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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q/A

(Amendment No. 1)



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(Mark One)

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

For the quarterly period ended September 30, 2005



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

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)



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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.  x    Yes ̈No

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈Nox

As of September 30, 2005, 12,897,250 shares of the issuers Common Stock, no par value per share, were outstanding.



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q/A



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|           |  | PART I - FINANCIAL INFORMATION                                                        |  |     
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  |     
|           |  |                                                                                      
|           |  | Condensed Consolidated Balance Sheets                                                 |  | F-1 
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Stockholders Equity                             |  | F-2 
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Operations                                       |  | F-3 
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | F-4 
|           |  |                                                                                      
|           |  | Notes to Unaudited Condensed Consolidated Financial Statements                        |  | F-5 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 3   
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 27  
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 28  
|           |  |                                                                                      
|           |  | PART II  OTHER INFORMATION                                                           |  |     
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 31  
|           | 
|Signatures |  | 31                                                                                   



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EXPLANATORY NOTE

Yak Communications Inc.,a Florida corporation (the Company) is filing this Amendment No. 1 (the Amendment) to its Quarterly Report on Form 10-Q for the period ended September 30, 2005
(the Report) to amend previously issued financial statements corrected for certain previous errors in our consolidated balance sheets, statements of operations and statements of cash flows for the quarters ended September 30, 2005
and 2004. The Company has provided amended and restated financial statements and notes thereto and revisions to Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, and Item 4.
Controls and Procedures. No other information in the Report is amended hereby. Pursuant to Exchange Act Rule 12b-15, the Company is also including currently dated Sarbanes Oxley Act Section 302 and Section 906
certifications of the principal executive and financial officers, which certifications are attached to this Amendment No. 1 as Exhibits 31.1, 31.2, 32.1 and 32.2, respectively.

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



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



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



| |  |  | To enhance disclosure by adding a rate reconciliation according to SFAS 109;
| | - |  | ----------------------------------------------------------------------------



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



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

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

Concurrently with the filing of this Amendment No. 1, we are filing (i) Amendment No. 2 on Form 10-K/A to our Annual Report on Form 10-K for the year ended June 30, 2005, and (ii) Amendment No. 1 on Form 10-Q/A
to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.



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PART I

Item 1. Financial Statements

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

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

Special Note About
Forward Looking Statements

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

The following discussion should be read in conjunction with the information contained in the
unaudited condensed consolidated financial statements of the Company and the related notes thereto, appearing elsewhere herein, and in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of
Operations set forth in the Companys Form 10-K/A Amendment No. 2, as amended, for the year ended June 30, 2005, filed with the Securities and Exchange Commission (SEC). All the amounts are in thousands of dollars
except for share and per share data. The financial information in Managements Discussion and Analysis of Financial Condition and Results of Operations refers to our continuing operations.

Overview

We provide discount, long distance
telecommunication services to more than 892,000 recurring residential and small business customers in both Canada and the United States, using our facilities-based resale model and our Voice over Internet Protocol (VoIP) network.
Residential marketing efforts are primarily concentrated toward consumers who make significant numbers of international calls, directly targeting ethnic markets and communities in major urban centers. Our customer base is diversified across many
ethnic communities which we believe subjects us to a minimal risk of significant rate changes as a result of deregulation or other unforeseen political events in particular countries. We also offer end-to-end telecommunications services to
small-to-medium business enterprises in the Canadian market. Our focus is to provide the highest quality, competitively priced telecommunications services to existing markets. We realize that dial-around long distance is a commodity and there will
be a point in the future when we saturate our own marketplace. We intend to leverage the cash flow that our dial-around business provides to transition into higher growth, emerging markets such as VoIP.

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

Products

Our primary residential product offering is dial-around services (also known as casual calling) at both 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.



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We are the largest participant in the Canadian dial-around market, with over 70% market share. We believe
there is opportunity to further expand the Canadian market, and we intend to focus our efforts on retention and growth in this core market. Our goal is to expand the size of the addressable Canadian marketplace by marketing our product suite outside
of major urban centers.

