SG&A) increased $967,963 or 136% to $1,678,615 for the three months ended September 30, 2002 from $710,652 for the three months ended September 30, 2001. The increase is
primarily due to additional spending for marketing and advertising in order to attract new customers and increase our revenue base. Of the increase, advertising and promotion was the largest component of $989,000 for the three months ended September
30, 2002 from $324,000 for the three months ended September 30, 2001. We spent $482,000 in advertising and marketing costs to develop our operations in the United States. The next largest component of SG&A was salaries, which increased to
$306,000 for the three months ended September 30, 2002 from $177,000 for the three months ended September 30, 2001. The increase in salaries was a result of hiring additional administrative, technical and customer service employees, which were
required to support our growth in sales. These selling, general and administrative expenses, other than marketing, are expected to rise at a lower rate than that of our projected revenue increases.





Organizational and start-up costs for the development of our subsidiary, Yak Communications (America), Inc., were $58,000 for the three
months ended September 30, 2002 from $22,478 for the three months ended September 30, 2001. These costs were composed primarily of legal and consulting fees incurred to obtain the regulatory licenses and contracts required to commence U.S.
operations.





Accounts receivable financing costs related to the factoring of our trade accounts receivable have
decreased $39,000 or 43% to $89,575 for the three months ended September 30, 2002, as compared to $128,996 for the three months ended September 30, 2001. This change is a direct result of the reduced cost of accounts receivable being factored which
resulted from a renegotiation of our factoring arrangement in February 2002.





Depreciation and amortization
increased $9,000 or 8% to $122,000 for the three months ended September 30, 2002, as compared to $112,000 for the three months ended September 30, 2001. This increase is a result of total, to-date capital spending of our Company of $832,000 for the
last twelve months.





Liquidity and Capital Resources





Our liquidity requirements are for operating activities, purchases of capital assets and interest and principal payments on outstanding indebtedness. To date, we have
financed our growth through the private placement of equity securities, borrowings, accounts receivable financing, vendor financing and capital lease financing.




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Net cash provided from operating activities was $39,722 for the three months
ended September 30, 2002, as compared to net cash used in operating activities of $135,186 for the three months ended September 30, 2001. This was due to an increase of our net income from operating activities (before non-cash items) of $644,173 for
the three months ended September 30, 2002, as compared to a net income from operating activities (before non-cash items) of $166,465 for the three months ended September 30, 2001





Net cash used in investing activities was $237,291 for the three months ended September 30, 2002, as compared to $30,010 for the three months ended September 30, 2001.
These investing activities comprise the cash component of the additions to our property and equipment required to maintain our systems and expand our operations.





Net cash provided by financing activities was $440,362 for the three months ended September 30, 2002, as compared to $224,196 for the three months ended September 30, 2001. This increase is primarily
due to advances arising from our marketing agreement with Telus Communications, Inc.





We do not have any plans for
any further significant acquisitions of property and equipment during the current fiscal year. We believe we have sufficient fixed capacity to accommodate our anticipated volume of telephony traffic in both Canada and the U.S. during fiscal 2003. We
expect that the only capital additions expected to be made during fiscal year 2003 will be those required to maintain our existing telephone capacity, which are not expected to be greater than the capital additions made during fiscal year 2002.





We believe that our current operations will be able to generate sufficient cash to meet our current obligations
and maintain our current level of operations. We anticipate that additional working capital that will be required will be funded by increasing our available borrowings under our accounts receivable factoring arrangements. We have $6 million
available under our current accounts receivable factoring agreement of which approximately $2,777,065 is currently outstanding. In addition, we may seek to obtain additional funds from public or private equity or debt offerings; however, we have no
plans to do so at this time. We do not intend to significantly increase our marketing efforts in the U.S. until we are able to determine the potential for success of our business in the U.S.





In addition to the financing sources described above, our arrangement with Telus Communications, Inc. may provide a further $2.4 million of funds for specific use in
marketing and advertising our planned expansion. These amounts are reflected as deferrals of amounts otherwise due to Telus.





