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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB/A

(Amendment No. 1)



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(Mark One)

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



For the quarterly period ended March 31, 2004



| ̈ | 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.: 000-33471



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YAK COMMUNICATIONS INC.

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



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



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

(Address of principal executive offices)



(647) 722-2752

(Issuers Telephone Number, Including Area Code)



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

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



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



As of March 31,
2004, 12,893,250 shares of the issuers Common Stock, no par value per share, were outstanding.



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES



INDEX TO FORM 10-QSB/A

(Amendment No. 1)



|                               |  |                                                                                                                   |  |     
|------------------------------ |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                   |  | Page
|Explanatory Note               |  | 1                                                                                                                
|PART I - FINANCIAL INFORMATION |  |                                                                                                                  
|                               |  |                                                                                                                  
|Item 1.                        |  | Financial Statements                                                                                              |  | 2   
|                               |  |                                                                                                                  
|                               |  | Consolidated Balance SheetsMarch 31, 2004 and June 30, 2003                                                       |  | F-1 
|                               |  |                                                                                                                  
|                               |  | Consolidated Statements of Stockholders EquityMarch 31, 2004 and June 30, 2003                                   |  | F-3 
|                               |  |                                                                                                                  
|                               |  | Consolidated Statements of Income For the Three months andNine months ended March 31, 2004 and March 31, 2003     |  | F-4 
|                               |  |                                                                                                                  
|                               |  | Consolidated Statements of Cash Flows For the Three months andNine months ended March 31, 2004 and March 31, 2003 |  | F-5 
|                               |  |                                                                                                                  
|                               |  | Notes to Consolidated Financial Statements                                                                        |  | F-6 
|                               |  |                                                                                                                  
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 2   
|                               |  |                                                                                                                  
|Item 3.                        |  | Controls and Procedures                                                                                           |  | 12  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                                                  
|                               |  |                                                                                                                  
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                                  |  | 12  
|                               | 
|Signatures                     |  | 13                                                                                                               



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EXPLANATORY NOTE



Yak
Communications Inc. (the Company) is filing this Amendment No. 1 to its Quarterly Report on Form 10-QSB/A for the quarter ended March 31, 2004 (the Report) to restate its consolidated balance sheet, statements of operations
and statements of cash flows for the quarter ended March 31, 2004, and the notes related thereto. As previously disclosed, the Company has reviewed the accounting methodology used with respect to an historical software acquisition transaction and
has determined to restate its consolidated financial statements for fiscal years 2003 and 2004, along with the quarterly periods contained in fiscal 2004 and the first quarter of fiscal 2005, to change the accounting treatment for the subject
software transaction.



This Amendment No. 1 corrects the
Companys quarterly financial statements to reflect the fair value of certain software acquired by the Company on June 30, 2003, and to revise its assets and liabilities accordingly. The Company is restating its consolidated financial
statements to make the following classes of adjustments (the Restatement):



| |  |  | changes in accounting treatment of software acquisition transaction
| | - |  | -------------------------------------------------------------------



| |  |  | correct balance sheet amounts to reflect adjustments resulting from change in accounting treatment
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | adjust consolidated statement of operations and statement of cash flows for interest expense, depreciation expense, other income, and related income tax expense to reflect changes
in the above-referenced accounting treatment
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For
a more detailed description of the Restatement, see Note 5 entitled Next Generation Software and Financial Restatements to the accompanying consolidated financial statements.



While the remainder of the Report is unchanged, the Company is reproducing the Report in its entirety to provide a complete
presentation to the reader. However, this Amendment No. 1 also amends and restates Item 2 of Part I of the Report, in each case solely as a result of, and to reflect, the Restatement, and no other information in the Report is amended hereby. In
addition, pursuant to Rule 12b-15, the Company is also including currently dated certifications of the Chief Executive Officer and Principal Financial Officer. The certifications of the Companys Chief Executive Officer and Principal Financial
Officer are attached to this Amendment No. 1 as Exhibits 31.1, 31.2, 32.1 and 32.2.



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



Concurrently with the filing of this Amendment No. 1, the Company is filing (i) Amendment No. 1 on Form 10-KSB/A to its Annual Report on Form 10-KSB for
the year ended June 30, 2003, (ii) Amendment No. 1 on Form 10-QSB/A to its Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003, (iii) Amendment No. 1 on Form 10-QSB/A to its Quarterly Report on Form 10-QSB for the quarter ended
December 31, 2003, (iv) Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the year ended June 30, 2004, and (v) Amendment No. 1 on Form 10-Q/A to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.



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PART I



FINANCIAL INFORMATION



Item 1. Financial Statements.



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



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 Inc. and Subsidiaries, and the related notes to the Financial Statements included in the Companys Form 10-KSB/A for the fiscal year ended June 30, 2003, 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/A. Our Consolidated Financial Statements have been prepared in accordance with accounting principles
generally accepted 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.



Significant Transactions and Events



On June 20, 2003, Yak Communications (Canada) Inc., the Companys
wholly-owned subsidiary (Yak Canada), acquired certain next generation telecommunications software from Consortio, Inc., a Delaware corporation and Convenxia Limited, a corporation organized under the laws of the United
Kingdom (the Sellers), pursuant to the terms and conditions of a Software Acquisition Agreement. Payments made or due to the Sellers for the software were as follows: (a) $565,000 in cash was paid at the closing of the transaction; (b)
delivery of a short term promissory note in the principal amount of $400,000 providing for equal monthly payments of $40,000; and (c) the balance of the purchase price is evidenced by a long-term promissory note executed in favor of Consortio, Inc.
with a principal amount of $8,535,000 bearing interest at 7.25% per annum. Interest and principal are payable quarterly in the amount of $174,965 commencing September 30, 2003 and is due July 15, 2012. The sole recourse by the lender is the
software. Yak Canada was also issued a warrant to purchase up to 8% of the issued and outstanding common stock of Convenxia Limited.



In addition to the purchase of the software, Yak Canada and the Sellers entered into a joint venture agreement which licensed the use of the software for
telecommunication services outside Canada to non-Yak customers using the subject software. Under the joint venture agreement, Yak Canada is entitled to receive 4% of all gross revenue arising from the sale of services using the acquired software
with minimum quarterly payments of $150,000 through June 30, 2006 and, thereafter, 2.75% of gross revenue with minimum quarterly payments of $175,000.



On January 24, 2005, the Company engaged Deloitte & Touche (Deloitte) as its new independent certified public accountants. In connection
with their review of the historical financial statements, Deloitte identified a software acquisition transaction with respect to which the accounting treatment used by the Company possibly was incorrect.



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On February 23, 2005, the Company announced that it was delaying the filing of its Form 10-Q for the
third fiscal quarter ended December 31, 2004, beyond the extended filing deadline of February 22, 2005, because the work required to review this matter was not able to be completed.



Also on February 23, 2005, The NASDAQ Stock Market advised the Company that it did not comply with Marketplace Rule
4310(c)(14), which requires it to provide NASDAQ with copies of all reports required to be filed with the SEC. As a result, NASDAQ appended the fifth character E to the Companys common stock trading symbol as of the opening of
business on February 25, 2005.



On March 30, 2005, Yak
announced that it had presented a written submission to the Office of the Chief Accountant (OCA) of the SEC seeking guidance with respect to the accounting issues described above. Due to the judgments involved in the applicable
accounting analysis, the Company, in consultation with its Audit Committee, decided to obtain the guidance of the OCA on its analysis and conclusions regarding the subject software transaction. Based on initial discussions with the OCA we have
restated various historical financial statements; however, these amended filings are subject to final guidance from the OCA which may result in further restatements.



On April 6, 2005, the Company re-engaged Horwath Orenstein LLP as its new independent certified public accountants.



The Company estimated the fair value of the assets
and liabilities associated with the Software Acquisition Agreement based on the related estimated cash flows. Statement of Financial Accounting Concepts No. 7 (SFAC No. 7) provides a framework for using future cash flows and present value as the
basis for accounting measurements of fair value. In accordance with SFAC No. 7, the Company used the expected cash flow approach to estimate fair value, focusing on explicit assumptions about the range of possible cash outcomes and their respective
probabilities. Based on this expected cash flow approach, the fair values of the liabilities are estimated to be significantly less than their face values. The fair value of the Convenxia warrants was derived by using the Black-Scholes valuation
model.



Based on the foregoing, the fair value of the Convenxia
transactions components were estimated for accounting purposes as follows:



|                              |  |   |            
|----------------------------- |  | - | -----------
|Software                      |  | $ | 1.7 million
|Receivable from joint venture |  |   | 5.0 million
|Warrants                      |  |   | 0.1 million
|                              |  |   |            
|Total assets acquired         |  | $ | 6.8 million
|                              | 
|Cash paid                     |  | $ | 0.7 million
|Short-term note payable       |  |   | 0.4 million
|Long-term note payable        |  |   | 5.7 million
|                              |  |   |            
|Total consideration paid      |  | $ | 6.8 million



The Company obtained
an independent valuation in the amount of $5.9 million (which is in the mid-point of the range of $5.4 million to $6.4 million as calculated by the independent valuator) for the acquired software. In accordance with Statement of Financial Accounting
Standards No. 141 (FAS 141), the excess of fair value assigned to the assets acquired (i.e., $4.2 million) was allocated as a pro rata basis to reduce the amounts that otherwise would have been assigned to all of the non-financial acquired assets
(e.g., software). As a result, the fair value of the software acquired was reduced for accounting purposes from its estimated fair value of $5.9 million to its carrying value of $1.7 million.



For further details, refer to Note 5 to the Consolidated Financial
Statements.



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On July 2, 2003, Yak Canada, acquired Contour Telecom Inc. and Argos Telecom Inc. from Allstream Inc.,
formerly AT&T Canada Corp., pursuant to the terms and conditions of a Share and Debt Purchase Agreement. Contour Telecom Inc. is a provider of outsourced telecommunications management services and Argos Telecom Inc. is a value added reseller of
telecommunications services across Canada. Consideration for this purchase was $5,572,710 in cash plus costs associated with the transaction of $1,258,933. Yak Canada will record goodwill of approximately $1,900,000 in respect of this transaction.
The acquired companies had revenues of $21,266,155 for the twelve months ended June 30, 2003. On September 15, 2003, we filed an amendment to our current report on Form 8-K filing certain historical and pro forma financial statements in connection
with this transaction.



Overview



We are a provider of discount, long-distance telecommunication services in
Canada and the U.S. to residential and small-to-medium business enterprises. We primarily concentrate our marketing efforts towards consumers that make significant amounts of international calls directly targeting ethnic markets and communities in
major urban centers.



Our primary product offering is
dial-around services (also known as casual calling) at variable and flat rate pricing. Casual calling allows our customers to dial-around their existing long distance carrier on any call by entering a few digits prior to making the
call, without permanently switching long distance carriers. We offer 1+ billing which allows our customers to permanently switch all of their calls from their existing long distance carrier to our long distance service. We also offer
telecom management services.



