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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A

(Amendment No. 1)



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|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

For the quarterly period ended December 31, 2005

OR



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from              to

Commission file number: .: 000-33471



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YAK COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|FLORIDA                                                        |  | 98-0203422                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

300 Consilium Place, Suite 500, Toronto, Ontario, Canada M1H 3G2

(Address of principal executive offices)

(647) 722-2752

(Registrants telephone number)

N/A

(Registrants former name)



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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

As of December 31, 2005, 12,905,250 shares of the issuers Common Stock, no par value per share, were outstanding.



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q/A



|                                                                                                      |  |                                                                |  |     
|----------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- |  | ----
|                                                                                                      |  |                                                                |  | Page
|PART I - FINANCIAL INFORMATION                                                                        |  |                                                               
|                                                                                                      | 
|Item 1. Financial Statements                                                                          |  |                                                               
|                                                                                                      |  |                                                               
|                                                                                                      |  | Condensed Consolidated Balance Sheets                          |  | F-1 
|                                                                                                      |  |                                                               
|                                                                                                      |  | Condensed Consolidated Statements of Stockholders Equity      |  | F-2 
|                                                                                                      |  |                                                               
|                                                                                                      |  | Condensed Consolidated Statements of Operations                |  | F-3 
|                                                                                                      |  |                                                               
|                                                                                                      |  | Condensed Consolidated Statements of Cash Flows                |  | F-4 
|                                                                                                      |  |                                                               
|                                                                                                      |  | Notes to Unaudited Condensed Consolidated Financial Statements |  | F-5 
|                                                                                                      | 
|Item 2. Interim Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 3                                                             
|                                                                                                      | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                    |  | 30                                                            
|                                                                                                      | 
|Item 4. Controls and Procedures                                                                       |  | 31                                                            
|                                                                                                      | 
|PART II - OTHER INFORMATION                                                                           |  | 33                                                            
|                                                                                                      | 
|Item 5. Submission of Matters to a Vote of Security Holders                                           |  | 33                                                            
|                                                                                                      | 
|Item 6. Exhibits                                                                                      |  | 34                                                            
|                                                                                                      | 
|Signatures                                                                                            |  | 35                                                            



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EXPLANATORY NOTE

Yak Communications Inc.,a Florida corporation (the Company) is filing this Amendment No. 1 (the Amendment) to its Quarterly Report on Form 10-Q for the period ended December 31, 2005
(the Report) to amend previously issued financial statements corrected for certain previous errors in our consolidated balance sheets, statements of operations and statements of cash flows for the quarters ended December 31, 2005
and 2004. The Company has provided amended and restated financial statements and notes thereto, and revisions to Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 4.
Controls and Procedures. No other information in the Report is amended hereby. Pursuant to Exchange Act Rule 12b-15, the Company is also including currently dated Sarbanes Oxley Act Section 302 and Section 906
certifications of the principal executive and financial officers, which certifications are attached to this Amendment No. 1 as Exhibits 31.1, 31.2, 32.1 and 32.2, respectively.

The Company has restated its reported financial statements and accompanying notes included in the originally filed Report to correct for the errors and
deficiencies described below.



| |  |  | To correct for the misapplication of SFAS 133, SFAS 150 and EITF 00-19 related to the 2004 issuance of detachable warrants (the Warrants);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To correct for disclosure deficiencies under SFAS 131;
| | - |  | ------------------------------------------------------



| |  |  | To correct for errors in its Cash Flow Statements; and
| | - |  | ------------------------------------------------------



| |  |  | To correct for the fiscal 2005 misclassification of financing expenses related to assignment of accounts receivable.
| | - |  | --------------------------------------------------------------------------------------------------------------------

This Amendment No. 1 speaks as of the original date of the filing date of the Report, except for certifications, which speak as of their respective
dates and the filing date of this Amendment No. 1. Except as specifically indicated, the Report has not been updated to reflect events occurring subsequently to the original filing date. Other events occurring after the filing of the Report or
other disclosures necessary to reflect subsequent events will be addressed in reports filed with the SEC subsequent to the date of this filing.

Concurrently with the filing of this Amendment No. 1, we are filing (i) Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for the year ended June 30, 2005, and (ii) Amendment No. 1 on Form 10-Q/A
to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.

PART I

Item 1. Financial Statements

Immediately following the signature page of this Form 10-Q/A.

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

Special Note About
Forward Looking Statements

This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, which are based on managements exercise of business judgment as well as assumptions made by and information currently
available to, management. When used in this document, the words may, will, anticipate, believe, estimate, expect, intend and words of similar import, are intended to
identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties as described in the
Companys Annual Report on Form 10-K as well as other periodic reports, filed with the Securities and Exchange Commission, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance
that our expectations will materialize.

The following discussion should be read in conjunction with the information contained in the
unaudited condensed consolidated financial statements of the Company and the related notes thereto, appearing elsewhere herein, and in



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conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations set forth in the Companys
Form 10-K/A Amendment No. 2 for the year ended June 30, 2005, filed with the Securities and Exchange Commission (SEC). All the amounts are in thousands of dollars except for share and per share data. The financial information
in Managements Discussion and Analysis of Financial Condition and Results of Operations refers to our continuing operations.

Overview

Yak Communications Inc., through its wholly owned subsidiaries Yak Communications (Canada) Inc. and Yak Communications (America) Inc.
(collectively Yak or the Company) provides discounted long distance telecommunication services to more than nine-hundred thousand recurring residential and small business customers in Canada and the United States, using our
facilities-based, resale network model and our Voice over Internet Protocol (VoIP) network. Residential marketing efforts are primarily concentrated toward consumers who make a significant number of international calls, directly
targeting ethnic markets and communities in major urban centers. Our customer base is diversified particularly across many ethnic communities.

We also offer end-to-end telecommunications services to small-to-medium business enterprises in the Canadian market. Our focus is to provide the highest quality, competitively priced telecommunications services to existing markets.

Dial-around long distance telephony is a commodity product, and we expect that in the future we may saturate our Canadian marketplace. It
is our strategy to leverage our recurring cash flow which our dial-around business provides to transition into high growth and emerging markets, such as VoIP.

In 2005 we launched our VoIP network thereby expanding our market by providing cost effective access to global markets. Use of Internet Protocol enables us to provide our service to customers who wish to originate or
receive calls from multiple international locations and is a natural extension of our traditional value proposition. We expect that lower costs of providing service should translate into significant savings for a new base of customers with
high-speed Internet connections.

Products

Our primary residential product offerings are dial-around long distance services (also known as casual calling or 10-10-XXX), with both variable and flat rate pricing offered across Canada and in selected locations
in the United States. Casual calling allows our customers to dial-around their existing long distance carrier on any call by entering a few digits prior to making the call, without permanently switching long distance carriers. We also offer
1+ service (yakLongDistance), a presubscribed long distance telecommunications service for residential customers and small and medium-sized businesses in Canada. Our other products include:



| |  | yakCell®, a dial-around service for cell phone users;
| | - | -----------------------------------------------------



| |  | yakCallingCardTM, a post-paid phone card service
for travelers;
| | - | ---------------------------------------------------------------



| |  | LooneyCall®, a flat rate long distance dial-around product to certain destinations for $1 (CAD) per call;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | yakForFreeTM, a VoIP service which allows users
to make PC to PC phone calls with real-time video over a high-speed Internet connection;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | yakToAnyoneTM, a prepaid VoIP service which
allows users to make PC to PSTN Internet phone calls over a high-speed connection; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | yakUnlimitedTM, a presubscribed VoIP service
which allows users to make thirty-five hundred minutes of North American Internet phone calls for one monthly fee.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

At
present, we have the largest market share in the Canadian dial-around market, with over 70% market share. Nevertheless, we believe there is opportunity to further expand the Canadian market, and we intend to focus our efforts on the growth and
retention in this core market. Our goal is to expand the size of the addressable Canadian marketplace by marketing our product suite outside of the major urban centers. During our second fiscal quarter, we initiated a new advertising campaign in
British Columbia and Alberta focused on promoting our 1+, yakCell and yakCallingCard products. As of January 12, 2006, we have gained ten thousand new 1+ customers and an additional eleven thousand yakCell and yakCallingCard customers, an
increase of 121% and 73% respectively, over our previous customer base. We also recently launched a new feature which allows our customers using our subscription services to view their account online. Components of this new feature include account
updates, invoice downloading and the status of any new services ordered.



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We continue to promote our dial around services in the United States, relying on our core strategy of
niche marketing to ethnic communities to grow market share. Our 1+ and dial-around services are currently available in 48 states. We have an ongoing targeted marketing campaign to Hispanic markets in South Florida and Los Angeles. We have also
entered into an agreement with a Hispanic celebrity spokesperson and we utilize print and outdoor media to attract customers. We maintain an office in Aventura, Florida to support our strategic focus in the United States. Although the U.S. market is
highly competitive, our marketing campaign has continued to see increased customer usage growth, during the three months ended December 31, 2005. For the three-month period ending December 31, 2005, monthly minutes grew to more than eleven
million45% higher than the minutes used during the three months ending September 30, 2005 (almost eight million minutes) and 150% higher than the four and a half million minutes in the comparable period ended December 31, 2004. Net
revenue earned in the United States increased during the second quarter but was partially offset by higher bad debts and related call processing costs. During the quarter ending December 31, 2005, the Company addressed these factors by
implementing enhanced controls. We therefore expect improvements in contribution margin for the upcoming quarters. We believe that through the implementation of a strategically focused approach an opportunity to grow this market exists.

VoIP

Internet-enabled voice services represent an
important emerging market opportunity in the communications industry. VoIP service enables voice communication over broadband IP networks. The service has the potential to significantly reduce costs for end users while providing an array of
value-added services, e.g., voicemail, call-waiting, caller-ID, call-forwarding, auto-attendant, find-me/follow-me and roaming.

We believe
we are well-positioned to capture market share as VoIP services gain popularity among traditional phone users. We have initiated strong relationships with technology and network providers to incorporate VoIP into our current products offering. We
intend to leverage our successful dial-around business model which concentrates in the ethnic communities for international calling, the market reach of current advertising, and the ability to carry a portion or all of a call over the Internet, to
maximize our VoIP initiative contribution margin potential.

In 2005, we began marketing our VoIP service, WorldCity
VoIP, to residential customers in Canada and the U.S. For customers who currently have high-speed Internet access, WorldCity VoIP includes free member-to-member international calling and combines bundled local and long distance calling
packages with competitive international rates. The services include calling features such as Caller ID, Three Way Calling and Voicemail. Our VoIP service is generally available everywhere and specific DID (direct dial) numbers are currently
available in select cities in the United States and Canada.

In November 2005, we announced the addition of certain product lines to our
WorldCity VoIP service: yakForFree and yakToAnyone. These products are supported by Kayote Networks, Inc. (Kayote) and CounterPath Solutions, Inc. (CounterPath). Kayote provides recognized industry expertise to help
define VoIP technology solutions overcome the typical interoperability issues that have previously inhibited the widespread acceptance of Internet based services. CounterPath provides software end user devices (softphones) that allow customers to
make and receive phone calls or video phone calls directly on their personal computer without the need of a regular analogue phone line. In January 2006, we re-launched our WorldCity VoIP service with yakUnlimited residential first line
replacement service in certain locations in Canada and the United States. Certain necessary back-office systems for the yakUnlimited service were outsourced to CommPartners Inc. of Las Vegas, NV. yakUnlimited is a subscription service that
allows subscribers to make and receive calls over high speed DSL or cable Internet access to virtually any telephone or cellular phone worldwide.

yakForFree is a service which allows users to make free voice and video calls using the Internet to anyone who is also a yakForFree user. yakForFree members are encouraged to upgrade to one or more of our paying programs. yakToAnyone is a
PC-to-PSTN, pre-paid service, which supports video capabilities. As at December 31, 2005 we have experienced over thirteen thousand downloads of our free PC-to-PC product with over five hundred consumers upgrading to our yakToAnyone prepaid
service. At that time we also had more than seven hundred YakBasic and seven hundred YakUnlimited customers. Over the coming months, we plan on increasing our marketing efforts with respect to these products.

Network Facilities

Over the past four years, we have
established and expanded our own private, leased line network throughout most of Canada. Additionally, we have achieved comparable network breadth in the United States by interconnecting with Wiltel Communications Group, LLC (recently acquired by
Level 3 Communications Inc.), a major U.S. carrier. Currently, this coast-to-coast network delivers all of our telephony traffic. Our current level of traffic is using approximately forty thousand ports of our Tekelec/Santera switch, based in
Toronto, Canada. This switch is expandable to two-hundred thousand ports, and as a result, we anticipate having significant switching capacity in the foreseeable future. During the quarter ending December 31, 2005, a second switch was installed
in Miami, FL and became fully operational in December 2005. It is currently being used as a redundant system and to handle overflow from our Toronto switch.



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Cost reduction initiative

In addition to the direct cost savings associated with the migration to and operation of the Tekelec/Santera platform, the transition has also afforded us the opportunity to reduce costs by bringing a greater portion
of our traffic onto our network, i.e. on-net traffic. As of December 31, 2005, we are now routing 6,200 (or 12%) more minutes per month on-net compared to our on-net utilization as of June 30, 2005. We continually pursue other methods of
reducing our variable direct costs such as employing least cost routing of our international traffic, negotiating lower variable costs with multiple carriers to multiple destinations to achieve the lowest available cost per minute, and continuing to
expand the capacity of our network to accommodate the growing demand in certain areas of the markets we serve.

Foreign Currency

For the six months ended December 31, 2005, 93.7% of our net revenue is derived from sales and operations in Canada. The functional currency for this
revenue is the Canadian dollar; however, our reporting currency for our consolidated financial statements is the U.S. dollar. Although we expect to derive an increasingly lower percentage of our total revenues from Canada in the future, we expect
that changing exchange rates may continue to have a significant, and potentially adverse, effect on our results of operations. Strengthening of the Canadian dollar relative to the U.S. dollar could have a positive impact on our future results of
operations.

For example, during the six months ending December 31, 2005, the U.S. dollar weakened as compared to the Canadian dollar.
As a result, although the revenues from our Canadian subsidiaries decreased CAD$3,124 (or 5.9%) in Canadian dollars, we only experienced a net decrease of $68 when stated in U.S. dollars.

Employees

As of December 31, 2005, we employed
165 people. The majority of these people are located in our Toronto office, with the remainder located in Montreal and Miami. During the last quarter the Company experienced a net headcount increase of five employees.

Competition

As described below, in both Canada and
the U.S. there are several other dial-around companies competing against Yak in the marketplace.

Canada

In Canada, our key competitors include Telehop and Alterna-Call (a division of Sprint Canada, which was recently acquired by Rogers Communications Inc.)
Telehop offers a dial-around service, in addition to its traditional, regional flat-rate long distance calling service. Alterna-Call, also offers a dial-around service. Both of these competitors have third-party arrangements with the LECs for the
billing and collection of their dial-around calls, similar to what we have in place.

During the fiscal quarter ended December 31,
2003 we introduced a competing product to the AlternaCall and Telehop offerings called LooneyCall. We introduced this product to compete with AlternaCall and Telehop with an emphasis on increasing our market share and providing our
customers with additional value especially for those that wish to make calls of a longer duration. We believe this product provides us with a broader product offering allowing all of our customers calling patterns to be serviced. LooneyCall
also has billing arrangements with the LECs (Bell Canada, Telus, Sasktel, MTS, and Alliant) for the billing and collection of these calls.

United States

In the U.S the long distance telephony industry has become increasingly more consolidated with the merger of
SBC and AT&T ($16 billion merger consummated in November 2005) and the acquisition of MCI by Verizon for $8.5 billion. These transactions have resulted in a U.S. market with two mega-carriers, Verizon and the new AT&T
Inc., that are expected to compete head-to-head across a wide variety of sectors, including local exchange and long distance telephony, broadband and high-speed Internet access, business, and wireless services.

In the U.S. there are many established companies offering dial-around services, including Verizon and AT&T, medium sized companies such
as VarTec Telecommunications, Inc. and Americatel Corporation, as well as numerous smaller companies typically offering their dial-around service in a particular local geographic area. The product offerings of these companies vary with different
calling plans and rates which also often depend on the time of day when the



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call is made. Most of these companies have placed a large emphasis on their North American calling rates (principally for calling inter-state and intra-state
within the U.S.) with rates varying at different times of the day, and most advertising flat rate calling (packaged minutes for a set amount of cost). We believe that even though the U.S. market has numerous competitors of varying resources in the
dial-around segment, there is room for a company specializing in a pay-as-you-go program for international discount calling without the myriad of access and service charges.

VoIP/Broadband

Competition from traditional telecommunication companies and non-traditional
start-ups entering the broadband VoIP telephony market is at a relatively early stage, but this market is showing signs of material growth which may be indicative of a material change in the telecommunications marketplace. Because this market is at
such an early stage of development, no market models have emerged to properly gauge competition; therefore, it is difficult to estimate a pattern of competition in this market. Despite the start up nature of this market, several relatively small
companies have begun to market innovative Internet telephone calling services including Primus Canada and a variety of U.S.-based companies, such as Vonage Holdings Corp., 8x8, Inc., Netzero, BroadVox, LLC, and SunRocket Inc.

Several large telecommunication service providers have begun to provide VoIP telephone service in the United States, including AT&T, Verizon and
Qwest, and a number of large cable companies such as Comcast and Time Warner.

There are other of VoIP providers like Skype (recently
acquired by eBay), Yahoo, Google, MSN and Gizmo that do not consider the voice communications as their core business, but is considered a part of their entire communications package.

We believe that our existing customer base, network infrastructure, carrier relationships, technical team along with our free cash flow, will support us
in this highly competitive VoIP marketplace. We plan to essentially mirror our strategy from the dial-around market by targeting ethnic communities that make a large amount of international calls, providing them with a technologically progressive,
feature-rich VoIP product.

Results of Operations

The below table provides summary Consolidation unaudited results of operations on a rolling quarter basis for the preceding eight quarters:



|                                                               |  |               |        |                |   |               |  |   |               |   |               |   |                |  |               |        |               |   |        |  |   |        |  |   |       
|-------------------------------------------------------------- |  | ------------- | ------ | -------------- | - | ------------- |  | - | ------------- | - | ------------- | - | -------------- |  | ------------- | ------ | ------------- | - | ------ |  | - | ------ |  | - | ------
|                                                               |  | Dec. 31, 2005 |        | Sept. 30, 2005 |   | June 30, 2005 |  |   | Mar. 31, 2005 |   | Dec. 31, 2004 |   | Sept. 30, 2004 |  | June 30, 2004 |        | Mar. 31, 2004
|Net revenue                                                    |  | $             | 24,029 |                | $ | 23,508        |  | $ | 23,500        |   |               | $ | 23,850         |  | $             | 24,153 |               | $ | 21,197 |  | $ | 20,306 |  | $ | 21,465
|Cost of revenue(1)                                             |  | $             | 14,447 |                | $ | 14,375        |  | $ | 14,459        |   |               | $ | 14,798         |  | $             | 14,621 |               | $ | 13,758 |  | $ | 13,288 |  | $ | 14,367
|                                                               |  |               |        |                |   |               |  |   |               |   |               |   |                |  |               |        |               |   |        |  |   |        |  |   |       
|Contribution margin                                            |  | $             | 9,582  |                | $ | 9,133         |  | $ | 9,041         |   |               | $ | 9,052          |  | $             | 9,532  |               | $ | 7,439  |  | $ | 7,018  |  | $ | 7,098 
|                                                               |  |               |        |                |   |               |  |   |               |   |               |   |                |  |               |        |               |   |        |  |   |        |  |   |       
|Income from operations                                         |  | $             | 2,184  |                | $ | 466           |  | $ | 260           |   |               | $ | 1,192          |  | $             | 2,064  |               | $ | 2,276  |  | $ | 1,934  |  | $ | 1,972 
|                                                               |  |               |        |                |   |               |  |   |               |   |               |   |                |  |               |        |               |   |        |  |   |        |  |   |       
|Earnings (Loss) Before Income Tax                              |  | $             | 2,492  |                | $ | 656           |  | $ | (63           | ) |               | $ | 2,740          |  | $             | 2,079  |               | $ | 2,404  |  | $ | 2,176  |  | $ | 1,725 
|                                                               |  |               |        |                |   |               |  |   |               |   |               |   |                |  |               |        |               |   |        |  |   |        |  |   |       
|Provision for Income Tax                                       |  | $             | 1,306  |                | $ | 333           |  | $ | 152           |   |               | $ | 822            |  | $             | 689    |               | $ | 734    |  | $ | 747    |  | $ | 563   
|                                                               |  |               |        |                |   |               |  |   |               |   |               |   |                |  |               |        |               |   |        |  |   |        |  |   |       
|Net Earnings                                                   |  | $             | 1,186  |                | $ | 323           |  | $ | (215          | ) |               | $ | 1,918          |  | $             | 1,390  |               | $ | 1,670  |  | $ | 1,429  |  | $ | 1,162 
|                                                               |  |               |        |                |   |               |  |   |               |   |               |   |                |  |               |        |               |   |        |  |   |        |  |   |       
|Basic earnings per share                                       |  | $             | 0.09   |                | $ | 0.03          |  | $ | (0.02         | ) |               | $ | 0.15           |  | $             | 0.11   |               | $ | 0.13   |  | $ | 0.13   |  | $ | 0.10  
|Diluted earnings per share                                     |  | $             | 0.09   |                | $ | 0.03          |  | $ | (0.02         | ) |               | $ | 0.15           |  | $             | 0.11   |               | $ | 0.13   |  | $ | 0.13   |  | $ | 0.10  
|Weighted average number of common shares outstanding           |  |               | 12,898 |                |   | 12,897        |  |   | 12,897        |   |               |   | 12,897         |  |               | 12,897 |               |   | 12,893 |  |   | 10,706 |  |   | 11,636
|Weighted average number of common shares outstanding - diluted |  |               | 12,898 |                |   | 12,897        |  |   | 12,901        |   |               |   | 12,902         |  |               | 12,905 |               |   | 12,984 |  |   | 11,405 |  |   | 11,746

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|(1) | Excludes depreciation and amortization.
|--- | ---------------------------------------

Comparison of three months
ended December 31, 2005 and 2004

Net Revenue

Net revenue for the quarter ending December 31, 2005 at $24,029 was flat when compared to the $24,153 for the quarter ended December 31, 2004.



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Yak Canada

Net revenue from our Canadian based operations (excluding our Yak for Business and Contour businesses) for the quarter ending December 31, 2005 was $18,011, down from $19,318 in the same period in 2004. The reduction in our revenue is
attributed to a decrease in revenues from our LooneyCall product ($560 decrease on a quarter over quarter basis from $2,239 to $1,679), which was the result of increased competition and reduced advertising for the product. Our more recent marketing
focus has been on our other dial-around and 1+ products, and, as a result, our dial-around revenue showed a slightly better performance when compared to the comparable quarter last year. Our yakCell and yakCallingCard products experienced strong
quarter over quarter revenue growth of 60.0%, increasing from $120 to $193. While, these products continue to represent an insignificant amount of our revenue, we believe they will continue to gain market acceptance thereby increasing their relative
share of our total revenue.

Yak America

Our net U.S. based revenue increased 213.2%, to $1,400, from $447 for the period ending December 31, 2005. This increase was due to our continued marketing campaign principally aimed at Hispanic markets in Florida and California that
utilized a variety of advertising, including television and radio commercials as well as flyers and print media. We expect that this campaign will strengthen our presence in the U.S. market over time.

Yak for Business

Yak for Business, a division of Yak
Communications (Canada) Inc., contributed revenue of $3,341 for the quarter ending December 31, 2005, which represented an increase of $520, or 18.4%, from $2,823 the quarter ending December 31, 2004. The increase is primarily attributed
to the acquisition of Navigatas eastern-Canadian customer base.

Contour

Contour Telecom, a wholly-owned subsidiary, contributed revenue of $1,262 for the quarter ended December 31, 2005, a decrease of $257, or 16.9%, from
the $1,520 for the quarter ended December 31, 2004. This is primarily due to the price concessions provided to customers during contract renewals.

WorldCity VoIP

On September 8, 2004 we launched our residential WorldCity VoIP service. This product is a basic
VoIP offering to the residential market. While revenue associated with World City VoIP is insignificant at the present time, in November 2005 we announced the launch of a strategic marketing campaign aimed at capturing market share in the
internet-enabled long distance market. It is anticipated that an increasingly significant proportion of our total revenues will be derived from this product and from the value-added services to be offered in the future.

The following information for the quarters ended December 31, 2005 and 2004 is provided for informational purposes and should be read in conjunction
with the Consolidated Condensed Financial Statements and Notes.