Seasonality





The results of any interim period is not necessarily indicative
of the results that might be expected during a full fiscal year.




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Trends





Over the past nine months, several major telecommunication companies have had to reconsolidate or reorganize pursuant to various bankruptcy proceedings partly due to excess capacity. This excess capacity has resulted in decreasing
prices for long-distance and other telecommunications services. Once the consolidation of capacity providers in the telecommunications industry stabilizes we anticipate that prices in the industry will become more constant.





In order to increase sales in our existing markets, we plan to develop new services to compliment our dial-around program. In addition, we
are evaluating international opportunities for our services in markets outside of North America.





FORWARD LOOKING STATEMENTS





From time to time, we make statements about our future results in this Form 10-QSB that may constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations and the current economic environment. Such statements are subject to known and
unknown risks and uncertainties that could cause actual future results and developments to differ materially from those currently projected. We caution you that these statements are not guarantees of future performance. They involve a number of
risks and uncertainties that are difficult to predict. Our actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause our actual
results to differ materially from those in the forward-looking statements, include, but are not limited to: (i) access to sufficient working capital to meet our operating and financial needs; (ii) our ability to respond to growing competition in our
markets for discount long distance services as well as the extent, timing and success of such competition; (iii) our ability to expand into new markets and to effectively manage our growth; (iv) the profitability of our entry and expansion into the
U.S. market; (v) customer acceptance and effectiveness of us as a discount long distance provider and our ability to assimilate new technology and to adapt to technological change in the telecommunications industry; (vi) our ability to develop and
provide voice over internet and web-based communications services; (vii) changes in, or failure to comply with, applicable governmental regulations; (viii) our reliance on our key personnel and the availability of qualified personnel; (ix) the
duration and extent of the current economic downturn especially in Canada; (x) general economic conditions or material adverse changes in markets we serve; (xi) the risk that our analyses of these risks could be incorrect and that the strategies
developed to address them could be unsuccessful; (xii) changes in our accounting assumptions that regulatory agencies (including the Securities and Exchange Commission) may require or that result from changes in the accounting rules or their
application, which could result in an impact on our earnings; and (xiii) the various other factors discussed in this filing.





Controls
and Procedures





Evaluation of Disclosure Controls and Procedures.The Company maintains controls
and procedures designed to ensure that information required to be disclosed in the reports that the




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Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive and principal financial officers of the Company concluded that the Companys
disclosure controls and procedures were adequate.





Changes in Internal Controls.The Company
made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive and principal financial officers.





PART II





OTHER INFORMATION





Item 6.    Exhibits and Reports on Form 8-K.





(a)    Exhibits.





None.





(b)    Reports on Form 8-K.





None.







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SIGNATURES





Pursuant to the requirements 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.








YAK COMMUNICATIONS (USA), INC.Date:    November 13, 2002



By:

/s/  Charles
ZwebnerCharles Zwebner, President




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CERTIFICATIONS





I, Charles Zwebner, certify that:





1.    I have reviewed this quarterly report on Form 10-QSB of Yak Communications (USA), Inc.;





2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;





3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this quarterly report;





4.    I am responsible
for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:





| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation
Date;
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------




5.    I have disclosed, based on my most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):





| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




6.    I have indicated in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date of my most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.





Date:    November 13, 2002



By:

/s/  Charles
ZwebnerCharles Zwebner Chief
Executive Officer & Principal Financial Officer




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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,


AS ADOPTED PURSUANT TO


SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002





In connection with the Yak Communications (USA), Inc. (the Company) Quarterly Report on Form 10-QSB for the quarter ended September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Charles Zwebner, Chief Executive Officer and principal financial officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:





| | (1). |  | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------




| | (2). |  | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




Date:    November 13, 2002



By:

/s/  Charles
ZwebnerCharles Zwebner Chief
Executive Officer & Principal Financial Officer




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CONSOLIDATED


FINANCIAL STATEMENTS





YAK COMMUNICATIONS (USA), INC.