Results of Operations



Comparison of nine months ended March 31, 2004 and 2003



Net revenue increased $32,428,092, or 116%, to $60,496,281 for the nine
months ended March 31, 2004, when compared to the nine months ended March 31, 2003. This increase in revenues resulted partly from our July 2, 2003 acquisition of Contour Telecom Inc. (Contour) and its subsidiary, Argos Telecom Inc.
(Argos), which collectively added sales of $13,248,879 for the subject period. The balance of the increase was a result of (i) sales of our Looney Call product, which added revenues of $6,754,351 compared to $824,636 for the
comparable period in 2003, and (ii) continued growth in Canadian markets, which increased sales by $13,554,074. Our revenue in our U.S. operating territories decreased by $304,576 to $808,065 for the nine months ended March 31, 2004, from $1,112,641
for the nine months ended March 31, 2003. This decrease was a result of managements decision to change its active strategy of penetration into the U.S. market, considering more cost effective alternatives, specifically one or more acquisitions
of a U.S. company with existing telephony operations.



Cost of
revenue increased $22,188,479 or 126%, to $39,860,386 for the nine months ended March 31, 2004, from $17,671,907 for the nine months ended March 31, 2003. Cost of revenue is comprised primarily of the cost of long distance services, fees for the
processing and transporting of our calls and fixed and variable line access costs. The overall cost of revenue increased to 66% of sales for the nine months ended March 31, 2004, from 63% of sales for the nine months ended March 31, 2003. This
increase in cost of sales is a result of the lower margins inherent in our Contour and Argos businesses as compared to those of our core dial-around operations. The cost of long distance services has decreased to 28% for the nine months ended March
31, 2004, from 35% for the nine months ended March 31, 2003, as a result of our actively seeking competitive routes and the effect of deregulation on the cost of long distance services in other international markets.



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General and administrative expenses (G&A) increased $5,726,542 or 247%, to $8,046,646 for
the nine months ended March 31, 2004, from $2,320,104 for the nine months ended March 31, 2003. Of this increase, $3,124,448 resulted from our acquisition of Contour and Argos. The largest component of G&A was salaries, which increased to
$4,811,339 for the nine months ended March 31, 2004, from $1,244,196 for the nine months ended March 31, 2003. This salary increase was a result of hiring additional administration, technical and customer service employees that were required to
support our growth during fiscal year 2004, and included $2,206,782 in salaries from our acquisition of Contour and Argos. In addition, to facilitate the future growth of the Company, we added four senior executives to our management team which
increased salaries further. G&A expenses at the holding company level increased by $449,317 due to the increasing costs of operating as a public company. The majority of the increase was in professional fees including investor relations, the
costs of research reports, in addition to the costs associated with exploring the Companys new growth opportunities and financing alternatives.



Sales and marketing expenses increased $334,710 or 12% to $3,228,053 for the nine months ended March 31, 2004, from $2,893,343 for the nine months ended
March 31, 2003. This increased amount takes into account a reduction of sales and marketing expenses in the U.S. of $678,242. An increase of $1,012,952 is due to additional spending for marketing to re-brand the 10-10 Yak product in order to
increase our revenue base in our Canadian markets, as well as $44,853 to promote our services in Peru.



Accounts receivable financing costs related to the factoring of our trade accounts receivable, increased $144,293 or 49%, to $436,064 for the nine months
ended March 31, 2004, from $291,771 for the nine months ended March 31, 2003. This is due to a 91% increase in the amounts financed and the impact of a lower interest rate that was negotiated with the lending party.



Organizational and start-up costs for the development of new operations were
$114,729 for the nine months ended March 31, 2004, as compared to $415,966 for the nine months ended March 31, 2003. These costs were composed primarily of legal and consulting fees incurred to obtain the regulatory licenses and contracts for our
operations outside Canada. For the nine months ended March 31, 2004 organizational and start-up costs include $86,647 expended for the development of our international operations in Peru and $28,082 for employee-related expenses for our broadband
initiative.



Depreciation and amortization increased
$1,669,625, or 318%, to $2,194,351 for the nine months ended March 31, 2004, as compared to $524,726 for the nine months ended March 31, 2003. This resulted primarily from an increase in capital spending to $4,618,566 for the nine months ended March
31, 2004, and a reduction in the estimated useful life of existing telecommunication switching systems, which amounted to $878,000 of increased depreciation. The accelerated depreciation of the switching systems is based on a conservative view of
their remaining useful lives, and is unusual in scope and magnitude. Amortization of customer lists acquired in connection with the Argos transaction was $300,000 for the period.



Net income increased by $1,517,298 or 62% to $3,961,589 for the nine months ended March 31, 2004, from $2,444,291 for the
nine months ended March 31, 2003.



Comparison of three months ended March
31, 2004 and 2003



Net revenue increased $10,872,739 or
103%, to $21,464,734 for the three months ended March 31, 2004, from $10,591,995 for the three months ended March 31, 2003. This increase resulted partly from our acquisition of Contour and Argos, which added sales of $4,300,283. The balance of the
increase was a result of our Looney-Call product, which added $2,505,490 compared to $756,542 for the same period in 2003 and continued growth in our Canadian markets which increased sales by $4,898,034. Our



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revenue in our U.S. operating territories decreased by $74,526 to $323,063 for the three months ended March 31, 2004,
from $397,589 for the three months ended March 31, 2003. The decrease is attributed to managements decision to find a more cost effective strategy for penetrating the U.S. market, specifically one or more acquisitions of a U.S. company with
existing telephony operations.



Cost of revenue increased
$7,528,032, or 110%, to $14,367,068 for the three months ended March 31, 2004, from $6,839,036 for the three months ended March 31, 2003. Cost of revenue is comprised primarily of the cost of long distance services, fees for the processing and
transporting of our calls and fixed and variable line access costs. The overall cost of revenue increased to 67% of sales for the three months ended March 31, 2004, from 65% of sales for the three months ended March 31, 2003. This increase in cost
of sales is a result of the lower margins inherent in our Contour and Argos businesses as compared to those of our core dial-around operations. The cost of long distance services has decreased to 30% for the three months ended March 31, 2004, from
38% for the three months ended March 31, 2003, as a result of our actively seeking out competitive routes and the effect of deregulation on the cost of long distance services in other international markets.



G&A increased $2,019,566 or 207%, to $2,996,376 for the three months
ended March 31, 2004, from $976,810 for the three months ended March 31, 2003. Of this increase, $1,074,351 resulted from our acquisition of Contour and Argos. The largest component of G&A was salaries, which increased to $1,846,876 for the
three months ended March 31, 2004, from $490,087 for the three months ended March 31, 2003. This salary increase was a result of hiring additional administration, technical and customer service employees that were required to support our growth
during fiscal year 2004 and included $641,088 in salaries from acquisition of Contour and Argos. In addition, we added four senior executives to our management team in the current quarter to facilitate the future growth in Canada and the U.S.
G&A of our holding company increased by $173,500 due to the increase in professional fees including investor relations costs and the costs of research reports, as well as the costs associated with exploring the Companys new growth
opportunities and financing alternatives.



Sales and marketing
expenses increased $399,194 or 47% to $1,256,790 for the three months ended March 31, 2004, from $857,596 for the three months ended March 31, 2003. Our spending in the U.S. increased marginally by $1,987 as management re-evaluates its U.S.
strategy. An increase of $397,207 is due to additional spending to promote and re-brand our existing products to increase our revenue base in our Canadian markets.



Accounts receivable financing costs related to the factoring of our trade accounts receivable, increased $54,332, or 60%, to
$144,148 for the three months ended March 31, 2004, from $89,816 for the three months ended March 31, 2003. This increase is a direct result of larger borrowings for the three months ended March 31, 2004 and the impact of a lower interest rate that
was negotiated with the lending party effective March 2004.



Organizational and start-up costs for the development of new operations were $28,082 for the three months ended March 31, 2004, as compared to $64,073 for the three months ended March 31, 2003. These costs were composed primarily of
employee-related expenses for our broadband initiative.



Depreciation and amortization increased $678,244, or 409%, to $844,149 for the three months ended March 31, 2004, as compared to $165,905 for the three months ended March 31, 2003. Depreciation and amortization has increased over the last
fiscal years as capital spending has increased and due to the reduction in the estimated useful life of existing telecom switching systems, which amounted to $346,000 of increased depreciation. The accelerated depreciation of the switching systems
is based on a conservative view of their remaining useful lives, and is unusual in scope and magnitude.



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Net income increased by $70,330 or 7% to $1,131,372 for the three months ended March 31, 2004, from
$1,061,042 for the three months ended March 31, 2003.



Liquidity and Capital
Resources



Our liquidity needs are for operating
activities, purchases of capital assets and interest and principal payments on outstanding indebtedness. To date, we have financed our growth through internally generated funds, borrowings (including accounts receivable financing, vendor financing
and capital lease financing) and, initially, the private placement of equity securities. In March 2004, we raised an additional $17,010,710 through the issuance of 1,470,000 shares and warrants to purchase 367,500 shares of our common stock in a
private placement transaction.



Net cash provided from
operating activities increased to $10,569,584 for the nine months ended March 31, 2004, from $3,140,781 for the nine months ended March 31, 2003. This was principally due to the increase in our net income to $3,961,589 for the nine months ended
March 31, 2004, from $2,444,291 for the nine months ended March 31, 2003, change in deferred taxes of $1,059,870, and the net increase in net assets and liabilities of $2,734,544.



Net cash used in investing activities was $10,842,580 for the nine months ended March 31, 2004, as compared to net cash used
of $1,623,245 for the nine months ended March 31, 2003. For the nine months ended March 31, 2004, the Company used $4,618,566 for acquisition of property and equipment and $5,472,712 to acquire Contour and Argos on July 2, 2003.



Net cash provided by financing activities was $16,259,168 for the nine months
ended March 31, 2004, as compared to $846,442 provided by financing activities for the nine months ended March 31, 2003. The increase in 2003 was principally due to the increase in advances from Telus Corp. of $1,765,059 during the nine months ended
March 31, 2003 of which $664,439 was repaid during the nine months ended March 31, 2004. The increase for the current period was mainly due to the net proceeds of $17,010,710 resulting from the private placement of our common stock and warrants.



In September 2003, we acquired state of the art
switching equipment for approximately $1.7 million, $1.0 million of which has been paid to date. The remaining balance of approximately $754,000 will be paid during the next quarter pursuant to an amendment to the initial financing terms with the
equipment vendor.



We believe we have sufficient fixed capacity
to meet our anticipated volume of telephony traffic in both Canada and the U.S. during fiscal 2004. In addition, with the acquisition of our state of the art switch, we believe we are capable of providing for future long-term growth as
well as accommodating technological change. With this new switch, we expect to migrate our traffic from our more traditional legacy systems to these next generation platforms.



During the remainder of fiscal year 2004, we expect that we will require approximately $2.2 million for our broadband
initiative and to relocate our existing offices. Approximately $1.5 million of these expenditures are expected to be funded through the use of long-term capital leases and the remainder from our internal cash flows.



Critical Accounting Policies



Yaks consolidated financial statements and related public financial
information are based on the application of accounting principles generally accepted in the United States (GAAP). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that



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have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect
supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and
conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions
or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.



Our significant accounting policies are summarized in Note 2 of our consolidated financial statements. While all these significant accounting policies
impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Companys consolidated
financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other
reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.



