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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,
D.C. 20549



FORM 10-QSB



(Mark One)



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE
SECURITIES EXCHANGE ACT OF 1934



For the
quarterly period ended December 31, 2002



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from
 to



Commission File No.:



YAK COMMUNICATIONS (USA), INC.

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



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



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

(Address of principal executive offices)



(416) 296-7111

Issuers Telephone Number, Including Area Code:



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



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



As of December 31, 2002, 4,792,158 shares of the
issuers Common Stock, no par value per share, were outstanding.





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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



INDEX TO FORM 10-QSB







|PART IFINANCIAL INFORMATION                                                                                                                                                  |  | Page
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Item 1.    Financial Statements                                                                                                                                               |  | 1   
|                                                                                                                                                                             
|Consolidated Balance Sheets December 31, 2002 and June 30, 2002                                                                                                               |  |     
|                                                                                                                                                                             
|Consolidated Statements of Stockholders Equity December 31, 2002 and June
30, 2002                                                                                           |  |     
|                                                                                                                                                                             
|Consolidated Statements of Operations For the Three Months Ended December 31,
2002 and December 31, 2001 and for the Six Months Ended December 31, 2002 and December 31,
2001 |  |     
|                                                                                                                                                                             
|Consolidated Statements of Cash Flows For the Three Months Ended December 31,
2002 and December 31, 2001 and for the Six Months Ended December 31, 2002 and December 31,
2001 |  |     
|                                                                                                                                                                             
|Notes to the Consolidated Financial Statements                                                                                                                                |  |     
|                                                                                                                                                                             
|                                                                                                                                                                              |  |     
|Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                              |  | 1   



PART
IIOTHER INFORMATION



|Item 1.    Legal Proceedings                |  | 8 
|------------------------------------------- |  | --
|                                           
|Item 5.    Other Information                |  | 8 
|                                           
|Item 6.    Exhibits and Reports on Form 8-K |  | 9 
|                                           
|Signatures                                  |  | 10
|                                           
|Certifications                              |  | 11





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PART I



FINANCIAL INFORMATION



Item 1.    Financial Statements.



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



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



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



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



Critical Accounting Policies



We have several significant account policies all of which are
disclosed in Note 2 to the consolidated financial statements. Our critical accounting policies are as follows:



| |  |  | determining functional currency for the purpose of consolidation; and
| | - |  | ---------------------------------------------------------------------



| |  |  | valuation of property and equipment.
| | - |  | ------------------------------------



Determining Functional Currency for the Purpose of Consolidation



We have a foreign subsidiary in Canada that accounts for 96% of our revenue and 93% of our assets as of
December 31, 2002. In preparing our consolidated financial statements we translate the accounting records from Canadian dollars into United States dollars. This process results in exchange gains and losses, which under the provisions of SFAS No. 52,
are included as a separate part of our net equity under the caption accumulated other comprehensive income. Under these provisions the treatment of these translation gains or losses is dependant upon our managements determination
of the functional currency of our subsidiary. The functional currency is determined based on managements judgment of the currency that its subsidiary conducts substantially all of its transactions, including billings, financing and other
expenditures, which also includes the dependency upon the parent and the nature of the subsidiarys operations.



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Valuation
of Property and Equipment



We assess the
impairment of our property and equipment whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. The factors we consider include changes in the manner of use of the acquired assets,
significant negative industry or economic trends and significant changes in technology. When we determine that the carrying value of property and equipment may not be recoverable we measure any impairment based on a projected discounted cash flow
method using a discount rate determined by our management. Net property and equipment totaled $3 million as of December 31, 2002.



COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001



Results of Operations



Net revenue increased $3,458,287 or 59% to $9,297,089 for the three months ended December 31, 2002 from $5,858,802 for the three months
ended December 31, 2001. This increase in revenue is from the addition of new customers in existing and new markets resulting from our marketing efforts and consumer acceptance of our products, along with expansion into six new cities in Canada and
ten cities in the United States from 2001. Sales in markets existing from last year increased by $2,734,000 or 48% and sales in new markets accounted for $724,287 of our revenue increase ($412,074 of which arose from our operations in the United
States). In December 2002, we launched our loonie call product which added $70,913 in new revenue. For the three months ended December 31, 2002, 96% of revenue was earned in Canada and the remaining 4% in the United States.



Cost of revenue increased $1,040,063 or 24% to
$5,433,374 for the three months ended December 31, 2002 from $4,393,311 for the three months ended December 31, 2001. This increase is in proportion to the increased telephone traffic volume associated with the growth in our revenues. Cost of
revenue is comprised primarily of the cost of long-distance services, fees for the processing and transporting of our calls, and fixed line access and variable line usage costs. The overall cost of revenue decreased to 58% of sales for the three
months ended December 31, 2002, from 75% of sales for the three months ended December 31, 2001. The majority of the cost of revenue is variable, based upon the cost of the long-distance services, processing fees and line usage costs. As our
telephone traffic volume increased, our purchasing power improved significantly; this has allowed us to lower our long-distance costs. Furthermore, as our telephone volume increases many costs such as line access costs will remain fixed,
which allows us to improve our margins.



The
costs of long-distance services decreased to 33% for the three months ended December 31, 2002 from 44% for the three months ended December 31, 2001. This is due to our greater purchasing power resulting from our higher volumes of traffic.