For the Quarter Ended December 31, 2005



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|-------------------- |  | ------- |  | --------- |  | ------- |  | ------
|                    
|Products             |  | Revenue |  | Customers |  | Minutes |  | Calls 
|                     |  | $       |  |           |  |         |  |       
|Dial-Around/1+       |  | 17,539  |  | 834       |  | 270,875 |  | 23,618
|LooneyCall           |  | 1,679   |  | 63        |  | 17,666  |  | 1,301 
|Yakcell/Calling Card |  | 193     |  | 8         |  | 1,980   |  | 218   
|Total Core Revenue   |  | 19,411  |  | 905       |  | 290,521 |  | 25,137
|Yak for Business     |  | 3,341   |  |           |  |         |  |       
|Contour              |  | 1,262   |  |           |  |         |  |       
|VoIP                 |  | 15      |  |           |  |         |  |       
|Other                |  |        |  |           |  |         |  |       
|Net Revenue          |  | 24,029  |  |           |  |         |  |       



8



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For the Quarter Ended December 31, 2004



|                     |  |         |  |           |  |         |  |       
|-------------------- |  | ------- |  | --------- |  | ------- |  | ------
|Products             |  | Revenue |  | Customers |  | Minutes |  | Calls 
|                     |  | $       |  |           |  |         |  |       
|Dial-Around/1+       |  | 17,406  |  | 835       |  | 275,072 |  | 23,959
|LooneyCall           |  | 2,239   |  | 89        |  | 25,551  |  | 1,835 
|Yakcell/Calling Card |  | 120     |  | 3         |  | 1,064   |  | 133   
|Total Core Revenue   |  | 19,765  |  | 927       |  | 301,687 |  | 25,927
|Yak for Business     |  | 2,823   |  |           |  |         |  |       
|Contour              |  | 1,520   |  |           |  |         |  |       
|VoIP                 |  | 11      |  |           |  |         |  |       
|Other                |  | 34      |  |           |  |         |  |       
|Net Revenue          |  | 24,153  |  |           |  |         |  |       

The average rate per minute (ARPM) that we derive from our core dial around services
was $0.066 for the quarter ended December 31, 2005, as compared to $0.065 for the quarter ended December 31, 2004. This is a direct result of increased international traffic; however, we believe, that due to the competitive nature of this
business, and that long distance telephony services are increasingly becoming a commodity, we may experience gradual, but continued erosion in our ARPM over the foreseeable future. ARPM is not a metric under GAAP; however, it is a common measurement
in the telecommunications industry for a business to examine the change in its average billings. ARPM is calculated by dividing Core Revenue by total minutes.

Cost of Revenues

Our cost of revenue (which excludes depreciation and amortization in the second quarter of fiscal 2006 and
2005 of $531 and $617, respectively) decreased 1.2%, to $14,447, for the quarter ending December 31, 2005, from $14,621 for the quarter ending December 31, 2004. The cost of revenue as a percentage of revenue was 60.1% compared to the
60.5% rate in second quarter of fiscal 2005.

We improved our margins as a result of increased utilization of our leased line network. We
have continued to build out our network, which enables us to bring a greater share of our traffic onto our own network, resulting in a higher utilization of our fixed-cost access lines. As a result of the continuing downward pressure on the retail
long distance telephony prices, we are utilizing real-time, least cost routing algorithms, as well as contracting with a variety of carriers in order to manage the direct costs as efficiently and cost effectively as possible.

The table below presents a breakdown of the direct costs of our core dial-around business into its long distance and other components for the second
quarter of each of the last two fiscal years (all amounts in U.S. dollars):



|                      |  |                                                                      |  |       |                  |  |        |  |       |  
|--------------------- |  | -------------------------------------------------------------------- |  | ----- | ---------------- |  | ------ |  | ----- | -
|                      |  | Breakdown of Core Revenue and Direct Cost for the three-months ended | 
|                      |  | December 31,2005                                                     |  |       | December 31,2004 | 
|(Thousands)           |  | $                                                                    |  | %     |                  |  | $      |  | %     |  
|Core Revenue*         |  | 19,411                                                               |  | 100.0 | %                |  | 19,765 |  | 100.0 | %
|Long Distance Charges |  | 4,376                                                                |  | 22.5  | %                |  | 5,486  |  | 27.8  | %
|Other Fees**          |  | 6,364                                                                |  | 32.8  | %                |  | 6,008  |  | 30.4  | %
|Contribution Margin   |  | 8,671                                                                |  | 44.7  | %                |  | 8,271  |  | 41.8  | %

---

|* | Core revenue is equal to Net Revenue per the financial statements less revenue from Yak for Business, Contour and other misc. revenue. (See above breakout of revenue)
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Other fees include line access charges for our leased line network, occupancy, call processing fees, CRTC contribution fees (universal service fees paid to the Canadian
telecommunications regulator), and costs to originate and terminate traffic on our leased line network.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



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Cost of revenue in our dial-around business is comprised primarily of the cost of long distance services, fees for the
processing and transporting of our calls, billing and collection costs, and fixed and variable line access costs. The cost of the pure long distance component of services has decreased to $4,376, or 22.5% of core revenues, for the quarter ended
December 31, 2005, from $5,486 or 27.8% of core revenues for the quarter ended December 31, 2004. This cost savings was mainly due to routing calls on our own network, as noted above. The cost of the Other component of services
has increased to 32.8% for the quarter ended December 31, 2005, from 30.4% for the quarter ended December 31, 2004 as a percentage of revenue. These changes are largely the result of a relative increase in the cost of access lines and
billing and collection fees on a quarter-over-quarter basis as we continue to move more of our traffic on-network.

Contribution Margin

Our overall contribution margin, i.e., sales revenues less variable costs, increased 0.4% during the quarter ended December 31,
2005, as compared to our contribution margin rate for the quarter ended December 31, 2004. For the quarter ended December 31, 2005, the contribution margin rate was 39.9 %, as compared to 39.5% for the quarter ended December 31,
2004.

Yak Canada

The contribution
margin rate for Yak Canada was 49.9% for the quarter ending December 31, 2005, compared to 43.0% for the quarter ending December 31, 2004. While we do not anticipate that there will be significant erosion in our core margins in the short
term, since we continue to optimize our network efficiency and control direct costs through on-going negotiations with various carriers, there can be no assurance that declines in contribution margins will not occur.

Yak America

The contribution margin rate for Yak
America was negative 22.4% for the quarter ending December 31, 2005, compared to negative 9.2% for the quarter ending December 31, 2004. This increase was due to the change in customer call mix and the related long distance costs, as the
Company tries to advertise long-distance rates to more profitable international destinations.

Yak for Business

The contribution margin of Yak for Business was 18.3% for the quarter ending December 31, 2005, compared to 31.3% for the quarter ending
December 31, 2004. The decrease is primarily the result of the write-down of obsolete equipment and decreases in the contribution margin of our local service and extended service area offerings due to higher costs.

Contour

The contribution margin of Contour was 24.2%
for the quarter ending December 31, 2005, compared to 22.3% for the quarter ending December 31, 2004. This is largely due to costs reductions that impacted this quarter.

WorldCity VoIP

On September 8, 2004 we launched our residential WorldCity VoIP service.
This product is a basic VoIP offering to the residential market. While revenue associated with World City VoIP is insignificant at the present time, in November 2005 we announced the launch of a strategic marketing campaign aimed at capturing market
share in the internet-enabled long distance market. It is anticipated that an increasingly significant proportion of our total revenues will be derived from this product and from the value-added services to be offered in the future.

General & Administrative Expenses

General
and administrative expenses (G&A) decreased to $4,919 for the quarter ending December 31, 2005, from $5,075 for the quarter ending December 31, 2004. We experienced cost increases in legal, audit and SOX consulting related
fees, which increased $466 to $1,075 for the quarter ended December 31, 2005 as compared to $609 during the quarter ended December 31, 2004. These increases were partially offset by the fact that the Company no longer required an
impairment reserve on its international operations of $203 established in fiscal 2005. The impairment reserve related to the phase out of our Peruvian operations during our last fiscal year.



10



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Salaries decreased $202, or 7.4%, to $2,532 for the quarter ended December 31, 2005 when compared to
$2,734 for the quarter ended December 31, 2004. This was primarily due to a lower amount being accrued for management bonuses during the period.

No organizational or start-up costs were incurred in the current quarter. As a result, organizational and start-up costs decreased by $156 to $nil for the quarter ended in December 31, 2005, when compared to the
$156 outlay (primarily for our VoIP initiative) during the quarter ended December 31, 2004.

Sales & Marketing

Sales and marketing expenses decreased by $72 or 4.2% to $1,627 for the quarter ended December 31, 2005, compared to $1,699 for the quarter ending
December 31, 2004. The cost of advertising in our Canadian markets was $377 for the current quarter, compared to $382 for the quarter ended December 31, 2004. Advertising for our VoIP products was approximately $405, and we spent $840 for
our dial around operations in the U.S. However, the aggregate U.S. advertising expenditure was $77 less for the quarter ended December 31, 2005, when compared to the same quarter ended December 31, 2004.

Interest Expenses

Interest expense was $33 during
the quarter ended December 31, 2005 compared to $214 in the comparative period last year. The decrease was primarily due to our decision cease our factoring program.

Depreciation & Amortization

Depreciation and amortization for the quarter ended
December 31, 2005 was $741, $47 higher as compared to the quarter ended December 31, 2004. The increase was a result of the depreciation of new VoIP equipment and additional office furniture and computer equipment. We anticipate that
depreciation will increase in the future as the demand for further equipment to support our new products increases.

Comparison of six months ended
December 31, 2005 and 2004

Net Revenue

Net revenue increased $2,187, or 4.8%, to $47,537 for the six months ended December 31, 2005, from $45,350 for the six months ended December 31, 2004.

Yak Canada

Our Canadian revenue (excluding Yak for Business and Contour) decreased $443 or 1.2% from
$36,156 to $35,713. This was primary due to a decline in customer demand for LooneyCall of $1,072 when compared to the six months ended December 31, 2004. This was partially offset by the increase in the dial-around and 1+ products which showed
an increase of $456, or 1.2%, and an increase of YakCell and Yak CallingCard that achieved an increase of $179 for the six months ended December 31, 2005, as compared to the same period ended December 31, 2004.

As the majority of our revenues are derived in Canadian dollars, we have benefited from the continued weakening of the U.S. dollar. The effect of this
weakening in the period was an increase of $2,200.

Yak America

Our U.S. revenue increased $1,959 to $2,627 for the six months ended December 31, 2005, from $668 for the six months ended December 31, 2004. This can be attributed to our ongoing marketing campaigns aimed
at the South Florida and Southern California Hispanic markets, which utilize diverse media channels such as television and radio, as well as flyers and print, and is expected to increase our exposure in the U.S. market.

Yak for Business

Yak for Business contributed
revenue of $6,701 in the six months ended December 31, 2005 which represented an increase of $1,170 from the comparable six month period in 2004. The majority of this increase was due to the acquisition of Navigatas Eastern-Canadian
customer base that was purchased in March 2005.



11



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Contour

Contour Telecom revenue declined $426 to $2,481 for the six months ended December 31, 2005 when compared to $2,907 revenue for the first two fiscal quarters of 2004.

WorldCity VoIP

On September 8, 2004 we launched our residential WorldCity VoIP service.
This product is a basic VoIP offering to the residential market. While revenue associated with World City VoIP is insignificant at the present time, in November 2005 we announced the launch of a strategic marketing campaign aimed at capturing market
share in the internet-enabled long distance market. It is anticipated that an increasingly significant proportion of our total revenues will be derived from this product and from the value-added services to be offered in the future.

Cost of Revenue

Cost of revenue (which excludes
depreciation and amortization of $1,232 and $1,126, respectively) increased 1.6% to $28,822 for the six months ended December 31, 2005 from $28,379 for the six months ended December 31, 2004. As a percentage of sales, cost of revenue was
60.6% as compared to 62.6% for the six months ended December 31, 2004. Margins improved as a result of the increased utilization of our leased line network. We continue to build out the network, which enables us to bring a greater
share of traffic onto our own network, resulting in a higher utilization of fixed-cost access lines. As a result of the continuing downward pressure on the retail price of long distance services, we are utilizing real-time, least cost routing
algorithms, as well as contracting with various carriers to manage our direct costs.

The following information for the six months ended
December 31, 2005, and 2004 is provided for informational purposes and should be read in conjunction with the Condensed Consolidated Financial Statements and Notes (all amounts in U.S. dollars).

For the six months Ended December 31, 2005



|                     |  |         |        |           |     |         |         |       |       
|-------------------- |  | ------- | ------ | --------- | --- | ------- | ------- | ----- | ------
|Products             |  | Revenue |        | Customers |     | Minutes |         | Calls
|Dial-Around/1+       |  | $       | 34,582 |           | 834 |         | 532,734 |       | 47,772
|LooneyCall           |  |         | 3,374  |           | 63  |         | 35,872  |       | 2,703 
|Yakcell/Calling Card |  |         | 384    |           | 8   |         | 3,659   |       | 408   
|Core Revenue         |  |         | 38,340 |           | 905 |         | 572,265 |       | 50,883
|Yak for Business     |  |         | 6,701  |           |     |         |         |       |       
|Contour              |  |         | 2,481  |           |     |         |         |       |       
|WorldCity VoIP       |  |         | 15     |           |     |         |         |       |       
|Net Revenue          |  |         | 47,537 |           |     |         |         |       |       

For the six months Ended December 31, 2004



|                     |  |         |        |           |     |         |         |       |       
|-------------------- |  | ------- | ------ | --------- | --- | ------- | ------- | ----- | ------
|Products             |  | Revenue |        | Customers |     | Minutes |         | Calls
|Dial-Around/1+       |  | $       | 32,173 |           | 835 |         | 519,456 |       | 46,709
|LooneyCall           |  |         | 4,446  |           | 89  |         | 51,002  |       | 3,802 
|Yakcell/Calling Card |  |         | 205    |           | 3   |         | 1,876   |       | 235   
|Core Revenue         |  | $       | 36,824 |           | 927 |         | 572,334 |       | 50,746
|Yak for Business     |  |         | 5,531  |           |     |         |         |       |       
|Contour              |  |         | 2,907  |           |     |         |         |       |       
|WorldCity VoIP       |  |         | 14     |           |     |         |         |       |       
|Other                |  |         | 74     |           |     |         |         |       |       
|Net Revenue          |  |         | 45,350 |           |     |         |         |       |       

The ARPM that we derive from our core dial around services was $0.066 for the six months ended
December 31, 2005, as compared to $0.064 for the six months ended December 31, 2004. Due to the competitive nature of this business and the fact that long distance telephony services are increasingly becoming a commodity, we may experience
gradual, but continuing erosion in our ARPM over the foreseeable future. ARPM is not a metric under GAAP, however, it is common measurement in the telecommunication industry for a business to examine the change in its average billings, it is
calculated by dividing Core Revenue by total minutes.



12



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The table below presents a breakdown of the cost of revenue of our core dial-around business into its
long distance and other components for the six months ended December 31 for each of the last two fiscal years (all amounts in U.S. dollars):



|                      |  |                                                                    |  |       |                   |  |        |  |       |  
|--------------------- |  | ------------------------------------------------------------------ |  | ----- | ----------------- |  | ------ |  | ----- | -
|                      |  | Breakdown of Core Revenue and Direct Cost for the six-months ended | 
|                      |  | December 31, 2005                                                  |  |       | December 31, 2004 | 
|(Thousands)           |  | $                                                                  |  | %     |                   |  | $      |  | %     |  
|Core Revenue*         |  | 38,340                                                             |  | 100.0 | %                 |  | 36,824 |  | 100.0 | %
|Long Distance Charges |  | 9,115                                                              |  | 23.8  | %                 |  | 11,116 |  | 30.2  | %
|Other Fees**          |  | 12,677                                                             |  | 33.0  | %                 |  | 11,054 |  | 30.0  | %
|Contribution Margin   |  | 16,548                                                             |  | 43.2  | %                 |  | 14,654 |  | 39.8  | %

---

|* | Core revenue includes dial-around, LooneyCall and YakCell.
|- | ----------------------------------------------------------

|** | Other fees include line access charges for our leased line network, occupancy, call processing fees, CRTC contribution fees (universal service fees paid to the CRTC), and costs to
originate and terminate traffic on our leased line network.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The cost of the long distance telephony component of services
has decreased to $9,115 or 23.8% when measured as a percent of sales for the six months ended December 31, 2005, from $11,116 or 30.2% of sales for the six months ended December 31, 2004. The cost of the Other component of
services has increased to 33.0% of sales for the six months ended December 31, 2005, from 30.0% of sales for the six months ended December 31, 2004. These changes are largely the result of a relative increase in the cost of access lines
and billing and collection fees on a year-over-year basis, as we continue to move more of our traffic on-network.

Contribution Margin

Yak Canada

The contribution margin
rate for Yak Canada was 47.5% for the six months ended December 31, 2005, compared to 40.9% for the six months ended December 31, 2004. While we do not anticipate that there will be significant erosion in our core margins in the short
term, since we continue to optimize our network efficiency and control direct costs through on-going negotiations with various carriers, there can be no assurance that declines in contribution margins will not occur.

Yak America

The contribution margin rate for Yak
America was negative 16.4% for the six months ended December 31, 2005, compared to negative 9.9% for the six months ended December 31, 2004. This decrease was due to the change in customer call mix and the related long distance costs, as
the Company tries to advertise long-distance rates to more profitable international destinations.

Yak for Business

The contribution margin rate for Yak for Business was 23.7% for the six months ended December 31, 2005, as compared to 29.1% for the six months ended
December 31, 2004. This is primarily the result of decreases in the contribution margin of our local service and extended service area offerings due to higher service costs.

Contour

Contour Telecom contribution margin rate was 23.9% for the six months ended
December 31, 2005, compared to 25.1% for the six months ended December 31, 2004. This decrease in contribution margin is largely the result of credits for toll overcharges recorded in the first half of fiscal 2004.

WorldCity VoIP

On September 8, 2004 we launched
our residential WorldCity VoIP service. This product is a basic VoIP offering to the residential market. While revenue associated with World City VoIP is insignificant at the present time, in November 2005 we announced the launch of a
strategic marketing campaign aimed at capturing market share in the internet-enabled long distance market. It is anticipated that an increasingly significant proportion of our total revenues will be derived from this product and from the value-added
services to be offered in the future.



13



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General & Administration Expenses

G&A increased 35.5% to $10,847 for the six months ended December 31, 2005, from $8,685 for the six months ended December 31, 2004. The
increase of G&A of $2,162 can be attributed mainly to increased consulting fees of $1,270, salaries of $437, legal fees and SOX-related consulting fees of $688, partially offset by decreases in organizational or start-up costs by $678, investor
relations by $181 and impairment reserve by $203.

Consulting fees increased $1,270 to $1,392 for the six months ended December 31,
2005. The increase can be attributed to approximately $200 of fees incurred through our launching of our VoIP product and an additional $200 was incurred during the implementation of our new accounting system and other related accounting
consultants. Another $300 of costs was incurred for due diligence and consulting work for potential acquisitions. Finally, $100 was expended on transitioning a portion of our billing system in-house from a third-party provider.

Legal and SOX consulting related fees increased $688 or 89.0% to $1,461 for the six months ended December 31, 2005. The majority, $555, relates to
SOX compliance. The remaining increase in professional fees included those incurred in connection with regulatory matters and the fees associated with exploring potential acquisition opportunities. We anticipate that we will continue to evaluate
potential acquisitions, become more involved in regulatory proceedings, and launch new products, and therefore the Company does not anticipate significant reduction in future legal expenses of this nature.

No organizational or start-up costs were incurred in the current six month period, as compared to the $678 outlay (primarily for our VoIP initiative)
during the six months ended December 31, 2004.

Sales & Marketing

Sales and marketing expenses increased to $3,522 for the six months ended December 31, 2005 from $2,690 for the six months ended December 31,
2004. The cost of advertising in our Canadian territory decreased $369 to $723 for the six months ended December 31, 2005. Advertising costs in the US increased by $1,200 in the U.S. marketapproximately $800 were VoIP related advertising
expenses. It is managements intention in fiscal 2006 to expand advertising in the Canadian market, while we deliver more focused advertising dollars in the United States. Advertising in both the Canadian and U.S. markets is being expended to
support the launch of our 1+ service and to increase brand recognition through our focused campaign of flyers, TV commercials and Internet-based advertising.

Interest Expenses

Interest expense was $68 during the six months ended December 31, 2005 compared to $477 in the
comparative period last year. The decrease was primarily due to our decision to cease our accounts receivable factoring program.

Depreciation & Amortization

Depreciation and amortization increased $329, or 26.2%, to $1,585 for the six months
ended December 31, 2005, as compared to $1,256 for the six months ended December 31, 2004. The increase was a result of the depreciation of the new VoIP equipment and additional office furniture and computer equipment. We anticipate that
depreciation will increase in the future as additional equipment is purchased to support our new products materializes. Amortization of customer lists for the year-to-date period was $305 as compared to $210 for the six months ended
December 31, 2004, due to the purchase of an additional customer list in March 2005.

Liquidity and Capital Resources

Our liquidity requirements arise from cash used in operating activities, purchases of capital assets and interest and principal payments on outstanding
indebtedness. Previously, we financed our growth through accounts receivable financing and vendor and capital lease financings.

For the
six months ended December 31, 2005, there was a decrease in cash and cash equivalents of $5,199 compared with the $2,359 decrease for the six months ended December 31, 2004. Net cash provided from operating activities during the first six
months of fiscal 2006 consumed $2,713, as compared to an increase of $1,185 for the comparable period in fiscal 2005. This change was primarily due to lower earnings and the amount of cash invested in non-cash working capital, including
approximately $1,383 in income tax paid for fiscal 2005, and approximately $3,110 reduction in accounts payable and a $512 increase in accounts receivable. Accounts payable were reduced due to the payout of management and employee



14



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bonuses of approximately $500, legal and consulting fees that arose in conjunction with a restatement of the Companys financial statements during 2005
of $300, with the balance pertaining to a reduction in trade payables. The increase in the accounts receivable balance is due to length of our billing and collection cycles in the U.S. as compared to that in Canada, and due to a delay in the timing
of our own billing cycle during the current quarter resulting from the integration of one of our billing systems. As our revenue grows in the U.S. our working capital requirements will continue to increase. The decrease in cash flows in operating
activities was partially offset by $1,585 in amortization.

Net cash used in investing activities was $2,071 for the six months ended
December 31, 2005, which is $741 lower when compared to the $2,812 for the six months ended December 31, 2004. Capital expenditures made in the first half of the year were primarily for costs related to investments in our new VoIP
initiatives and the installation of our Tekelec/Santera switch in Miami, Florida. Though capital expenditures are expected to be lower in fiscal 2006 than in fiscal 2005, we expect to continue to add to our network and network equipment in the
coming year to support the growth of the business. In addition, we continue to actively pursue acquisitions and invest in new business initiatives.

Significant commitments that will require the use of cash in future periods include obligations under operating leases, capital leases and advances under contract and other agreements, as shown in the following table (in millions):

Payments Due by Period



|                        |  |       |     |                  |   |           |  |           |     |                   |   |   |  |   |  
|----------------------- |  | ----- | --- | ---------------- | - | --------- |  | --------- | --- | ----------------- | - | - |  | - | -
|Contractual Obligations |  | Total |     | Less Than 1 Year |   | 1-3 Years |  | 3-5 Years |     | More Than 5 Years
|Operating Leases        |  | $     | 1.6 |                  | $ | 0.6       |  | $         | 1.0 |                   |   |  |  |   | 
|Capital Leases          |  | $     | 1.4 |                  | $ | 0.6       |  | $         | 0.8 |                   |   |  |  |   | 
|Carrier Commitments     |  | $     | 5.8 |                  | $ | 4.1       |  | $         | 1.7 |                   |   |  |  |   | 
|Other Agreements        |  | $     | 0.6 |                  | $ | 0.6       |  |           |    |                   |   |  |  |   | 
|                        |  |       |     |                  |   |           |  |           |     |                   |   |   |  |   |  
|Total                   |  | $     | 9.4 |                  | $ | 5.9       |  | $         | 3.5 |                   | $ |  |  | $ | 
|                        |  |       |     |                  |   |           |  |           |     |                   |   |   |  |   |  

Net cash used by financing activities was $666 for the six months ended December 31, 2005, as
compared to $756 used by financing activities for the six months ended December 31, 2004. Financing activity is primarily related to reductions in and termination of the Telus advance, which was a commitment until October 2005 to promote,
advertise and market Telus services, and in return, we enjoyed a payment deferral for amounts otherwise due to Telus.

We believe we
have sufficient fixed network capacity to meet our anticipated volume of telephony traffic in both Canada and the U.S. during fiscal 2006. Based on our current products, we do not anticipate spending additional capital on our Canadian switching
platform; however, we may invest more in equipment to support our VoIP systems. Meanwhile, in the quarter ended December 31, 2005, we installed an additional switch in the U.S. to provide for long-term growth and network redundancy as well as
accommodating technological change and operating improvements.