Our critical accounting policies are as follows: determining functional
currency for the purpose of consolidation; valuation of long-lived assets and estimating fair value.



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Determining Functional Currency for the Purpose of Consolidation



We have a foreign subsidiary in Canada that accounts for 99% of our revenue
and 79% of our assets as of March 31, 2004. In preparing our consolidated financial statements we translate the accounting records from Canadian dollars into U.S. dollars. This process results in exchange gains and losses which under the provisions
of SFAS No. 52 and SFAS No. 130, 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.



Valuation of Long-lived Assets



We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from
the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property and equipment and amortizable intangible assets. We assess the impairment of goodwill
annually in our fourth fiscal quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. Intangible assets other than goodwill are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value may not be fully recoverable. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the
factors we consider include: (i) significant decrease in the market value of an asset; (ii) significant changes in the extent or manner for which the asset is being used or in its physical condition; (iii) a significant change, delay or departure in
our business strategy related to the asset; (iv) significant negative changes in the business climate, industry or economic conditions; and (v) 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. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different
estimates could have a significant impact on the results of our evaluation. For example, we may need to revise our estimates to accommodate more rapid depreciation with respect to certain equipment due to expected changes in relevant technologies.
Net property and equipment totaled $8,377,759 as of March 31, 2004, representing 17% of our total assets.



Estimating Fair Value



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



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TRENDS



During the nine months ended March 31, 2004, the Company focused on expanding its operations across Canada. As a result of our acquisition of Contour in
July 2003, we are able to expand our customer base to small and medium business and to also expand telecommunication services offered to our customers. For the twelve month period before our acquisition (period ended June 30, 2003), Contour had
consolidated revenues of $21,266,155. We expect the amount to be similar for the next 12 months, ended June 30, 2004. We believe that we can successfully integrate the operations of Contour and as a result obtain certain synergies that we expect
will have a positive effect on both sales and net income with no anticipated corresponding material impact on liquidity.



We believe that our current operations will be able to generate sufficient cash to meet our current obligations and maintain our planned level of
operations. We have no further significant cash commitment to develop our international operations in Peru. In July 2003 we received a short-term loan of $720,000 ($1,000,000 Canadian), which was repaid on December 31, 2003. In connection with this
loan, we issued 10,000 shares of our common stock to the lender. We may seek to obtain additional funds from public or private equity or debt offerings to fund new opportunities that may arise.



As a result of our recent issuance of shares of our common stock, we believe
we now have sufficient funds to continue to add to our existing base of products, including the implementation of our broadband initiative. In addition, we are pursuing various opportunities to acquire one or more companies with material U.S.
telephony operations as a platform for growth in the U.S. market. There is no assurance that any such acquisition can be made on favorable terms and there are certain due diligence costs associated with pursuing those acquisition
opportunities. The success of any such acquisition will depend on the proper and efficient integration of the operations of any newly-acquired businesses.



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. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and
that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Companys other
reports filed with the SEC. 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) the results of the audit and review processes performed by the Companys independent auditors with respect to the restatement of the Companys historic financial
statements; (ii) the continuing possibility of delisting, or halt in trading of, the Companys common stock from the Nasdaq National Market and the repercussions from any such delisting, or halt in trading; (iii) the continuing risks associated
with the Companys failure to be in compliance with its periodic reporting requirements with the SEC; (iv) access to sufficient working capital to meet our operating and financial needs; (v) 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; (vi) our ability to expand into new markets and to effectively manage our growth; (vii) the profitability of our entry and expansion into the
U.S. market; (viii) 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; (ix) our ability to develop
and



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provide voice over internet and web-based communications services; (x) changes in, or failure to comply with, applicable
governmental regulation; (xi) our reliance on our key personnel and the availability of qualified personnel; (xii) the duration and extent of the current economic downturn; (xiii) general economic conditions or material adverse changes in markets we
serve; (xiv) the risk that our analyses of these risks could be incorrect and that the strategies developed to address them could be unsuccessful; (xv) changes in our accounting assumptions that regulatory agencies, including the SEC, may require or
that result from changes in the accounting rules or their application, which could result in an impact on our earnings; (xvi) integrating the operations of our newly-acquired businesses; (xvii) the successful deployment of new equipment and
realization of material savings there from; and (xviii) various other factors discussed in this filing. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes in the future operating results over time. The Company believes that its assumptions are based upon reasonable data derived from and known about its business and operations and the business and operations of the
Company. No assurances are made that actual results of operations or the results of the Companys future activities will not differ materially from its assumptions.



New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Accounting Standards (SFAS) No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are subject to annual impairment tests in accordance with the Statements of Accounting Standards. The Company applied the new rules of accounting for goodwill and other intangible assets beginning the first quarter of fiscal
year 2003, and there was no material impact on the Companys financial statements.



In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 established a single accounting model for the impairment or disposal of
long-lived assets. As required by SFAS No. 144, the Company adopted this new accounting standard on July 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Companys financial statements.



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback transactions and established that gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of extraordinary.
There was no material impact on the Companys financial statements as a result of adopting SFAS No. 145.



SFAS No. 143, Accounting for Asset Retirement Obligation was adopted by the Company in fiscal year 2003. Under this SFAS, asset retirement and
the obligations associated with the retirement of tangible, long-lived assets will change. This statement will not have a material effect on our financial statements as presented.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the
liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after March 31, 2003. The Company did not have any such activities during the nine months ended March 31, 2004.



11



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##### Table of Contents

Item 3. Controls and Procedures



Evaluation
of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this Quarterly Report on Form 10-QSB. Based on this evaluation, our Chief Executive Officer and our principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are
required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.



Changes in internal control over financial reporting. There was no change in
our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting



PART II



OTHER INFORMATION



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



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



|     |  |                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of our Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.       
|     | 
|31.2 |  | Certification of our Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.   
|     | 
|32.1 |  | Certification of our Chief Executive Officer required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    
|     | 
|32.2 |  | Certification of our Principal Financial Officer required 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.
|--- | --------------------



On February 19, 2004, we filed a current report on Form 8-K reporting under Item 12 Results of Operations and Financial Condition our results
of operations and financial condition for the quarter ended December 31, 2003.



On March 17, 2004, we filed a current report on Form 8-K reporting under Item 5 Other Events our press release issued on March 16, 2004.



On March 17, 2004, we filed a current report on Form 8-K reporting under Item 5 Other Events the sale 1,470,000
shares of our common stock, and warrants to purchase 367,500 shares of our common stock, to a small number of institutional and other accredited investors.



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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: May 31, 2005 |  | YAK COMMUNICATIONS INC.
|                   |  |                        
|                   |  | By:                     |  | /s/ Charles Zwebner    
|                   |  |                         |  | Charles Zwebner        
|                   |  |                         |  | Chief Executive Officer



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED BALANCE SHEETS



|                            |  |      |  |                           |  |                                  
|--------------------------- |  | ---- |  | ------------------------- |  | ---------------------------------
|                            |  | Note |  | March 31,2004 (Unaudited) |  | June 30,2003 (Audited) (Restated)
|                            |  |      |  | $                         |  | $                                
|ASSETS                      |  |      |  |                           |  |                                  
|                            |  |      | 
|CURRENT                     |  |      |  |                           |  |                                  
|Cash and cash equivalents   |  |      |  | 21,964,223                |  | 5,442,538                        
|Accounts receivable, net    |  | 3    |  | 15,368,536                |  | 9,336,032                        
|Prepaid expenses and sundry |  |      |  | 980,365                   |  | 656,939                          
|                            |  |      |  |                           |  |                                  
|                            |  |      |  | 38,313,124                |  | 15,435,509                       
|                            |  |      | 
|WARRANTS IN CONVENXIA       |  | 5    |  | 59,681                    |  | 59,681                           
|                            |  |      | 
|JOINT VENTURE RECEIVABLE    |  | 5    |  | 4,706,568                 |  | 4,985,278                        
|                            |  |      | 
|PROPERTY AND EQUIPMENT, NET |  | 4    |  | 8,632,243                 |  | 5,919,385                        
|                            |  |      | 
|DEFERRED ACQUISITION COSTS  |  |      |  | 228,461                   |  | 1,659,458                        
|                            |  |      | 
|LOAN RECEIVABLE             |  | 7    |  | 415,844                   |  | 160,925                          
|                            |  |      | 
|INVESTMENT IN AFFILIATE     |  | 8    |  | 490,273                   |  | 470,905                          
|                            |  |      | 
|INTANGIBLES, NET            |  | 9    |  | 1,679,358                 |  |                                 
|                            |  |      | 
|GOODWILL                    |  | 9    |  | 534,864                   |  |                                 
|                            |  |      | 
|DEFERRED INCOME TAXES       |  | 13   |  | 43,389                    |  |                                  
|                            |  |      |  |                           |  |                                  
|                            |  |      |  | 55,103,805                |  | 28,691,141                       
|                            |  |      |  |                           |  |                                  



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



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED BALANCE SHEETS



|                                                                |  |      |  |                           |  |                                  
|--------------------------------------------------------------- |  | ---- |  | ------------------------- |  | ---------------------------------
|                                                                |  | Note |  | March 31,2004 (Unaudited) |  | June 30,2003 (Audited) (Restated)
|                                                                |  |      |  | $                         |  | $                                
|LIABILITIES                                                     |  |      |  |                           |  |                                  
|CURRENT                                                         |  |      |  |                           |  |                                  
|Accounts payable and accrued liabilities                        |  |      |  | 3,653,683                 |  | 2,675,110                        
|Amounts due for network access and usage                        |  |      |  | 1,856,282                 |  | 966,111                          
|Amounts due to long distance carriers                           |  |      |  | 6,871,259                 |  | 3,123,583                        
|Amounts due for equipment                                       |  |      |  | 937,159                   |  | 351,727                          
|Due to Factor                                                   |  | 3    |  | 5,452,912                 |  | 4,689,751                        
|Income taxes payable                                            |  |      |  | 431,886                   |  | 1,712,412                        
|Short-term notes payable                                        |  | 10   |  | 39,536                    |  | 375,298                          
|Current portion of advances from TELUS Communications Inc.      |  | 11   |  | 1,274,114                 |  | 1,030,716                        
|Current portion of obligations under capital leases             |  | 12   |  | 75,809                    |  | 13,008                           
|Current portion of note payable                                 |  | 5    |  | 242,299                   |  | 192,231                          
|Deferred revenue                                                |  |      |  | 1,011,719                 |  |                                 
|                                                                |  |      |  |                           |  |                                  
|                                                                |  |      |  | 21,846,658                |  | 15,129,947                       
|                                                                |  |      |  |                           |  |                                  
|LONG-TERM DEBT                                                  |  |      |  |                           |  |                                  
|Advances from TELUS Communications Inc.                         |  | 11   |  | 677,433                   |  | 1,585,270                        
|Obligations under capital leases                                |  | 12   |  | 66,979                    |  | 14,606                           
|Note payable                                                    |  | 5    |  | 5,517,416                 |  | 5,473,611                        
|                                                                |  |      |  |                           |  |                                  
|                                                                |  |      |  | 6,261,828                 |  | 7,073,487                        
|                                                                |  |      |  |                           |  |                                  
|DEFERRED INCOME TAXES                                           |  | 13   |  |                           |  | 759,637                          
|                                                                |  |      |  |                           |  |                                  
|                                                                |  |      |  | 28,108,486                |  | 22,963,071                       
|                                                                |  |      |  |                           |  |                                  
|STOCKHOLDERS EQUITY                                            |  |      |  |                           |  |                                  
|                                                                |  |      | 
|COMMON STOCK                                                    |  | 14   |  | 225,415                   |  | 199,266                          
|                                                                |  |      | 
|ADDITIONAL PAID-IN CAPITAL                                      |  |      |  | 19,190,283                |  | 2,050,315                        
|                                                                |  |      | 
|ACCUMULATED OTHER COMPREHENSIVE INCOME - TRANSLATION ADJUSTMENT |  |      |  | 616,623                   |  | 477,080                          
|                                                                |  |      | 
|RETAINED EARNINGS                                               |  |      |  | 6,962,998                 |  | 3,001,409                        
|                                                                |  |      |  |                           |  |                                  
|                                                                |  |      |  | 26,995,319                |  | 5,728,070                        
|                                                                |  |      |  |                           |  |                                  
|                                                                |  |      |  | 55,103,805                |  | 28,691,141                       
|                                                                |  |      |  |                           |  |                                  