Selling, general and administrative expenses
(SG&A) increased $937,123 or 92% to $1,946,959 for the three months ended December 31, 2002 from $1,009,836 for the three months ended December 31, 2001. The increase is primarily due to additional spending for marketing and



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advertising in order to
attract new customers and increase our revenue base. Of this increase, advertising and promotion was the largest component of $1,046,334 for the three months ended December 31, 2002 from $385,047 for the three months ended December 31, 2001. We
spent $389,000 in advertising and marketing costs to develop our operations in the United States. The next largest component of SG&A was salaries, which increased to $473,000 for the three months ended December 31, 2002 from $258,000 for the
three months ended December 31, 2001. The increase in salaries resulted from the hiring additional administrative, technical and customer service employees, which were required to support our growth in sales. These selling, general and
administrative expenses, other than marketing, are expected to rise at a lower rate than that of our projected revenue increases.



Organizational and start-up costs for the development of our subsidiary, Yak Communications (America), Inc., were $58,065 for the three
months ended December 31, 2002 from $22,478 for the three months ended December 31, 2001. These costs were composed primarily of legal and consulting fees incurred to obtain the regulatory licenses and contracts required to commence U.S. operations.
We spent $81,674 to develop international operations in Peru for the three months ended December 31, 2002.



Accounts receivable financing costs related to the factoring of our trade accounts receivable have decreased $28,229 or 20% to $112,380
for the three months ended December 31, 2002, as compared to $140,609 for the three months ended December 31, 2001. This change is a direct result of the reduced cost of accounts receivable being factored which resulted from a renegotiation of our
factoring arrangement in February 2002.



Depreciation and amortization increased $121,114 or 104% to $236,981 for the three months ended December 31, 2002, as compared to $115,867 for the three months ended December 31, 2001. This increase is a result of total, to-date
capital spending of our Company of $497,000 for the last six months and accelerated depreciation of $100,000 for equipment no longer in use.



Net income increased by $695,509 to $737,362 for the three months ended December 31, 2002, from $41,853 for the three months ended
December 31, 2001. This increase is after an income tax provision of $778,556 for the three months ended December 31, 2002 and $0 for the three months ended December 31, 2001, due to the application of prior periods income tax losses carried
forward.



Liquidity and Capital Resources



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



Net cash provided from
operating activities was $1,069,774 for the three months ended December 31, 2002, as compared to net cash used in operating activities of $393,207 for the three



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months ended December 31,
2001. This was primarily due to an increase of our net income from operating activities (before non-cash items) of $776,520 to $1,014,240 for the three months ended December 31, 2002, as compared to a net income from operating activities (before
non-cash items) of $237,720 for the three months ended December 31, 2001



Net cash used in investing activities was $354,069 for the three months ended December 31, 2002, as compared to $199,697 for the three months ended December 31, 2001. These investing activities comprise the cash component of
the additions to our property and equipment required to maintain our systems and expand our operations and a $100,000 initial investment in our joint venture operations in Peru.



Net cash provided by financing activities was $487,498 for the three months ended December 31, 2002, as
compared to net cash used in financing activities of $277,638 for the three months ended December 31, 2001. This increase is primarily due to advances arising from our marketing agreement with Telus Communications, Inc.



COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001



Results of Operations



Net revenue increased $6,360,216 or 57% to $17,476,194 for
the six months ended December 31, 2002 from $11,115,978 for the six months ended December 31, 2001. This increase in revenue is from the addition of new customers in existing and new markets resulting from our marketing efforts and consumer
acceptance of our products, along with expansion into six new cities in Canada and ten cities in the United States from 2001. Sales in markets existing from last year increased by $5,262,414 or 48% and sales in new markets accounted for $1,097,802
of our revenue increase ($715,053 of which arose from our operations in the United States). In December 2002, we launched our loonie call product which has added $70,913 in new revenue. For the six months ended December 31, 2002, 96% of
revenue was earned in Canada and the remaining 4% in the United States.



Cost of revenue increased $2,334,521 or 27% to $10,832,871 for the six months ended December 31, 2002 from $8,498,350 for the six months ended December 31, 2001. This increase is in proportion to the increased telephone
traffic volume associated with the growth in our revenues. Cost of revenue is comprised primarily of the cost of long-distance services, fees for the processing and transporting of our calls, and fixed line access costs and variable line usage
costs. The overall cost of revenue decreased to 62 % of sales for the six months ended December 31, 2002, from 76% of sales for the six months ended December 31, 2001. The majority of the cost of revenue is variable, based upon the cost of the
long-distance services, processing fees and line usage costs. As our telephone traffic volume increased, our purchasing power improved significantly; this has allowed us to lower our long-distance costs. Furthermore, as our telephone
volume increases many costs such as line access costs will remain fixed, which allows us to improve our margins.



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The costs of
long-distance services decreased to 34% for the six months ended December 31, 2002 from 44% for the six months ended December 31, 2001. This is due to our greater purchasing power resulting from our higher volumes of traffic.