AND SUBSIDIARIES





September 30, 2002





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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS





Note

September 30, 2002

June 30,2002(unaudited)ASSETSCURRENTCash and cash equivalents



$
825,306

$
582,513Accounts receivable

4


5,643,553


4,886,802Prepaid expenses and sundry




413,148


425,783Income taxes recoverable




6,244


6,2446,888,251


5,901,342PROPERTY AND EQUIPMENT

3


2,991,238


2,844,112DEPOSITS




61,350


63,6469,940,839


8,809,100





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




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS





Note

September 30,2002

June 30,2002(unaudited)LIABILITIESCURRENTAccounts payable and accrued liabilities



$
1,224,223

$
1,146,253Amounts due from network access and usage




527,400


523,543Amounts due to long distance carriers




1,991,493


1,943,754Amounts due for equipment




176,131


188,976Due to Factor

4


2,777,065


3,006,017Income taxes payable




147,606


Current portion of obligations under capital leases

5


98,735


129,1106,942,653


6,937,653LONG-TERM DEBTObligations under capital leases

5


21,217


9,970Advances from Telus Communications Inc.

6


634,671


143,775655,888


153,745DEFERRED INCOME TAXES

7


235,675


204,0007,834,216


7,295,398STOCKHOLDERS EQUITYCOMMON STOCK

8


201,521


201,521SERIES A CONVERTIBLE PREFERRED STOCK

8





ADDITIONAL PAID-IN CAPITAL




1,732,060


1,732,060ACCUMULATED OTHER COMPREHENSIVE INCOMETRANSLATION ADJUSTMENT




15,440


67,232RETAINED EARNINGS (DEFICIT)




157,602


(487,111
)2,106,623


1,513,7029,940,839


8,809,100





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




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY








Common stock

Additional paid-in capital

Series A Preferred
stock


Accumulated other comprehensive income (loss)


Retained earnings (deficit)


Stockholders' Equity (Deficit)Shares

Amount


Shares


AmountBalance, June 30, 2001

4,055,158

$
194,151

$
764,359

497,000


$
497,000


$
31,585


$
(1,644,842
)

$
(157,747
)Common stock issued under employee stock award

40,000


400


79,600

















80,000Common stock issued for conversion of debt to equity

200,000


2,000


396,071

















398,071Common stock issued for conversion of preferred stock to common stock

497,000


4,970


492,030

(497,000
)


(497,000
)










Foreign currency translation adjustment (unaudited)

















35,647







35,647Dividends on preferred stock





















(52,850
)


(52,850
)Net income





















1,210,581



1,210,581Balance, June 30, 2002

4,792,158


201,521


1,732,060









67,232



(487,111
)


1,513,702Foreign currency translation adjustment (unaudited)

















(51,792
)






(51,792
)Net income (unaudited)





















644,713



644,713Balance, September 30, 2002 (unaudited)

4,792,158


201,521


1,732,060









15,440



157,602



2,106,623





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




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS





For the three months endedSeptember 30, 2002

September 30, 2001(unaudited)NET REVENUE

$
8,179,105

$
5,277,176COST OF REVENUE


5,399,497


4,105,039GROSS MARGIN


2,779,608


1,172,137EXPENSESSelling, general and administration


1,678,615


710,652Accounts receivable financing


89,575


128,996Organizational and start-up costs


58,772


22,478Interest on capital lease obligations


4,916


9,130Interest on long-term debt





22,128Depreciation and amortization


121,840


112,2881,953,718


1,005,672INCOME BEFORE INCOME TAX PROVISION


825,890


166,465INCOME TAX PROVISION


181,177


NET INCOME


644,713


166,465BASIC EARNINGS PER SHARE


0.13


0.04DILUTED EARNINGS PER SHARE


0.11


0.03WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING


4,792,158


4,055,158WEIGHTED AVERAGE NUMBER OF COMMON SHARESASSUMING DILUTION


6,076,158


5,836,158





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




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS





For the three months endedSeptember 30, 2002


September 30, 2001(unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet income