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



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                              |  |      |        |              |   |        |                            |   |  |                                      |   |                            |         |  |                               |   |  |            |  
|------------------------------------------------------------- |  | ---- | ------ | ------------ | - | ------ | -------------------------- | - |  | ------------------------------------ | - | -------------------------- | ------- |  | ----------------------------- | - |  | ---------- | -
|                                                              |  | Note |        | Common stock |   |        | Additional paid-in capital |   |  | Accumulatedother comprehensiveincome |   | Retained earnings(deficit) |         |  | StockholdersEquity (Deficit) |  
|                                                              |  |      | Shares |              |   | Amount |                            |   |  |                                      |  
|                                                              |  |      |        |              |   |        | $                          |   |  | $                                    |   |                            | $       |  | $                             |   |  | $          |  
|Balance, June 30, 2002 (Audited)                              |  |      |        | 9,584,316    |   |        | 201,521                    |   |  | 1,732,060                            |   |                            | 67,232  |  | (487,111                      | ) |  | 1,513,702  |  
|Foreign currency translation adjustment                       |  |      |        |             |   |        |                           |   |  |                                     |   |                            | 409,848 |  |                              |   |  | 409,848    |  
|Common stock redeemed                                         |  |      |        | (800,000     | ) |        | (4,000                     | ) |  | (796,000                             | ) |                            |        |  |                              |   |  | (800,000   | )
|Common stock issued for cash                                  |  |      |        | 320,000      |   |        | 1,600                      |   |  | 998,400                              |   |                            |        |  |                              |   |  | 1,000,000  |  
|Common stock issued for services                              |  |      |        | 29,000       |   |        | 145                        |   |  | 115,855                              |   |                            |        |  |                              |   |  | 116,000    |  
|Net income                                                    |  |      |        |             |   |        |                           |   |  |                                     |   |                            |        |  | 3,488,520                     |   |  | 3,488,520  |  
|                                                              |  |      |        |              |   |        |                            |   |  |                                      |   |                            |         |  |                               |   |  |            |  
|Balance, June 30, 2003 (Audited) (Restated)                   |  |      |        | 9,133,316    |   |        | 199,266                    |   |  | 2,050,315                            |   |                            | 477,080 |  | 3,001,409                     |   |  | 5,728,070  |  
|Foreign currency translation adjustment                       |  |      |        |             |   |        |                           |   |  |                                     |   |                            | 139,543 |  |                              |   |  | 139,543    |  
|Common stock issued to obtain note payable                    |  |      |        | 20,000       |   |        | 100                        |   |  | 89,900                               |   |                            |        |  |                              |   |  | 90,000     |  
|Common stock issued for services                              |  |      |        | 9,000        |   |        | 45                         |   |  | 50,987                               |   |                            |        |  |                              |   |  | 51,032     |  
|Common stock issued in exchange for stock options surrendered |  |      |        | 2,260,934    |   |        | 11,304                     |   |  | (11,304                              | ) |                            |        |  |                              |   |  |           |  
|Stock compensation expense                                    |  | 6    |        |             |   |        |                           |   |  | 14,375                               |   |                            |        |  |                              |   |  | 14,375     |  
|Common stock issued for cash                                  |  |      |        | 1,470,000    |   |        | 14,700                     |   |  | 14,563,420                           |   |                            |        |  |                              |   |  | 14,578,120 |  
|Common stock warrants                                         |  |      |        |             |   |        |                           |   |  | 2,432,590                            |   |                            |        |  |                              |   |  | 2,432,590  |  
|Net income                                                    |  |      |        |             |   |        |                           |   |  |                                     |   |                            |        |  | 3,961,589                     |   |  | 3,961,589  |  
|                                                              |  |      |        |              |   |        |                            |   |  |                                      |   |                            |         |  |                               |   |  |            |  
|Balance, March 31, 2004 (Unaudited)                           |  |      |        | 12,893,250   |   |        | 225,415                    |   |  | 19,190,283                           |   |                            | 616,623 |  | 6,962,998                     |   |  | 26,995,319 |  
|                                                              |  |      |        |              |   |        |                            |   |  |                                      |   |                            |         |  |                               |   |  |            |  



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



F-3



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



(Unaudited)



|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|------------------------------------------------------------ |  | ---- |  | ---------------------------- | - |  | --------------------------- | - |  | ---------- | - |  | ----------
|                                                             |  |      |  | Three months ended March 31, |   |  | Nine months ended March 31,
|                                                             |  | Note |  | 2004                         |   |  | 2003                        |   |  | 2004       |   |  | 2003      
|                                                             |  |      |  | $                            |   |  | $                           |   |  | $          |   |  | $         
|NET REVENUE                                                  |  |      |  | 21,464,734                   |   |  | 10,591,995                  |   |  | 60,496,281 |   |  | 28,068,189
|                                                             |  |      |  |                              |  
|COST OF REVENUE                                              |  |      |  | 14,367,068                   |   |  | 6,839,036                   |   |  | 39,860,386 |   |  | 17,671,907
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|GROSS MARGIN                                                 |  |      |  | 7,097,666                    |   |  | 3,752,959                   |   |  | 20,635,895 |   |  | 10,396,282
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|EXPENSES                                                     |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|General and administration                                   |  |      |  | 2,996,376                    |   |  | 976,810                     |   |  | 8,046,646  |   |  | 2,320,104 
|Sales and marketing                                          |  |      |  | 1,256,790                    |   |  | 857,596                     |   |  | 3,228,053  |   |  | 2,893,343 
|Interest on note payable                                     |  |      |  | 127,248                      |   |  |                            |   |  | 379,673    |   |  |          
|Interest on short-term loan                                  |  |      |  | 4,132                        |   |  |                             |   |  | 24,238     |   |  |           
|Accounts receivable financing                                |  |      |  | 144,148                      |   |  | 89,816                      |   |  | 436,064    |   |  | 291,771   
|Common stock issued to obtain note payable                   |  |      |  |                             |   |  |                            |   |  | 89,600     |   |  |          
|Organizational and start-up costs                            |  |      |  | 28,082                       |   |  | 64,073                      |   |  | 114,729    |   |  | 415,966   
|Share of net loss of affiliate                               |  |      |  | 33,900                       |   |  |                            |   |  | 99,298     |   |  |          
|Interest on capital lease obligations                        |  |      |  | 2,671                        |   |  | 2,734                       |   |  | 5,798      |   |  | 11,365    
|Interest earned                                              |  |      |  | (33,234                      | ) |  |                            |   |  | (71,081    | ) |  |          
|Income from joint marketing agreement                        |  |      |  | (68,772                      | ) |  |                            |   |  | (210,290   | ) |  |          
|Long Term note discount amortization                         |  |      |  | 79,699                       |   |  |                             |   |  | 239,097    |   |  |           
|Depreciation and amortization                                |  |      |  | 844,149                      |   |  | 165,905                     |   |  | 2,194,351  |   |  | 524,726   
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|                                                             |  |      |  | 5,415,189                    |   |  | 2,156,934                   |   |  | 14,576,176 |   |  | 6,457,275 
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|INCOME BEFORE INCOME TAX                                     |  |      |  | 1,682,477                    |   |  | 1,596,025                   |   |  | 6,059,719  |   |  | 3,939,007 
|                                                             |  |      |  |                              |  
|PROVISION FOR INCOME TAXES                                   |  | 13   |  | 551,105                      |   |  | 534,983                     |   |  | 2,098,130  |   |  | 1,494,716 
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|NET INCOME                                                   |  |      |  | 1,131,372                    |   |  | 1,061,042                   |   |  | 3,961,589  |   |  | 2,444,291 
|                                                             |  |      |  |                              |  
|OTHER COMPREHENSIVE INCOME                                   |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|Foreign currency translation adjustment                      |  |      |  | (92,342                      | ) |  | (538,776                    | ) |  | 139,543    |   |  | 109,055   
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|COMPREHENSIVE INCOME                                         |  |      |  | 1,039,030                    |   |  | 522,266                     |   |  | 4,101,132  |   |  | 2,553,346 
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|BASIC EARNINGS PER SHARE                                     |  | 2    |  | 0.10                         |   |  | 0.11                        |   |  | 0.37       |   |  | 0.26      
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|DILUTED EARNINGS PER SHARE                                   |  | 2    |  | 0.10                         |   |  | 0.09                        |   |  | 0.36       |   |  | 0.20      
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  |      |  | 11,635,583                   |   |  | 9,326,538                   |   |  | 10,731,019 |   |  | 9,499,644 
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  |      |  | 11,745,983                   |   |  | 11,894,538                  |   |  | 10,857,597 |   |  | 12,067,644
|                                                             |  |      |  |                              |   |  |                             |   |  |            |   |  |           