As a result of the continued convergence of voice and data, the release of
our VoIP products is a significant event because it provides us with a product for future growth. As high-speed Internet based services gain a critical level of acceptance in the marketplace, the ability to bundle other services with this core
offering will become an important distinguishing factor between the many competitors. We plan to continue to research and augment our core offerings with value-added services that are priced competitively and address the demands of the market. We
believe that in the future, there will be an opportunity for top-line revenue growth and contribution margin improvement in Yak for Business.

In addition to our VoIP product, we continue to advertise our long-distance telephony product in the U.S. market. The continued support of this product is consistent with our previously stated intentions of increasing our presence in the
United States. Through new product introductions and potentially new acquisitions, we anticipate growing our customer base in this market substantially over the medium to long-term.

We believe that our current operations will be able to continue to generate sufficient cash to meet our current obligations and support the growth of our
business through new product introductions, e.g., VoIP and the launch of our long-distance product in the U.S. market. We may seek to obtain additional funds from public or private equity or debt offerings to fund new opportunities that may arise.



15



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Restatement of Historical Financial Statements

The Company has restated its previously issued financial statements to correct for the errors and deficiencies described below:



| | A. | To correct for the misapplication of SFAS 133, SFAS 150 and EITF 00-19 related to the 2004 issuance of detachable Warrants;
| | -- | ---------------------------------------------------------------------------------------------------------------------------



| | B. | To correct for disclosure deficiencies under SFAS 131;
| | -- | ------------------------------------------------------



| | C. | To correct for errors in its Cash Flow Statements; and
| | -- | ------------------------------------------------------



| | D. | To correct for the fiscal 2005 misclassification of financing expenses related to assignment of accounts receivable.
| | -- | --------------------------------------------------------------------------------------------------------------------

The net effect of the restatements was to increase net income by $219 or $0.02 earnings per share for the quarter ended December 31, 2005. The net
effect of the initial and the amended restatements was to increase net income by $114 or $0.02 earnings per share for the quarter ended December 31, 2004.

The net effect of the restatements was to increase net income by $328 or $0.03 earnings per share for the six months ended December 31, 2005. For the six months ended December 31, 2005, the cash flows from
operating activities and the effect of exchange rate changes on cash and cash equivalents were understated by $9 and $189 respectively, while the cash flows from investing and financing activities were overstated by $177 and $21, respectively. At
December 31, 2005, liabilities were understated by $765 while shareholders equity was overstated by $765.

The net effect of the
initial and the amended restatements was to increase net income by $417 or $0.04 earnings per share for the six months ended December 31, 2004. For the six months ended December 31, 2004, the cash flows from operating activities were
understated by $168, while cash flows from financing activities and the effect of exchange rate changes on cash and cash equivalents were overstated by $83 and $85 respectively.

The following schedules show the effect of the financial restatements of the above matters:

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|--------------------------------------------------- |  | ------------------------------- | - |  | ------ | - |  | ------ |  | ------ |  | ------ |  | --------------------------- | -
|(in $ thousands)                                    |  | December 31,2005 Initial filing |   |  | Note2A |   |  | Note2B |  | Note2C |  | Note2D |  | December 31,2005 (Restated) |  
|                                                    |  | $                               |   |  | $      |   |  | $      |  | $      |  | $      |  | $                           |  
|ASSETS                                              |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Current                                             |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Cash and cash equivalents                           |  | 11,552                          |   |  |       |   |  |       |  |       |  |       |  | 11,552                      |  
|Accounts receivable, net                            |  | 18,772                          |   |  |       |   |  |       |  |       |  |       |  | 18,772                      |  
|Allowance for doubtful accounts                     |  | (612                            | ) |  |       |   |  |       |  |       |  |       |  | (612                        | )
|Prepaid expenses and other assets                   |  | 960                             |   |  |       |   |  |       |  |       |  |       |  | 960                         |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Total Current Assets                                |  | 30,672                          |   |  |       |   |  |       |  |       |  |       |  | 30,672                      |  
|Property and equipment, net                         |  | 14,761                          |   |  |       |   |  |       |  |       |  |       |  | 14,761                      |  
|Deferred income taxes                               |  | 1,158                           |   |  |       |   |  |       |  |       |  |       |  | 1,158                       |  
|Intangibles, net                                    |  | 1,697                           |   |  |       |   |  |       |  |       |  |       |  | 1,697                       |  
|Goodwill                                            |  | 530                             |   |  |       |   |  |       |  |       |  |       |  | 530                         |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|                                                    |  | 48,818                          |   |  |       |   |  |       |  |       |  |       |  | 48,818                      |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|LIABILITIES                                         |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Current                                             |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Accounts payable and accrued liabilities            |  | 9,078                           |   |  |       |   |  |       |  |       |  |       |  | 9,078                       |  
|Income taxes payable                                |  | 94                              |   |  |       |   |  |       |  |       |  |       |  | 94                          |  
|Advances from TELUS Communications Inc.             |  |                                |   |  |       |   |  |       |  |       |  |       |  |                            |  
|Current portion of obligations under capital leases |  | 523                             |   |  |       |   |  |       |  |       |  |       |  | 523                         |  
|Unearned revenue                                    |  | 808                             |   |  |       |   |  |       |  |       |  |       |  | 808                         |  
|Obligations under warrants                          |  |                                |   |  | 765    |   |  |       |  |       |  |       |  | 765                         |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|                                                    |  | 10,503                          |   |  | 765    |   |  |       |  |       |  |       |  | 11,268                      |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Non-Current Liabilities                             |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Deferred income taxes                               |  | 2,636                           |   |  |       |   |  |       |  |       |  |       |  | 2,636                       |  
|Obligations under capital leases                    |  | 768                             |   |  |       |   |  |       |  |       |  |       |  | 768                         |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|                                                    |  | 3,404                           |   |  |       |   |  |       |  |       |  |       |  | 3,404                       |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|                                                    |  | 13,907                          |   |  | 765    |   |  |       |  |       |  |       |  | 14,672                      |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|STOCKHOLDERS EQUITY                                |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|Common Stock                                        |  | 225                             |   |  |       |   |  |       |  |       |  |       |  | 225                         |  
|Additional paid-in capital                          |  | 16,845                          |   |  | 260    |   |  |       |  |       |  |       |  | 17,105                      |  
|Common stock purchase warrants                      |  | 2,433                           |   |  | (2,433 | ) |  |       |  |       |  |       |  |                            |  
|Accumulated Other Comprehensive Income              |  | 2,076                           |   |  |       |   |  |       |  |       |  |       |  | 2,076                       |  
|Retained Earnings                                   |  | 13,332                          |   |  | 1,408  |   |  |       |  |       |  |       |  | 14,740                      |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|                                                    |  | 34,911                          |   |  | (765   | ) |  |       |  |       |  |       |  | 34,146                      |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  
|                                                    |  | 48,818                          |   |  |       |   |  |       |  |       |  |       |  | 48,818                      |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                             |  



16



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|------------------------------------------------------------ |  | ----------------------------------------------- | - |  | ------ | - |  | ------ |  | ------ |  | ------ |  | ------------------------------------------- | -
|(in $ thousands)                                             |  | Six months endedDecember 31,2005 Initial filing |   |  | Note2A |   |  | Note2B |  | Note2C |  | Note2D |  | Six months endedDecember 31,2005 (Restated) |  
|                                                             |  | $                                               |   |  | $      |   |  | $      |  | $      |  | $      |  | $                                           |  
|NET REVENUE                                                  |  | 47,537                                          |   |  |       |   |  |       |  |       |  |       |  | 47,537                                      |  
|COST OF REVENUE                                              |  | 28,822                                          |   |  |       |   |  |       |  |       |  |       |  | 28,822                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|GROSS MARGIN                                                 |  | 18,715                                          |   |  |       |   |  |       |  |       |  |       |  | 18,715                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|OPERATING EXPENSES                                           |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|General and administration                                   |  | 10,847                                          |   |  |       |   |  |       |  |       |  |       |  | 10,847                                      |  
|Sales and marketing                                          |  | 3,522                                           |   |  |       |   |  |       |  |       |  |       |  | 3,522                                       |  
|Write down of property and equipment                         |  | 111                                             |   |  |       |   |  |       |  |       |  |       |  | 111                                         |  
|Depreciation and amortization                                |  | 1,585                                           |   |  |       |   |  |       |  |       |  |       |  | 1,585                                       |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|TOTAL OPERATING EXPENSES                                     |  | 16,065                                          |   |  |       |   |  |       |  |       |  |       |  | 16,065                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|INCOME FROM OPERATIONS                                       |  | 2,650                                           |   |  |       |   |  |       |  |       |  |       |  | 2,650                                       |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|OTHER EXPENSES (INCOME)                                      |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|Interest expense                                             |  | 68                                              |   |  |       |   |  |       |  |       |  |       |  | 68                                          |  
|Interest income                                              |  | (238                                            | ) |  |       |   |  |       |  |       |  |       |  | (238                                        | )
|Change in fair value of obligation under warrants            |  |                                                |   |  | (328   | ) |  |       |  |       |  |       |  | (328                                        | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|                                                             |  | (170                                            | ) |  | (328   | ) |  |       |  |       |  |       |  | (498                                        | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 2,820                                           |   |  | 328    |   |  |       |  |       |  |       |  | 3,148                                       |  
|PROVISION FOR INCOME TAXES                                   |  | 1,639                                           |   |  |       |   |  |       |  |       |  |       |  | 1,639                                       |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|NET EARNINGS                                                 |  | 1,181                                           |   |  | 328    |   |  |       |  |       |  |       |  | 1,509                                       |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | 733                                             |   |  |       |   |  |       |  |       |  |       |  | 733                                         |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|COMPREHENSIVE INCOME                                         |  | 1,914                                           |   |  | 328    |   |  |       |  |       |  |       |  | 2,242                                       |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|BASIC EARNINGS PER SHARE                                     |  | 0.09                                            |   |  | 0.03   |   |  |       |  |       |  |       |  | 0.12                                        |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.09                                            |   |  | 0.03   |   |  |       |  |       |  |       |  | 0.12                                        |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,898                                          |   |  | 12,898 |   |  |       |  |       |  |       |  | 12,898                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,898                                          |   |  | 12,898 |   |  |       |  |       |  |       |  | 12,898                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |  |        |  |                                             |  



17



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|------------------------------------------------------------ |  | ----------------------------------------------- | - |  | ------ | - |  | ------ |  | ------ | - |  | ------ |  | ------------------------------------------- | -
|(in $ thousands)                                             |  | Six months endedDecember 31,2005 Initial filing |   |  | Note2A |   |  | Note2B |  | Note2C |   |  | Note2D |  | Six months endedDecember 31,2005 (Restated) |  
|                                                             |  | $                                               |   |  | $      |   |  | $      |  | $      |   |  | $      |  | $                                           |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Net earnings                                                 |  | 1,181                                           |   |  | 328    |   |  |       |  |       |   |  |       |  | 1,509                                       |  
|Adjustments for                                              |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Depreciation and amortization                                |  | 1,585                                           |   |  |       |   |  |       |  |       |   |  |       |  | 1,585                                       |  
|Foreign exchange loss                                        |  |                                                |   |  |       |   |  |       |  | 103    |   |  |       |  | 103                                         |  
|Deferred income taxes                                        |  | 89                                              |   |  |       |   |  |       |  | (601   | ) |  |       |  | (512                                        | )
|Stock issued for services rendered                           |  | 29                                              |   |  |       |   |  |       |  |       |   |  |       |  | 29                                          |  
|Stock-based compensation expense                             |  | 124                                             |   |  |       |   |  |       |  |       |   |  |       |  | 124                                         |  
|Write-down of property and equipment                         |  | 111                                             |   |  |       |   |  |       |  |       |   |  |       |  | 111                                         |  
|Changes in fair value of obligation under warrants           |  |                                                |   |  | (328   | ) |  |       |  |       |   |  |       |  | (328                                        | )
|Changes in non-cash working capital                          |  | (5,841                                          | ) |  |       |   |  |       |  | 507    |   |  |       |  | (5,334                                      | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows from operating activities                         |  | (2,722                                          | ) |  |       |   |  |       |  | 9      |   |  |       |  | (2,713                                      | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES               |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Purchase of property and equipment                           |  | (1,894                                          | ) |  |       |   |  |       |  | (284   | ) |  |       |  | (2,178                                      | )
|Refund on customer lists                                     |  |                                                |   |  |       |   |  |       |  | 107    |   |  |       |  | 107                                         |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows used in investing activities                      |  | (1,894                                          | ) |  |       |   |  |       |  | (177   | ) |  |       |  | (2,071                                      | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES               |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Repayments on obligations under capital leases               |  | (263                                            | ) |  |       |   |  |       |  | (8     | ) |  |       |  | (271                                        | )
|Repayments on advances from TELUS Communications Inc.        |  | (382                                            | ) |  |       |   |  |       |  | (13    | ) |  |       |  | (395                                        | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows used in financing activities                      |  | (645                                            | ) |  |       |   |  |       |  | (21    | ) |  |       |  | (666                                        | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  | 62                                              |   |  |       |   |  |       |  | 189    |   |  |       |  | 251                                         |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|DECREASE IN CASH AND CASH EQUIVALENTS                        |  | (5,199                                          | ) |  |       |   |  |       |  |       |   |  |       |  | (5,199                                      | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               |  | 16,751                                          |   |  |       |   |  |       |  |       |   |  |       |  | 16,751                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                     |  | 11,552                                          |   |  |       |   |  |       |  |       |   |  |       |  | 11,552                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Supplemental disclosure of cash flow information:            |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Interest paid                                                |  | 67                                              |   |  |       |   |  |       |  |       |   |  |       |  | 67                                          |  
|Income taxes paid                                            |  | 3,671                                           |   |  |       |   |  |       |  |       |   |  |       |  | 3,671                                       |  



18



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|--------------------------------------------------------- |  | -------------------------------- |  | ------ | - |  | ------ |  | ------ |  | ------ |  | -------------------------------
|(in $ thousands)                                          |  | June 30, 2005 InitialRestatement |  | Note2A |   |  | Note2B |  | Note2C |  | Note2D |  | June 30, 2005AmendedRestatement
|                                                          |  | $                                |  | $      |   |  | $      |  | $      |  | $      |  | $                              
|ASSETS                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|Current                                                   |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|Cash and cash equivalents                                 |  | 16,751                           |  |       |   |  |       |  |       |  |       |  | 16,751                         
|Accounts receivable, net                                  |  | 16,220                           |  |       |   |  |       |  |       |  |       |  | 16,220                         
|Prepaid expenses and other current assets                 |  | 1,413                            |  |       |   |  |       |  |       |  |       |  | 1,413                          
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|Total Current Assets                                      |  | 34,384                           |  |       |   |  |       |  |       |  |       |  | 34,384                         
|                                                          |  |                                  |  |        |   | 
|Property and equipment, net                               |  | 13,559                           |  |       |   |  |       |  |       |  |       |  | 13,559                         
|Intangibles, net                                          |  | 2,005                            |  |       |   |  |       |  |       |  |       |  | 2,005                          
|Goodwill                                                  |  | 503                              |  |       |   |  |       |  |       |  |       |  | 503                            
|Deferred income taxes                                     |  | 2,787                            |  |       |   |  |       |  |       |  |       |  | 2,787                          
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|                                                          |  | 53,238                           |  |       |   |  |       |  |       |  |       |  | 53,238                         
|                                                          |  |                                  |  |        |   | 
|LIABILITIES                                               |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|Current                                                   |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|Accounts payable and accrued liabilities                  |  | 11,891                           |  |       |   |  |       |  |       |  |       |  | 11,891                         
|Income taxes payable                                      |  | 3,547                            |  |       |   |  |       |  |       |  |       |  | 3,547                          
|Current portion of advances from TELUS Communications Inc |  | 382                              |  |       |   |  |       |  |       |  |       |  | 382                            
|Current portion of obligations under capital leases       |  | 511                              |  |       |   |  |       |  |       |  |       |  | 511                            
|Unearned Revenue                                          |  | 1,096                            |  |       |   |  |       |  |       |  |       |  | 1,096                          
|Obligations Under Warrants                                |  |                                 |  | 1,093  |   |  |       |  |       |  |       |  | 1,093                          
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|                                                          |  | 17,427                           |  | 1,093  |   |  |       |  |       |  |       |  | 18,520                         
|                                                          |  |                                  |  |        |   | 
|LONG-TERM DEBT                                            |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|Deferred income taxes                                     |  | 1,990                            |  |       |   |  |       |  |       |  |       |  | 1,990                          
|Obligations under capital leases                          |  | 977                              |  |       |   |  |       |  |       |  |       |  | 977                            
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|                                                          |  | 2,967                            |  |       |   |  |       |  |       |  |       |  | 2,967                          
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|                                                          |  | 20,394                           |  | 1,093  |   |  |       |  |       |  |       |  | 21,487                         
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|                                                          |  |                                  |  |        |   | 
|STOCKHOLDERS EQUITY                                      |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|Common stock                                              |  | 225                              |  |       |   |  |       |  |       |  |       |  | 225                            
|Additional paid incapital                                |  | 16,692                           |  | 260    |   |  |       |  |       |  |       |  | 16,952                         
|Common stock purchase warrants                            |  | 2,433                            |  | (2,433 | ) |  |       |  |       |  |       |  |                               
|Accumulated other comprehensive income                    |  | 1,343                            |  |       |   |  |       |  |       |  |       |  | 1,343                          
|Retained earnings                                         |  | 12,151                           |  | 1,080  |   |  |       |  |       |  |       |  | 13,231                         
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|                                                          |  | 32,844                           |  | (1,093 | ) |  |       |  |       |  |       |  | 31,751                         
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                
|                                                          |  | 53,238                           |  |       |   |  |       |  |       |  |       |  | 51,238                         
|                                                          |  |                                  |  |        |   |  |        |  |        |  |        |  |                                



19



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------ | - |  | ------ | - |  | ------ |  | ------ |  | ------ | - |  | -------------------------------------------- | -
|(in $ thousands)                                             |  | Six months endedDecember 31, 2004 Initial filing |   |  | Note2A |   |  | Note2B |  | Note2C |  | Note2D |   |  | Six months endedDecember 31, 2004 (Restated) |  
|                                                             |  | $                                                |   |  | $      |   |  | $      |  | $      |  | $      |   |  | $                                            |  
|NET REVENUE                                                  |  | 45,350                                           |   |  |       |   |  |       |  |       |  |       |   |  | 45,350                                       |  
|COST OF REVENUE                                              |  | 28,379                                           |   |  |       |   |  |       |  |       |  |       |   |  | 28,379                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|GROSS MARGIN                                                 |  | 16,971                                           |   |  |       |   |  |       |  |       |  |       |   |  | 16,971                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|OPERATING EXPENSES                                           |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|General and administration                                   |  | 8,685                                            |   |  |       |   |  |       |  |       |  |       |   |  | 8,685                                        |  
|Sales and marketing                                          |  | 2,690                                            |   |  |       |   |  |       |  |       |  |       |   |  | 2,690                                        |  
|Accounts receivable financing                                |  | 182                                              |   |  |       |   |  |       |  |       |  | (182   | ) |  |                                             |  
|Depreciation and amortization                                |  | 1,256                                            |   |  |       |   |  |       |  |       |  |       |   |  | 1,256                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|TOTAL OPERATING EXPENSES                                     |  | 12,813                                           |   |  |       |   |  |       |  |       |  | (182   | ) |  | 12,631                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|INCOME FROM OPERATIONS                                       |  | 4,158                                            |   |  |       |   |  |       |  |       |  | 182    |   |  | 4,340                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|OTHER EXPENSES (INCOME)                                      |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|Interest expense                                             |  | 295                                              |   |  |       |   |  |       |  |       |  | 182    |   |  | 477                                          |  
|Interest income                                              |  | (183                                             | ) |  |       |   |  |       |  |       |  |       |   |  | (183                                         | )
|Income from joint marketing agreement                        |  | (281                                             | ) |  |       |   |  |       |  |       |  |       |   |  | (281                                         | )
|Long-term debt discount amortization                         |  | 261                                              |   |  |       |   |  |       |  |       |  |       |   |  | 261                                          |  
|Change in fair value of obligation under warrants            |  |                                                 |   |  | (417   | ) |  |       |  |       |  |       |   |  | (417                                         | )
|Other expenses                                               |  |                                                 |   |  |       |   |  |       |  |       |  |       |   |  |                                             |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|                                                             |  | 92                                               |   |  | (417   | ) |  |       |  |       |  | 182    |   |  | (143                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 4,066                                            |   |  | 417    |   |  |       |  |       |  |       |   |  | 4,483                                        |  
|PROVISION FOR INCOME TAXES                                   |  | 1,423                                            |   |  |       |   |  |       |  |       |  |       |   |  | 1,423                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|NET EARNINGS                                                 |  | 2,643                                            |   |  | 417    |   |  |       |  |       |  |       |   |  | 3,060                                        |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | 987                                              |   |  |       |   |  |       |  |       |  |       |   |  | 987                                          |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|COMPREHENSIVE INCOME                                         |  | 3,630                                            |   |  | 417    |   |  |       |  |       |  |       |   |  | 4,047                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|BASIC EARNINGS PER SHARE                                     |  | 0.20                                             |   |  | 0.04   |   |  |       |  |       |  |       |   |  | 0.24                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.20                                             |   |  | 0.04   |   |  |       |  |       |  |       |   |  | 0.24                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,895                                           |   |  | 12,895 |   |  |       |  |       |  |       |   |  | 12,895                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,929                                           |   |  | 12,929 |   |  |       |  |       |  |       |   |  | 12,929                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  



20



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|----------------------------------------------------------------------- |  | ------------------------------------------------ | - |  | ------ | - |  | ------- |  | ------ | - |  | ------ |  | -------------------------------------------- | -
|(in $ thousands)                                                        |  | Six months endedDecember 31, 2004 Initial
filing |   |  | Note2A |   |  | Note 2B |  | Note2C |   |  | Note2D |  | Six months endedDecember 31, 2004 (Restated) |  
|                                                                        |  | $                                                |   |  | $      |   |  | $       |  | $      |   |  | $      |  | $                                            |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Net earnings                                                            |  | 2,643                                            |   |  | 417    |   |  |        |  |       |   |  |       |  | 3,060                                        |  
|Adjustments for                                                         |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Amortization of discount on notes payable                               |  | 261                                              |   |  |       |   |  |        |  |       |   |  |       |  | 261                                          |  
|Depreciation and amortization                                           |  | 1,256                                            |   |  |       |   |  |        |  |       |   |  |       |  | 1,256                                        |  
|Deferred income taxes                                                   |  | (128                                             | ) |  |       |   |  |        |  | 32     |   |  |       |  | (96                                          | )
|Stock issued for services rendered                                      |  | 24                                               |   |  |       |   |  |        |  |       |   |  |       |  | 24                                           |  
|Stock-based compensation expense                                        |  | 27                                               |   |  |       |   |  |        |  |       |   |  |       |  | 27                                           |  
|Changes in fair value of obligation under warrants                      |  |                                                 |   |  | (417   | ) |  |        |  |       |   |  |       |  | (417                                         | )
|Impairment of loan receivable                                           |  | 203                                              |   |  |       |   |  |        |  |       |   |  |       |  | 203                                          |  
|Changes in non-cash working capital                                     |  | (3,269                                           | ) |  |       |   |  |        |  | 136    |   |  |       |  | (3,133                                       | )
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Cash flows from operating activities                                    |  | 1,017                                            |   |  |       |   |  |        |  | 168    |   |  |       |  | 1,185                                        |  
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                          |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Purchase of property and equipment                                      |  | (2,868                                           | ) |  |       |   |  |        |  |       |   |  |       |  | (2,868                                       | )
|Proceeds from sale of property and equipment, and software              |  | 14                                               |   |  |       |   |  |        |  |       |   |  |       |  | 14                                           |  
|Loan receivable                                                         |  | 42                                               |   |  |       |   |  |        |  |       |   |  |       |  | 42                                           |  
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Cash flows used in investing activities                                 |  | (2,812                                           | ) |  |       |   |  |        |  |       |   |  |       |  | (2,812                                       | )
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                          |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Repayments on obligations under capital leases                          |  | (80                                              | ) |  |       |   |  |        |  | (159   | ) |  |       |  | (239                                         | )
|Repayments on advances from TELUS Communications Inc.                   |  | (507                                             | ) |  |       |   |  |        |  | (152   | ) |  |       |  | (659                                         | )
|Repayments on notes payable                                             |  | (132                                             | ) |  |       |   |  |        |  | 132    |   |  |       |  |                                             |  
|Receipt of principal portion of joint venture receivable                |  | 46                                               |   |  |       |   |  |        |  | 96     |   |  |       |  | 142                                          |  
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Cash flows used in financing activities                                 |  | (673                                             | ) |  |       |   |  |        |  | (83    | ) |  |       |  | (756                                         | )
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  | 109                                              |   |  |       |   |  |        |  | (85    | ) |  |       |  | 24                                           |  
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                   |  | (2,359                                           | ) |  |       |   |  |        |  |       |   |  |       |  | (2,359                                       | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          |  | 22,149                                           |   |  |       |   |  |        |  |       |   |  |       |  | 22,149                                       |  
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  | 19,790                                           |   |  |       |   |  |        |  |       |   |  |       |  | 19,790                                       |  
|                                                                        |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Supplemental disclosure of cash flow information:                       |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Interest paid                                                           |  | 201                                              |   |  |       |   |  |        |  |       |   |  | 182    |  | 383                                          |  
|Income taxes paid                                                       |  | 391                                              |   |  |       |   |  |        |  |       |   |  |       |  | 391                                          |  
|Supplemental disclosure of non-cash investing and financing activities: |  |                                                  |   |  |        |   |  |         |  |        |   |  |        |  |                                              |  
|Capital leases for acquisition of furniture and equipment               |  | 374                                              |   |  |       |   |  |        |  |       |   |  |       |  | 374                                          |  
|Notes payable on purchase of software                                   |  | 4,249                                            |   |  |       |   |  |        |  |       |   |  |       |  | 4,249                                        |  
|Joint venture receivable on purchase of software                        |  | 3,904                                            |   |  |       |   |  |        |  |       |   |  |       |  | 3,904                                        |  



21



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A. Correction for the misapplication of SFAS 133, SFAS 150 and EITF 00-19 related to the 2004 issuance of detachable
warrants

Management has determined that the prior accounting for its 2004 detachable warrants issued in conjunction with its securities offering was in
error. The Company initially classified the Warrants as an equity instrument; however the net cash settlement feature, which is applicable in certain limited circumstances, contained within the instrument precludes this classification. The
instrument has now been classified as a liability in accordance with the application of the provisions of SFAS 133, SFAS 150, and EITF 00-19.