Selling, general and administrative expenses
(SG&A) increased $1,882,958 or 108% to $3,625,574 for the six months ended December 31, 2002 from $1,742,616 for the six months ended December 31, 2001. The increase is primarily due to additional spending for marketing and
advertising in order to attract new customers and increase our revenue base. Of the increase, advertising and promotion was the largest component of $2,035,746 for the six months ended December 31, 2002 from $700,864 for the six months ended
December 31, 2001. For the six months ended December 31, 2002, we spent $871,800 in advertising and marketing costs to develop our operations in the United States, as compared to $8,222 for the comparable period in 2001. The next largest component
of SG&A was salaries, which increased to $754,128 for the six months ended December 31, 2002 from $560,834 for the six months ended December 31, 2001. The increase in salaries was a result of hiring additional administrative, technical and
customer service employees, which were required to support our growth in sales. These selling, general and administrative expenses, other than marketing, are expected to rise at a lower rate than that of our projected revenue increases.



Organizational and start-up costs for the
development of our subsidiary, Yak Communications (America), Inc., were $106,533 for the six months ended December 31, 2002 from $72,033 for the six months ended December 31, 2001. These costs were composed primarily of legal and consulting fees
incurred to obtain the regulatory licenses and contracts required to commence U.S. operations. We spent $156,674 to develop international operations in Peru for the six months ended December 31, 2002.



Accounts receivable financing costs related to the factoring
of our trade accounts receivable have decreased $67,650 or 25% to $201,955 for the six months ended December 31, 2002, as compared to $269,605 for the six months ended December 31, 2001. This change is a direct result of the reduced cost of accounts
receivable being factored which resulted from a renegotiation of our factoring arrangement in February 2002.



Depreciation and amortization increased $130,666 or 57% to $358,821 for the six months ended December 31, 2002, as compared to $228,155
for the six months ended December 31, 2001. This increase is a result of total, to-date capital spending of our Company of $497,000 for the last six months and accelerated depreciation of $100,000 for equipment no longer in use.



Net income increased by $1,173,757 to $1,382,075 for
the six months ended December 31, 2002, from $208,318 for the six months ended December 31, 2001. This increase is after an income tax provision of $959,733 for the six months ended December 31, 2002 and $0 for the six months ended December 31,
2001, due to the application of prior periods income tax losses carried forward.



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Liquidity and Capital
Resources



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



Net cash provided from operating activities was $1,109,765 for the six months ended December 31, 2002, as compared to $258,021 for the six months ended December 31, 2001. This was due to an increase of our net income from operating
activities (before non-cash items) of $1,812,468 for the six months ended December 31, 2002, as compared to a net income from operating activities (before non-cash items) of $516,473 for the six months ended December 31, 2001.



Net cash used in investing activities was $591,360 for the six
months ended December 31, 2002, as compared to $229,707 for the six months ended December 31, 2001. These investing activities comprise the cash component of the additions to our property and equipment required to maintain our systems and expand our
operations and a $100,000 initial investment in our joint venture operation in Peru.



Net cash provided by financing activities was $927,591 for the six months ended December 31, 2002, as compared to $229,707 for the six months ended December 31, 2001. This increase is primarily due to
advances arising from our marketing agreement with Telus Communications, Inc.



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



We believe that our current operations will be able to generate sufficient cash to meet our current obligations and maintain our current level of operations. We anticipate that additional working
capital that will be required will be funded by increasing our available borrowings under our accounts receivable factoring arrangements. We have $6 million available under our current accounts receivable factoring agreement of which approximately
$2,776,197 is currently outstanding. In addition, we may seek to obtain additional funds from public or private equity or debt offerings; however, we have no plans to do so at this time. We do not intend to significantly increase our marketing
efforts in the United States until we are able to determine the potential for success of our business in the United States.



In addition to the financing sources described above, our arrangement with Telus Communications, Inc. may provide a further $1.2 million
of funds for specific use in marketing and



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advertising our planned expansion. These amounts are reflected as deferrals of amounts otherwise due to
Telus Communications, Inc.



Seasonality



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



Trends



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



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



FORWARD LOOKING STATEMENTS



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



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agencies (including the Securities and Exchange Commission) may require or that result from changes in the
accounting rules or their application, which could result in an impact on our earnings; and (xiii) the various other factors discussed in this filing.



Controls and Procedures



Evaluation of Disclosure Controls and Procedures.    The Company maintains controls and procedures
designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive and principal financial officers of the Company
concluded that the Companys disclosure controls and procedures were effective.



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



PART II



OTHER INFORMATION



Item 1.    Legal Proceedings.



On January 9, 2003, the Company filed an action in the Circuit Court for the 11th Circuit of Florida in and for Miami-Dade County, Florida, against Talk Visual Corporation (TVC)
and Sidney Dulman. The complaint alleges, among other things, that TVC breached certain agreements entered into with the Company with respect to, among other things, the purchase by the Company of the Companys 405,516 common stock shares owned
by TVC. The Company is seeking a declaratory decree, damages and specific performance in connection with its claims. TVC has responded with an answer and a motion to dismiss certain counts included in the complaint. In connection with this action,
the Company has engaged in preliminary settlement negotiations with TVC. At this time it is not in a position to render an opinion as to the outcome of this action.



Item 5.    Other Information.