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



F-4



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED STATEMENTS OF CASH FLOWS



(Unaudited)



|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|-------------------------------------------------------------------------------- |  | ---- |  | ---------------------------- | - |  | --------------------------- | - |  | ----------- | - |  | ---------- | -
|                                                                                 |  |      |  | Three months ended March 31, |   |  | Nine months ended March 31, |  
|                                                                                 |  | Note |  | 2004                         |   |  | 2003                        |   |  | 2004        |   |  | 2003       |  
|                                                                                 |  |      |  | $                            |   |  | $                           |   |  | $           |   |  | $          |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                             |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Net income                                                                       |  |      |  | 1,131,372                    |   |  | 1,061,042                   |   |  | 3,961,589   |   |  | 2,444,291  |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Depreciation and amortization                                                    |  |      |  | 844,149                      |   |  | 165,905                     |   |  | 2,194,351   |   |  | 524,726    |  
|Amortization of discount                                                         |  |      |  | 79,699                       |   |  |                             |   |  | 239,097     |   |  |            |  
|Deferred income taxes                                                            |  |      |  | (455,346                     | ) |  | 19,603                      |   |  | 1,149,428   |   |  | 89,558     |  
|Share of net loss of affiliate                                                   |  |      |  | 33,900                       |   |  |                            |   |  | 99,298      |   |  |           |  
|Stock compensation expense                                                       |  |      |  | 10,781                       |   |  |                            |   |  | 14,375      |   |  |           |  
|Loss on disposal of assets                                                       |  |      |  |                             |   |  | 19                          |   |  |            |   |  | 1,636      |  
|Common stock issued to obtain note payable                                       |  |      |  |                             |   |  |                            |   |  | 45,300      |   |  |           |  
|Stock issued for services rendered                                               |  |      |  |                             |   |  |                            |   |  | 51,032      |   |  |           |  
|                                                                                 |  |      |  |                              |  
|Changes in assets and liabilities                                                |  | 16   |  | 2,121,000                    |   |  | 784,447                     |   |  | 2,815,114   |   |  | 80,570     |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Net cash from operating activities                                               |  |      |  | 3,765,555                    |   |  | 2,031,016                   |   |  | 10,569,584  |   |  | 3,140,781  |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                             |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Investment in joint venture                                                      |  |      |  |                             |   |  | (17,700                     | ) |  |            |   |  | (117,700   | )
|Purchase of property and equipment                                               |  |      |  | (1,842,531                   | ) |  | (514,185                    | ) |  | (4,618,566  | ) |  | (1,011,473 | )
|Proceeds from sale of assets                                                     |  |      |  |                             |   |  |                            |   |  |            |   |  | 5,928      |  
|Purchase of shares of Contour Telecom                                            |  |      |  |                             |   |  |                            |   |  | (5,472,712  | ) |  |           |  
|Investment in Odyssey Management Group, Inc.                                     |  |      |  | (118,666                     | ) |  | (500,000                    | ) |  | (118,666    | ) |  | (500,000   | )
|Foreign exchange difference on purchase of shares of Contour Telecom             |  |      |  | 75,911                       |   |  |                            |   |  | (149,256    | ) |  |           |  
|Loan receivable                                                                  |  |      |  | (36,539                      | ) |  |                            |   |  | (254,919    | ) |  |           |  
|Increase in deferred acquisition cost                                            |  |      |  | (228,461                     | ) |  |                            |   |  | (228,461    | ) |  |           |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Net cash used in investing activities                                            |  |      |  | (2,150,286                   | ) |  | (1,031,885                  | ) |  | (10,842,580 | ) |  | (1,623,245 | )
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                             |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Issuance of common shares                                                        |  |      |  | 17,010,710                   |   |  |                            |   |  | 17,010,710  |   |  |           |  
|Obligations under capital leases                                                 |  |      |  | 118,138                      |   |  | (23,958                     | ) |  | 115,173     |   |  | (118,617   | )
|Advances from (to) TELUS Communications Inc.                                     |  |      |  | (342,200                     | ) |  | 742,809                     |   |  | (664,439    | ) |  | 1,765,059  |  
|Repayments on note payable                                                       |  |      |  | (115,869                     | ) |  |                            |   |  | (1,049,333  | ) |  |           |  
|Issuance of note payable                                                         |  |      |  |                             |   |  |                            |   |  | 713,570     |   |  |           |  
|Repurchase of capital stock                                                      |  |      |  |                             |   |  | (800,000                    | ) |  |            |   |  | (800,000   | )
|Receipt of Principal portion of Joint Venture receivable                         |  |      |  | 94,228                       |   |  |                             |   |  | 278,710     |   |  |            |  
|Repayments of principal portion of note payable                                  |  |      |  | (47,718                      | ) |  |                            |   |  | (145,223    | ) |  |           |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Net cash provided by (used in) financing activities                              |  |      |  | 16,717,289                   |   |  | (81,149                     | ) |  | 16,259,168  |   |  | 846,442    |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                     |  |      |  | (250,140                     | ) |  |                            |   |  | 535,513     |   |  |           |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|INCREASE IN CASH AND CASH EQUIVALENTS                                            |  |      |  | 18,082,418                   |   |  | 917,982                     |   |  | 16,521,685  |   |  | 2,363,978  |  
|                                                                                 |  |      |  |                              |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   |  |      |  | 3,881,805                    |   |  | 2,028,509                   |   |  | 5,442,538   |   |  | 582,513    |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                         |  |      |  | 21,964,223                   |   |  | 2,946,491                   |   |  | 21,964,223  |   |  | 2,946,491  |  
|                                                                                 |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Supplemental disclosure of cash flow information:                                |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Interest paid                                                                    |  |      |  | 146,819                      |   |  | 2,734                       |   |  | 452,644     |   |  |           |  
|Taxes paid                                                                       |  |      |  | 431,220                      |   |  |                            |   |  | 1,430,898   |   |  |           |  
|Supplemental disclosure of non-cash investing and financing activities           |  |      |  |                              |   |  |                             |   |  |             |   |  |            |  
|Issuance of common stock for services rendered                                   |  |      |  |                             |   |  |                            |   |  | 51,032      |   |  |           |  
|Issuance of common stock to obtain note payable                                  |  |      |  |                             |   |  |                            |   |  | 90,000      |   |  |           |  
|Notes payable on purchase of software (Note 5)                                   |  |      |  | 5,799,251                    |   |  |                            |   |  | 5,799,251   |   |  |           |  
|Joint Venture receivable on purchase of software (Note 5)                        |  |      |  | 4,706,568                    |   |  |                            |   |  | 4,706,568   |   |  |           |  
|Acquisition of software                                                          |  |      |  | 1,561,181                    |   |  |                            |   |  | 1,561,181   |   |  |           |  



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



F-5



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



On December 15, 2003, the Company changed its name from Yak Communications (USA) Inc. to Yak Communications Inc.. Yak Communications 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
|-- | ------------------------------------------



The accompanying unaudited consolidated financial statements of Yak Communications Inc. (The Company) have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB of Regulations S-B. Accordingly, they do not include all the information, necessary for a comprehensive
presentation of financial position and results of operations.



It is managements opinion, however, that all material adjustments have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be
expected for the year.



For further information, refer to the
consolidated financial statements and footnotes included in the Companys annual report on Form 10-KSB for the year ended June 30, 2003.



Principles of consolidation



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



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



Use of estimates



The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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.



Revenue recognition



The Company records revenue using the following recognition policies:



| | (a) | Dial-around services and the resale of long-distance services revenues are recorded at the time of customer usage based upon minutes of use.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Service revenues of Argos Telecom are recognized as the related client telecommunications costs, less applicable supplier discounts, are incurred.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Revenue from the resale of voice and data telecommunications service of Contour Telecom Inc. is recorded at the time the Company is billed by the respective service providers.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Management fees of Contour Telecom Inc. are recorded on a monthly basis over the term of the management agreement.
| | --- | ------------------------------------------------------------------------------------------------------------------



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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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



Cost of revenue (contd)



Argos Telecom records voice and data telecommunications services costs as incurred by the respective telecommunications carriers.



Contour Telecom Inc.s supplier service costs come directly from the
telecommunications carriers and are recorded once billed.



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 over the estimated useful lives of the assets as follows:



|                                                     |  |                             
|---------------------------------------------------- |  | ----------------------------
|Telecom switching systems                            |  | 11% to 20% declining balance
|Next Generation software                           |  | 20% declining balance       
|Billing, administration and customer service systems |  | 20% declining balance       
|Installed lines                                      |  | 20% declining balance       
|Computer software                                    |  | 20% declining balance       
|Carrier identification codes loading                 |  | 20% declining balance       
|Office furniture and equipment                       |  | 20% declining balance       
|Computer equipment                                   |  | 20% declining balance       
|Leasehold improvements                               |  | over term of the lease      
|Automobile                                           |  | 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. Depreciation expense is not recorded until assets are placed into service.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE 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 leases are amortized using rates consistent with similar assets.



Intangibles



Customer lists are stated at cost less accumulated amortization which is provided on the straight-line basis over five years.



Goodwill



Goodwill represents the difference between the purchase price, including
acquisition costs, of business acquired and the fair value of the identifiable net assets acquired. Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or circumstances indicate that the asset
might be impaired. Impairment is tested by comparing the fair value of the goodwill to its carrying cost. Any excess of carrying value over fair value is charged to income in the period in which the impairment is determined.



Joint venture



The Companys proportionate share of revenues, expenses, assets and
liabilities in unincorporated joint venture are consolidated in the Companys accounts.



Investment in affiliate



The Company records its investment in affiliate under which it exercises significant influence by the equity method. Under this method, an investment is recorded at its original cost and its carrying value is thereafter adjusted to include
the Companys share of the income or loss for each fiscal year of the entity since its acquisition.



Unearned revenue



Unearned revenue represents billings in advance of services performed and customer deposits for future services.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



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.



Advertising and
promotion expense



The production costs of commercials and
programming are charged to operations in the fiscal year during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the fiscal year incurred. The cost of promotional
marketing materials are deferred and expensed as used.



Income taxes



The Company accounts for income
taxes in accordance with SFAS No. 109 Accounting for Income Taxes which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed periodically
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.



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 stock options, and outstanding warrants.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



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.



Stock-based compensation



Compensation expense under stock options is reported
using the intrinsic method. Under this method, compensation cost is reflected in net income for options granted with an exercise price less than the market price of the underlying common stock at the date of grant.



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, and pro forma basic and diluted net income per share for the three and nine months ending March 31,
2004 and 2003, would be as follows:



|                             |  |                              |  |                             |  |           |  |          
|---------------------------- |  | ---------------------------- |  | --------------------------- |  | --------- |  | ---------
|                             |  | Three months ended March 31, |  | Nine months ended March 31,
|                             |  | 2004                         |  | 2003                        |  | 2004      |  | 2003     
|                             |  | $                            |  | $                           |  | $         |  | $        
|Net income as reported       |  | 1,131,372                    |  | 1,061,042                   |  | 3,961,589 |  | 2,444,291
|Pro forma net income         |  | 1,071,264                    |  | 1,061,042                   |  | 3,928,481 |  | 2,444,291
|                             |  |                              |  |                            
|Basic net income per share   |  |                              |  |                             |  |           |  |          
|As reported                  |  | 0.10                         |  | 0.11                        |  | 0.37      |  | 0.26     
|Pro forma                    |  | 0.09                         |  | 0.11                        |  | 0.37      |  | 0.26     
|                             |  |                              |  |                            
|Diluted net income per share |  |                              |  |                             |  |           |  |          
|As reported                  |  | 0.10                         |  | 0.09                        |  | 0.36      |  | 0.20     
|Pro forma                    |  | 0.09                         |  | 0.09                        |  | 0.36      |  | 0.20     



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



Stock-based compensation (contd)



At March 31, 2004, 230,000 options were outstanding with an exercise price of $6.50 per share, with a weighted average remaining life of 4.9 years. None
of these options are vested at March 31, 2004.



In addition to
this Stock Option Plan, on December 21, 2000, nonqualified options for 2,568,000 common shares were granted to an individual who is a director and chief executive officer and are exercisable at $0.78 per share on or before December 31, 2003, or upon
the sale of the Company. These options were exchanged for 2,260,934 shares of Common Stock on December 30, 2003 (see Note 14).