As a result
of this error, liabilities at December 31, 2005 were understated by $765, while shareholders equity at September 30, 2005 was overstated by $765. Further, the standards require the Company to re-measure the fair value of the Warrants
at the end of each reporting period with the resulting increase or decrease to the liability reported as a component of the Statement of Income and Comprehensive Income. As a result of a decrease in the value of the Warrants since issuance, the net
income of the Company for the six months ended December 31, 2005 and 2004 was previously understated by $328 and $417 or $0.03 per share and $0.04 per share, respectively.

B. Correction for disclosure deficiencies under SFAS 131

The Company has modified its segmented disclosure to
enhance disclosures and to further provide meaningful information to readers of its financial statements. There was no effect on the net income, earnings per share, assets, liabilities, and shareholders equity.

C. Correction for errors in its Cash Flow Statements

The Company has
modified its cash flow statements to correct for disclosure inaccuracies resulting from errors in the exchange rates used to translate foreign currency cash flows to the Companys reporting currency.

For the six months ending December 31, 2005, the cash flows from operating activities and the effect of exchange rate changes on cash and cash equivalents were
understated by $9 and $189 respectively, while the cash flows from investing and financing activities were overstated by $177 and $21 respectively.

For
the six months ended December 31, 2004, the cash flows from operating activities were understated by $168, while the cash flows from financing activities , and the effect of exchange rate changes on cash and cash equivalents were overstated by
$83 and $85, respectively.

D. Misclassification of financing costs as operating expense

The Company misclassified financing costs relating to factoring of trade accounts receivable as operating expenses for the six months ending December 31, 2004 versus
disclosing such costs below the line as an element of interest expense as discussed by the AICPAs Special Committee on Classification of Items of Comprehensive Income. The effect of this misclassification was an overstatement of
operating expenses and understatement of income from operations in the amount of $182. There was no effect on the net income, earnings per share, assets, liabilities or shareholders equity as a result of this change.



22



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Inflation.

Inflation did not have a significant impact on our results during the last fiscal quarter.

Off-Balance Sheet Transactions.

We do not engage in any material off-balance sheet transactions.

Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following
risks and all other information contained in our public filings before making an investment decision about our common stock. While the risks described below are the ones we believe are most important for you to consider, these risks are not the only
ones that we face. If any of the following risks actually occurs, our business, operating results or financial condition could suffer, the market value of our common stock could decline and you could lose all or part of your investment.

Our actual results may 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:



| |  |  | access to sufficient working capital to meet our operating and financial needs;
| | - |  | -------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to expand into new markets and to effectively manage our growth;
| | - |  | ----------------------------------------------------------------------------



| |  |  | profitability of our expansion into the U.S. market;
| | - |  | ----------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to develop and provide voice over internet and web-based communications services;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | changes in, or failure to comply with, applicable governmental regulation;
| | - |  | --------------------------------------------------------------------------



| |  |  | changes in tax laws or rates;
| | - |  | -----------------------------



| |  |  | our reliance on our key personnel and the availability of qualified personnel;
| | - |  | ------------------------------------------------------------------------------



| |  |  | general economic conditions or material adverse changes in markets we serve;
| | - |  | ----------------------------------------------------------------------------



| |  |  | risk that our analyses of these risks could be incorrect and that the strategies developed to address them could be unsuccessful;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | integrating the operations of newly acquired businesses;
| | - |  | --------------------------------------------------------



| |  |  | successful deployment of new equipment and realization of material savings there from; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | various other factors discussed in this filing.
| | - |  | -----------------------------------------------

Industry
trends and specific risks may affect our future business and results. The matters discussed below could cause our future results to differ from past results or those described in forward-looking statements and could have a material adverse effect on
our business, financial condition, results of operations and stock price.

Our future growth depends on our ability to attract and retain customers.

Our success will depend on our ability to effectively anticipate and adapt to customer requirements and offer products and services
that meet customer demands. A failure of our current or prospective customers to use our services for any reason, including a downturn in their economic fortunes, would seriously harm our ability to grow our business. Increasingly, our growth will
depend on our ability to successfully fund ,develop and introduce new and enhanced products. The



23



---

development of new and enhanced products is a costly, complex and uncertain process that requires us to anticipate accurately future technological and market
trends. We cannot be sure whether our new product offerings will be successfully developed and introduced to the market on a timely basis, or at all. If we do not develop these products in a timely manner, our competitive position and financial
condition could be adversely affected.

Our business is dependent upon our ability to keep pace with the latest technological changes.

The international telecommunications industry is changing rapidly due to deregulation, technological improvements, expansion of telecommunications
infrastructure, privatization and the globalization of national economies. There can be no assurance that one or more of these factors will not vary in a manner that could have a material adverse effect on us. In addition, deregulation of any
particular market may cause such market to shift unpredictably. There can be no assurance that we will be able to compete effectively or adjust our contemplated plan of development to meet changing market conditions. The market for our services and
the telecommunications industry generally is in a period of rapid technological evolution, marked by the introduction of new product and service offerings and increasing transmission capacity for services similar to those provided by us. Failure to
respond in a timely and cost-effective way to these technological developments could result in serious harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from
providing telecommunications services that are based upon current technologies which are capable of adapting to future technologies. As a result, our success will depend, in part, on our ability to afford the cost of acquiring new hardware and
software associated with new technologies, develop and market service offerings that have significant customer demand, and respond in a timely manner to the technological advances of our customers, evolving industry standards and changing client
preferences. Our profitability will depend on our ability to offer, on a timely and cost-effective basis, services that meet evolving industry standards. There can be no assurance that we will be able to access or adapt to such technological changes
at a competitive price, maintain competitive services or obtain new technologies on a timely basis or on satisfactory terms.

The increase of services
offered by our competitors could adversely impact our business.

Recently, telecommunications providers have increased the range of
telecommunication services they offer to customers. This activity and the potential continuing trend towards offering new services may lead to a greater ability among our competitors to provide a comprehensive range of telecommunications services,
which could lead to a reduction in demand for our services and a corresponding reduction in the number of current or potential customers.

Our business
is susceptible to severe pricing pressures from the larger carriers.

The long distance telecommunications industry is significantly
impacted by the marketing campaigns and associated pricing decisions of the larger carriers. There has been downward pressure on prices in the industry in recent years, a trend that we expect to continue. Our competitors within the Canadian market
include Bell Canada, Telus, and Allstream. More recently, Canadas large cable operators have launched bundled VoIP/long distance services. Our competitors in the U.S. include larger carriers, such as AT&T/SBC, MCI/Verizon, Sprint, the
other RBOCs, and the major wireless carriers. The recent consolidation in the U.S. market may further intensify competitive pressures in the U.S. long distance market. We would also expect that the competition will be intense in certain emerging
markets including those associated with our VoIP product. Many of our competitors are significantly larger than we are and have substantially greater financial, technical and marketing resources, larger networks, a broader portfolio of service
offerings, greater control over transmission lines, stronger name recognition and customer loyalty, and long-standing relationships with our target customers. As a result, our ability to attract and retain customers particularly in the United States
may be adversely affected.

The success of our broadband initiative is dependent on growth and public acceptance of IP telephony as well as our ability
to adapt to rapid technological changes in IP telephony.

The development of broadband telephony in Canada and the United States is in
its early stages. It is uncertain as to how competition in our markets for telephony opportunities provided by broadband applications will develop. The financial models for return on pricing, capital expenditures and return on investment have not
been fully developed so it is difficult to gauge what applications will be financially successful. The success of our broadband initiative is dependent upon future demand for IP telephony systems and services which, in turn, will depend on a number
of factors including IP telephony achieving a similar level of reliability that users of the public switched telephone network have come to expect from their telephone service. IP telephony service providers must offer cost and feature benefits to
their customers that are sufficient to cause the customers to switch away from traditional telephony service providers. If any or all of these factors fail to occur, our VoIP business may not grow.



24



---

The telecommunications regulatory environment.

Our retail services have been largely deregulated by the CRTC (in Canada); however, our major competitors, the incumbent local exchange carriers (ILECs)
remain subject to CRTC regulation with respect to many of their services, including the requirement to provide certain access and wholesale services to competitors at cost-based prices. How the ILECs comply with regulation as well as how the CRTC
enforces its regulation against the ILECs could impact our operations and financial condition. Any change in CRTC policy, regulations or interpretations could have a material adverse effect on our operations and financial condition and operating
results. In this regard, in at least two policy proceedings, the ILECs are advocating that mandated wholesale/access requirements be significantly relaxed.

The CRTC (Canada) and the FCC (United States) recently imposed 9-1-1 and other local service obligations applicable to VoIP providers such as Yak. As a result of these decisions, the VoIP market may evolve
towards a primary line replacement service as opposed to a second line/nomadic service. Recently, the CRTC released two decisions on a regulatory framework for VoIP services. It affirmed its preliminary position that VoIP services that
provide subscribers with access to and/or from the public switched telephone network (PSTN) and the ability to make and/or receive local telephone calls are to be regulated as local exchange services. Therefore, existing regulatory requirements
would apply depending on the class of service provider. This approach will allow us to offer VoIP services as a local reseller with minimal regulatory requirements and our competitors in Canada, particularly the incumbent carriers, will be
regulated to a much greater degree, e.g., ILECs will be required to file tariffs and not price their service below cost. Although we view this decision as positive, we will still be required to develop and implement local service features (such
as basic 911 and privacy obligations) that will increase our costs to provide VoIP services.

Although we currently comply with the
CRTCs obligations to provide basic 911 services, the CRTC indicated that this is only an interim measure and in the medium-term expects VoIP providers to offer full enhanced 911 services. We may not have the capability to offer enhanced
911 services as required by the CRTC. Additionally, the ILECs have appealed the CRTC decision and have argued that their VoIP services should be free from economic regulation. Should the ILEC appeal be successful, ILECs would not be
required to offer VoIP services pursuant to tariff and would be able to price below cost.

We currently offer 911 services in the United
States through a third-party provider of E-911 services. Our third party provider only offers E-911 in limited areas in the United States. As such, to comply with the FCCs E911 obligations, Yak was compelled to modify its two-way
interconnected VoIP offering (yakUnlimited) by making it available to new customers only in limited areas in the United States. We expect that its third-party provider will substantially increase its E-911 coverage area in the coming months,
however, we cannot guarantee that it will be able to implement a comprehensive E-911 solution in the near future and, accordingly, we cannot assure you when we will be able to provide yakUnlimited on a ubiquitous basis in the United States.

Further, if the FCC were to determine that those VoIP service providers like Yak, or the services they provide, are subject to FCC
regulation, including the payment of access charges and contribution to the universal service funds, it could have a material adverse affect on our broadband initiative. In addition, although the FCC has declared that certain VoIP services are
interstate in nature and therefore subject to federal regulation, state regulatory authorities potentially still retain some oversight and may determine that intrastate IP telephony service and VoIP providers should be subject to local regulation,
certification and fees and as such, could impose some regulatory burdens. Further, although other aspects of the regulatory status of VoIP telephony remain undecided at the FCC, the FCC and other U.S. regulatory bodies have begun to assert
regulatory authority and impose obligations on VoIP telephony providers. The effect of potential future VoIP telephony laws and regulations on our broadband initiative in the United States cannot yet be determined.

Additionally, our ability to offer VoIP services outside North America is subject to the local regulatory environment, which may be unknown, complicated
and often uncertain. Regulatory treatment of VoIP telephony outside North America varies from country to country. There is no assurance that we will immediately be in compliance with the applicable laws and regulations of the markets we have
identified as promising for our VoIP services. Some countries may assert that we are required to register as a telecommunications service provider.

Any
future acquisitions could be difficult to integrate, disrupt our business, dilute stockholder value and adversely affect our operating results.

We may expand our operations through acquisitions over time. This may require significant management time and financial resources because we may need to integrate widely dispersed operations with distinct corporate cultures. Our failure to
manage future acquisitions successfully could seriously harm our operating results. Also, acquisition costs could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we financed the
acquisitions by incurring convertible debt or issuing securities.



25



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The current expansion of the Company will continue to put pressure on management.

Our continued growth and expansion may place a significant strain on our management, operational and financial resources, and increase demand on our
systems and controls. We entered the small and medium enterprise (SME) market in Canada, July 2003, launched our VoIP service in September 2004 and expanded into the U.S. market in the Fall of 2004. To manage our growth effectively, we must continue
to implement and improve our operational and financial systems and controls, purchase and utilize other transmission facilities, and expand, train and manage our employee base. If we inaccurately forecast the movement of traffic onto our network, we
could have insufficient or excessive transmission facilities and disproportionate fixed expenses. As we proceed with our development, operational difficulties could arise from additional demand placed on customer support, billing and management
information systems, on our support, sales and marketing and administrative resources and on our network infrastructure.

We have a significant
dependence on Transmission Facilities-Based Carriers.

We primarily connect our customers telephone calls through transmission
lines and interconnection arrangements that we obtain under a variety of arrangements with various facilities-based carriers. We also rely on facilities-based carriers to bill and collect from our customers for calls made through such
interconnection arrangements. Many of these carriers are, or may become, our competitors. Our ability to maintain and expand our business depends on our ability to maintain favorable relationships with these carriers. Where competition in the
underlying facilities does not exist or is limited, regulators have historically mandated non-discriminatory access to such facilities. If our relationship with one or more of these carriers were to deteriorate or terminate, it could have a material
adverse effect upon our cost structure, service quality, network diversity, results of operations and financial condition. Similarly, if regulators should prematurely deregulate this market or diminish or remove obligations by such carriers to
interconnect with or provide services to us, including services related to billing and collecting for our customers calls, it could have a similar material adverse effect.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and other trading market rules, are creating uncertainty
for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all appropriate resources to comply with evolving standards, and this investment may result in
increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

We have entered into outsourcing agreements related to key business operations.

We have entered into outsourcing agreements
for processing and rating of billing functions, billing presentation, and billing and collection services. As a result, we must rely on third parties to execute our operational priorities and interface with our customers. Any difficulties
experienced in these arrangements could result in additional expense, and loss of customers and revenues.

Our common stock may be delisted from the
Nasdaq National Market.

If we fail to demonstrate compliance with applicable Nasdaq rules, our common stock may be delisted from
trading from the Nasdaq National Market, which could materially adversely affect the trading price and volumes of our common stock regardless of our actual results of operations. Also, the coverage of our common stock by securities analysts may
decrease or cease entirely. Public announcements regarding the possible delisting of our common stock could result in extreme price and volume fluctuations that are unrelated or disproportionate to our actual operating performance. In addition, the
delisting of our common stock would impair the liquidity of our common stock and there is no assurance that a market would exist for our common stock. This would limit our potential to raise future capital through the sale of our securities, which
could have a material adverse effect on our future business prospects.

Our quarterly results may fluctuate causing our stock price to decline.

A number of factors, many of which are outside of our control, are likely to cause these fluctuations.

The factors outside of our control include:



| |  |  | long distance telecommunications market conditions as well as economic conditions generally;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | fluctuations in demand for our services;
| | - |  | ----------------------------------------



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| |  |  | reductions in the prices of services offered by our competitors;
| | - |  | ----------------------------------------------------------------



| |  |  | costs of integrating technologies or businesses that we add; and
| | - |  | ----------------------------------------------------------------



| |  |  | changes in foreign exchange rates.
| | - |  | ----------------------------------

The factors
substantially within our control include:



| |  |  | the timing of expansion into new markets, both domestically and internationally; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the timing and payments associated with possible acquisitions.
| | - |  | --------------------------------------------------------------

Because our operating results may vary significantly from quarter to quarter, our operating results may not meet the expectations of securities analysts and investors, and our common stock could decline significantly which may expose us to
risks of securities litigation, impair our ability to attract and retain qualified individuals using equity incentives and make it more difficult to complete acquisitions using equity as consideration.

Our critical accounting policies and significant estimates made may not be appropriate or accurate.

We have selected accounting policies that we believe are appropriate for the business conducted and that comply with accounting policies generally
accepted in the United States. Such accounting policies and their application may change from time to time, as new standards and interpretations emerge or the application of existing standards change. Additionally, financial statements involve the
use of estimates and the application of professional judgment, which may be challenged by auditors, regulators and investors from time to time. Qualified people exercising due care, may make judgments at any point in time utilizing the best
available information, including the use of subject matter experts, and may reach conclusions that are not appropriate. You are encouraged to read and obtain a full understanding of the financial statements and related notes contained in our
securities filings and the related reports of the independent auditor. The critical accounting policies we selected and identified may require thorough study and assessment by you in order for you to reach a conclusion about the appropriateness and
reasonableness of the policy or estimate, given the facts and circumstances. You should reach your own conclusion on the appropriateness, fairness and application of the accounting policies we have applied and estimates we have made in consultation
with your financial and other advisors before making any decision to invest in us.

Our internal disclosure controls may not reduce to a relatively low
level the risk that a material error in our financial statements may go undetected.

Our Certifying Officers are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Yak Communications. Accordingly, the Certifying Officers designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under their supervision, to ensure that material information relating to Yak, including our consolidated subsidiaries, is made known to the Certifying Officers by others within those entities. We
regularly evaluate the effectiveness of disclosure controls and procedures and report our conclusions about the effectiveness of the disclosure controls quarterly on our Form 10-Q and annually on our Form 10-K. In completing such reporting we
disclose, as appropriate, any significant change in our internal control over financial reporting that occurred during our most recent fiscal period that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting. This disclosure, based on our most recent evaluation of our disclosure controls and procedures, is made to our auditors and the audit committee of our Board of Directors (or persons performing the equivalent functions). All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information are
reported in our public filings. Additionally, any fraud, whether or not material, that involves management or other employees who have a significant role in our internal control over financial reporting is reported on such filings as applicable.

The Certifying Officers have reported six separate events of control deficiencies, constituting material weaknesses. Control deficiencies
were last reported in the second quarter of 2006, ended December 31, 2005. We have undertaken specific measures to cure or mitigate the ineffective controls and procedures identified in our filings. Such measures have included adding
professionally designated accounting staff, systems, process and control changes. We believe that the changes made to date will resolve our control deficiencies in the near term. The details of the control deficiencies are detailed in the following
filings:



| |  |  | Form 10-K for the year ended June 30, 2005, as amended;
| | - |  | -------------------------------------------------------



| |  |  | Form 10-Q for the quarter ended September 30, 2005, as amended; and
| | - |  | -------------------------------------------------------------------



| |  |  | Form 10-Q for the quarter ended December 31, 2005 as amended.
| | - |  | -------------------------------------------------------------



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While management is responsible for ensuring an effective control environment and has taken steps to
ensure that the internal control environment remains free of significant deficiencies and/or material weaknesses, the inherent nature of our business and rapidly changing environment may affect managements ability to be successful with this
initiative.

There can be no assurance that we will not have to restate our financial statements.

We have completed several restatements of previously reported financial results, affecting seven separate reporting periods over the last two years. The
details of these restatements covering the reporting periods are detailed in the following filings:



| |  |  | Form 10-K for the year ended June 30, 2005, as amended;
| | - |  | -------------------------------------------------------



| |  |  | Form 10-Q for the quarter ended September 30, 2005, as amended; and
| | - |  | -------------------------------------------------------------------



| |  |  | Form 10-Q for the quarter ended December 31, 2005 as amended.
| | - |  | -------------------------------------------------------------

In response to this situation, we have taken what we believe to be the necessary measures to ensure that restatements will not occur in the future. However, there can be no certainty that future restatements will not
be necessary due to evolving policies, revised or new accounting pronouncements or otherwise.

Critical Accounting Policies

The critical accounting estimates used in the preparation of our consolidated financial statements are discussed in our Annual Report on Form 10-K/A for
the fiscal year ended June 30, 2005. To aid in the understanding of our financial reporting, a summary of significant accounting policies are described below. These policies may potentially have a significant impact on our financial statements,
either because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in
nature.

Revenue Recognition

Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Companys price to the customer is fixed and determinable, and collection of the resulting receivable is reasonably
assured. Revenue is derived from telecommunications usage based on minutes of use. Revenue derived from usage is recognized as services are provided, based on agreed upon usage rates. Revenue is recorded net of estimated customer credits and
uncollectible billings, which are recorded at the same time the corresponding revenue is recognized. Revenue from billings for services rendered where collectibility is not assured is recognized when the cash is collected.

Allowance for Doubtful Accounts

As of
December 31, 2005, we had $18,160 of net trade accounts receivable, inclusive of a recorded allowance for doubtful accounts of approximate $612. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical
collection trends, analyses of receivable portfolios by business unit and by reviewing specific accounts and make adjustments in the allowance as necessary. Changes in economic conditions or dramatic changes in the telecommunications industry could
have an impact on the collection of receivable balances or future allowance considerations.

Income Taxes

We account for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes which requires an asset and liability approach to
financial accounting and reporting for income taxes. We have generated deferred income tax liabilities primarily due to the accounting basis of our assets exceeding the tax basis of those same assets. These liabilities are offset by certain net
operating loss carryforwards that are available for twenty years from the date incurred and which begin to expire in the year 2023. Our ability to fully utilize these net operating loss carryforwards is highly dependent on our ability to implement
identified tax planning strategies or to generate future income in the tax jurisdictions that the losses originated. If these estimates and assumptions change in the future, we will be required to adjust our deferred tax valuation allowances.



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Our income tax accounts reflect estimates of the outcome or settlement of various asserted and unasserted
income tax contingencies including tax audits and administrative appeals. At any point in time, several tax years may be in various stages of audit or appeals or could be subject to audit by various taxing jurisdictions. This requires a periodic
identification and evaluation of significant doubtful or controversial issues, both individually and in the aggregate. The results of these audits, appeals, or expiration of the statute of limitations could affect our prior estimates for income tax
accounts.

The effective income tax rate in any period may be materially impacted by the overall level of income (loss) before income
taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws (which may be retroactive), changes in the expected outcome or settlement of an income tax contingency, changes in the deferred tax valuation allowance, and
adjustments of a deferred tax asset or liability for enacted changes in tax laws or rates.

Customer Lists

As of December 31, 2005, customer lists were recorded at a net book value of $1,697, representing the unamortized cost of customer lists purchased as
part of the Argos (now Yak for Business) and Contour acquisitions in July 2003 as well as the customer base purchased from Navigata Communications Ltd. in March 2005, as discussed above. Customer lists are amortized on a straight-line basis over
five years, which represents the estimated customer life-cycle in the telecom industry. If the retention rate for acquired customers is less than initially estimated, accelerated amortization or impairment may be necessary.

Impairment of Long-lived Assets and Goodwill

As of
December 31, 2005, our long-lived assets were comprised primarily of $14,761 of property and equipment and $530 of goodwill. We review the carrying value of long-lived assets and goodwill according to Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assetsand SFAS 142 Goodwill and Other Intangible Assets. Our estimate of useful lives on property and equipment are based on assumptions using
historical data and industry trends. Impairment is recorded on long-lived assets when assets are identified for disposal or other events suggesting impairment occur and if the carrying value of the long-lived asset exceeds its anticipated
undiscounted future net cash flows. Impairment is recorded on goodwill when the carrying value of a reporting unit exceeds the anticipated undiscounted future net cash flows of that reporting unit. In each case, if an impairment loss is recognized,
it is based on the difference between the assets fair value and its carrying value.