On November 12, 2002, the Company entered into a Commercial Services and Marketing Agreement with Digital Way, S.A., a Peruvian corporation (Digital Way). In addition, Yak
Communications (Canada), Inc., a subsidiary of the Company, entered into a Telecommunications Services and Disbursement Agreement with Digital Way. Pursuant to these agreements, the Company is providing certain telecommunication services to Digital
Way. Digital Way intends to establish dial around long distance service in Lima, Peru using the Companys services. Digital Way is partly-owned by Universal Communications Systems, Inc., a public company whose chairman and principal
shareholder is Michael Zwebner. Michael Zwebner is also a director of Digital Way. Michael Zwebner and Charles Zwebner are brothers.



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



|(a) |  | Exhibits.
|--- |  | ---------



99.1.    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------



None.





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SIGNATURES



Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|Date: February 13, 2003 |  |  |  | YAK COMMUNICATIONS (USA), INC.
|----------------------- |  |  |  | ------------------------------
|                       
|                        |  |  |  |                               
|                        |  |  |  |                               







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CERTIFICATIONS



I, Charles Zwebner,
certify that:



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



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



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



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



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



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



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



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



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



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



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



|                       
|-----------------------
|Date: February 13, 2003
|                       





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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                            |  | Note |  | December 31, 2002 |            | June 30, 2002
|--------------------------- |  | ---- |  | ----------------- | ---------- | -------------
|                            |  |      |  | (unaudited)       |            |              
|ASSETS                      |  |      |  |                   |            |              
|CURRENT                     |  |      |  |                   |            |              
|Cash and cash equivalents   |  |      |  | $                 | 2,028,509  |              
|Accounts receivable, net    |  | 5    |  |                   | 6,465,439  |              
|Prepaid expenses and sundry |  |      |  |                   | 497,856    |              
|Income taxes recoverable    |  |      |  |                   |           |              
|                            |  |      |  |                   |            |              
|                            |  |      |  |                   | 8,991,804  |              
|                            |  |      |  |                   |            |              
|PROPERTY AND EQUIPMENT      |  | 3    |  |                   | 3,006,709  |              
|                           
|INVESTMENT IN JOINT VENTURE |  | 4    |  |                   | 100,000    |              
|                           
|DEPOSITS                    |  |      |  |                   | 61,413     |              
|                            |  |      |  |                   |            |              
|                            |  |      |  |                   | 12,159,926 |              
|                            |  |      |  |                   |            |              





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



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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                              |  | Note |  | December 31, 2002 |            | June 30, 2002 |  
|------------------------------------------------------------- |  | ---- |  | ----------------- | ---------- | ------------- | -
|                                                              |  |      |  | (unaudited)       |            |               |  
|LIABILITIES                                                   |  |      |  |                   |            |               |  
|CURRENT                                                       |  |      |  |                   |            |               |  
|Accounts payable and accrued liabilities                      |  |      |  | $                 | 1,329,723  |               | $
|Amounts due to network access and usage                       |  |      |  |                   | 384,308    |               |  
|Amounts due to long distance carriers                         |  |      |  |                   | 2,349,463  |               |  
|Amounts due for equipment                                     |  |      |  |                   | 87,935     |               |  
|Due to Factor                                                 |  | 5    |  |                   | 2,776,199  |               |  
|Income taxes payable                                          |  |      |  |                   | 875,866    |               |  
|Current portion of obligations under capital leases           |  | 6    |  |                   | 57,364     |               |  
|                                                              |  |      |  |                   |            |               |  
|                                                              |  |      |  |                   | 7,860,858  |               |  
|                                                              |  |      |  |                   |            |               |  
|LONG-TERM DEBT                                                |  |      |  |                   |            |               |  
|Obligations under capital leases                              |  | 6    |  |                   | 18,732     |               |  
|Advances from Telus Communications Inc.                       |  | 7    |  |                   | 1,166,025  |               |  
|                                                              |  |      |  |                   |            |               |  
|                                                              |  |      |  |                   | 1,184,757  |               |  
|                                                              |  |      |  |                   |            |               |  
|DEFERRED INCOME TAXES                                         |  | 8    |  |                   | 273,955    |               |  
|                                                              |  |      |  |                   |            |               |  
|                                                              |  |      |  |                   | 9,319,570  |               |  
|                                                              |  |      |  |                   |            |               |  
|STOCKHOLDERS EQUITY (DEFICIT)                               
|COMMON STOCK                                                  |  | 9    |  |                   | 201,521    |               |  
|SERIES A CONVERTIBLE PREFERRED STOCK                          |  | 9    |  |                   |           |               |  
|ADDITIONAL PAID-IN CAPITAL                                    |  |      |  |                   | 1,732,060  |               |  
|ACCUMULATED OTHER COMPREHENSIVE INCOMETRANSLATION ADJUSTMENT |  |      |  |                   | 11,811     |               |  
|RETAINED EARNINGS (DEFICIT)                                   |  |      |  |                   | 894,964    |               |  
|                                                              |  |      |  |                   |            |               |  
|                                                              |  |      |  |                   | 2,840,356  |               |  
|                                                              |  |      |  |                   |            |               |  
|                                                              |  |      |  |                   | 12,159,926 |               |  
|                                                              |  |      |  |                   |            |               |  