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 purposes 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 and cash equivalents, accounts receivable, accounts payable and accrued liabilities, 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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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



Financial instruments (contd)



The Companys financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable and accrued
liabilities and deferred revenue. Unless otherwise noted, it is managements opinion that the Company is not exposed to significant interest or currency risks arising from these financial instruments. The Company has in place systems to prevent
and detect fraud. On occasion, defaults occur on receivables. The Company makes a provision when deemed necessary. As of March 31, 2004 and June 30, 2003, the allowance for doubtful accounts was approximately $288,000 and $15,000, respectively. The
Company places its cash and cash equivalents in high quality financial instruments.



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



Reclassifications



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



|3. | 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 March 31, 2004, the amount sold under the agreement, expiring February 2006, that had not been collected was approximately $7,328,000 (June 30, 2003 - $6,177,000) which will be forwarded to the Company
once collected after repayment of the Factors advances.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|4. | PROPERTY AND EQUIPMENT
|-- | ----------------------



Property and equipment consist of the following:



|                                                     |  |            |  |                         |  |                |  |             
|---------------------------------------------------- |  | ---------- |  | ----------------------- |  | -------------- |  | ------------
|                                                     |  |            |  |                         |  | Net book value
|                                                     |  | Cost       |  | Accumulateddepreciation |  | March 31,2004  |  | June 30,2003
|                                                     |  | $          |  | $                       |  | $              |  | $           
|Telecom switching systems                            |  | 6,211,518  |  | 2,980,557               |  | 3,230,961      |  | 2,462,928   
|Next Generation software (Note 5)                  |  | 1,982,539  |  |                        |  | 1,982,539      |  | 1,669,660   
|Billing, administration and customer service systems |  | 1,982,476  |  | 617,938                 |  | 1,364,538      |  | 780,259     
|Installed lines                                      |  | 872,445    |  | 248,776                 |  | 623,669        |  | 495,593     
|Computer software                                    |  | 742,033    |  | 444,816                 |  | 297,217        |  | 140,113     
|Carrier identification codes loading                 |  | 501,003    |  | 89,794                  |  | 411,209        |  | 195,566     
|Office furniture and equipment                       |  | 549,715    |  | 373,273                 |  | 176,442        |  | 101,218     
|Computer equipment                                   |  | 1,629,170  |  | 1,244,352               |  | 384,818        |  |            
|Leasehold improvements                               |  | 238,326    |  | 80,859                  |  | 157,467        |  | 70,321      
|Automobile                                           |  | 6,647      |  | 3,264                   |  | 3,383          |  | 3,727       
|                                                     |  |            |  |                         |  |                |  |             
|                                                     |  | 14,715,872 |  | 6,083,629               |  | 8,632,243      |  | 5,919,385   
|                                                     |  |            |  |                         |  |                |  |             



Telecom switching
systems include assets under capital leases having a net book value of approximately $1,885,000 as of March 31, 2004 and $1,838,000 as of June 30, 2003.



Depreciation expense for equipment under capital leases for three-month and nine-month periods ended March 31, 2004 was approximately $343,000 and
$898,000 respectively.



On June 20, 2003, Yak Communications
(Canada) Inc., the Companys wholly-owned subsidiary, acquired certain next generation telecommunications software from Consortio, Inc., and Convenxia Limited, with a fair value, estimated by the Company, of approximately $1.7
million. For more details see Note 5, Next Generation Software and Financial Restatements.



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS
|-- | ---------------------------------------------------



On June 20, 2003, Yak Communications (Canada) Inc., the Companys wholly-owned subsidiary (Yak Canada), acquired certain next
generation telecommunications software from Consortio, Inc., a Delaware corporation and Convenxia Limited, a corporation organized under the laws of the United Kingdom (collectively, the Sellers), pursuant to the terms and
conditions of a Software Acquisition Agreement. Payments made or due to the Sellers for the software were as follows: (a) $565,000 in cash was paid at the closing of the transaction; (b) delivery of a short term promissory note in the principal
amount of $400,000 providing for equal monthly payments of $40,000; and (c) the balance of the purchase price is evidenced by a long-term promissory note executed in favor of Consortio, Inc. with a principal amount of $8,535,000 bearing interest at
7.25% per annum. Interest and principal are payable quarterly in the amount of $174,965 commencing September 30, 2003 and is due July 15, 2012. The sole recourse by the lender is the software. Yak Canada was also issued a warrant to purchase up to
8% of the issued and outstanding common stock of Convenxia Limited.



In addition to the purchase of the software, Yak Canada and the sellers entered into a joint venture agreement which licenced the use of the software for telecommunication services outside Canada to non-Yak customers. Under the joint
venture agreement, Yak Canada is entitled to receive 4% of all gross revenue arising from the sale of services using the acquired software with minimum quarterly payments of $150,000 through June 30, 2006 and, thereafter, 2.75% of gross revenue with
minimum quarterly payments of $175,000.



The Company estimated
the fair value of the assets and liabilities associated with the Software Acquisition Agreement based on the related estimated cash flows. Statement of Financial Accounting Concepts No. 7 (SFAC No. 7) provides a framework for using
future cash flows and present value as the basis for accounting measurements of fair value. In accordance with SFAC No. 7, the Company used the expected cash flow approach to estimate fair value, focusing on explicit assumptions about the range of
possible cash outcomes and their respective probabilities. Based on this expected cash flow approach, the fair values of the liabilities are estimated to be significantly less than their face values. The fair value of the Convenxia warrants was
derived by using the Black-Scholes valuation model.



Based on
the foregoing, the fair value of each of the Convenxia transactions components were estimated for accounting purposes as follows:



|                              |  |   |            
|----------------------------- |  | - | -----------
|Software                      |  | $ | 1.7 million
|Receivable from joint venture |  |   | 5.0 million
|Warrants                      |  |   | 0.1 million
|                              |  |   |            
|Total assets acquired         |  | $ | 6.8 million
|                              | 
|Cash paid                     |  | $ | 0.7 million
|Short-term note payable       |  |   | 0.4 million
|Long-term note payable        |  |   | 5.7 million
|                              |  |   |            
|Total consideration paid      |  | $ | 6.8 million



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##### Table of Contents

The above fair value estimates are as at June 30, 2003. The following assumptions were made with respect
to these fair value estimates:



Software - The Company
obtained an independent valuation in the amount of $5.9 million (which is the mid-point of range of 5.4 million to 6.4 million as calculated by the independent valuator) for the acquired software. .In accordance with Statement of Financial
Accounting Standards No. 141 (FAS 141), the excess of fair value assigned to the assets acquired (i.e., $4.3 million) was allocated on a pro rata basis to reduce the amounts that otherwise would have been assigned to the non-financial acquired asset
(e.g. software). As a result, the fair value of the software acquired was reduced for accounting purposes from its estimated fair value of $5.9 million to its carrying value of $1.6 million.



Receivable from joint venture  The range of possible cash outcomes
varied based on the expected length of time that the joint venture would remain intact. Contractual cash flows were present-valued using a discount rate equal to 200 basis points higher than the Companys weighted average cost of capital.



Warrants  The range of possible cash outcomes varied
based on estimated future revenues for Convenxia Limited. Because Convenxia is a privately-held entity, enterprise valuation multiples and volatility inputs necessary for the Black-Scholes valuation model were derived from comparable public company
statistics.



Short-term note payable  Contractual cash
flows were present valued using a discount rate equal to the Companys weighted average cost of capital.



Long-term note payable  Similar to the joint venture receivable fair value estimate, the range of possible cash outcomes varied based on the
expected length of time that the joint venture would remain intact and also on the probabilities that the balloon payment would ultimately be paid in 2012. Contractual cash flows were present valued using a discount rate equal to the Companys
weighted average cost of capital.



On March 3, 2005, the
Company entered into a settlement agreement with the Sellers. Pursuant to the settlement agreement, Yak paid $150,000 to the Sellers and committed to complete further development of the software for $350,000 in exchange for a discharge of any
further obligation under the long-term note with a principal amount of $ 8.4 million at December 31, 2004.



The following presents the impact on the financial statements presented herein:



|                                      |  |                                  |   |  |                                  |   |  |                                 |   |  |                                 |  
|------------------------------------- |  | -------------------------------- | - |  | -------------------------------- | - |  | ------------------------------- | - |  | ------------------------------- | -
|                                      |  | Prior Reported                   |   |  | As Restated                      |   |  | Prior Reported                  |   |  | As Restated                     |  
|                                      |  | Three months endedMarch 31, 2004 |   |  | Three months endedMarch 31, 2004 |   |  | Nine months endedMarch 31, 2004 |   |  | Nine months endedMarch 31, 2004 |  
|                                      |  | $                                |   |  | $                                |   |  | $                               |   |  | $                               |  
|Statement of Operations:              |  |                                  |   |  |                                  |   |  |                                 |   |  |                                 |  
|                                      |  |                                  |   | 
|Interest on note payable              |  | 150,480                          |   |  | 127,248                          |   |  | 453,178                         |   |  | 379,673                         |  
|Interest on Short-term note           |  |                                 |   |  | 4,132                            |   |  |                                |   |  | 24,238                          |  
|Income from Joint Venture             |  | (162,155                         | ) |  | (68,772                          | ) |  | (462,155                        | ) |  | (210,290                        | )
|Depreciation and amortization         |  | 744,249                          |   |  | 844,149                          |   |  | 2,213,037                       |   |  | 2,194,351                       |  
|Long-term note discount amortization  |  |                                 |   |  | 79,699                           |   |  |                                |   |  | 239,097                         |  
|Income before income taxes            |  | 1,936,359                        |   |  | 1,682,477                        |   |  | 6,482,728                       |   |  | 6,059,719                       |  
|Provision for income taxes            |  | 639,964                          |   |  | 551,105                          |   |  | 2,246,183                       |   |  | 2,098,130                       |  
|Net Income                            |  | 1,296,395                        |   |  | 1,131,372                        |   |  | 4,236,545                       |   |  | 3,961,589                       |  
|Foreign currency adjustment           |  | (192,779                         | ) |  | (92,342                          | ) |  | 455,052                         |   |  | 139,543                         |  
|Comprehensive income                  |  | 1,103,616                        |   |  | 1,039,030                        |   |  | 4,691,597                       |   |  | 4,101,132                       |  
|                                      |  |                                  |   | 
|                                      |  | Prior Reported                   |   |  | As Restated                      |   |  | Prior reported                  |   |  | As Restated                     |  
|                                      |  | March 31, 2004                   |   |  | March 31, 2004                   |   |  | June 30, 2003                   |   |  | June 30, 2003                   |  
|                                      |  | $                                |   |  | $                                |   |  | $                               |   |  | $                               |  
|Balance Sheet:                        |  |                                  |   |  |                                  |   |  |                                 |   |  |                                 |  
|                                      |  |                                  |   | 
|Property & Equipment (Net)            |  | 8,377,759                        |   |  | 8,632,243                        |   |  | 13,858,204                      |   |  | 5,919,385                       |  
|Warrants in Convenxia                 |  |                                 |   |  | 59,681                           |   |  |                                |   |  | 59,681                          |  
|Joint Venture Receivable              |  |                                 |   |  | 4,706,568                        |   |  |                                |   |  | 4,985,278                       |  
|Current portion of note payable       |  |                                 |   |  | 242,299                          |   |  | 99,824                          |   |  | 192,231                         |  
|Short-term notes payable              |  | 40,000                           |   |  | 39,536                           |   |  | 400,000                         |   |  | 375,298                         |  
|Long-term note payable-Convenxia      |  |                                 |   |  | 5,517,416                        |   |  | 8,435,176                       |   |  | 5,473,611                       |  
|Deferred Income tax asset (liability) |  | (1,055,972                       | ) |  | 43,389                           |   |  | (1,858,998                      | ) |  | (759,637                        | )
|Income taxes payable                  |  |                                 |   |  | 431,866                          |   |  | 613,051                         |   |  | 1,712,412                       |  
|Income taxes recoverable              |  | 519,422                          |   |  |                                 |   |  |                                |   |  |                                |  



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##### Table of Contents

|6. | 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).