$
644,713


$
166,465Adjustments to reconcile net income to net cash provided by (used in) operating activitiesDepreciation and amortization


121,840



112,288Deferred income taxes


31,675



Changes in assets and liabilities:Decrease (increase) in:Accounts receivable


(756,751
)


(996,890
)Prepaid expenses and sundry


12,635



(189,862
)Deferred costs






77,002Deposits


2,296



772Increase (decrease) in:Accounts payable and accrued liabilities


25,909



590,948Amounts due for network access and usage


3,857



(66,813
)Amounts due to long distance carriers


47,739



124,797Amount due for equipment


(12,845
)


(156,813
)Due to Factor


(228,952
)


202,920Income taxes payable


147,606



Net cash provided by (used in) operating activities


39,722



(135,186
)CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment


(237,291
)


(30,010
)CASH FLOWS FROM FINANCING ACTIVITIESRepayments on obligations under capital leases


(50,534
)


(73,495
)Loan payable






(16,959
)Due to related parties






316,755Note payable






(2,105
)Advances from Telus Communications Inc.


490,896



Net cash provided by financing activities


440,362



224,196INCREASE (DECREASE) IN CASH


242,793



59,000CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD


582,513



59,404CASH AND CASH EQUIVALENTS, END OF PERIOD


825,306



118,404Supplemental disclosure of cash flow information:Interest paid


4,916



31,258Non-cash investing and financing activities:Obligations under capital leases incurred in connection with acquisition of equipment


31,675









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





Unaudited




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)







1.    ORGANIZATION AND BUSINESS





Yak Communications (USA), Inc. is a switch based reseller specializing in offering dial-around long-distance services to consumers. The
Company was incorporated in the State of Florida on December 24, 1998 and operates as a holding company of its wholly-owned subsidiaries in the United States and Canada.





The Company began offering its services to consumers in Canada in July 1999 and in the United States commencing December 2001.





2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and reflect the following
policies:





Principles of consolidation





These consolidated financial statements include the accounts of Yak Communications (USA), Inc. and its wholly-owned subsidiaries - Yak Communications (America), Inc. and
Yak Communications (Canada), Inc. (collectively "Company"). All intercompany balances and transactions are eliminated upon consolidation.





Revenue recognition





The Company records revenue from the sale of dial-around
services and the resale of long-distance services at the time of customer usage based upon minutes of use.





Cost of revenue





Cost of revenue includes network costs that consist of the cost of
long-distance services, processing costs, line access and usage costs. These costs are recognized when incurred.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)





Use of estimates





The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those
estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the period in which they become known.





Computation of earnings (loss) per common share





Basic earnings per share is computed by dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed giving
effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of convertible preferred stock and stock options.





Foreign currency translation and foreign assets





In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS"), No. 52, "Foreign Currency Translation," assets and liabilities of the Company's
foreign subsidiary were translated into United States dollars at the exchange rates in effect on the reporting date. Income and expenses are translated at an average exchange rate for the respective period. For the foreign subsidiary which utilizes
its local currency as its functional currency, the resulting translation gains and losses are included in other comprehensive income. Gains or losses resulting from foreign exchange transactions are reflected in earnings.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)





Cash and cash equivalents





Cash and cash equivalents are comprised of cash and term deposits with original maturity dates of less than 90 days.