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



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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                    |  | Common stock |  | Additional paid-in capital |         | Series A Preferred stock |        |           | Accumulated other comprehensive income (loss) |          |   | Retained earnings (deficit) |   |          | Stockholders Equity (Deficit) | 
|--------------------------------------------------- |  | ------------ |  | -------------------------- | ------- | ------------------------ | ------ | --------- | --------------------------------------------- | -------- | - | --------------------------- | - | -------- | ------------------------------ | 
|                                                    |  | Shares       |  | Amount                     |         |                          | Shares |           |                                               | Amount   |   |                             |   |         
|Balance, June 30, 2001                              |  | 4,055,158    |  | $                          | 194,151 |                          | $      | 764,359   |                                               | 497,000  |   |                             | $ | 497,000  |                                | 
|Common stock issued under employee stock award      |  | 40,000       |  |                            | 400     |                          |        | 79,600    |                                               |         |   |                             |   |         |                                | 
|Common stock issued for conversion of debt          |  |              |  |                            |         |                          |        |           |                                               |          |   |                             |   |          |                                | 
|to equity                                           |  | 200,000      |  |                            | 2,000   |                          |        | 396,071   |                                               |         |   |                             |   |         |                                | 
|Common stock issued for conversion of preferred     |  |              |  |                            |         |                          |        |           |                                               |          |   |                             |   |          |                                | 
|stock in common stock                               |  | 497,000      |  |                            | 4,970   |                          |        | 492,030   |                                               | (497,000 | ) |                             |   | (497,000 | )                              | 
|Foreign currency translation adjustment             |  |             |  |                            |        |                          |        |          |                                               |         |   |                             |   |         |                                | 
|Dividends on preferred stock                        |  |             |  |                            |        |                          |        |          |                                               |         |   |                             |   |         |                                | 
|Net income                                          |  |             |  |                            |        |                          |        |          |                                               |         |   |                             |   |         |                                | 
|                                                    |  |              |  |                            |         |                          |        |           |                                               |          |   |                             |   |          |                                | 
|Balance, June 30, 2002                              |  | 4,792,158    |  |                            | 201,521 |                          |        | 1,732,060 |                                               |         |   |                             |   |         |                                | 
|Foreign currency translation adjustment (unaudited) |  |             |  |                            |        |                          |        |          |                                               |         |   |                             |   |         |                                | 
|Net income (unaudited)                              |  |             |  |                            |        |                          |        |          |                                               |         |   |                             |   |         |                                | 
|                                                    |  |              |  |                            |         |                          |        |           |                                               |          |   |                             |   |          |                                | 
|Balance, December 31, 2002 (unaudited)              |  | 4,792,158    |  |                            | 201,521 |                          |        | 1,732,060 |                                               |         |   |                             |   |         |                                | 
|                                                    |  |              |  |                            |         |                          |        |           |                                               |          |   |                             |   |          |                                | 



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



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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                           |  | Three months ended December 31, |           | Six months ended December 31,
|---------------------------------------------------------- |  | ------------------------------- | --------- | -----------------------------
|                                                           |  | 2002                            |           | 2001                         
|                                                           |  | (unaudited)                     |           | (unaudited)                  
|NET REVENUE                                                |  | $                               | 9,297,089 |                              
|                                                          
|COST OF REVENUE                                            |  |                                 | 5,433,374 |                              
|                                                           |  |                                 |           |                              
|GROSS MARGIN                                               |  |                                 | 3,863,715 |                              
|                                                           |  |                                 |           |                              
|EXPENSES                                                   |  |                                 |           |                              
|Advertising and promotion                                  |  |                                 | 1,046,334 |                              
|General and administration                                 |  |                                 | 900,625   |                              
|Employee stock award cost                                  |  |                                 |          |                              
|Organizational and start-up costs                          |  |                                 | 47,762    |                              
|Accounts receivable financing                              |  |                                 | 112,380   |                              
|Interest on capital lease obligations                      |  |                                 | 3,715     |                              
|Depreciation and amortization                              |  |                                 | 236,981   |                              
|                                                           |  |                                 |           |                              
|                                                           |  |                                 | 2,347,797 |                              
|                                                           |  |                                 |           |                              
|INCOME BEFORE INCOME TAX                                   |  |                                 | 1,515,918 |                              
|                                                          
|PROVISION FOR INCOME TAXES                                 |  |                                 | 778,556   |                              
|                                                           |  |                                 |           |                              
|NET INCOME                                                 |  |                                 | 737,362   |                              
|                                                           |  |                                 |           |                              
|BASIC EARNINGS PER SHARE                                   |  |                                 | 0.15      |                              
|                                                           |  |                                 |           |                              
|DILUTED EARNINGS PER SHARE                                 |  |                                 | 0.12      |                              
|                                                           |  |                                 |           |                              
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING       |  |                                 | 4,792,158 |                              
|                                                           |  |                                 |           |                              
|WEIGHTED AVERAGE NUMBER OF COMMON SHARESASSUMING DILUTION |  |                                 | 6,076,158 |                              
|                                                           |  |                                 |           |                              