The determination and measurement of an
impairment loss requires the continuous use of significant judgments and estimates. Our assumptions related to estimates of future cash flows are based on historical results of cash flows adjusted for management projections for future periods taking
into account known conditions and planned future activities. Our assumptions regarding the fair value of our long-lived assets and goodwill are based on the discounted future cash flows. Future events may result in differences in managements
judgments and estimates. Factors that could result in increased future impairment charges include increases in interest rates, which would impact discount rates; unfavorable economic conditions or other factors, such as a change in our expectations
for growth and public acceptance of IP telephony technology, which could decrease revenues and profitability; and changes in our cost structure.

Obligation Under Warrants and Registration Rights Agreement

The Company accounts for the detachable Warrants issued in 2004
in accordance with the provisions of SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) along with related interpretations EITF No. 00-19 Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19) and EITF No. 05-2 The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19 (EITF 05-2). SFAS No.
133 requires every derivative instrument (including certain derivative instruments embedded in other contracts) to be recorded in the Balance Sheet as either an asset or liability measured at its fair value, with changes in the derivatives
fair value recognized currently in earnings unless specific hedge accounting criteria are met. We made the determination that the detachable Warrants issued in 2004 are a derivative instrument and measured its value at $2,173 at inception.
Additionally, at the end of each reporting period, the accounting standard requires the Company to record the outstanding derivatives at fair value, resulting in an adjustment to the recorded liability of the Warrants, and a gain or loss in the
applicable reporting period. Since the inception of the Warrants, the fair value under the Black-Scholes method of valuation has declined and the Company has recorded a cumulative pre-tax gain of $1,408. The Company values the Warrants using the
Black-Scholes option-pricing model to determine fair value. This model requires management to make assumptions on the expected volatility rates, risk-free interest rates and the instruments expected remaining life. These assumptions require
significant management judgment. The Company also recorded an obligation in 2005 of $540 related to a breach of the registration rights agreement related to the Warrants.



29



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Estimating Fair Value

We estimated the fair value of the assets and liabilities associated with the purchase of certain next generation telecommunications software from Consortio, Inc and Convenxia Limited noted above, based on
the related estimated cash flows. Statement of Financial Accounting Concepts No. 7 (SFAC No. 7) provides a framework for using future cash flows and present value as the basis for accounting measurements of fair value. When observable
marketplace-determined values are not available, discounted cash flows are often used to estimate fair value. Consistent with the methodology of SFAC No. 7, we used the expected cash flow approach to estimate fair value, focusing on explicit
assumptions about the range of possible cash outcomes and their respective probabilities.

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, which eliminates the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 will be effective for non-monetary transactions occurring after
June 15, 2005. The Company does not expect the adoption of SFAS No. 153 will have a material impact on the consolidated financial statements.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R) Share-Based Payments, which is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123 (R) supersedes Accounting Principal Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and amends FASB No. 95, Statement of Cash
Flows. Generally, the approach to accounting in Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The
Company adopted Statement 123(R) on July 1, 2005 using the modified prospective transition method. Prior to adoption, the Company accounted for these payments under the intrinsic value provisions of APB No. 25 with expense recognition in
the financial statements for the difference between the strike price and market value on the date stock options were granted. Compensation cost increased $102 and basic and diluted earnings per share were one penny lower in the six months ended
December 31, 2005 as a result of adopting Statement 123 (R). As of December 31, 2005, there was $635 of total unrecognized compensation costs related to granted stock options. That cost is expected to be recognized over a weighted-average
period of 1.70 years.

On June 7, 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections,
(Statement 154), a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Statement 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Previously, most voluntary changes in accounting principles required recognition of a cumulative effect adjustment within net income of the period of the change. Statement 154
requires retrospective application to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Statement 154 is effective for accounting changes made
in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. We do not believe adoption of Statement 154 will have a material effect on our
consolidated financial position, results of operations or cash flows.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risk exposures
relate to changes in foreign currency exchange rates.

Foreign currencyFor the six months ended December 31, 2005, in excess
of 94.5% of our current revenue is derived from sales and operations in Canada. The reporting currency for our consolidated financial statements is the U.S. dollar. The functional currency for each of our operating entities is the respective local
currency. In the future we expect to derive a greater proportion of our revenues outside of Canada; however, in the short-term, changes in the exchange rate may continue to have a significant, and potentially adverse effect on our results of
operations. Our primary risk of loss regarding foreign currency exchange rate risk is caused by fluctuations in the U.S. dollar/Canadian dollar.

We are exposed to financial statement fluctuations as a result of translating the operating results and financial position of our Canadian subsidiary. We translate the Canadian dollar statements of operations into U.S. dollar using the
average exchange rate during the reporting period. Changes in foreign exchange rates affect our reported profits and losses and cash flows and may distort comparisons from year to year. As an example, if the U.S. dollar were to strengthen relative
to the Canadian dollar, it would take a greater amount of revenue and profits in Canadian dollars to achieve a similar level of results in U.S. dollars compared to the previous year.



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ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

As of the end of the period covered by this Amended Quarterly Report (the Amended Report), our Chief Executive Officer and Chief Accounting
Officer (the Certifying Officers) conducted evaluations of our disclosure controls and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), the
term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions (SEC) rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuers management, including the Certifying Officers,
to allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying Officers have concluded that our disclosure controls and procedures were not effective to ensure that material information is recorded, processed,
summarized and reported by our management on a timely basis in order to comply with our disclosure obligations under the Exchange Act, and the rules and regulations promulgated thereunder. The Company determined that this deficiency constituted a
material weakness and detailed below are the circumstances surrounding this matter.

On June 20, 2003, the Companys wholly-owned
subsidiary, Yak Communications (Canada) Inc., acquired certain telecommunications software from Consortio, Inc., a Delaware corporation and Convenxia Limited, a corporation organized under the laws of the United Kingdom. During the fourth quarter in
2005, the Company determined that the assumptions on which the valuations of the software acquisition were made and the agreement recorded were in error. The Company previously restated its consolidated financial statements for fiscal years 2003 and
2004 and for certain interim fiscal periods to correct accounting errors relating to the accounting treatment of the software acquisition transaction which, in part, was the result of a material weakness in the Companys internal controls. The
Company filed such amended reports, including its amended Annual Report on Form 10-K/A including its amended and restated consolidated financial statements for fiscal years 2003 and 2004 with the SEC on May 31, 2005 to correct and restate said
consolidated financial statements.

However, subsequent to the May 31, 2005 filing of its amended Annual Report on Form 10-K/A for
fiscal years 2003 and 2004, and as a result of the Companys subsequent dialogue with the SECs Office of Chief Accountant (OCA), the Company discovered additional errors in its May 2005 amended and restated filings. Namely,
the errors were as follows:



| |  |  | An error in calculating the discount rate used to determine the fair value of the June 2003 software acquisition transaction components for the May 31, 2005 restatements. The
error caused the Company to overstate the value of the long-term note payable, the joint venture receivable and the software in its amended Annual Report on Form 10-K/A for fiscal year 2003 and subsequent filings;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The revaluation of the long-term note payable in the amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2004 10-K/A was not consistent with U.S. GAAP,
notwithstanding the fact that the resultant gain was deferred;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The loss on impairment of the joint venture receivable was incorrectly deferred in the amended Annual Report on Form 10-K/A for fiscal year 2004. The loss should have been
recognized in the fourth fiscal quarter of 2004; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The $1.4 million gain recognized on early extinguishment of debt in the third fiscal quarter of 2005 was overstated by $200,000.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



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To reflect the foregoing corrections, the Company has restated the amounts previously reported in its
consolidated financial statements for fiscal years 2003 and 2004 as well as each of the quarters in fiscal years 2004 and 2005. The Companys response timeline to the foregoing deficiencies was as follows: the material weakness was detected on
or about February 24, 2005, subsequent to and as a result of its dialogue with the OCA; the Company promptly commenced its efforts to address the matter and completed its remedial steps by September 28, 2005, resulting in the filing of the
affected public reports.

Subsequent to the foregoing discovery, the Company has determined to remedy the material weakness described above
and, as of the date hereof, has taken the following steps to improve its disclosure controls and procedures:



| |  |  | Has added several accounting personnel to its accounting team, including a new Chief Accounting Officer (a certified public accountant and a chartered accountant) to oversee changes
in the design of the Companys internal controls, to formalize the control environment and to improve the accounting and financial reporting of the Company as well as has engaged accounting consultants and other outside professionals during the
year to assist in the performance of certain Chief Financial Officer (CFO) functions on an interim basis and to maintain and improve our internal controls over financial reporting,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Has completed the implementation of a new general ledger accounting system, and
| | - |  | -------------------------------------------------------------------------------



| |  |  | Has modified its billing process and procedures for certain classification of revenue.
| | - |  | --------------------------------------------------------------------------------------

The Company did not make any other additional changes to its disclosure controls and procedures to the discovery of the deficiency described above. The Company believes that the completion of these remedial steps will
allow the Company to conclude that our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order to comply with our disclosure
obligations under the Exchange Act and the rules and regulations thereunder. The Company will continue to evaluate its disclosure controls and procedures and to seek to both implement, on a timely basis, changes to its disclosure controls and
procedures that may be necessary to keep them effective in light of any changes in the nature of its business and any rapidly changing environment and improve them.

Additionally, in the same amended and restated financial statements, the Company corrected the following errors:



| |  |  | Misapplication of SFAS 133, SFAS 150, and EITF 00-19. Detachable warrants were previously erroneously classified as an equity instrument. This instrument has now been
classified as a liability in accordance with the application of the provisions of SFAS 133, SFAS 150, and EITF 00-19. As a result of this error, liabilities at December 31, 2005 were understated by $765, while shareholders equity at
September 30, 2005 was overstated by $765. Further, the standards require the Company to re-measure the value of the Warrants at the end of each reporting period with the resulting increase or decrease to the liability reported as a component
of the Statement of Income and Comprehensive Income. As a result of a decrease in the value of the Warrants since issuance, the net income of the Company for six months ended December 31, 2005 and 2004 were previously understated by $328 and
$417 or $0.03 per share and $0.04 per share, respectively;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Correction for disclosure deficiencies under SFAS 131. The Company has modified its segmented disclosure to comply with the standards of SFAS 131 and to further provide
meaningful information to readers of its financial statements. There was no effect on the net income, earnings per share, assets, liabilities, and shareholders equity;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Correction of errors in Cash Flow Statements. The Company has modified its cash flow statements to correct for disclosure inaccuracies resulting from errors in the exchange
rates used to translate foreign currency cash flows to the Companys reporting currency and to correct for an error in the reporting of the gain on settlement. The Company previously completed its cash flow statement at the consolidated level
and failed to consider the foreign currency effects appropriately. For the six months ending December 31, 2005, the cash flows from operating activities and the effect of exchange rate changes on cash and cash equivalents were understated by $9 and
$189 respectively, while the cash flows from investing and financing activities were overstated by $177 and $21 respectively. For the six months ended December 31, 2004, the cash flows from operating activities were understated by $168, while
the cash flows from financing activities and the effect of exchange rate changes on cash and cash equivalents were overstated by $83 and $85, respectively; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32



---

| |  |  | Correction for the misclassification of financing expenses related to assignment of accounts receivable. The Company misclassified financing costs relating to factoring of
trade accounts receivable as operating expenses for quarter ending December 31, 2004 versus disclosing such costs below the line as an element of interest expense as discussed by the AICPAs Special Committee on Classification of
Items of Comprehensive Income. The effect of this misclassification was an overstatement of operating expenses and understatement of income from operations in the amount of $182. There was no effect on the net income, earnings per share,
assets, liabilities or shareholders equity as a result of this change.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the fiscal period ended
December 31, 2005, the Company, in connection with its implementation of the new accounting system and updating of the internal controls, completed a physical count of all of its property and equipment and recorded a write-off for certain
assets totaling $111,000(or less than 1% of the net book value of assets at the end of the reporting period in question). The Company determined that it lacked the ability to locate the assets recorded in the ledgers and that this inability
constituted a significant deficiency in its internal controls and, as such, needed to be addressed and remedied. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to
a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements may occur and not be detected within a timely period by employees in the normal course of
performing their assigned functions.

The Company believes that the foregoing errors were caused by the fact that the Company has been
without a full-time CFO throughout the second half of fiscal 2005 and the first quarter of fiscal 2006. The Company has engaged additional accounting personnel to its accounting team, including a new Chief Accounting Officer (a certified public
accountant and a chartered accountant) to oversee changes in the design of the Companys internal controls, to formalize the control environment and to improve the accounting and financial reporting of the Company. The Company also has engaged
accounting consultants and other outside professionals during the year to assist in the performance of certain Chief Financial Officer (CFO) functions on an interim basis and to maintain and improve our internal controls over financial reporting.
The Company believes that the foregoing remedial steps coupled with educational and professional development of its accounting personnel would be sufficient to prevent a reoccurrence of the foregoing accounting errors. The Company did not make any
other additional changes to its disclosure controls and procedures.

There were no changes in the Companys internal control
over financial reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, identified in connection with the above-described evaluation that occurred during the fiscal period in question that has
materially affected or is reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II

OTHER INFORMATION

Item 5. Submission of Matters to a Vote of Security Holders

On December 12, 2005, we held our annual
meeting of shareholders. The following proposals were approved at the annual meeting:



| |  |  | The board of directors was elected. The results of the balloting for this proposal were as follows:
| | - |  | ---------------------------------------------------------------------------------------------------



|                       |  |               |  |                  |  |          
|---------------------- |  | ------------- |  | ---------------- |  | ---------
|Charles Zwebner        |  | 6,692,910 For |  | 48,637 Withheld  |  | 0 Abstain
|                       |  |               | 
|Anthony Greenwood      |  | 6,716,168 For |  | 25,379 Withheld  |  | 0 Abstain
|                       |  |               | 
|Anthony Heller         |  | 6,716,168 For |  | 25,379 Withheld  |  | 0 Abstain
|                       |  |               | 
|Adrian Garbacz         |  | 6,716,168 For |  | 25,379 Withheld  |  | 0 Abstain
|                       |  |               | 
|Joseph Grunwald        |  | 6,716,718 For |  | 24,829 Withheld  |  | 0 Abstain
|                       |  |               | 
|Kevin Crumbo           |  | 6,481,826 For |  | 259,721 Withheld |  | 0 Abstain
|                       |  |               | 
|R. Gregory Breetz, Jr. |  | 6,695,519 For |  | 46,028 Withheld  |  | 0 Abstain
|                       |  |               | 
|Gary M. Clifford       |  | 6,712,718 For |  | 28,829 Withheld  |  | 0 Abstain



| |  |  | The appointment of Ernst & Young LLP as our independent auditors was approved. The results of the balloting for this proposal was: 6,788,062 for, 17,844 against and 2,540
abstain.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



33



---

Item 6. Exhibits.



|        |  |                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1(1) |  | Employment Agreement, dated as of December 21, 2005, between Yak Communications (Canada) Inc. and Valerie Ferraro.                                                                                     
|        | 
|31.1    |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.     
|        | 
|31.2    |  | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|        | 
|32.1    |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                     
|        | 
|32.2    |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                 

---

|(1) | Incorporated by reference from our Quarterly Report on Form 10-Q as filed with the SEC on February 14, 2006.
|--- | ------------------------------------------------------------------------------------------------------------



34



---

SIGNATURES

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



|                     |  |                         |  |                                                                                           
|-------------------- |  | ----------------------- |  | ------------------------------------------------------------------------------------------
|                     |  | Yak Communications Inc.
|                     |  |                        
|Date: April 21, 2006 |  | By:                     |  | /s/ Charles Zwebner                                                                       
|                     |  |                         |  | Charles Zwebner, President, Chairman of the Board of
Directors and Chief Executive Officer
|                     |  |                        
|                     |  | By:                     |  | /s/ Paul Broude                                                                           
|                     |  |                         |  | Paul Broude, Chief Accounting Officer and Principal
Financial Officer                     



35



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                    |  |                             |   |  |                        |  
|--------------------------------------------------- |  | --------------------------- | - |  | ---------------------- | -
|(in $ thousands)                                    |  | December 31,2005 (Restated) |   |  | June 30,2005(Restated) |  
|                                                    |  | $                           |   |  | $                      |  
|ASSETS                                              |  |                             |   |  |                        |  
|Current                                             |  |                             |   |  |                        |  
|Cash and cash equivalents                           |  | 11,552                      |   |  | 16,751                 |  
|Accounts receivable                                 |  | 18,772                      |   |  | 16,709                 |  
|Allowance for doubtful accounts                     |  | (612                        | ) |  | (489                   | )
|Prepaid expenses and other assets                   |  | 960                         |   |  | 1,413                  |  
|                                                    |  |                             |   |  |                        |  
|Total current assets                                |  | 30,672                      |   |  | 34,384                 |  
|                                                    |  |                            
|Property and equipment, net                         |  | 14,761                      |   |  | 13,559                 |  
|Deferred income taxes                               |  | 1,158                       |   |  | 2,787                  |  
|Intangibles, net                                    |  | 1,697                       |   |  | 2,005                  |  
|Goodwill                                            |  | 530                         |   |  | 503                    |  
|                                                    |  |                             |   |  |                        |  
|                                                    |  | 48,818                      |   |  | 53,238                 |  
|                                                    |  |                             |   |  |                        |  
|LIABILITIES                                         |  |                             |   |  |                        |  
|Current                                             |  |                             |   |  |                        |  
|Accounts payable and accrued liabilities            |  | 9,078                       |   |  | 11,891                 |  
|Unearned revenue                                    |  | 808                         |   |  | 1,096                  |  
|Income taxes payable                                |  | 94                          |   |  | 3,547                  |  
|Advances from TELUS Communications Inc.             |  |                            |   |  | 382                    |  
|Current portion of obligations under capital leases |  | 523                         |   |  | 511                    |  
|Obligations under warrants                          |  | 765                         |   |  | 1,093                  |  
|                                                    |  |                             |   |  |                        |  
|                                                    |  | 11,268                      |   |  | 18,520                 |  
|Non-current liabilities                             |  |                             |   |  |                        |  
|Deferred income taxes                               |  | 2,636                       |   |  | 1,990                  |  
|Obligations under capital leases                    |  | 768                         |   |  | 977                    |  
|                                                    |  |                             |   |  |                        |  
|                                                    |  | 14,672                      |   |  | 21,487                 |  
|                                                    |  |                             |   |  |                        |  
|STOCKHOLDERS EQUITY                                |  |                             |   |  |                        |  
|Common stock                                        |  | 225                         |   |  | 225                    |  
|Additional paid-in capital                          |  | 17,105                      |   |  | 16,952                 |  
|Accumulated other comprehensive income              |  | 2,076                       |   |  | 1,343                  |  
|Retained earnings                                   |  | 14,740                      |   |  | 13,231                 |  
|                                                    |  |                             |   |  |                        |  
|                                                    |  | 34,146                      |   |  | 31,751                 |  
|                                                    |  |                             |   |  |                        |  
|                                                    |  | 48,818                      |   |  | 53,238                 |  
|                                                    |  |                             |   |  |                        |  

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



F-1



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (3) (Restated)

(Unaudited)



|                                                              |        |                    |        |                           |  |        |                                        |  |       |                   |  |                            |  |        |  
|------------------------------------------------------------- | ------ | ------------------ | ------ | ------------------------- |  | ------ | -------------------------------------- |  | ----- | ----------------- |  | -------------------------- |  | ------ | -
|(in thousands)                                                |        | Common stock1, 2 |        | Additionalpaid-in capital |  |        | Accumulated other comprehensive income |  |       | Retained earnings |  | Total stockholders equity | 
|                                                              | Shares |                    | Amount |                           |  |        |                                       
|                                                              |        |                    |        | $                         |  | $      |                                        |  | $     |                   |  | $                          |  | $      |  
|Balance, June 30, 2003 (Restated)                             |        | 9,133              |        | 199                       |  | 2,050  |                                        |  | 477   |                   |  | 3,002                      |  | 5,728  |  
|Foreign currency translation adjustment                       |        |                   |        |                          |  |       |                                        |  | (364  | )                 |  |                           |  | (364   | )
|Common stock issued to obtain note payable                    |        | 20                 |        |                          |  | 90     |                                        |  |      |                   |  |                           |  | 90     |  
|Common stock issued in exchange for stock options surrendered |        | 2,261              |        | 11                        |  | (11    | )                                      |  |      |                   |  |                           |  |       |  
|Common stock issued for services rendered                     |        | 9                  |        |                          |  | 51     |                                        |  |      |                   |  |                           |  | 51     |  
|Stock-based compensation expense                              |        |                   |        |                          |  | 26     |                                        |  |      |                   |  |                           |  | 26     |  
|Common stock issued for cash                                  |        | 1,470              |        | 15                        |  | 14,636 |                                        |  |      |                   |  |                           |  | 14,651 |  
|Net earnings                                                  |        |                   |        |                          |  |       |                                        |  |      |                   |  | 5,466                      |  | 5,466  |  
|                                                              |        |                    |        |                           |  |        |                                        |  |       |                   |  |                            |  |        |  
|Balance, June 30, 2004 (Restated)                             |        | 12,893             |        | 225                       |  | 16,842 |                                        |  | 113   |                   |  | 8,468                      |  | 25,648 |  
|Foreign currency translation adjustment                       |        |                   |        |                          |  |       |                                        |  | 1,230 |                   |  |                           |  | 1,230  |  
|Common stock issued for services rendered                     |        | 4                  |        |                          |  | 29     |                                        |  |      |                   |  |                           |  | 29     |  
|Stock-based compensation expense                              |        |                   |        |                          |  | 81     |                                        |  |      |                   |  |                           |  | 81     |  
|Net earnings                                                  |        |                   |        |                          |  |       |                                        |  |      |                   |  | 4,763                      |  | 4,763  |  
|                                                              |        |                    |        |                           |  |        |                                        |  |       |                   |  |                            |  |        |  
|Balance, June 30, 2005 (Restated)                             |        | 12,897             |        | 225                       |  | 16,952 |                                        |  | 1,343 |                   |  | 13,231                     |  | 31,751 |  
|Foreign currency translation adjustment                       |        |                   |        |                          |  |       |                                        |  | 733   |                   |  |                           |  | 733    |  
|Common stock issued for services rendered                     |        | 8                  |        |                          |  | 29     |                                        |  |      |                   |  |                           |  | 29     |  
|Stock-based compensation expense                              |        |                   |        |                          |  | 124    |                                        |  |      |                   |  |                           |  | 124    |  
|Net earnings                                                  |        |                   |        |                          |  |       |                                        |  |      |                   |  | 1,509                      |  | 1,509  |  
|                                                              |        |                    |        |                           |  |        |                                        |  |       |                   |  |                            |  |        |  
|Balance, December 31, 2005 (Restated)                         |        | 12,905             |        | 225                       |  | 17,105 |                                        |  | 2,076 |                   |  | 14,740                     |  | 34,146 |  
|                                                              |        |                    |        |                           |  |        |                                        |  |       |                   |  |                            |  |        |  

---

|(1) | On January 29, 2004 a two-for-one stock split of the Companys outstanding shares occurred. The common share figures presented reflect the two-for-one split as if it had
occurred as of June 30, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Common stock, par value of $0.01, 100,000,000 shares authorized.
|--- | ----------------------------------------------------------------

|(3) | Series A Preferred Stock, with no par value, 1,000,000 shares authorized, nil issued.
|--- | -------------------------------------------------------------------------------------