On November 17, 2003, 230,000 options were granted
to three officers of the Company, with an exercise price of $6.50. The market price of the stock on that date was $7.25. The holders may exercise 25% of their options on each anniversary date, and the options expire November 17, 2008. The Company
has recorded a deferred compensation expense of $14,375 in connection with the grant of these options for the nine months ended March 31, 2004.



The Company has adopted only the disclosure provision of SFAS 123, Accounting for Stock-Based Compensation. It applies APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in accounting for plans and does not recognize compensation expense for its stock-based compensation plan if the exercise prices equals or exceeds the fair market
value on the date of grant.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|7. | LOAN RECEIVABLE
|-- | ---------------



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 the Company will process its international traffic and earn 50% of the profits generated by the business. At March 31, 2004 and June 30, 2003 the Company had made advances of $964,903 and $392,261
respectively under this agreement, of which $415,844 (June 30, 2003 - $160,925) is a loan receivable (see Note 15).



|8. | INVESTMENT IN AFFILIATE
|-- | -----------------------



On March 28, 2003, the Company purchased 3,838,491 common shares (a 20% interest) of Odyssey Management Group, Inc., (Odyssey) a corporation
of which the Companys chairman is a shareholder and director, for $500,000. Consideration was cash for $174,290 and a note for $325,710, payable in installments of $36,190 per month commencing April 15, 2003. Repayment of the note was
accelerated. The balance outstanding at March 31, 2004 and June 30, 2003 was $nil and $110,817 respectively and is included in accounts payable.



The Company has the option until March 28, 2005, to purchase up to 51% of the outstanding shares of Odyssey Management Group, Inc. at their fair market.



During March 2004, the Company contributed additional capital
to match contributions made by other shareholders to maintain its 17.3% equity interest in the investment.



|                               |  |               |   |  |               |  
|------------------------------ |  | ------------- | - |  | ------------- | -
|                               |  | March 31,2004 |   |  | June 30, 2003 |  
|                               |  | $             |   |  | $             |  
|Shares at cost                 |  | 470,905       |   |  | 500,000       |  
|Share of net loss of affiliate |  | (99,298       | ) |  | (29,095       | )
|Contribution of capital        |  | 118,666       |   |  |              |  
|                               |  |               |   |  |               |  
|                               |  | 490,273       |   |  | 470,905       |  
|                               |  |               |   |  |               |  



Odyssey is in the
development stage providing real time data transfer for electronic money cards and currently operates in the State of Florida. Odyssey has recently been granted regulatory approval to become a registered money transmitter in the State of
Florida.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|9. | ACQUISITION
|-- | -----------



On July 2, 2003, the Company acquired all of the outstanding shares and debt of Contour Telecom Inc., which included its wholly-owned subsidiary, Argos
Telecom Inc. Contour Telecom Inc. is a provider of outsourced telecommunications management services. Argos Telecom Inc., the wholly-owned subsidiary, is a value added reseller of telecommunications services. Consideration for this purchase was
$6,017,793 in cash plus costs associated with the transaction of $1,114,377. The goodwill recognized on this transaction is not expected to be deductible for tax purposes. This acquisition was accounted for under the purchase method of accounting,
and the operating results of the business are included in the consolidated operating results from the effective date of acquisition. The purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities
assumed based on the exchange rate in effect on July 2, 2003 at their estimated fair values as follows:



|                    |  |            |  
|------------------- |  | ---------- | -
|                    |  | $          |  
|Current assets      |  | 5,377,419  |  
|Capital assets      |  | 241,942    |  
|Future tax asset    |  | 3,125,491  |  
|Customer lists      |  | 2,000,000  |  
|Goodwill            |  | 461,238    |  
|                    |  |            |  
|                    |  | 11,206,090 |  
|Liabilities assumed |  | (4,073,920 | )
|                    |  |            |  
|Net assets acquired |  | 7,132,170  |  
|                    |  |            |  



Customer lists are
being amortized on the straight-line basis over five years.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|9. | ACQUISITION (contd)
|-- | --------------------



In conjunction with the acquisition on July 2, 2003, management began implementing its plan to restructure operations. The estimated costs of this
restructuring plan totaling approximately $700,000 is a result of the reduction of workforce and consolidation of operations and locations.



The unaudited pro-forma combined historical results, as if Contour Telecom Inc. had been acquired at the beginning of the nine months ended March 31,
2003, are estimated to be:



|                                                                                    |  |           
|----------------------------------------------------------------------------------- |  | ----------
|                                                                                    |  | $         
|Net revenue                                                                         |  | 43,043,437
|Net income (excludes Contour Telecom Inc. non-recurring impairments of $10,136,381) |  | 2,333,280 
|Basic Earnings per share                                                            |  | 0.25      
|Fully Diluted Earnings per share                                                    |  | 0.19      



The pro-forma results
are not necessarily indicative of what actually would have accrued if the acquisition had been completed as of the beginning of the period presented.



|10. | SHORT-TERM NOTES PAYABLE
|--- | ------------------------



|                                                                |  |               |  |             
|--------------------------------------------------------------- |  | ------------- |  | ------------
|                                                                |  | March 31,2004 |  | June 30,2003
|                                                                |  | $             |  | $           
|Non-interest bearing, repayable in monthly payments of $40,000. |  | 39,536        |  | 375,298     



F-19



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|11. | ADVANCES FROM TELUS COMMUNICATIONS INC. (Telus)
|--- | -----------------------------------------------



In 2003, Telus provided the Company with marketing credits to a total maximum value of $3,250,000. The marketing credits were 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 was restricted to spend this amount on advertising and promotional activities within sixty days of the credits being advanced to the Company.



Repayment of the marketing credits commenced September 15,
2003 and is ending October 15, 2005. Repayments are by way of paying an additional $0.004/minute, at a minimum of $100,686 per month. The repayments are non-interest bearing as long as no payments are in default, and are classified as follows:



|          |  |               |  |              
|--------- |  | ------------- |  | -------------
|          |  | March 31,2004 |  | June 30, 2003
|          |  | $             |  | $            
|Current   |  | 1,274,114     |  | 1,030,716    
|Long-term |  | 677,433       |  | 1,585,270    
|          |  |               |  |              
|          |  | 1,951,547     |  | 2,615,986    
|          |  |               |  |              



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|12. | 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:



|                              |  |        
|----------------------------- |  | -------
|                              |  | $      
|Year ending March 31, 2005    |  | 91,226 
|Year ending March 31, 2006    |  | 71,509 
|                              |  |        
|Total minimum lease payments  |  | 162,735
|Amounts representing interest |  | 19,947 
|                              |  |        
|Principal                     |  | 142,788
|Current portion               |  | 75,809 
|                              |  |        
|                              |  | 66,979 
|                              |  |        



|13. | 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 relate to the difference between the depreciation used for Canadian tax purposes and financial reporting purposes.



The provision for income taxes for the nine months ended March 31, 2004
includes $1,149,428 (2003-$72,346) which represents the deferred income tax portion of the provision.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|14. | COMMON STOCK
|--- | ------------



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



On March 3, 2003, 800,000 common shares were purchased by the Company for $800,000.



On June 17, 2003, 240,000 common shares were issued for $750,000.



On June 30, 2003, 80,000 common shares were issued for
$250,000.



On June 30, 2003, 29,000 common shares were issued
for services rendered of $116,000.



On July 15, 2003, 20,000
common shares were issued to obtain a loan in the amount of $713,570 due December 31, 2003.



On December 30, 2003, as part of a transaction involving corporate intermediaries, an individual who is a director and chief executive officer, surrendered options in exchange for the receipt of 2,260,934 shares of
Common Stock. For purposes of this exchange, which took the form of the redemption of certain stock of a corporate intermediary, the option was valued at an aggregate of $12,815,000, or 2,260,934 shares of Common Stock assuming a discounted market
price of $5.67 per share as of November 30, 2003, which is the amount of shares equal to the Common Stock underlying such option had the option been exercised on a cash less basis as otherwise provided in the subject option. The Company has
accounted for the transaction as a non-monetary exchange of shares that do not represent the culmination of the earnings process. Accordingly the exchange was recorded at carrying value, with no dividend recorded on the redemption of the stock.



On December 31, 2003, 9,000 common shares were issued for
services rendered of $51,032.



On January 29, 2004 a
two-for-one stock split on the Companys outstanding shares was distributed to shareholders of record at January 15, 2004. For every one share of the Companys common stock held on the record date, a holder will receive one additional
share. All share information has been adjusted retroactively for the stock split.



On March 18, 2004, 1,470,000 common shares were issued for gross proceeds of $18,007,500 less direct cost associated with the transaction of $996,790 for net proceeds of $17,010,710. Attached to these shares were
common stock warrants issued to purchase 367,500 shares of the Companys common stock. These warrants have an exercise price of $17.00 and expire March 18, 2010.