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



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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                 |  | Three months ended December 31, |           |   | Six months ended December 31, |  
|-------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ----------------------------- | -
|                                                                                 |  | 2002                            |           |   | 2001                          |  
|                                                                                 |  | (unaudited)                     |           |   | (unaudited)                   |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                             |  |                                 |           |   |                               |  
|Net income                                                                       |  | $                               | 737,362   |   |                               | $
|Adjustments to reconcile net income to net cash provided by operating
activities |  |                                 |           |   |                               |  
|Depreciation and amortization                                                    |  |                                 | 236,981   |   |                               |  
|Deferred income taxes                                                            |  |                                 | 38,280    |   |                               |  
|Employee stock award cost                                                        |  |                                 |          |   |                               |  
|Loss on disposal of assets                                                       |  |                                 | 1,617     |   |                               |  
|Changes in assets and liabilities:                                               |  |                                 |           |   |                               |  
|Decrease (increase) in:                                                          |  |                                 |           |   |                               |  
|Accounts receivable                                                              |  |                                 | (821,886  | ) |                               |  
|Prepaid expenses and sundry                                                      |  |                                 | (84,708   | ) |                               |  
|Income taxes recoverable                                                         |  |                                 |          |   |                               |  
|Deferred costs                                                                   |  |                                 |          |   |                               |  
|Deposits                                                                         |  |                                 | (63       | ) |                               |  
|Increase (decrease) in:                                                          |  |                                 |           |   |                               |  
|Accounts payable and accrued liabilities                                         |  |                                 | 101,871   |   |                               |  
|Amounts due for network access and usage                                         |  |                                 | (143,092  | ) |                               |  
|Amounts due to long distance carriers                                            |  |                                 | 357,970   |   |                               |  
|Amounts due for equipment                                                        |  |                                 | (88,196   | ) |                               |  
|Income taxes payable                                                             |  |                                 | 734,504   |   |                               |  
|Due to Factor                                                                    |  |                                 | (866      | ) |                               |  
|                                                                                 |  |                                 |           |   |                               |  
|Net cash provided by operating activities                                        |  |                                 | 1,069,774 |   |                               |  
|                                                                                 |  |                                 |           |   |                               |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                             |  |                                 |           |   |                               |  
|Investment in joint venture                                                      |  |                                 | (100,000  | ) |                               |  
|Purchase of property and equipment                                               |  |                                 | (259,997  | ) |                               |  
|Proceeds from sale of assets                                                     |  |                                 | 5,928     |   |                               |  
|                                                                                 |  |                                 |           |   |                               |  
|Net cash used in investing activities                                            |  |                                 | (354,069  | ) |                               |  
|                                                                                 |  |                                 |           |   |                               |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                             |  |                                 |           |   |                               |  
|Repayments on obligations under capital leases                                   |  |                                 | (43,856   | ) |                               |  
|Advances from Telus Communications Inc.                                          |  |                                 | 531,354   |   |                               |  
|Repayments under loan payable                                                    |  |                                 |          |   |                               |  
|Due to related parties                                                           |  |                                 |          |   |                               |  
|Note payable                                                                     |  |                                 |          |   |                               |  
|                                                                                 |  |                                 |           |   |                               |  
|Net cash provided by (used in) financing activities                              |  |                                 | 487,498   |   |                               |  
|                                                                                 |  |                                 |           |   |                               |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             |  |                                 | 1,203,203 |   |                               |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   |  |                                 | 825,306   |   |                               |  
|                                                                                 |  |                                 |           |   |                               |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                         |  |                                 | 2,028,509 |   |                               |  
|                                                                                 |  |                                 |           |   |                               |  



Supplemental disclosure of cash flow information (note 10).



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



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YAK COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|1. |  | ORGANIZATION AND BUSINESS
|-- |  | -------------------------



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



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



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------



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



Principles of
consolidation



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



Revenue
recognition



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



Cost of revenue



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



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- |  | ---------------------------------------------------



Use of estimates



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



Computation of earnings per common share



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



Foreign currency translation and foreign assets



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



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- |  | ---------------------------------------------------



Cash and cash equivalents



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



Property and equipment



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



|Telecom switching systems                            |  | 20% declining balance 
|---------------------------------------------------- |  | ----------------------
|Billing, administration and customer service systems |  | 20% declining balance 
|Carrier identification codes loading                 |  | 20% declining balance 
|Office furniture and equipment                       |  | 20% declining balance 
|Leasehold improvements                               |  | over term of the lease
|Computer hardware                                    |  | 20% declining balance 
|Automobile                                           |  | 20% declining balance 
|Install Lines                                        |  | 20% declining balance 



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



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- |  | ---------------------------------------------------



Property and equipment (contd)



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



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



Income taxes



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



Cost of Start-up Activities



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



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- |  | ---------------------------------------------------



Advertising and promotion expense



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



Stock option plan



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



Comprehensive income



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



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



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- |  | ---------------------------------------------------



Comprehensive income (contd)



Comprehensive income for the six months ended December 31, 2002 and 2001 are as follows:



|                                        |  | December 31, 2002 |           |   | June 30, 2002 |  
|--------------------------------------- |  | ----------------- | --------- | - | ------------- | -
|Net income                              |  | $                 | 1,382,075 |   |               | $
|Foreign currency translation adjustment |  |                   | (55,421   | ) |               |  
|                                        |  |                   |           |   |               |  
|                                        |  |                   | 1,326,654 |   |               |  
|                                        |  |                   |           |   |               |  



Fair value of
financial instruments



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



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





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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- |  | ---------------------------------------------------



Credit risk



Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts
receivable. The Company has in place systems to prevent and detect fraud. The Companys system limits credit to any one customer in the amount of $225 without formal approval. On occasion, defaults occur on receivables. The Company makes a
provision when deemed necessary. As of December 31, 2002 and June 30, 2002, the allowance for doubtful accounts was approximately $19,000.