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



F-2



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|-------------------------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | - |  | -------------- | - |  | --------------- | -
|                                                         |  | Three months ended December 31, |   |  | Six months ended December 31, |  
|(in $ thousands, except share and per share
amounts)     |  | 2005(Restated)                  |   |  | 2004 (Restated)               |   |  | 2005(Restated) |   |  | 2004 (Restated) |  
|                                                         |  | $                               |   |  | $                             |   |  | $              |   |  | $               |  
|Net revenue                                              |  | 24,029                          |   |  | 24,153                        |   |  | 47,537         |   |  | 45,350          |  
|Cost of revenue(1)                                       |  | 14,447                          |   |  | 14,621                        |   |  | 28,822         |   |  | 28,379          |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Contribution margin                                      |  | 9,582                           |   |  | 9,532                         |   |  | 18,715         |   |  | 16,971          |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Operating expenses                                       |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|General and administration                               |  | 4,919                           |   |  | 5,075                         |   |  | 10,847         |   |  | 8,685           |  
|Sales and marketing                                      |  | 1,627                           |   |  | 1,699                         |   |  | 3,522          |   |  | 2,690           |  
|Writedown of property and equipment                      |  | 111                             |   |  |                              |   |  | 111            |   |  |                |  
|Depreciation and amortization                            |  | 741                             |   |  | 694                           |   |  | 1,585          |   |  | 1,256           |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Total operating expenses                                 |  | 7,398                           |   |  | 7,468                         |   |  | 16,065         |   |  | 12,631          |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Income from operations                                   |  | 2,184                           |   |  | 2,064                         |   |  | 2,650          |   |  | 4,340           |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Other expenses (income)                                  |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Interest expense                                         |  | 33                              |   |  | 214                           |   |  | 68             |   |  | 477             |  
|Interest income                                          |  | (122                            | ) |  | (105                          | ) |  | (238           | ) |  | (183            | )
|Change in fair value of obligation under warrants        |  | (219                            | ) |  | (114                          | ) |  | (328           | ) |  | (417            | )
|Income from joint marketing agreement                    |  |                                |   |  | (140                          | ) |  |               |   |  | (281            | )
|Long-term debt discount amortization                     |  |                                |   |  | 130                           |   |  |               |   |  | 261             |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|                                                         |  | (308                            | ) |  | (15                           | ) |  | (498           | ) |  | (143            | )
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Earnings before income taxes                             |  | 2,492                           |   |  | 2,079                         |   |  | 3,148          |   |  | 4,483           |  
|Provision for income taxes                               |  | 1,306                           |   |  | 689                           |   |  | 1,639          |   |  | 1,423           |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Net earnings                                             |  | 1,186                           |   |  | 1,390                         |   |  | 1,509          |   |  | 3,060           |  
|Other comprehensive income                               |  | (454                            | ) |  | 466                           |   |  | 733            |   |  | 987             |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Comprehensive income                                     |  | 732                             |   |  | 1,856                         |   |  | 2,242          |   |  | 4,047           |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Basic earnings per share                                 |  | 0.09                            |   |  | 0.11                          |   |  | 0.12           |   |  | 0.24            |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Diluted earnings per share                               |  | 0.09                            |   |  | 0.11                          |   |  | 0.12           |   |  | 0.24            |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Weighted average number of common shares outstanding     |  | 12,898                          |   |  | 12,897                        |   |  | 12,898         |   |  | 12,895          |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  
|Weighted average number of common shares - fully diluted |  | 12,898                          |   |  | 12,905                        |   |  | 12,898         |   |  | 12,929          |  
|                                                         |  |                                 |   |  |                               |   |  |                |   |  |                 |  

---

|(1) | Excludes depreciation and amortization of $531, $617 for the three months ended, and $1,232 and $1,126 for the six months ended December 31, 2005 and 2004 respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



F-3



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                                        |  |                               |   |  |                 |  
|----------------------------------------------------------------------- |  | ----------------------------- | - |  | --------------- | -
|                                                                        |  | Six months ended December 31, |  
|(in $ thousands)                                                        |  | 2005(Restated)                |   |  | 2004 (Restated) |  
|                                                                        |  | $                             |   |  | $               |  
|CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES                          |  |                               |   |  |                 |  
|Net earnings                                                            |  | 1,509                         |   |  | 3,060           |  
|Adjustments for                                                         |  |                               |   |  |                 |  
|Amortization of discount on note payable                                |  |                              |   |  | 261             |  
|Depreciation and amortization                                           |  | 1,585                         |   |  | 1,256           |  
|Foreign exchange loss                                                   |  | 103                           |   |  |                |  
|Deferred income taxes                                                   |  | (512                          | ) |  | (96             | )
|Stock issued for services rendered                                      |  | 29                            |   |  | 24              |  
|Stock-based compensation expense                                        |  | 124                           |   |  | 27              |  
|Write-down of property and equipment                                    |  | 111                           |   |  |                |  
|Impairment on Loan Receivable                                           |  |                              |   |  | 203             |  
|Change in fair value of warrants                                        |  | (328                          | ) |  | (417            | )
|Increase in non-cash working capital                                    |  | (5,334                        | ) |  | (3,133          | )
|                                                                        |  |                               |   |  |                 |  
|Cash flows from (used in) operating activities                          |  | (2,713                        | ) |  | 1,185           |  
|                                                                        |  |                               |   |  |                 |  
|CASH FLOWS USED IN INVESTING ACTIVITIES                                 |  |                               |   |  |                 |  
|Purchase of property and equipment                                      |  | (2,178                        | ) |  | (2,868          | )
|Refund on customer lists                                                |  | 107                           |   |  |                |  
|Proceeds from sale of property and equipment, and software              |  |                              |   |  | 14              |  
|Loan receivable                                                         |  |                              |   |  | 42              |  
|                                                                        |  |                               |   |  |                 |  
|Cash flows used in investing activities                                 |  | (2,071                        | ) |  | (2,812          | )
|                                                                        |  |                               |   |  |                 |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                          |  |                               |   |  |                 |  
|Repayments on obligations under capital leases                          |  | (271                          | ) |  | (239            | )
|Repayments on advances from TELUS Communications Inc.                   |  | (395                          | ) |  | (659            | )
|Repayments on notes payable                                             |  |                              |   |  |                |  
|Receipt of principal portion of joint venture receivable                |  |                              |   |  | 142             |  
|                                                                        |  |                               |   |  |                 |  
|Cash flows used in financing activities                                 |  | (666                          | ) |  | (756            | )
|                                                                        |  |                               |   |  |                 |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  | 251                           |   |  | 24              |  
|                                                                        |  |                               |   |  |                 |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                   |  | (5,199                        | ) |  | (2,359          | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          |  | 16,751                        |   |  | 22,149          |  
|                                                                        |  |                               |   |  |                 |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  | 11,552                        |   |  | 19,790          |  
|                                                                        |  |                               |   |  |                 |  
|Supplemental disclosure of cash flow information:                       |  |                               |   |  |                 |  
|Interest paid                                                           |  | 67                            |   |  | 383             |  
|Income taxes paid                                                       |  | 3,671                         |   |  | 391             |  
|                                                                        |  |                              
|Supplemental disclosure of non-cash investing and financing activities: |  |                               |   |  |                 |  
|Capital leases for acquisition of furniture and equipment               |  |                              |   |  | 374             |  
|Notes payable on purchase of software                                   |  |                              |   |  | 4,249           |  
|Joint venture receivable on purchase of software                        |  |                              |   |  | 3,904           |  

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



F-4



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share
data)

Note 1  Description of Business and Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Yak Communications Inc. and its wholly owned subsidiaries Yak Communications (Canada) Inc., Yak Communications (America) Inc. and
Contour Telecom Inc. These entities combined are referred to as Yak or the Company in these unaudited condensed consolidated financial statements. Yak Communications Inc. 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.

Yak is a switch-based reseller
providing a variety of discount long distance services primarily in Canada and to a lesser degree the United States, to residential and small business markets, as well as telecommunications management services to large enterprises in Canada. The
Company also provides Voice over Internet Protocol (VoIP) services to customers in Canada, the United States and internationally.

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

Note 2  Restatement

The Company has restated its previously issued financial statements to correct for the errors and deficiencies described below:



| | A. | To correct for the misapplication of SFAS 133, SFAS 150 and EITF 00-19 related to the 2004 issuance of detachable warrants (the Warrants);
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------



| | B. | To correct for disclosure deficiencies under SFAS 131;
| | -- | ------------------------------------------------------



| | C. | To correct for errors in its Cash Flow Statements; and
| | -- | ------------------------------------------------------



| | D. | To correct for the fiscal 2005 misclassification of financing expenses related to assignment of accounts receivable.
| | -- | --------------------------------------------------------------------------------------------------------------------

The net effect of the restatements was to increase net income by $219 or $0.02 earnings per share for the quarter ended December 31, 2005. The net effect of the
initial and the amended restatements was to increase net income by $114 or $0.02 earnings per share for the quarter ended December 31, 2004.

The net
effect of the restatements was to increase net income by $328 or $0.03 earnings per share for the six months ended December 31, 2005. For the six months ended December 31, 2005, the cash flows from operating activities and the effect of
exchange rate changes on cash and cash equivalents were understated by $9 and $189 respectively, while the cash flows from investing and financing activities were overstated by $177 and $21 respectively. At December 31, 2005, liabilities were
understated by $765 while shareholders equity was overstated by $765.

The net effect of the initial and the amended restatements was to increase net
income by $417 or $0.04 earnings per share for the six months ended December 31, 2004. For the six months ended December 31, 2004, the cash flows from operating activities were understated by $168, while cash flows from operating financing
activities and the effect of exchange rate changes on cash and cash equivalents were overstated by $83 and $85, respectively.



F-5



---

The following schedules show the effect of the financial restatements of the above matters:

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|--------------------------------------------------- |  | ------------------------------- | - |  | ------ | - |  | ------ |  | ------ |  | ------ |  | -------------------------- | -
|(in $ thousands)                                    |  | December 31,2005 Initial filing |   |  | Note2A |   |  | Note2B |  | Note2C |  | Note2D |  | December 31,2005(Restated) |  
|                                                    |  | $                               |   |  | $      |   |  | $      |  | $      |  | $      |  | $                          |  
|ASSETS                                              |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Current                                             |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Cash and cash equivalents                           |  | 11,552                          |   |  |       |   |  |       |  |       |  |       |  | 11,552                     |  
|Accounts receivable, net                            |  | 18,772                          |   |  |       |   |  |       |  |       |  |       |  | 18,772                     |  
|Allowance for doubtful accounts                     |  | (612                            | ) |  |       |   |  |       |  |       |  |       |  | (612                       | )
|Prepaid expenses and other assets                   |  | 960                             |   |  |       |   |  |       |  |       |  |       |  | 960                        |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Total Current Assets                                |  | 30,672                          |   |  |       |   |  |       |  |       |  |       |  | 30,672                     |  
|Property and equipment, net                         |  | 14,761                          |   |  |       |   |  |       |  |       |  |       |  | 14,761                     |  
|Deferred income taxes                               |  | 1,158                           |   |  |       |   |  |       |  |       |  |       |  | 1,158                      |  
|Intangibles, net                                    |  | 1,697                           |   |  |       |   |  |       |  |       |  |       |  | 1,697                      |  
|Goodwill                                            |  | 530                             |   |  |       |   |  |       |  |       |  |       |  | 530                        |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|                                                    |  | 48,818                          |   |  |       |   |  |       |  |       |  |       |  | 48,818                     |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|LIABILITIES                                         |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Current                                             |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Accounts payable and accrued liabilities            |  | 9,078                           |   |  |       |   |  |       |  |       |  |       |  | 9,078                      |  
|Income taxes payable                                |  | 94                              |   |  |       |   |  |       |  |       |  |       |  | 94                         |  
|Advances from TELUS Communications Inc.             |  |                                |   |  |       |   |  |       |  |       |  |       |  |                           |  
|Current portion of obligations under capital leases |  | 523                             |   |  |       |   |  |       |  |       |  |       |  | 523                        |  
|Unearned revenue                                    |  | 808                             |   |  |       |   |  |       |  |       |  |       |  | 808                        |  
|Obligations under warrants                          |  |                                |   |  | 765    |   |  |       |  |       |  |       |  | 765                        |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|                                                    |  | 10,503                          |   |  | 765    |   |  |       |  |       |  |       |  | 11,268                     |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Non-Current Liabilities                             |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Deferred income taxes                               |  | 2,636                           |   |  |       |   |  |       |  |       |  |       |  | 2,636                      |  
|Obligations under capital leases                    |  | 768                             |   |  |       |   |  |       |  |       |  |       |  | 768                        |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|                                                    |  | 3,404                           |   |  |       |   |  |       |  |       |  |       |  | 3,404                      |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|                                                    |  | 13,907                          |   |  | 765    |   |  |       |  |       |  |       |  | 14,672                     |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|STOCKHOLDERS EQUITY                                |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|Common Stock                                        |  | 225                             |   |  |       |   |  |       |  |       |  |       |  | 225                        |  
|Additional paid-in capital                          |  | 16,845                          |   |  | 260    |   |  |       |  |       |  |       |  | 17,105                     |  
|Common stock purchase warrants                      |  | 2,433                           |   |  | (2,433 | ) |  |       |  |       |  |       |  |                           |  
|Accumulated Other Comprehensive Income              |  | 2,076                           |   |  |       |   |  |       |  |       |  |       |  | 2,076                      |  
|Retained Earnings                                   |  | 13,332                          |   |  | 1,408  |   |  |       |  |       |  |       |  | 14,740                     |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|                                                    |  | 34,911                          |   |  | (765   | ) |  |       |  |       |  |       |  | 34,146                     |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  
|                                                    |  | 48,818                          |   |  |       |   |  |       |  |       |  |       |  | 48,818                     |  
|                                                    |  |                                 |   |  |        |   |  |        |  |        |  |        |  |                            |  



F-6



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|------------------------------------------------------------ |  | ----------------------------------------------- | - |  | ------ | - |  | ------- |  | ------ |  | ------ |  | ------------------------------------------- | -
|(in $ thousands)                                             |  | Six months endedDecember 31,2005 Initial filing |   |  | Note2A |   |  | Note 2B |  | Note2C |  | Note2D |  | Six months endedDecember 31,2005 (Restated) |  
|                                                             |  | $                                               |   |  | $      |   |  | $       |  | $      |  | $      |  | $                                           |  
|NET REVENUE                                                  |  | 47,537                                          |   |  |       |   |  |        |  |       |  |       |  | 47,537                                      |  
|COST OF REVENUE                                              |  | 28,822                                          |   |  |       |   |  |        |  |       |  |       |  | 28,822                                      |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|GROSS MARGIN                                                 |  | 18,715                                          |   |  |       |   |  |        |  |       |  |       |  | 18,715                                      |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|OPERATING EXPENSES                                           |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|General and administration                                   |  | 10,847                                          |   |  |       |   |  |        |  |       |  |       |  | 10,847                                      |  
|Sales and marketing                                          |  | 3,522                                           |   |  |       |   |  |        |  |       |  |       |  | 3,522                                       |  
|Write down of property and equipment                         |  | 111                                             |   |  |       |   |  |        |  |       |  |       |  | 111                                         |  
|Depreciation and amortization                                |  | 1,585                                           |   |  |       |   |  |        |  |       |  |       |  | 1,585                                       |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|TOTAL OPERATING EXPENSES                                     |  | 16,065                                          |   |  |       |   |  |        |  |       |  |       |  | 16,065                                      |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|INCOME FROM OPERATIONS                                       |  | 2,650                                           |   |  |       |   |  |        |  |       |  |       |  | 2,650                                       |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|OTHER EXPENSES (INCOME)                                      |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|Interest expense                                             |  | 68                                              |   |  |       |   |  |        |  |       |  |       |  | 68                                          |  
|Interest income                                              |  | (238                                            | ) |  |       |   |  |        |  |       |  |       |  | (238                                        | )
|Change in fair value of obligation under warrants            |  |                                                |   |  | (328   | ) |  |        |  |       |  |       |  | (328                                        | )
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|                                                             |  | (170                                            | ) |  | (328   | ) |  |        |  |       |  |       |  | (498                                        | )
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 2,820                                           |   |  | 328    |   |  |        |  |       |  |       |  | 3,148                                       |  
|PROVISION FOR INCOME TAXES                                   |  | 1,639                                           |   |  |       |   |  |        |  |       |  |       |  | 1,639                                       |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|NET EARNINGS                                                 |  | 1,181                                           |   |  | 328    |   |  |        |  |       |  |       |  | 1,509                                       |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | 733                                             |   |  |       |   |  |        |  |       |  |       |  | 733                                         |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|COMPREHENSIVE INCOME                                         |  | 1,914                                           |   |  | 328    |   |  |        |  |       |  |       |  | 2,242                                       |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|BASIC EARNINGS PER SHARE                                     |  | 0.09                                            |   |  | 0.03   |   |  |        |  |       |  |       |  | 0.12                                        |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.09                                            |   |  | 0.03   |   |  |        |  |       |  |       |  | 0.12                                        |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,898                                          |   |  | 12,898 |   |  |        |  |       |  |       |  | 12,898                                      |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,898                                          |   |  | 12,898 |   |  |        |  |       |  |       |  | 12,898                                      |  
|                                                             |  |                                                 |   |  |        |   |  |         |  |        |  |        |  |                                             |  



F-7



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|------------------------------------------------------------ |  | ----------------------------------------------- | - |  | ------ | - |  | ------ |  | ------ | - |  | ------ |  | ------------------------------------------- | -
|(in $ thousands)                                             |  | Six months endedDecember 31,2005 Initial filing |   |  | Note2A |   |  | Note2B |  | Note2C |   |  | Note2D |  | Six months endedDecember 31,2005 (Restated) |  
|                                                             |  | $                                               |   |  | $      |   |  | $      |  | $      |   |  | $      |  | $                                           |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Net earnings                                                 |  | 1,181                                           |   |  | 328    |   |  |       |  |       |   |  |       |  | 1,509                                       |  
|Adjustments for                                              |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Amortization of discount                                     |  |                                                |   |  |       |   |  |       |  |       |   |  |       |  |                                            |  
|Amortization                                                 |  | 1,585                                           |   |  |       |   |  |       |  |       |   |  |       |  | 1,585                                       |  
|Foreign exchange loss                                        |  |                                                |   |  |       |   |  |       |  | 103    |   |  |       |  | 103                                         |  
|Deferred income taxes                                        |  | 89                                              |   |  |       |   |  |       |  | (601   | ) |  |       |  | (512                                        | )
|Stock issued for services rendered                           |  | 29                                              |   |  |       |   |  |       |  |       |   |  |       |  | 29                                          |  
|Stock-based compensation expense                             |  | 124                                             |   |  |       |   |  |       |  |       |   |  |       |  | 124                                         |  
|Write-down of property and equipment                         |  | 111                                             |   |  |       |   |  |       |  |       |   |  |       |  | 111                                         |  
|Changes in fair value of obligation under warrants           |  |                                                |   |  | (328   | ) |  |       |  |       |   |  |       |  | (328                                        | )
|Changes in non-cash working capital                          |  | (5,841                                          | ) |  |       |   |  |       |  | 507    |   |  |       |  | (5,334                                      | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows from operating activities                         |  | (2,722                                          | ) |  |       |   |  |       |  | 9      |   |  |       |  | (2,713                                      | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES               |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Purchase of property and equipment                           |  | (1,894                                          | ) |  |       |   |  |       |  | (284   | ) |  |       |  | (2,178                                      | )
|Refund on customer lists                                     |  |                                                |   |  |       |   |  |       |  | 107    |   |  |       |  | 107                                         |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows used in investing activities                      |  | (1,894                                          | ) |  |       |   |  |       |  | (177   | ) |  |       |  | (2,071                                      | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES               |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Repayments on obligations under capital leases               |  | (263                                            | ) |  |       |   |  |       |  | (8     | ) |  |       |  | (271                                        | )
|Repayments on advances from TELUS Communications Inc.        |  | (382                                            | ) |  |       |   |  |       |  | (13    | ) |  |       |  | (395                                        | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows used in financing activities                      |  | (645                                            | ) |  |       |   |  |       |  | (21    | ) |  |       |  | (666                                        | )
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  | 62                                              |   |  |       |   |  |       |  | 189    |   |  |       |  | 251                                         |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|DECREASE IN CASH AND CASH EQUIVALENTS                        |  | (5,199                                          | ) |  |       |   |  |       |  |       |   |  |       |  | (5,199                                      | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               |  | 16,751                                          |   |  |       |   |  |       |  |       |   |  |       |  | 16,751                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                     |  | 11,552                                          |   |  |       |   |  |       |  |       |   |  |       |  | 11,552                                      |  
|                                                             |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Supplemental disclosure of cash flow information:            |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Interest paid                                                |  | 67                                              |   |  |       |   |  |       |  |       |   |  |       |  | 67                                          |  
|Income taxes paid                                            |  | 3,671                                           |   |  |       |   |  |       |  |       |   |  |       |  | 3,671                                       |  



F-8



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|--------------------------------------------------------- |  | -------------------------------- |  | ------ | - |  | ------- |  | ------ |  | ------- |  | -------------------------------
|(in $ thousands)                                          |  | June 30, 2005 InitialRestatement |  | Note2A |   |  | Note 2B |  | Note2C |  | Note 2D |  | June 30, 2005AmendedRestatement
|                                                          |  | $                                |  | $      |   |  | $       |  | $      |  | $       |  | $                              
|ASSETS                                                    |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|Current                                                   |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|Cash and cash equivalents                                 |  | 16,751                           |  |       |   |  |        |  |       |  |         |  | 16,751                         
|Accounts receivable, net                                  |  | 16,220                           |  |       |   |  |        |  |       |  |        |  | 16,220                         
|Prepaid expenses and other current assets                 |  | 1,413                            |  |       |   |  |        |  |       |  |        |  | 1,413                          
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|Total Current Assets                                      |  | 34,384                           |  |       |   |  |        |  |       |  |        |  | 34,384                         
|                                                          |  |                                  |  |        |   | 
|Property and equipment, net                               |  | 13,559                           |  |       |   |  |        |  |       |  |        |  | 13,559                         
|Intangibles, net                                          |  | 2,005                            |  |       |   |  |        |  |       |  |        |  | 2,005                          
|Goodwill                                                  |  | 503                              |  |       |   |  |        |  |       |  |        |  | 503                            
|Deferred income taxes                                     |  | 2,787                            |  |       |   |  |        |  |       |  |        |  | 2,787                          
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|                                                          |  | 53,238                           |  |       |   |  |        |  |       |  |        |  | 53,238                         
|LIABILITIES                                               |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|Current                                                   |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|Accounts payable and accrued liabilities                  |  | 11,891                           |  |       |   |  |        |  |       |  |        |  | 11,891                         
|Income taxes payable                                      |  | 3,547                            |  |       |   |  |        |  |       |  |        |  | 3,547                          
|Current portion of advances from TELUS Communications Inc |  | 382                              |  |       |   |  |        |  |       |  |        |  | 382                            
|                                                          |  |                                  |  |        |   | 
|Current portion of obligations under capital leases       |  | 511                              |  |        |   |  |         |  |       |  |        |  | 511                            
|Unearned Revenue                                          |  | 1,096                            |  |       |   |  |        |  |       |  |        |  | 1,096                          
|Obligations Under Warrants                                |  |                                 |  | 1,093  |   |  |        |  |       |  |        |  | 1,093                          
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|                                                          |  | 17,427                           |  | 1,093  |   |  |        |  |       |  |        |  | 18,520                         
|LONG-TERM DEBT                                            |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|Deferred Income Taxes                                     |  | 1,990                            |  |       |   |  |        |  |       |  |        |  | 1,990                          
|Obligations under capital leases                          |  | 977                              |  |       |   |  |        |  |       |  |        |  | 977                            
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|                                                          |  | 2,967                            |  |       |   |  |        |  |       |  |        |  | 2,967                          
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|                                                          |  | 20,394                           |  | 1,093  |   |  |        |  |       |  |        |  | 21,487                         
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|STOCKHOLDERS EQUITY                                      |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|Common stock                                              |  | 225                              |  |       |   |  |        |  |       |  |        |  | 225                            
|Additional paid incapital                                |  | 16,692                           |  | 260    |   |  |        |  |       |  |        |  | 16,952                         
|Common stock purchase warrants                            |  | 2,433                            |  | (2,433 | ) |  |        |  |       |  |        |  |                               
|Accumulated other comprehensive income                    |  | 1,343                            |  |       |   |  |        |  |       |  |        |  | 1,343                          
|Retained earnings                                         |  | 12,151                           |  | 1,080  |   |  |        |  |       |  |        |  | 13,231                         
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|                                                          |  | 32,844                           |  | (1,093 | ) |  |        |  |       |  |        |  | 31,751                         
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                
|                                                          |  | 53,238                           |  |       |   |  |        |  |       |  |        |  | 53,238                         
|                                                          |  |                                  |  |        |   |  |         |  |        |  |         |  |                                