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|15. | JOINT VENTURE
|--- | -------------



Included in the consolidated financial statements are the Companys proportionate share of revenues, expenses, assets and liabilities of the
unincorporated joint venture as follows:



|                                      |  |               |   |  |               |  
|------------------------------------- |  | ------------- | - |  | ------------- | -
|                                      |  | March 31,2004 |   |  | June 30, 2003 |  
|                                      |  | $             |   |  | $             |  
|Assets                                |  |               |   |  |               |  
|Cash                                  |  | 36,191        |   |  |              |  
|Accounts receivable                   |  | 14,899        |   |  |              |  
|Prepaid expenses                      |  | 2,500         |   |  |              |  
|Property and equipment                |  | 118,446       |   |  | 95,679        |  
|                                      |  |               |   |  |               |  
|                                      |  | 172,036       |   |  | 95,679        |  
|                                      |  |               |   |  |               |  
|Liabilities                           |  |               |   |  |               |  
|Accounts payable                      |  | 47,796        |   |  | 53,349        |  
|Due to Yak Communications Inc.        |  | 415,844       |   |  | 160,925       |  
|                                      |  |               |   |  |               |  
|                                      |  | 463,640       |   |  | 214,274       |  
|                                      |  |              
|Deficit                               |  | (291,604      | ) |  | (118,595      | )
|                                      |  |               |   |  |               |  
|Total liabilities and deficit         |  | 172,036       |   |  | 95,679        |  
|                                      |  |               |   |  |               |  
|Revenue                               |  | 26,159        |   |  |              |  
|                                      |  |              
|Expenses                              |  | 199,168       |   |  |              |  
|                                      |  |               |   |  |               |  
|Net loss                              |  | (173,009      | ) |  |              |  
|                                      |  |               |   |  |               |  
|Cash used in operating activities     |  | (243,757      | ) |  |              |  
|                                      |  |              
|Cash used in investing activities     |  | (22,767       | ) |  |              |  
|                                      |  |              
|Cash provided by financing activities |  | 302,715       |   |  |              |  
|                                      |  |               |   |  |               |  
|Cash, beginning of year               |  | 36,191        |   |  |              |  
|                                      |  |               |   |  |               |  
|Cash, end of year                     |  | 36,191        |   |  |              |  
|                                      |  |               |   |  |               |  



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|16. | STATEMENT OF CASH FLOWS
|--- | -----------------------



The following recap presents the detail of the net change in non-cash working capital presented in the statement of cash flows for the three months ended
March 31, 2004 and 2003; and nine months ended March 31, 2004 and 2003:



|                                         |  |                              |   |  |                             |   |  |            |   |  |            |  
|---------------------------------------- |  | ---------------------------- | - |  | --------------------------- | - |  | ---------- | - |  | ---------- | -
|                                         |  | Three months ended March 31, |   |  | Nine months ended March 31, |  
|                                         |  | 2004                         |   |  | 2003                        |   |  | 2004       |   |  | 2003       |  
|                                         |  | $                            |   |  | $                           |   |  | $          |   |  | $          |  
|Decrease (increase) in:                  |  |                              |   |  |                             |   |  |            |   |  |            |  
|Accounts receivable                      |  | (725,611                     | ) |  | (1,431,897                  | ) |  | (6,032,504 | ) |  | (3,010,534 | )
|Prepaid expenses and sundry              |  | 16,326                       |   |  | (175,313                    | ) |  | (278,726   | ) |  | (247,386   | )
|Income taxes recoverable                 |  | (431,220                     | ) |  |                            |   |  | (519,422   | ) |  |           |  
|Deposits                                 |  |                             |   |  | 4,464                       |   |  |           |   |  | 2,231      |  
|Increase (decrease) in:                  |  |                              |   |  |                             |   |  |            |   |  |            |  
|Deferred revenue                         |  | (16,494                      | ) |  |                            |   |  | 1,011,719  |   |  |           |  
|Accounts payable and accrued liabilities |  | 167,568                      |   |  | 561,506                     |   |  | 978,573    |   |  | 692,847    |  
|Amounts due for network access and usage |  | 846,067                      |   |  | 349,285                     |   |  | 890,171    |   |  | 210,050    |  
|Amounts due to long distance carriers    |  | 725,409                      |   |  | 431,068                     |   |  | 3,747,676  |   |  | 836,777    |  
|Amount due for equipment                 |  | 381,807                      |   |  | 27,850                      |   |  | 585,432    |   |  | (73,191    | )
|Due to Factor                            |  | 146,646                      |   |  | 83,798                      |   |  | 763,161    |   |  | (146,020   | )
|Income taxes payable                     |  | 1,010,502                    |   |  | 607,977                     |   |  | 338,257    |   |  | 1,490,087  |  
|Subscriptions payable                    |  |                             |   |  | 325,709                     |   |  |           |   |  | 325,709    |  
|Less: Net assets acquired from Contour   |  |                             |   |  |                            |   |  | 1,330,777  |   |  |           |  
|                                         |  |                              |   |  |                             |   |  |            |   |  |            |  
|                                         |  | 2,121,000                    |   |  | 784,447                     |   |  | 2,815,114  |   |  | 80,570     |  
|                                         |  |                              |   |  |                             |   |  |            |   |  |            |  



The following is the
breakdown of amounts included in the purchase of Contour cash outflow:



|                                                      |  |           |  
|----------------------------------------------------- |  | --------- | -
|                                                      |  | $         |  
|Future tax asset                                      |  | 3,190,898 |  
|Customer lists                                        |  | 2,000,000 |  
|Goodwill                                              |  | 512,744   |  
|Capital assets                                        |  | 247,005   |  
|Current assets net of liabilities                     |  | 1,330,777 |  
|                                                      |  |           |  
|Purchase price net of currency translation adjustment |  | 7,281,424 |  
|Currency translation adjustment                       |  | (149,254  | )
|                                                      |  |           |  
|Purchase price                                        |  | 7,132,170 |  
|                                                      |  |           |  



F-24



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|17. | COMMITMENTS
|--- | -----------



The Company has operating lease commitments for its premises and commitments for leased lines which expire at various dates through July 2009. The future
minimum lease payments (exclusive of operating costs and payments for additional volume) for the years ending March 31, are as follows:



|     |  |          
|---- |  | ---------
|     |  | $        
|2005 |  | 3,427,881
|2006 |  | 3,398,316
|2007 |  | 3,378,759
|2008 |  | 3,378,759
|2009 |  | 3,364,834



Under the terms of an
agreement with one of their long distance providers, Contour Telecom Inc. and Argos Telecom Inc. are committed to purchasing a minimum amount of long distance for their customers use. The minimum amount of customer use is $1,973,288 for the year
ending March 31, 2005 and $501,683 for the year ending March 31, 2006.



On September 11, 2003, the Company entered into an agreement to acquire a new telecommunications switch for approximately $2,000,000. The amount was reduced to $1,700,000 during the quarter and the balance due of $754,000 was paid on May 3,
2004.



|18. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



| | (a) | The Company purchased property and equipment of $nil and $14,000 for the periods ended March 31, 2004 and 2003 from a corporation of which the Companys chairman is a
shareholder and director, and made advances for the periods ending March 31, 2004 and 2003 of $2,577 and nil respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The Company paid marketing and design fees for the periods ending March 31, 2004 and 2003 of $122,167 and $71,604 respectively to a corporation controlled by an officer and
shareholder.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-25



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|18. | RELATED PARTY TRANSACTIONS (contd)
|--- | -----------------------------------



| | (c) | The Company paid professional fees for legal services for the periods ending March 31, 2004 and 2003 of $95,187 and $40,285 respectively to a director and minority shareholder.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | The Company paid consulting fees for the periods ended March 31, 2004 and 2003 of $nil and $150,000 respectively to a shareholder for the development of international operations in
Peru. This shareholder is a Director of the Company in Peru with which the Company has a commercial service and marketing agreement.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | The Company paid a management fee for the periods ended March 31, 2004 and 2003 of $nil and $90,000 respectively to a Corporation controlled by the Companys chairman.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) | The Company paid consulting fees for the periods ended March 31, 2004 and 2003 of $nil and $83,326 respectively to a Corporation controlled by a minority shareholder.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



All other related party transactions have been
disclosed on the consolidated financial statements.



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



|19. | ECONOMIC DEPENDENCE
|--- | -------------------



The Company is dependent in Ontario, Quebec, British Columbia and Alberta upon carriers to provide billing and collection services to its customers under
renewable agreements. The Company is also dependent upon TELUS Communications Inc. to provide billing, transport and handling services under a renewable agreement which expires in June 2004. Management expects that these agreements will
automatically renew.



|20. | CHANGES IN ESTIMATES
|--- | --------------------



Effective July 1, 2003, the estimated useful life for existing telecom switching systems has been changed to reflect the expected replacement by the new
Switch that was purchased in September, 2003 (see Note 17).



This change in estimate has been applied on a prospective basis and the effect of this change increased amortization for the period by approximately $878,000 and reduced net income for the period by approximately $878,000.



F-26



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|21. | SEGMENTED AND RELATED INFORMATION
|--- | ---------------------------------



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



|                        |  |                              |   |  |                             |   |  |               |   |  |               |  
|----------------------- |  | ---------------------------- | - |  | --------------------------- | - |  | ------------- | - |  | ------------- | -
|                        |  | -For the three months ended- |   |  | -For the nine months ended- |  
|                        |  | March 31,2004                |   |  | March 31,2003               |   |  | March 31,2004 |   |  | March 31,2003 |  
|                        |  | $                            |   |  | $                           |   |  | $             |   |  | $             |  
|Net revenue             |  |                              |   |  |                             |   |  |               |   |  |               |  
|Canada                  |  | 21,084,127                   |   |  | 10,194,406                  |   |  | 59,603,746    |   |  | 26,955,548    |  
|United States           |  | 323,064                      |   |  | 397,589                     |   |  | 808,065       |   |  | 1,112,641     |  
|Peru                    |  | 57,543                       |   |  |                            |   |  | 84,470        |   |  |              |  
|                        |  |                              |   |  |                             |   |  |               |   |  |               |  
|                        |  | 21,464,734                   |   |  | 10,591,995                  |   |  | 60,496,281    |   |  | 28,068,189    |  
|                        |  |                              |   |  |                             |   |  |               |   |  |               |  
|Operating profit (loss) |  |                              |   |  |                             |   |  |               |   |  |               |  
|Canada                  |  | 2,333,491                    |   |  | 1,746,147                   |   |  | 7,684,173     |   |  | 5,295,127     |  
|United States           |  | (550,742                     | ) |  | (128,768                    | ) |  | (1,428,518    | ) |  | (1,178,091    | )
|Peru                    |  | (100,272                     | ) |  | (21,354                     | ) |  | (195,936      | ) |  | (178,029      | )
|                        |  |                              |   |  |                             |   |  |               |   |  |               |  
|                        |  | 1,682,477                    |   |  | 1,596,025                   |   |  | 6,059,719     |   |  | 3,939,007     |  
|                        |  |                              |   |  |                             |   |  |               |   |  |               |  
|                        |  |                              |   | 
|                        |  |                              |   |  |                             |   |  | March 31,2004 |   |  | June 30,2003  |  
|                        |  |                              |   |  |                             |   |  | $             |   |  | $             |  
|Assets                  |  |                              |   |  |                             |   |  |               |   |  |               |  
|Canada                  |  |                              |   |  |                             |   |  | 36,038,512    |   |  | 27,343,757    |  
|United States           |  |                              |   |  |                             |   |  | 18,806,418    |   |  | 1,251,705     |  
|Peru                    |  |                              |   |  |                             |   |  | 258,875       |   |  | 95,679        |  
|                        |  |                              |   |  |                             |   |  |               |   |  |               |  
|                        |  |                              |   |  |                             |   |  | 55,103,805    |   |  | 28,691,141    |  
|                        |  |                              |   |  |                             |   |  |               |   |  |               |  



The Canadian assets
include goodwill and intangible assets of $534,864 and $1,679,358 respectively.



F-27



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



|22. | CONTINGENCIES
|--- | -------------



Various lawsuits and claims are pending against the Company and estimated provisions have been included in current liabilities where appropriate. It is
the opinion of management that the final determination of these claims will not have a material adverse effect on the financial position or the results of the Company.



F-28



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##### Table of Contents

Exhibit Index



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