Property and equipment





Property and equipment is stated at cost less accumulated depreciation which is provided on the straight-line and declining balance methods over the estimated useful lives of the assets as follows:





Telecom switching systems

20% declining balanceBilling, administration and customer service systems

20% declining balanceCarrier identification codes loading

20% declining balanceOffice furniture and equipment

20% declining balanceLeasehold improvements

over term of the leaseComputer hardware

20% declining balanceAutomobile

20% declining balanceInstalled lines

20% declining balance





Cost includes major expenditures for improvements and replacements
which extend useful lives or increase capacity of assets as well as expenditures necessary to place assets into readiness for use. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life
of the systems. Expenditures for maintenance and repairs are expensed as incurred.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)





Property and equipment (cont'd)





The Company periodically evaluates the realizability of its property and equipment. In making such evaluations, the Company compares certain financial indicators such as expected undiscounted future
revenues and cash flows to the carrying amount of the assets.





Assets under capital lease are amortized using
rates consistent with similar assets.





Income taxes





The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" which requires an asset and
liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The income tax provision is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.





Cost of Start-up Activities





The Company expenses the cost of start-up activities and organizational costs as incurred in accordance with statement of position 98-5 "Reporting on the Costs of Start-up Activities".




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)





Advertising and promotion expense





Advertising costs are expensed as incurred. The costs of promotional marketing materials are deferred and expensed as used.





Stock option plan





The Company
accounts for stock options issued to employees in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No.25, "Accounting for
Stock Issued to Employees", and provide pro forma disclosures of the effect on net income and net income per share for employee stock option grants as if the fair value based method, as defined in SFAS No. 123, has been applied. The Company has
elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123. Under APB Opinion No. 25, the Company recognizes no compensation expense related to employee stock options, as no options are
granted at a price below the fair market value on the day of grant.





Comprehensive income





The Company reports and presents comprehensive income and its components in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations.





Other comprehensive income is comprised of the foreign translation adjustment arising from the conversion from Canadian dollars to U.S. dollars and is presented as a
separate component of stockholders' equity.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)





Comprehensive income (cont'd)





Comprehensive income for the three months ended September 30, 2002 and 2001 are as follows:





September 30, 2002


June 30, 2002Net income (loss)

$
644,713


$
166,465Foreign currency translation adjustment


(51,792
)


(8,280
)592,921



158,185





Fair value of financial instruments





SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of certain financial
instruments for which it is practicable to estimate fair value. For purpose of the disclosure requirements, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The carrying values of cash, receivables, accounts payable, and other current liabilities are reasonable estimates of their fair value due to the short-term maturity of the underlying financial
instruments. The carrying value of the capital leases is a reasonable estimate of its fair value based on current rates for equipment obligations





The estimated difference between the carrying value and the fair value of the advances from Telus Communications Inc. in which no interest has been charged is not material.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)





Credit risk





Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivable. The Company has in place systems to prevent and detect fraud. The Company's system limits
credit to any one customer in the amount of $225 without formal approval. On occasion, defaults occur on receivables. The Company makes a provision when deemed necessary. As of September 30, 2002 and June 30, 2002, the allowance for doubtful
accounts was approximately $19,000.





Reclassifications





Certain classifications were made to prior period balances to conform to the current period presentation.





Unaudited interim financial statements





The accompanying financial statements of the Company for the three months ended September 30, 2002 and 2001 are unaudited. All adjustments (consisting only of normal recurring adjustments) have been
made which in the opinion of management, are necessary for a fair presentation thereof. Results of operations for the three months ended September 30, 2002 and 2001 are not necessarily indicative of the results that may be expected for the full year
or for any future period.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)







3.    PROPERTY AND EQUIPMENT





Property and equipment consist of the following:





September 30, 2002

June 30, 2002Cost

Accumulated depreciation

Net book valueTelecom switching systems

$
2,308,994

$
758,408

$
1,550,586

$
1,855,102Billing, administration and customer service systems


1,121,385


241,154


880,231


551,306Carrier identification codes loading


227,953


18,402


209,551


122,336Office furniture and equipment


69,447


11,199


58,248


36,540Leasehold improvements


34,089


9,292


24,797


27,150Computer hardware


60,563


6,720


53,843


33,627Automobile


13,046


4,090


8,956


9,805Installed lines


262,905


57,879


205,026


208,2464,098,382


1,107,144


2,991,238


2,844,112





Telecom switching systems include assets under capital leases
having a net book value of approximately $782,000 as of September 30, 2002 and $858,000 as of June 30, 2002.