Reclassifications



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



Unaudited interim financial statements



The accompanying financial statements of the Company for the
six months ended December 31, 2002 and 2001 are unaudited. All adjustments (consisting only of normal recurring adjustments) have been made which in the opinion of management, are necessary for a fair presentation thereof. Results of operations for
the six months ended December 31, 2002 and 2001 are not necessarily indicative of the results that may be expected for the full year or for any future period.



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|3. |  | PROPERTY AND EQUIPMENT
|-- |  | ----------------------



Property and equipment consist of the following:



|                                     |  | Cost |           | Accumulated depreciation |   | Net book value
|------------------------------------ |  | ---- | --------- | ------------------------ | - | --------------
|                                     |  |      |           | December 31, 2002        |   | June 30, 2002 
|Telecom switching systems            |  | $    | 2,621,024 |                          | $ | 899,588       
|Billing, administration and          |  |      |           |                          |   |               
|customer service systems             |  |      | 928,830   |                          |   | 302,163       
|Carrier identification codes loading |  |      | 231,487   |                          |   | 32,240        
|Office furniture and equipment       |  |      | 81,330    |                          |   | 14,360        
|Leasehold improvements               |  |      | 52,229    |                          |   | 11,253        
|Computer hardware                    |  |      | 102,852   |                          |   | 10,527        
|Automobile                           |  |      | 5,514     |                          |   | 1,915         
|Installed lines                      |  |      | 324,966   |                          |   | 69,477        
|                                     |  |      |           |                          |   |               
|                                     |  |      | 4,348,232 |                          |   | 1,341,523     
|                                     |  |      |           |                          |   |               



Telecom
switching systems include assets under capital leases having a net book value of approximately $742,900 as of December 31, 2002 and $858,000 as of June 30, 2002.



Depreciation expense for property and equipment including equipment under capital leases for the periods
ended December 31, 2002 and June 30, 2002 was approximately $359,000 and $463,299, respectively.



|4. |  | INVESTMENT IN JOINT VENTURE
|-- |  | ---------------------------



The Company has entered into a commercial services and marketing agreement with a company in Peru to provide up to $400,000 to assist in
its development of dial-around long-distance services for which Yak Communications (USA) Inc. and its subsidiaries will process its international traffic and earn 50% of the profits generated by the business. To December 31, 2002, the Company had
advanced $100,000 under this agreement and it is committed to advance a further $300,000 over the next six months.



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|5. |  | DUE TO FACTOR
|-- |  | -------------



The amounts due to factor are secured by a pledge of the Companys accounts receivable. The Company has an agreement to sell an
undivided interest in certain accounts receivable with recourse to a Factor. Payments are collected by the Factor from the sold accounts receivable; the collections are reinvested by the Factor in new accounts receivable of the Company, and a yield,
as defined in the agreement, is transferred to the Factor. As at December 31, 2002, the amount sold under the agreement, expiring February 2004, that had not been collected was approximately $4,208,000 (December 31, 2001$2,195,000) which will
be forwarded to the Company once collected after repayment of the Factors advances.



|6. |  | OBLIGATIONS UNDER CAPITAL LEASES
|-- |  | --------------------------------



The Companys capital leases are for terms of 24 to 36 months at annual interest rates ranging from 9.25% to 15.00%.



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



|For the year ended December 31, |  |   |       
|------------------------------- |  | - | ------
|2003                            |  | $ | 65,259
|2004                            |  |   | 15,074
|2005                            |  |   | 7,537 
|                                |  |   |       
|Total minimum lease payments    |  |   | 87,870
|Amounts representing interest   |  |   | 11,774
|                                |  |   |       
|Principal                       |  |   | 76,096
|Current portion                 |  |   | 57,364
|                                |  |   |       
|                                |  |   | 18,732
|                                |  |   |       



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YAK
COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|7. |  | ADVANCES FROM TELUS COMMUNICATIONS INC. (Telus)
|-- |  | -----------------------------------------------



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



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



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



|Current   |  | $ | 540,000  
|--------- |  | - | ---------
|Long-term |  |   | 626,025  
|          |  |   |          
|          |  |   | 1,166,025
|          |  |   |          



|8. |  | DEFERRED INCOME TAXES
|-- |  | ---------------------



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The deferred tax liabilities of December 31, 2002 and June 30, 2002 are approximately $274,000 and $204,000 respectively and relate to the difference between the depreciation
used for Canadian tax purposes and financial reporting purposes.



As of December 31, 2002, the Company has net operating loss carryforwards for U.S. Federal income tax purposes of $325,000 which may provide future income tax benefits expiring between 2010 and 2022.



Realization of the net operating loss carryforward is
dependant on generating sufficient taxable income before expiration of the loss carryforwards. As such Management has provided a valuation allowance for the full amount of the deferred tax asset of $100,000 as of December 31, 2002 related to the
U.S. operations.