F-9



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------ | - |  | ------ | - |  | ------ |  | ------ |  | ------ | - |  | -------------------------------------------- | -
|(in $ thousands)                                             |  | Six months endedDecember 31, 2004 Initial
filing |   |  | Note2A |   |  | Note2B |  | Note2C |  | Note2D |   |  | Six months endedDecember 31, 2004 (Restated) |  
|                                                             |  | $                                                |   |  | $      |   |  | $      |  | $      |  | $      |   |  | $                                            |  
|NET REVENUE                                                  |  | 45,350                                           |   |  |       |   |  |       |  |       |  |       |   |  | 45,350                                       |  
|COST OF REVENUE                                              |  | 28,379                                           |   |  |       |   |  |       |  |       |  |       |   |  | 28,379                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|GROSS MARGIN                                                 |  | 16,971                                           |   |  |       |   |  |       |  |       |  |       |   |  | 16,971                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|OPERATING EXPENSES                                           |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|General and administration                                   |  | 8,685                                            |   |  |       |   |  |       |  |       |  |       |   |  | 8,685                                        |  
|Sales and marketing                                          |  | 2,690                                            |   |  |       |   |  |       |  |       |  |       |   |  | 2,690                                        |  
|Accounts receivable financing                                |  | 182                                              |   |  |       |   |  |       |  |       |  | (182   | ) |  |                                             |  
|Amortization                                                 |  | 1,256                                            |   |  |       |   |  |       |  |       |  |       |   |  | 1,256                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|TOTAL OPERATING EXPENSES                                     |  | 12,813                                           |   |  |       |   |  |       |  |       |  | (182   | ) |  | 12,631                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|INCOME FROM OPERATIONS                                       |  | 4,158                                            |   |  |       |   |  |       |  |       |  | 182    |   |  | 4,340                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|OTHER EXPENSES (INCOME)                                      |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|Interest expense                                             |  | 295                                              |   |  |       |   |  |       |  |       |  | 182    |   |  | 477                                          |  
|Interest income                                              |  | (183                                             | ) |  |       |   |  |       |  |       |  |       |   |  | (183                                         | )
|Income from joint marketing agreement                        |  | (281                                             | ) |  |       |   |  |       |  |       |  |       |   |  | (281                                         | )
|Long-term debt discount amortization                         |  | 261                                              |   |  |       |   |  |       |  |       |  |       |   |  | 261                                          |  
|Change in fair value of obligation under warrants            |  |                                                 |   |  | (417   | ) |  |       |  |       |  |       |   |  | (417                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|                                                             |  | 92                                               |   |  | (417   | ) |  |       |  |       |  | 182    |   |  | (143                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 4,066                                            |   |  | 417    |   |  |       |  |       |  |       |   |  | 4,483                                        |  
|PROVISION FOR INCOME TAXES                                   |  | 1,423                                            |   |  |       |   |  |       |  |       |  |       |   |  | 1,423                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|NET EARNINGS                                                 |  | 2,643                                            |   |  | 417    |   |  |       |  |       |  |       |   |  | 3,060                                        |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | 987                                              |   |  |       |   |  |       |  |       |  |       |   |  | 987                                          |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|COMPREHENSIVE INCOME                                         |  | 3,630                                            |   |  | 417    |   |  |       |  |       |  |       |   |  | 4,047                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|BASIC EARNINGS PER SHARE                                     |  | 0.20                                             |   |  | 0.04   |   |  |       |  |       |  |       |   |  | 0.24                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.20                                             |   |  | 0.04   |   |  |       |  |       |  |       |   |  | 0.24                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,895                                           |   |  | 12,895 |   |  |       |  |       |  |       |   |  | 12,895                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,929                                           |   |  | 12,929 |   |  |       |  |       |  |       |   |  | 12,929                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |                                              |  



F-10



---

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|----------------------------------------------------------------------- |  | ----------------------------------------------- | - |  | ------ | - |  | ------ |  | ------ | - |  | ------ |  | ------------------------------------------- | -
|(in $ thousands)                                                        |  | Six months endedDecember 31,2004 Initial filing |   |  | Note2A |   |  | Note2B |  | Note2C |   |  | Note2D |  | Six months endedDecember 31,2004 (Restated) |  
|                                                                        |  | $                                               |   |  | $      |   |  | $      |  | $      |   |  | $      |  | $                                           |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Net earnings                                                            |  | 2,643                                           |   |  | 417    |   |  |       |  |       |   |  |       |  | 3,060                                       |  
|Adjustments for                                                         |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Amortization of discount                                                |  | 261                                             |   |  |       |   |  |       |  |       |   |  |       |  | 261                                         |  
|Amortization                                                            |  | 1,256                                           |   |  |       |   |  |       |  |       |   |  |       |  | 1,256                                       |  
|Deferred income taxes                                                   |  | (128                                            | ) |  |       |   |  |       |  | 32     |   |  |       |  | (96                                         | )
|Stock issued for services rendered                                      |  | 24                                              |   |  |       |   |  |       |  |       |   |  |       |  | 24                                          |  
|Stock-based compensation expense                                        |  | 27                                              |   |  |       |   |  |       |  |       |   |  |       |  | 27                                          |  
|Changes in fair value of obligation under warrants                      |  |                                                |   |  | (417   | ) |  |       |  |       |   |  |       |  | (417                                        | )
|Impairment of loan receivable                                           |  | 203                                             |   |  |       |   |  |       |  |       |   |  |       |  | 203                                         |  
|Changes in non-cash working capital                                     |  | (3,269                                          | ) |  |       |   |  |       |  | 136    |   |  |       |  | (3,133                                      | )
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows from operating activities                                    |  | 1,017                                           |   |  |       |   |  |       |  | 168    |   |  |       |  | 1,185                                       |  
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                          |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Purchase of property and equipment                                      |  | (2,868                                          | ) |  |       |   |  |       |  |       |   |  |       |  | (2,868                                      | )
|Proceeds from sale of property and equipment, and software              |  | 14                                              |   |  |       |   |  |       |  |       |   |  |       |  | 14                                          |  
|Loan receivable                                                         |  | 42                                              |   |  |       |   |  |       |  |       |   |  |       |  | 42                                          |  
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows used in investing activities                                 |  | (2,812                                          | ) |  |       |   |  |       |  |       |   |  |       |  | (2,812                                      | )
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                          |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Repayments on obligations under capital leases                          |  | (80                                             | ) |  |       |   |  |       |  | (159   | ) |  |       |  | (239                                        | )
|Repayments on advances from TELUS Communications Inc.                   |  | (507                                            | ) |  |       |   |  |       |  | (152   | ) |  |       |  | (659                                        | )
|Repayments on notes payable                                             |  | (132                                            | ) |  |       |   |  |       |  | 132    |   |  |       |  |                                            |  
|Receipt of principal portion of joint venture receivable                |  | 46                                              |   |  |       |   |  |       |  | 96     |   |  |       |  | 142                                         |  
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Cash flows used in financing activities                                 |  | (673                                            | ) |  |       |   |  |       |  | (83    | ) |  |       |  | (756                                        | )
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  | 109                                             |   |  |       |   |  |       |  | (85    | ) |  |       |  | 24                                          |  
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                   |  | (2,359                                          | ) |  |       |   |  |       |  |       |   |  |       |  | (2,359                                      | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          |  | 22,149                                          |   |  |       |   |  |       |  |       |   |  |       |  | 22,149                                      |  
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  | 19,790                                          |   |  |       |   |  |       |  |       |   |  |       |  | 19,790                                      |  
|                                                                        |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Supplemental disclosure of cash flow information:                       |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Interest paid                                                           |  | 201                                             |   |  |       |   |  |       |  |       |   |  | 182    |  | 383                                         |  
|Income taxes paid                                                       |  | 391                                             |   |  |       |   |  |       |  |       |   |  |       |  | 391                                         |  
|Supplemental disclosure of non-cash investing and financing activities: |  |                                                 |   |  |        |   |  |        |  |        |   |  |        |  |                                             |  
|Capital leases for acquisition of furniture and equipment               |  | 374                                             |   |  |       |   |  |       |  |       |   |  |       |  | 374                                         |  
|Notes payable on purchase of software                                   |  | 4,249                                           |   |  |       |   |  |       |  |       |   |  |       |  | 4,249                                       |  
|Joint venture receivable on purchase of software                        |  | 3,904                                           |   |  |       |   |  |       |  |       |   |  |       |  | 3,904                                       |  



F-11



---

A. Correction for the misapplication of SFAS 133, SFAS 150 and EITF 00-19 related to the 2004 issuance of detachable
warrants (Warrants)

Management has determined that the prior accounting for its 2004 detachable warrants issued in conjunction with its
securities offering was in error. The Company initially classified the Warrants as an equity instrument; however the net cash settlement feature, which is applicable in certain limited circumstances, contained within the instrument precludes this
classification. The instrument has now been classified as a liability in accordance with the application of the provisions of SFAS 133, SFAS 150, and EITF 00-19.

As a result of this error, liabilities at December 31, 2005 were understated by $765, while shareholders equity at September 30, 2005 was overstated by $765. Further, the standards require the Company to re-measure the fair
value of the warrants at the end of each reporting period with the resulting increase or decrease to the liability reported as a component of the Statement of Income and Comprehensive Income. As a result of a decrease in the value of the Warrants
since issuance, the net income of the Company for the six months ended December 31, 2005 and 2004 was previously understated by $328 and $417 or $0.03 per share and $0.04 per share, respectively.

B. Correction for disclosure deficiencies under SFAS 131

The Company
has modified its segmented disclosure to comply with the standards of SFAS 131 and to further provide meaningful information to readers of its financial statements. There was no effect on the net income, earnings per share, assets, liabilities, and
shareholders equity.

C. Correction for errors in its Cash Flow Statements

The Company has modified its cash flow statements to correct for disclosure inaccuracies resulting from errors in the exchange rates used to translate foreign currency cash flows to the Companys reporting
currency.

For the six months ending December 31, 2005, the cash flows from operating activities and the effect of exchange rate changes on cash and cash
equivalents were understated by $9 and $189 respectively, while the cash flows from investing and financing activities were overstated by $177 and $21 respectively.

For the six months ended December 31, 2004, the cash flows from operating activities were understated by $168, while the cash flows from financing activities, and the effect of exchange rate changes on cash and
cash equivalents were overstated by $83 and $85, respectively.

D. Misclassification of financing costs as operating expense

The Company misclassified financing costs relating to factoring of trade accounts receivable as operating expenses for the six months ending December 31, 2004 versus
disclosing such costs below the line as an element of interest expense as discussed by the AICPAs Special Committee on Classification of Items of Comprehensive Income. The effect of this misclassification was an overstatement of
operating expenses and understatement of income from operations in the amount of $182. There was no effect on the net income, earnings per share, assets, liabilities or shareholders equity as a result of this change.



F-12



---

Note 3  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed
consolidated financial statements have been prepared in U.S. dollars, in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial reporting. Management believes that the unaudited
interim data includes all adjustments consisting of normal recurring accruals for complete financial statements necessary for a fair presentation. The June 30, 2005 unaudited condensed consolidated balance sheet, as included herein, is derived
from the audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for complete financial statements. The December 31, 2005 unaudited condensed consolidated financial statements should be read in
conjunction with the Companys annual report on Form 10-KA for the year ended June 30, 2005, filed with the Securities and Exchange Commission.

These interim condensed financial statements have been prepared using accounting policies that are consistent with policies used in preparing the Companys audited consolidated financial statements for the year ended June 30,
2005, except that effective July 1, 2005, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 123(R), Share Based Payment (Statement 123(R)).

All significant inter-company accounts and transactions have been eliminated upon consolidation.

The results of operations for the three and six month periods ended December 31, 2005 are not necessarily indicative of those to be expected for the entire year
ending June 30, 2006.

Certain balances in the financial statements as of and for the years ended June 30, 2005 have been reclassified to conform
to current period presentation. These changes had no effect on the previously reported net loss, total assets, liabilities or stockholders deficit.

Stock-Based Compensation

At December 31, 2005, the Company has a stock-based compensation plan, which is described more fully in these
notes to the financial statements. Prior to July 1, 2005, the Company accounted for stock based compensation under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations (Opinion 25), as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123).

Effective July 1, 2005, the Company adopted the fair value recognition provisions of Statement 123(R) using the modified-prospective-transition method. Under that transition method, compensation cost recognized in fiscal 2006 will
include: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and
(b) compensation cost for all share-based payments granted, modified, repurchased, or cancelled subsequent to July 1, 2005. Results for prior periods are not restated. No options were granted, modified or repurchased and 50,000 options
were forfeited during the three months ended December 31, 2005.

As a result of adopting Statement 123(R) on July 1, 2005, the Companys
income before income taxes for the three and six months ended December 31, 2005, is lower by $51 and $102 respectively, due to the adoption of this policy change. The tax effect of the adoption of Statement 123(R) on the Companys net
income is not considered significant. Basic and diluted earnings per share for the three and six months ended December 31, 2005 is $0.07 and $0.09, respectively, whether the Company adopted the new policy or not.

Prior to the adoption of Statement 123(R), the Company was required to present all tax benefits of deductions resulting from the exercise of stock options as operating
cash flows in the Statement of Cash Flows. Statement 123(R) requires the cash flows from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as
financing cash flows.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value
recognition provisions of Statement 123 to options granted under the Companys stock option plans in all periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes-Merton option
pricing formula and amortized to expense over the options vesting periods.



F-13



---

|                                                                                                                                            |  |                                         |       |   |                                       |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ----- | - | ------------------------------------- | - | ----- | -
|                                                                                                                                            |  | Three-monthsDecember 31,2004 (Restated) |       |   | Six-monthsDecember 31,2004 (Restated) |  
|Net Earnings                                                                                                                                |  | $                                       | 1,390 |   |                                       | $ | 3,060 |  
|Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects.                               |  |                                         | 14    |   |                                       |   | 27    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                         | (63   | ) |                                       |   | (116  | )
|                                                                                                                                            |  |                                         |       |   |                                       |   |       |  
|Pro Forma Net Earnings                                                                                                                      |  | $                                       | 1,341 |   |                                       | $ | 2,971 |  
|                                                                                                                                            |  |                                         |       |   |                                       |   |       |  
|Earnings per share                                                                                                                          |  |                                         |       |   |                                       |   |       |  
|Basic  as reported                                                                                                                         |  | $                                       | 0.11  |   |                                       | $ | 0.24  |  
|                                                                                                                                            |  |                                         |       |   |                                       |   |       |  
|Basic  pro forma                                                                                                                           |  | $                                       | 0.10  |   |                                       | $ | 0.23  |  
|                                                                                                                                            |  |                                         |       |   |                                       |   |       |  
|Diluted  as reported                                                                                                                       |  | $                                       | 0.11  |   |                                       | $ | 0.24  |  
|                                                                                                                                            |  |                                         |       |   |                                       |   |       |  
|Diluted  pro forma                                                                                                                         |  | $                                       | 0.10  |   |                                       | $ | 0.23  |  
|                                                                                                                                            |  |                                         |       |   |                                       |   |       |  

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the Companys price to the customer is fixed and determinable, and collection of the resulting receivable is
reasonably assured. Revenue is derived from telecommunications usage based on minutes of use. Revenue derived from usage is recognized as services are provided, based on agreed upon usage rates. Revenue is recorded net of estimated customer credits
and uncollectible billings, which are recorded at the same time the corresponding revenue is recognized. Revenue from billings for services rendered where collectibility is not assured is recognized when the cash is collected.

Provision for doubtful accounts

The Company evaluates the
collectibility of its receivables at least quarterly, based upon various factors including the financial condition and payment history of major customers, and overall review of collections experience on other accounts and economic factors or events
expected to affect the Companys future collections experience.

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity at acquisition of three months or less to be cash equivalents. The Company maintains its
cash and cash equivalents primarily with financial institutions in Toronto, Canada. These accounts may from time to time exceed federally insured limits. The Company has not experienced any losses on such accounts.

Advertising costs

Advertising production costs are expensed the
first time the advertisement is run. Media (television and print) placement costs are expensed in the month the advertising appears. The Company expensed $1,626, $3,521, $1,699, $2,690 in advertising costs for the three and six months ended
December 31, 2005 and 2004, respectively.

Income taxes

The Company records deferred taxes in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS
109). The statement requires recognition of deferred tax assets and liabilities for temporary differences between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the
enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company operates throughout North America and is therefore subject to income taxes in multiple jurisdictions. The income tax expense reported in the statement of
operations is based on a number of different estimates made by management. The effective tax rate can change from year to year based on the mix of income or loss among the different jurisdictions in which the Company operates, changes in tax laws in
these jurisdictions, and changes in the estimated values of deferred tax assets and liabilities recorded on the balance sheet. The income tax expense reflects an estimate of cash taxes expected to be paid in the current year, as well as a provision
for changes arising this year in the value of deferred tax assets and liabilities. The



F-14



---

likelihood of recovering value from deferred tax assets such as loss carryforwards and the future tax depreciation of capital assets is assessed at each
quarter-end and a valuation allowance may be established or modified. Changes in the amount of the valuation allowance required can materially increase or decrease the tax expense in a period. Significant judgment is applied to determine the
appropriate amount of valuation allowance to record.

Obligation Under Warrants and Registration Rights Agreement

The Company accounts for the detachable Warrants issued in 2004 in accordance with the provisions of SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) along with related interpretations EITF No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock (EITF 00-19) and EITF
No. 05-2 The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19 (EITF 05-2). SFAS No. 133 requires every derivative instrument (including certain derivative instruments embedded in other
contracts) to be recorded in the Balance Sheet as either an asset or liability measured at its fair value, with changes in the derivatives fair value recognized currently in earnings unless specific hedge accounting criteria are met. We made
the determination that the detachable Warrants issued in 2004 are a derivative instrument and measured its value at $2,173 at inception. Additionally, at the end of each reporting period, the accounting standard requires the Company to record the
outstanding derivatives at fair value, resulting in an adjustment to the recorded liability related to the Warrants, and a gain or loss in the applicable reporting period. Since the inception of the Warrants, the fair value under the Black-Scholes
method of valuation has declined and the Company has recorded a cumulative pre-tax gain of $1,408. The Company values the Warrants using the Black-Scholes option-pricing model to determine fair value. This model requires management to make
assumptions on the expected volatility rates, risk-free interest rates and the instruments expected remaining life. These assumptions require significant management judgment. The Company also recorded an obligation in 2005 of $540 related to a
breach of the registration rights agreement.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates include revenue recognition, the allowance for doubtful accounts, purchase accounting (including the ultimate recoverability of intangibles and other long-lived assets), valuation of deferred tax
assets, accrued obligations and contingencies surrounding litigation. These policies have the potential to have a significant impact on our financial statements, either because of the significance of the financial statement item to which they
relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events which are continuous in nature.

The Company accounts for intangible assets in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141) and SFAS No. 142, Goodwill
and Other Intangible Assets (SFAS 142). All business combinations are accounted for using the purchase method. Goodwill is not amortized, but is tested for impairment at least annually. Intangible assets are recorded based on estimates
of fair value at the time of the acquisition and finite life intangibles are amortized over their estimated useful lives.

The Company assesses the fair
value of goodwill based upon a discounted cash flow methodology. If the carrying amount of the net assets of the reporting unit to which the goodwill relates exceeds the estimated fair value of the reporting unit determined through the discounted
cash flow analysis, goodwill impairment may be present. The Company would measure the goodwill impairment loss based upon the fair value of the underlying assets and liabilities, and estimate the implied fair value of goodwill. An impairment loss
would be recognized to the extent that the business recorded goodwill exceeded the implied fair value of goodwill. The Company tests for impairment annually at June 30 of each year. No impairment was present upon the performance of these tests
in 2005 and 2004. We cannot predict the occurrence of future events that might adversely affect the reported value of goodwill. Such events may include, but are not limited to, strategic decisions made in response to economic and competitive
conditions, and judgments on the validity of the Companys prospects or due to other factors not known to management at this time.

Regularly, the
Company evaluates whether events or circumstances have occurred that indicate the carrying value of its other amortizable intangible assets may not be recoverable. When factors indicate the asset may not be recoverable, the Company compares the
related future net cash flows to the carrying value of the asset to determine if impairment exists. If the expected future net cash flows are less than carrying value, impairment is recognized to the extent that the carrying value exceeds the fair
value of the asset.

The Company is involved from time to time in various legal matters arising out of its operations in the normal course of business. On
a case by case basis, the Company evaluates the likelihood of possible outcomes for this litigation. Based on this evaluation, the Company determines whether the recognition of a liability is appropriate. If the likelihood of a negative outcome is
probable, and the amount is estimable, the Company accounts for the liability in the current period. A change in the circumstances surrounding any current litigation could have a material impact on the financial statements.



F-15



---

Concentrations

Concentrations of risk with third party providers:

The Company utilizes the services of certain local exchange carriers (LECs)
to bill and collect from customers for a significant portion of its revenues. If the LECs were unable or unwilling to provide such services in the future, the Company would be required to significantly enhance its billing and collection capabilities
in a short amount of time and its collection experience may be adversely affected during this transition period. If the LECs were unable to remit payments received from their customers relating to the Companys billings, the Companys
operations and cash position may be adversely affected.

The Company depends on certain large telecommunications carriers to provide network services for
significant portions of the Companys telecommunications traffic. If these carriers were unwilling or unable to provide such services in the future, the Companys ability to provide services to its customers may be adversely affected and
the Company might not be able to obtain similar services from alternative carriers on a timely basis or on terms favorable to the Company.

Concentrations of credit risk

The Companys retail telecommunications subscribers are primarily residential and small business
subscribers in Canada and the United States. The Companys customers are generally concentrated in the areas of highest population in Canada and the United States. No single customer accounted for over 10% of revenues in the three and six month
periods ending December 31, 2005 or 2004. The Company monitors the credit worthiness of its larger carriers and retail business customers.

Note 4
 Property and equipment



|                                                     |  |                  |   |  |              |  
|---------------------------------------------------- |  | ---------------- | - |  | ------------ | -
|                                                     |  | December 31,2005 |   |  | June 30,2005 |  
|                                                     |  | $                |   |  | $            |  
|Telecommunication switching systems                  |  | 9,833            |   |  | 8,353        |  
|Telecommunication software                           |  | 4,328            |   |  | 4,067        |  
|Billing, administration and customer service systems |  | 4,028            |   |  | 3,657        |  
|Installed lines                                      |  | 2,158            |   |  | 1,963        |  
|Office furniture and equipment                       |  | 3,775            |   |  | 3,329        |  
|Carrier identification codes loading                 |  | 834              |   |  | 834          |  
|Leasehold improvements                               |  | 883              |   |  | 723          |  
|                                                     |  |                  |   |  |              |  
|Total Cost                                           |  | 25,839           |   |  | 22,926       |  
|Accumulated Amortization                             |  | (11,078          | ) |  | (9,367       | )
|                                                     |  |                  |   |  |              |  
|Net Book Value                                       |  | 14,761           |   |  | 13,559       |  
|                                                     |  |                  |   |  |              |  

Telecom switching systems include assets under capital leases having a gross value of approximately $1,790 and a
net book value of approximately $1,430 as at December 31, 2005 and $1,756 and $1,463 as at June 30, 2005, respectively. Office furniture and equipment includes assets under capital leases having a gross value of approximately $386 and a
net book value of approximately $299 as at December 31, 2005. At June 30, 2005 these office furniture and equipment leases had a gross value of approximately $366 and a net book value of approximately $300.

Management recorded a write down of property and equipment totaling $111 during the quarter ended December 31, 2005 based upon the completion of a physical count of
all property and equipment in conjunction with the implementation of a new accounting system.

Note 5  Goodwill and Intangible assets

Goodwill and other intangible assets have arisen principally from business acquisitions. Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired. Other intangible assets include customer lists. The fair value of intangible assets is estimated based upon discounted future cash flow projections. The customer lists are amortized over their
estimated economic lives.

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in
proportion to the amount of economic benefits obtained by the Company in each reporting period. Total amortization expense related to intangible assets during the quarter ended December 31, 2005 and 2004, was $153 and $112, respectively, and
for



F-16



---

the six-months ended December 31, 2005 and 2004, was $303 and $217, respectively. As of December 31, 2005, future estimated amortization expense
related to amortizable customer lists will be:



|                                 |  |        |    
|-------------------------------- |  | ------ | ---
|Twelve months Ended December 31, |  | Amount
|2006                             |  | $      | 596
|2007                             |  | $      | 596
|2008                             |  | $      | 360
|2009                             |  | $      | 124
|2010                             |  | $      | 26 

Note 6  Obligations under Capital Leases

The Company leases telecommunications equipment, office furniture and computer equipment under capital lease agreements which expire at various dates through 2009. The
Companys capital leases range in terms of 24 to 60 months at annual interest rates ranging from 9.25% to 15.00%.

Future minimum lease payments for the assets under capital leases at December 31, 2005 are as follows:



|                                         |  |      
|---------------------------------------- |  | -----
|For the twelve months ended,             |  | $    
|December 31, 2006                        |  | 621  
|December 31, 2007                        |  | 397  
|December 31, 2008                        |  | 394  
|December 31, 2009                        |  | 22   
|                                         |  |      
|Total minimum obligations                |  | 1,434
|Interest                                 |  | 143  
|                                         |  |      
|Present value of net minimum obligations |  | 1,291
|Current portion                          |  | 523  
|                                         |  |      
|Long-term obligations                    |  | 768  
|                                         |  |      

Note 7  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. As indicated in note 2, the Company adopted
the fair value recognition provisions of Statement 123(R) on July 1, 2005. The compensation cost that was recorded for the three and six months ended December 31, 2005 was $62 and $124 respectively, pursuant to the transition provisions of
Statement 123 (R), and $13 and $27 respectively, pursuant to Opinion 25 for the three and six months ended December 31, 2004. The total income tax benefit recognized in the income statement related to options issued under the Plan was
insignificant for the three and six month periods ended December 31, 2005 and 2004 respectively.