Depreciation expense for property and equipment including equipment under capital leases for the periods ended September 30, 2002 and 2001 was approximately $122,000 and $113,000, respectively.





4.    DUE TO FACTOR





The amounts due to factor are secured by a pledge of the Company's accounts receivable (see note 8). The Company has an agreement to sell an undivided interest in certain accounts receivable with recourse to a Factor.
Payments are collected by the Factor from the sold accounts receivable; the collections are reinvested by the Factor in new accounts receivable of the Company, and a yield, as defined in the agreement is transferred to the Factor. As at September
30, 2002, the amount sold under the agreement, expiring February 2004, that had not been collected was approximately $4,182,000 (June 30, 2002 - $3,808,000) which will be forwarded to the Company once collected after repayment of the Factor's
advances.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)







5.    OBLIGATIONS UNDER CAPITAL LEASES





The Company's capital leases are for terms of 24 months at annual interest rates ranging from 9.25% to 15.00%.





The future minimum lease payments required under the capital lease agreements are as follows:





For the year ended September 30,2003

$
108,6302004


26,352Total minimum lease payments


134,982Amounts representing interest


15,030Principal


119,952Current portion


98,73521,217





6.    DUE TO TELUS COMMUNICATIONS INC. (Telus)





Telus provides the Company with marketing credits to a total maximum value of $3,250,000. The marketing credits are calculated
as 25% of the value of monthly billed revenue to the Company by Telus in the preceding month to a maximum of $270,000 per month.





The Company is restricted to spend this amount on advertising and promotional activities within sixty days of the credits being advanced to the Company.





Marketing credits will be repaid commencing July 1, 2003 and ending June 30, 2006. Repayments are by way of paying an additional $0.005/minute, at a minimum of $90,000 per
month. The repayments are non-interest bearing as long as no payments are in default.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)







7.    DEFERRED INCOME TAXES





Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The deferred tax liabilities of September 30, 2002 and June 30, 2002 relate to the difference between the depreciation used for Canadian tax purposes and financial reporting
purposes.





As of September 30, 2002, the Company has net operating loss carryforwards for U.S. Federal income tax
purposes of $325,000 which may provide future income tax benefits expiring between 2010 and 2020.





Realization of
the net operating loss carryforward is dependant on generating sufficient taxable income before expiration of the loss carryforwards. As such Management has provided a valuation allowance for the full amount of the deferred tax asset of $100,000 as
of September 30, 2002 related to the U.S. operations.





8.    CAPITAL STOCK





Common stock





100,000,000 shares authorized, no par value, stated value $0.01 per share.





On December
28, 2001, 40,000 common shares were issued to employees under an employee stock award.





On December 31, 2001,
200,000 common shares were issued for the conversion of a debt to a related party of $398,071.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)







8.    CAPITAL STOCK (cont'd)





Series A convertible preferred stock





500,000 shares authorized, par value $1.00 per share.





These
shares are convertible at the holders' option into common stock at a conversion rate of one share of common stock for each share of Series A preferred stock. The holders of Series A preferred stock are entitled to receive an annual cash dividend of
4% per share. The Company may redeem the Series A preferred stock at a redemption price of $1.00 per share. On June 30, 2002, 497,000 shares of Series A preferred stock were converted into 497,000 common shares.





9.    COMMITMENTS





The Company has lease commitments for its premises which expire at various dates through March 2007. The future minimum lease payments are as follows:





For the year ended September 30,2003

$
88,0002004


80,0002005


80,0002006


77,0002007


25,000




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




10.    STOCK OPTION PLAN





Effective June 30, 1999, the Company adopted a Stock Option Plan (the "Plan") which permits the issuance of stock options to selected employees and directors. The Company
reserved 640,000 shares of common stock for grant under the Plan. Options granted may be either nonqualified or incentive stock options and will expire no later than 20 years from the date of grant (10 years for incentive options). No options have
been issued under this plan.