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COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|9. |  | CAPITAL STOCK
|-- |  | -------------



Common stock



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



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



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



Series A convertible preferred stock



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



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



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COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|10. |  | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|--- |  | ------------------------------------------------



|                                                                                     |  | Three months ended December 31, |           | Six months ended December 31,
|------------------------------------------------------------------------------------ |  | ------------------------------- | --------- | -----------------------------
|                                                                                     |  | 2002                            |           | 2001                         
|                                                                                     |  | (unaudited)                     |           | (unaudited)                  
|Interest paid                                                                        |  | $                               | 3,715     |                              
|Common stock issued for services                                                     |  |                                 |          |                              
|Conversion of loan payable to common stock                                           |  |                                 |          |                              
|Obligation under capital leases incurred in connection with acquisition of
equipment |  |                                 |           |                              
|Cash and cash equivalents consists of:                                               |  |                                 |           |                              
|Cash balance                                                                         |  |                                 | 692,025   |                              
|Short-term investments                                                               |  |                                 | 1,336,484 |                              



|11. |  | COMMITMENTS
|--- |  | -----------



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



|For the year ended December 31, |  |   |       
|------------------------------- |  | - | ------
|2003                            |  | $ | 59,000
|2004                            |  |   | 80,000
|2005                            |  |   | 80,000
|2006                            |  |   | 77,000
|2007                            |  |   | 25,000



|(b) |  | The Company is obligated to repurchase 405,516 common shares from a shareholder for $811,032 in cash.
|--- |  | -----------------------------------------------------------------------------------------------------



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COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|12. |  | STOCK OPTION PLAN
|--- |  | -----------------



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



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



If compensation cost for the Companys grants for stock-based compensation had been recorded consistent with the fair value-based
method of accounting per SFAS No. 123, the Companys pro forma net income (loss), and pro forma basic and diluted net income (loss) per share for the six months ending December 31, would be as follows:



|                                    |  | For the six months ended |          
|----------------------------------- |  | ------------------------ | ---------
|                                    |  | December 31, 2002        |          
|Net income as reported              |  | $                        | 1,382,075
|Pro forma net income (loss)         |  |                          | 1,382,075
|Basic net income (loss) per share   |  |                          |          
|As reported                         |  |                          | 0.29     
|Pro forma                           |  |                          | 0.29     
|Diluted net income (loss) per share |  |                          |          
|As reported                         |  |                          | 0.23     
|Pro forma                           |  |                          | 0.23     



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COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|13. |  | RELATED PARTY TRANSACTIONS
|--- |  | --------------------------



|(a) |  | The Company paid office rent for the periods ended December 31, 2002 and 2001 of $nil and $45,000 and purchased property and equipment of $nil for the period ended
December 31, 2002 from a corporation of which the Companys chairman is a shareholder and director.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | The Company paid marketing and design fees for the periods ending December 31, 2002 and 2001 of $39,732 and $36,495 respectively to a corporation controlled by an
officer and shareholder.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) |  | The Company paid professional fees for the periods ending December 31, 2002 and 2001 of $21,220 and $25,741 respectively to a director and minority shareholder.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(d) |  | The Company paid consulting fees for the periods ending December 31, 2002 and 2001 of $31,641 and $46,334 to a corporation controlled by a minority shareholder.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



|(e) |  | The Company paid consulting fees for the period ended December 31, 2002 of $150,000 to a shareholder for the development of international operations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(f) |  | The Company paid a management fee for the period ended December 31, 2002 of $90,000 to a corporation controlled by the Companys chairman.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------



|(g) |  | Prepaid expenses and sundry assets include advances made during the year of $69,291 to a corporation of which the Companys chairman is a shareholder and
director.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(h) |  | A shareholder of the Company is a Director of the Joint Venture partner in Peru.
|--- |  | --------------------------------------------------------------------------------



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



|14. |  | ECONOMIC DEPENDENCE
|--- |  | -------------------



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



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COMMUNICATIONS (USA), INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|15. |  | ADVERTISING AND PROMOTION
|--- |  | -------------------------



The Company expenses advertising costs as incurred which includes direct-mail advertising, newspaper and television advertising.
Advertising expense for the six months ended December 31, 2002 and 2001 were approximately $2,036,000 and $700,000, respectively.



|16. |  | SEGMENTED AND RELATED INFORMATION
|--- |  | ---------------------------------



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



|                        |  | For the six months ended |           
|----------------------- |  | ------------------------ | ----------
|                        |  | December 31, 2002        |           
|Net revenue             |  |                          |           
|Canada                  |  | $                        | 16,761,142
|United States           |  |                          | 715,052   
|International           |  |                          |          
|                        |  |                          |           
|                        |  |                          | 17,476,194
|                        |  |                          |           
|Operating profit (loss) |  |                          |           
|Canada                  |  |                          | 3,547,806 
|United States           |  |                          | (1,049,323
|International           |  |                          | (156,675  
|                        |  |                          |           
|                        |  |                          | 2,341,808 
|                        |  |                          |           
|Assets                  |  |                          |           
|Canada                  |  |                          | 11,332,972
|United States           |  |                          | 726,954   
|International           |  |                          | 100,000   
|                        |  |                          |           
|                        |  |                          | 12,159,926
|                        |  |                          |           





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Exhibit Index



|Exhibit Number |  | Exhibit Description                                                                                                   
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------
|              
|99.1           |  | CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
|              
|               |  |