The Company reserved 640,000 shares of common stock
for grant under the Plan. The Companys policy is to issue new shares to satisfy stock option exercises. 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). Options generally vest over five years, with an equal percentage of options vesting each year. The straight-line recognition method is used to recognize compensation expense over the vesting period. Compensation expense
for the period ended December 31, 2005 is based on the fair value of the options on the date of grant, estimated using a Black-Scholes-Merton option-pricing formula.

During the three and six months ended December 31, 2005, 50,000 options were forfeited. No options were granted or exercised during this period.

During the six months ended December 31, 2004, 50,000 options were granted but none were exercised, forfeited, or expired. Information relating to options outstanding as of December 31, 2005, which are
vested or expected to vest, is as follows:



|                                |  |        |   |  |                              |      |                                                 |      |                         |  
|------------------------------- |  | ------ | - |  | ---------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------- | -
|                                |  | Shares |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm (Years) |      | AggregateIntrinsicValue
|Outstanding, September 30, 2005 |  | 280    |   |  |                              | 6.50 |                                                 | 3.40 |                         | 
|Granted                         |  |       |   |  |                              |     |                                                 |     |                         | 
|Exercised                       |  |       |   |  |                              |     |                                                 |     |                         | 
|Forfeited/expired               |  | (50    | ) |  |                              | 6.50 |                                                 | 3.38 |                         | 
|Outstanding, December 31, 2005  |  | 230    |   |  | $                            | 6.50 |                                                 | 3.15 |                         | 
|Exercisable, December 31, 2005  |  | 90     |   |  | $                            | 6.50 |                                                 | 3.05 |                         | 



F-17



---

As of December 31, 2005, there was $635 of total unrecognized compensation costs related to stock options granted
under the Plan. That cost is expected to be recognized over a weighted average period of 1.70 years.

Note 8  Income Taxes

The Companys income tax provision differs from the income tax expense computed at statutory rates as follows:



|                                                                |  |                                                |   |  |                                             |  
|--------------------------------------------------------------- |  | ---------------------------------------------- | - |  | ------------------------------------------- | -
|                                                                |  | Three months endedDecember 31, 2005 (Restated) |   |  | Six Months endedDecember 31,2005 (Restated) |  
|                                                                |  | $                                              |   |  | $                                           |  
|Earnings before income taxes                                    |  | 2,492                                          |   |  | 3,148                                       |  
|                                                                |  |                                                |   |  |                                             |  
|Income tax expense, based on a statutory income tax rate of 34% |  | 847                                            |   |  | 1,070                                       |  
|Increase (decrease) in income taxes resulting from:             |  |                                                |   |  |                                             |  
|Impact of tax rate changes                                      |  | 96                                             |   |  | (49                                         | )
|Stock option expense not benefited                              |  | 22                                             |   |  | 42                                          |  
|Other non-deductible items                                      |  | (60                                            | ) |  | (96                                         | )
|Change in valuation allowance                                   |  | 315                                            |   |  | 315                                         |  
|Interest and penalties                                          |  | 86                                             |   |  | 357                                         |  
|                                                                |  |                                                |   |  |                                             |  
|Actual income tax provision                                     |  | 1,306                                          |   |  | 1,639                                       |  
|                                                                |  |                                                |   |  |                                             |  
|Represented by:                                                 |  |                                                |   |  |                                             |  
|Current income tax provision                                    |  | 67                                             |   |  | 1,550                                       |  
|Deferred income tax provision                                   |  | 1,239                                          |   |  | 89                                          |  
|                                                                |  |                                                |   |  |                                             |  
|Provision for Income Taxes                                      |  | 1,306                                          |   |  | 1,639                                       |  
|                                                                |  |                                                |   |  |                                             |  

Deferred tax asset (liability):



|                                                                                |  |                        |   |  |                    |  
|------------------------------------------------------------------------------- |  | ---------------------- | - |  | ------------------ | -
|                                                                                |  | As at December 31,2005 |   |  | As at June 30,2005 |  
|United States                                                                   |  |                        |   |  |                    |  
|Accounting value of United States property and equipment in excess of tax basis |  | (45                    | ) |  |                   |  
|Unrealized United States tax loss carryforward                                  |  | 1,518                  |   |  | 2,788              |  
|Less: Valuation allowance                                                       |  | (315                   | ) |  |                   |  
|                                                                                |  |                        |   |  |                    |  
|                                                                                |  | 1,158                  |   |  | 2,788              |  
|Canada                                                                          |  |                        |   |  |                    |  
|Accounting value of Canadian property and equipment in excess of tax basis      |  | (2,636                 | ) |  | (1,991             | )
|                                                                                |  |                        |   |  |                    |  
|Net deferred tax asset (liability)                                              |  | (1,478                 | ) |  | 797                |  
|                                                                                |  |                        |   |  |                    |  

Note 9  Related Party Transactions

For the three months ending December 31, 2005 and 2004 the Company incurred costs of $18 and $nil, respectively, for professional consulting fees to a director and minority shareholder. For the six months ending
December 31, 2005 and 2004, the Company incurred costs of $54 and $nil respectively, as this director became a related party in October 2004. A balance of $18 and $136 was owed as of December 31, 2005 and June 30, 2005, respectively.

For the three months ending December 31, 2005 and 2004, the Company paid $35 and $53, respectively, for professional legal fees to a director and
minority shareholder. For the six months ending December 31, 2005 and 2004, the Company paid $69 and $88. A balance of $10 and $nil was owed as of December 31, 2005 and June 30, 2005, respectively.

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



F-18



---

Note 10  Commitments and Contingencies

Commitments

The Company has operating lease commitments for its premises, service vehicles and operating lease
commitments for its network access lines which expire at various dates through July 2009. The future minimum lease payments (exclusive of operating costs and payments for additional usage) as at December 31, 2005 for the twelve months ended
December 31, are as follows:



|                 |  |                    |       |                          |   |                  |  |   |   
|---------------- |  | ------------------ | ----- | ------------------------ | - | ---------------- |  | - | --
|Expiring through |  | TelecomObligations |       | Facility/RentObligations |   | OtherCommitments
|2006             |  | $                  | 4,134 |                          | $ | 587              |  | $ | 32
|2007             |  |                    | 1,369 |                          |   | 500              |  |   | 30
|2008             |  |                    | 293   |                          |   | 383              |  |   | 9 
|2009             |  |                    | 35    |                          |   | 119              |  |   |  
|2010             |  |                    | 7     |                          |   |                 |  |   |  

Under the terms of an agreement with one of their long-distance providers, the Company is committed to purchase a
minimum amount of long distance services for $570 for the year ending June 30, 2006.

Legal Proceedings

The Company is involved in various legal matters arising out of its operations in the normal course of business, none of which are expected, individually or in the
aggregate, to have a material adverse effect on the Company.

Note 11  Earnings Per Share

Basic earnings per share is determined by dividing net earnings applicable to common stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share amounts are similarly computed, but include the effect, when dilutive, of the Companys stock options outstanding determined using the treasury stock method.

Earnings per share for the three and six months ended December 31, 2005, 2004 are calculated as follows:



|                                                           |  |                 |        |                |   |                 |  |                |        |  |   |       
|---------------------------------------------------------- |  | --------------- | ------ | -------------- | - | --------------- |  | -------------- | ------ |  | - | ------
|                                                           |  | Three months    |        | Six months    
|                                                           |  | 2005 (Restated) |        | 2004(Restated) |   | 2005 (Restated) |  | 2004(Restated)
|                                                           |  | $               |        | $              |   | $               |  | $             
|Net earnings applicable to common stockholders             |  |                 | 1,186  |                |   | 1,390           |  |                | 1,509  |  |   | 3,060 
|Average shares outstanding:                                |  |                 |        |                |   |                 |  |                |        |  |   |       
|Weighted average number of common shares outstandingbasic |  |                 | 12,898 |                |   | 12,897          |  |                | 12,898 |  |   | 12,895
|Effect of dilutive securities:                             |  |                 |        |                |   |                 |  |                |        |  |   |       
|Stock options and warrants                                 |  |                 |       |                |   | 8               |  |                |       |  |   | 34    
|                                                           |  |                 |        |                |   |                 |  |                |        |  |   |       
|                                                           |  |                 | 12,898 |                |   | 12,905          |  |                | 12,898 |  |   | 12,929
|                                                           |  |                 |        |                |   |                 |  |                |        |  |   |       
|Basic earnings per share                                   |  | $               | 0.09   |                | $ | 0.11            |  | $              | 0.12   |  | $ | 0.24  
|                                                           |  |                 |        |                |   |                 |  |                |        |  |   |       
|Diluted earnings per share                                 |  | $               | 0.09   |                | $ | 0.11            |  | $              | 0.12   |  | $ | 0.24  
|                                                           |  |                 |        |                |   |                 |  |                |        |  |   |       

There were no incremental shares during the period ended December 31, 2005 as the outstanding stock options
and warrants currently have no intrinsic value.

Note 12  Consolidated statement of cash flows

The following table presents the details of the net changes in non-cash working capital presented in the statements of cash flows for the six months ended
December 30, 2005 and 2004:



F-19



---

|                                            |  |                              |   |  |                 |  
|------------------------------------------- |  | ---------------------------- | - |  | --------------- | -
|                                            |  | Six months endedDecember 31, |  
|                                            |  | 2005 (Restated)              |   |  | 2004 (Restated) |  
|                                            |  | $                            |   |  | $               |  
|Decrease (increase) in current assets:      |  |                              |   |  |                 |  
|Accounts receivable                         |  | (512                         | ) |  | (97             | )
|Prepaid expenses and other assets           |  | 25                           |   |  | (566            | )
|Increase (decrease) in current liabilities: |  |                              |   |  |                 |  
|Accounts payable and accrued liabilities    |  | (3,110                       | ) |  | (3,030          | )
|Taxes payable                               |  | (1,383                       | ) |  | 1,124           |  
|Unearned revenue                            |  | (354                         | ) |  | (61             | )
|Due to Factor                               |  |                             |   |  | (503            | )
|                                            |  |                              |   |  |                 |  
|                                            |  | (5,334                       | ) |  | (3,133          | )
|                                            |  |                              |   |  |                 |  



F-20



---

Note 13  Segment Reporting

The Company has five reportable segments: Yak Canada, Yak for Business, Contour, Yak America and VoIP. Segment sales and profit data that follow are consistent with the Companys current management reporting
structure. The Yak Canada and Yak America segments provide products such as Dial-Around, 1+, LooneyCall, YakCell and Calling Card. The Yak for Business segment provides voice and data products, including local lines, long distance, data
management and point-to-point private lines. The Contour segment provides telecommunication management services. The WorldCity VoIP segment provides VoIP services to residential customers. The Eliminations and Other column includes corporate head
office assets, management fees, interest income, warrant revaluation, and any other costs and expenses not allocated to individual segments. The Companys selling, general and administrative expenses and cost of revenues, excluding corporate
expense, are charged to each segment based on where the expenses are incurred. Segment results for the periods ended December 31, 2005 are as follows:



|                                          |  |                                      |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|----------------------------------------- |  | ------------------------------------ |  | --------------- | - |  | ------- | - |  | ---------- | - |  | ------------- | - |  | ------------- |  | --------------------- | - |  | ------ | -
|                                          |  | Three months ended December 31, 2005 | 
|                                          |  | YakCanada                            |  | Yak forBusiness |   |  | Contour |   |  | YakAmerica |   |  | WorldCityVoIP |   |  | TotalSegments |  | Eliminationsand other |   |  | Total  |  
|                                          |  | $                                    |  | $               |   |  | $       |   |  | $          |   |  | $             |   |  | $             |  | $                     |   |  | $      |  
|Revenues                                  |  | 18,011                               |  | 3,341           |   |  | 1,262   |   |  | 1,400      |   |  | 15            |   |  | 24,029        |  |                      |   |  | 24,029 |  
|Cost of Revenues                          |  | 9,026                                |  | 2,731           |   |  | 957     |   |  | 1,714      |   |  | 19            |   |  | 14,447        |  |                      |   |  | 14,447 |  
|                                          |  |                                      |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Contribution Margin                       |  | 8,985                                |  | 610             |   |  | 305     |   |  | (314       | ) |  | (4            | ) |  | 9,582         |  |                      |   |  | 9,582  |  
|General and administration                |  | 2,105                                |  | 864             |   |  | 119     |   |  | 432        |   |  | 631           |   |  | 4,151         |  | 768                   |   |  | 4,919  |  
|Sales and marketing                       |  | 355                                  |  |                |   |  |        |   |  | 904        |   |  | 368           |   |  | 1,627         |  |                      |   |  | 1,627  |  
|Other Expenses (Income)                   |  | 118                                  |  | (2              | ) |  | (9      | ) |  | (13        | ) |  | 14            |   |  | 108           |  | (305                  | ) |  | (197   | )
|Depreciation and Amortization             |  | 451                                  |  | 172             |   |  | 8       |   |  | 30         |   |  | 80            |   |  | 741           |  |                      |   |  | 741    |  
|                                          |  |                                      |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Earnings (Loss) Before Income Tax |  | 5,956                                |  | (424            | ) |  | 187     |   |  | (1,667     | ) |  | (1,097        | ) |  | 2,955         |  | (463                  | ) |  | 2,492  |  
|                                          |  |                                      |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Assets                            |  | 38,001                               |  | 5,861           |   |  | 2,964   |   |  | 3,352      |   |  | 1,939         |   |  | 52,117        |  | (3,299                | ) |  | 48,818 |  
|Long-Lived Assets                         |  | 11,812                               |  | 2,582           |   |  | 200     |   |  | 569        |   |  | 1,825         |   |  | 16,988        |  |                      |   |  | 16,988 |  
|                                          | 
|                                          |  | Three months ended December 31, 2004 | 
|                                          |  | YakCanada                            |  | Yak forBusiness |   |  | Contour |   |  | YakAmerica |   |  | WorldCityVoIP |   |  | TotalSegments |  | Eliminationsand other |   |  | Total  |  
|                                          |  | $                                    |  | $               |   |  | $       |   |  | $          |   |  | $             |   |  | $             |  | $                     |   |  | $      |  
|Revenues                                  |  | 19,318                               |  | 2,823           |   |  | 1,520   |   |  | 447        |   |  | 11            |   |  | 24,119        |  | 34                    |   |  | 24,153 |  
|Cost of Revenues                          |  | 10,956                               |  | 1,946           |   |  | 1,177   |   |  | 488        |   |  | 4             |   |  | 14,571        |  | 50                    |   |  | 14,621 |  
|                                          |  |                                      |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Contribution Margin                       |  | 8,362                                |  | 877             |   |  | 343     |   |  | (41        | ) |  | 7             |   |  | 9,548         |  | (16                   | ) |  | 9,532  |  
|General and administration                |  | 1,687                                |  | 733             |   |  | 306     |   |  | 312        |   |  | 272           |   |  | 3,310         |  | 1,765                 |   |  | 5,075  |  
|Sales and marketing                       |  | 374                                  |  | 2               |   |  |        |   |  | 1,383      |   |  |              |   |  | 1,759         |  | (60                   | ) |  | 1,699  |  
|Other Expenses (Income)                   |  | 869                                  |  | (6              | ) |  |        |   |  | (46        | ) |  | 12            |   |  | 829           |  | (844                  | ) |  | (15    | )
|Depreciation and Amortization             |  | 478                                  |  | 132             |   |  | 5       |   |  | 36         |   |  | 38            |   |  | 689           |  | 5                     |   |  | 694    |  
|                                          |  |                                      |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Earnings (Loss) Before Income Tax |  | 4,954                                |  | 16              |   |  | 32      |   |  | (1,726     | ) |  | (315          | ) |  | 2,961         |  | (882                  | ) |  | 2,079  |  
|                                          |  |                                      |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Assets                            |  | 38,528                               |  | 4,405           |   |  | 2,906   |   |  | 1,546      |   |  | 806           |   |  | 48,191        |  | 8,360                 |   |  | 56,551 |  
|Long-Lived Assets                         |  | 10,289                               |  | 2,330           |   |  | 324     |   |  | 696        |   |  | 775           |   |  | 14,414        |  | 94                    |   |  | 14,508 |  



F-21



---

|                                          |  |                                    |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|----------------------------------------- |  | ---------------------------------- |  | --------------- | - |  | ------- | - |  | ---------- | - |  | ------------- | - |  | ------------- |  | --------------------- | - |  | ------ | -
|                                          |  | Six months ended December 31, 2005 | 
|                                          |  | YakCanada                          |  | Yak forBusiness |   |  | Contour |   |  | YakAmerica |   |  | WorldCityVoIP |   |  | TotalSegments |  | Eliminationsand other |   |  | Total  |  
|                                          |  | $                                  |  | $               |   |  | $       |   |  | $          |   |  | $             |   |  | $             |  | $                     |   |  | $      |  
|Revenues                                  |  | 35,713                             |  | 6,701           |   |  | 2,481   |   |  | 2,627      |   |  | 15            |   |  | 47,537        |  |                      |   |  | 47,537 |  
|Cost of Revenues                          |  | 18,734                             |  | 5,115           |   |  | 1,888   |   |  | 3,058      |   |  | 27            |   |  | 28,822        |  |                      |   |  | 28,822 |  
|                                          |  |                                    |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Contribution Margin                       |  | 16,979                             |  | 1,586           |   |  | 593     |   |  | (431       | ) |  | (12           | ) |  | 18,715        |  |                      |   |  | 18,715 |  
|General and administration                |  | 4,930                              |  | 1,812           |   |  | 236     |   |  | 789        |   |  | 975           |   |  | 8,742         |  | 2,105                 |   |  | 10,847 |  
|Sales and marketing                       |  | 697                                |  |                |   |  |        |   |  | 2,369      |   |  | 456           |   |  | 3,522         |  |                      |   |  | 3,522  |  
|Other Expenses (Income)                   |  | 141                                |  | (8              | ) |  | (12     | ) |  | (56        | ) |  | 5             |   |  | 70            |  | (457                  | ) |  | (387   | )
|Depreciation and Amortization             |  | 1,013                              |  | 345             |   |  | 13      |   |  | 61         |   |  | 153           |   |  | 1,585         |  |                      |   |  | 1,585  |  
|                                          |  |                                    |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Earnings (Loss) Before Income Tax |  | 10,198                             |  | (563            | ) |  | 356     |   |  | (3,594     | ) |  | (1,601        | ) |  | 4,796         |  | (1,648                | ) |  | 3,148  |  
|                                          |  |                                    |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Assets                            |  | 38,001                             |  | 5,861           |   |  | 2,964   |   |  | 3,352      |   |  | 1,939         |   |  | 52,117        |  | (3,299                | ) |  | 48,818 |  
|Long-Lived Assets                         |  | 11,812                             |  | 2,582           |   |  | 200     |   |  | 569        |   |  | 1,825         |   |  | 16,988        |  |                      |   |  | 16,988 |  



|                                          |  |                                    |  |                 |   |  |         |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|----------------------------------------- |  | ---------------------------------- |  | --------------- | - |  | ------- |  | ---------- | - |  | ------------- | - |  | ------------- |  | --------------------- | - |  | ------ | -
|                                          |  | Six months ended December 31, 2004 | 
|                                          |  | YakCanada                          |  | Yak forBusiness |   |  | Contour |  | YakAmerica |   |  | WorldCityVoIP |   |  | TotalSegments |  | Eliminationsand other |   |  | Total  |  
|                                          |  | $                                  |  | $               |   |  | $       |  | $          |   |  | $             |   |  | $             |  | $                     |   |  | $      |  
|Revenues                                  |  | 36,156                             |  | 5,531           |   |  | 2,907   |  | 668        |   |  | 14            |   |  | 45,276        |  | 74                    |   |  | 45,350 |  
|Cost of Revenues                          |  | 21,386                             |  | 3,995           |   |  | 2,177   |  | 734        |   |  | 4             |   |  | 28,296        |  | 83                    |   |  | 28,379 |  
|                                          |  |                                    |  |                 |   |  |         |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Contribution Margin                       |  | 14,770                             |  | 1,536           |   |  | 730     |  | (66        | ) |  | 10            |   |  | 16,980        |  | (9                    | ) |  | 16,971 |  
|General and administration                |  | 3,174                              |  | 1,423           |   |  | 534     |  | 581        |   |  | 910           |   |  | 6,622         |  | 2,063                 |   |  | 8,685  |  
|Sales and marketing                       |  | 1,084                              |  | 8               |   |  |        |  | 1,568      |   |  |              |   |  | 2,660         |  | 30                    |   |  | 2,690  |  
|Other Expenses (Income)                   |  | 682                                |  | (6              | ) |  | 5       |  | (65        | ) |  | 24            |   |  | 640           |  | (783                  | ) |  | (143   | )
|Depreciation and Amortization             |  | 878                                |  | 256             |   |  | 9       |  | 65         |   |  | 38            |   |  | 1,246         |  | 10                    |   |  | 1,256  |  
|                                          |  |                                    |  |                 |   |  |         |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Earnings (Loss) Before Income Tax |  | 8,952                              |  | (145            | ) |  | 182     |  | (2,215     | ) |  | (962          | ) |  | 5,812         |  | (1,329                | ) |  | 4,483  |  
|                                          |  |                                    |  |                 |   |  |         |  |            |   |  |               |   |  |               |  |                       |   |  |        |  
|Segment Assets                            |  | 38,528                             |  | 4,405           |   |  | 2,906   |  | 1,546      |   |  | 806           |   |  | 48,191        |  | 8,360                 |   |  | 56,551 |  
|Long-Lived Assets                         |  | 10,289                             |  | 2,330           |   |  | 324     |  | 696        |   |  | 775           |   |  | 14,414        |  | 94                    |   |  | 14,508 |  

The Company operates, offering discounted long-distance services, in two geographic regions - Canada and the
United States. For the three months ended December 31, 2004, the Company also provided services to a third geographic region (primarily Peru). Summary information with respect to the Companys operations by geographic regions is as
follows:



|                                    |  |                               |   |  |                             |   |  |                |   |  |                |  
|----------------------------------- |  | ----------------------------- | - |  | --------------------------- | - |  | -------------- | - |  | -------------- | -
|                                    |  | Three months endedDecember 31 |   |  | Six months endedDecember 31 |  
|                                    |  | 2005(Restated)                |   |  | 2004(Restated)              |   |  | 2005(Restated) |   |  | 2004(Restated) |  
|                                    |  | $                             |   |  | $                           |   |  |                |   |  |                |  
|Net revenue                         |  |                               |   |  |                             |   |  |                |   |  |                |  
|Canada                              |  | 22,629                        |   |  | 23,706                      |   |  | 44,910         |   |  | 44,603         |  
|United States                       |  | 1,400                         |   |  | 447                         |   |  | 2,627          |   |  | 668            |  
|International                       |  |                              |   |  |                            |   |  |               |   |  | 79             |  
|                                    |  |                               |   |  |                             |   |  |                |   |  |                |  
|                                    |  | 24,029                        |   |  | 24,153                      |   |  | 47,537         |   |  | 45,350         |  
|                                    |  |                               |   |  |                             |   |  |                |   |  |                |  
|Earnings (loss) before income taxes |  |                               |   |  |                             |   |  |                |   |  |                |  
|Canada                              |  | 4,647                         |   |  | 3,719                       |   |  | 8,415          |   |  | 7,092          |  
|United States                       |  | (2,155                        | ) |  | (1,619                      | ) |  | (5,267         | ) |  | (2,555         | )
|International                       |  |                              |   |  | (21                         | ) |  |               |   |  | (54            | )
|                                    |  |                               |   |  |                             |   |  |                |   |  |                |  
|                                    |  | 2,492                         |   |  | 2,079                       |   |  | 3,148          |   |  | 4,483          |  
|                                    |  |                               |   |  |                             |   |  |                |   |  |                |  



F-22



---

|                  |  |                  |  |             
|----------------- |  | ---------------- |  | ------------
|                  |  | December 31,2005 |  | June 30,2005
|                  |  | $                |  | $           
|Long-lived assets |  |                  |  |             
|Canada            |  | 15,910           |  | 15,437      
|United States     |  | 1,078            |  | 630         
|                  |  |                  |  |             
|                  |  | 16,988           |  | 16,067      
|                  |  |                  |  |             

The Canadian assets include goodwill as at December 31, 2005 and June 30, 2005 of $530 and $503,
respectively and other intangible assets of $1,697 and $2,005, respectively.

Loss before income taxes in the United
States includes corporate head office costs and expenses not allocated to segments.



F-23



---

Exhibit Index



|            |  |                                                                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Exhibit Description                                                                                                                                                                                    
|31.1        |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.     
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                     
|            | 
|32.2        |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.