On December 21, 2000, nonqualified options for 1,284,000 common shares were granted
to an individual who is a director and chief executive officer and are exercisable at $1.56 per share on or before December 31, 2003, or upon the sale of the Company. In the event of the chief executive officer's death or termination of employment
prior to the exercise of the options and before December 31, 2003, the Company is obligated to purchase the optioned shares at a price equal to the fair market value of the shares less the option price. The purchase consideration of the option
shares shall be in stock of the Company.





If compensation cost for the Company's grants for stock-based
compensation had been recorded consistent with the fair value-based method of accounting per SFAS No. 123, the Company's pro forma net income (loss), and pro forma basic and diluted net income (loss) per share for the three months ending September
30, would be as follows:





For the three months endedSeptember 30, 2002

September 30, 2001Net income as reported

$
644,713

$
166,465Pro forma net income (loss)


79,753


(398,495
)Basic net income (loss) per shareAs reported


0.13


0.04Pro forma


0.02


(0.10
)Diluted net income (loss) per shareAs reported


0.11


0.03Pro forma


0.01


(0.07
)




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)







11.    RELATED PARTY TRANSACTIONS





(a
)

The Company paid office rent for the periods ended September 30, 2002 and 2001 of $nil and $17,616 and purchased property and equipment of $12,000 for the
period ended September 30, 2002 from a corporation of which the Company's chairman is a shareholder and director.(b
)

The Company paid marketing and design fees for the periods ending September 30, 2002 and 2001 of $20,945 and $18,927 respectively to a corporation controlled
by an officer and shareholder.(c
)

The Company paid professional fees for the periods ending September 30, 2002 and 2001 of $11,642 and $16,088 respectively to a director and minority
shareholder.(d
)

The Company paid consulting fees for the periods ending September 30, 2002 and 2001 of $8,653 and $14,312 to a corporation controlled by a minority
shareholder.(e
)

The Company paid consulting fees for the period ended September 30, 2002 of $75,000 to a shareholder for the development of international
operations.(f
)

The Company paid a management fee for the period ended September 30, 2002 of $75,000 to a Corporation controlled by the Company's chairman.(g
)

Prepaid expenses and sundry assets include advances made during the year of $69,291 to a corporation of which the Company's chairman is a shareholder and
director.





|These |  | transactions have all been accounted for at their exchange amounts.
|----- |  | -------------------------------------------------------------------




12.    ECONOMIC DEPENDENCE





The Company
is dependent in Ontario and Quebec upon Bell Canada and in British Columbia and Alberta upon Telus Corp. to provide billing and collection services to its customers under a renewable agreement. The Company is also dependent upon TELUS Communications
Inc. to provide billing, transport and handling services under a renewable agreement which expires in June 2003.




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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





(Unaudited)




13.    ADVERTISING AND PROMOTION





The Company expenses advertising costs as incurred which includes direct-mail advertising, newspaper and television advertising. Advertising expense for the three months
ended September 30, 2002 and 2001 were approximately $989,000 and $324,000, respectively.





14.    SEGMENTED AND
RELATED INFORMATION





The Company operates in one reportable segment in two geographic regions - Canada and the
United States. Summary information with respect to the Company's operations by geographic regions are as follows:





For the three months endedSeptember 30, 2002


September 30, 2001Net revenueCanada

$
7,876,123


$
5,277,176United States


302,982



-8,179,105



5,277,176Operating profit (loss)Canada


1,481,891



211,338United States


(656,001
)


(44,873
)825,890



166,465AssetsCanada


9,310,354



7,346,561United States


630,485



14,2049,940,839



7,360,765




F-19