In the first quarter of the current fiscal year, we continued to promote our dial-around services in the United
States, relying on our core strategy of niche marketing to ethnic communities to grow market share. Our CIC (Carrier Identification Code) codes, i.e., 10-10-925 and 1+ service are currently available in 48 states, and we have a targeted marketing
campaign in South Florida and Los Angeles. We have entered into agreements with celebrity ethnic spokespersons, specialized Internet marketing organizations and utilized print and outdoor media to further market and expand our U.S. operations. Our
strategic focus in the U.S. is supported by our office in Aventura, Florida. Although the U.S. market is highly competitive, our marketing campaign has continued to drive customer usage growth during the three months ended September 30, 2005.
For the three-month period ended September 30, 2005, monthly minutes grew to approximately 2.6 million 3% over the amount of minutes used during the three months ended June, 2005 and 313% over the 0.6 million in the comparable
period ended June 30, 2004. We believe that through the implementation of a strategically focused approach, there exists an opportunity to grow this market.

In March 2005, we decided to exit the Peru market as we evaluated our returns from the Peruvian joint venture and the potential for significant growth versus that available in other markets. Operations in Peru were
fully wound down during the first quarter of fiscal 2006 and at that time, Peru operations represented a very small portion of our total business. As such, an $85 thousand write-off was made for equipment located in Peru that was no longer being
used.

In January 2005, we began marketing our VoIP service, WorldCity VoIP, to residential customers in Canada and the U.S. For customers who currently
have high-speed internet access, WorldCity VoIP
includes free member-to-member international calling and combines bundled local and long distance calling packages with very competitive international rates, plus enhanced calling features like Caller ID, Three Way Calling and Voicemail for one flat
price. In addition to the basic package, future releases of the product are expected to provide services such as unified messaging and virtual international phone numbers, where available. Our VoIP service is generally available everywhere and
specific DID (direct dial) numbers are currently available from 53 U.S. cities, and 13 Canadian cities for incoming calling. To advance both the quality and quantity of our VoIP services, we have engaged the services of Kayote Networks, Inc. and
CounterPath Solutions, Inc (formerly Xten Networks, Inc.) Kayote Networks provides recognized industry expertise to help define VoIP technology solutions that break through the typical interoperability issues that have heretofore inhibited the
widespread acceptance of internet based services. CounterPath provides end user devices that offers consumers a choice in how they initiate VoIP calls. CounterPath provides soft phone capability that allows customers to make and receive
phone calls or video phone calls directly on their personal computer without the need of a regular analogue phone line.

On
November 7, 2005, we announced additional product lines to our WorldCity VoIP service. yakForFree, to be launched in mid-November 2005, is a new service which allows users to make free voice and video calls to anyone on the Internet who is also a member of yakForFree. yakForFree
members will be encouraged to upgrade to one or more of our paying programs. yakToAnyone is a PC-to-Phone, talk and video pre-paid service that will also be available
in mid-November. yakBasic and yakUnlimited
are subscription plans, that allow subscribers to make and receive calls over high speed DSL or cable internet access to virtually any telephone or cellular phone worldwide. yakBasic and yakUnlimited are expected to be available sometime in January
2006.

Network Facilities

Over the
past four years, we have established and expanded our own private leased line network throughout all major Canadian provinces. Additionally, we have achieved comparable network breadth in the U.S. by interconnecting with a major U.S. carrier.
Currently, this coast-to-coast network delivers all of our telephony traffic. To further enhance the cost and control advantages of this network, in September 2003, we purchased a Tekelec/Santera switch and Media Gateway. Our current level of
traffic is using approximately 40,000 ports and our Tekelec/Santera switch is expandable to 200,000 ports. As a result, we anticipate having significant switching capacity in the foreseeable future.

Cost reduction initiative

In addition to the direct
cost savings associated with the transition to and operation of the Santera platform, the transition has also afforded us the opportunity to reduce costs by bringing a greater portion of our traffic onto our own network. We continually pursue other
methods of reducing our variable direct costs such as employing least cost routing of



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our international traffic, negotiating lower variable costs with multiple carriers to multiple destinations to achieve the lowest available cost per minute,
and continuing to expand the capacity of our network to accommodate the growing demand in certain areas of the markets we serve.

VoIP

We believe that internet-enabled voice services represent an important emerging market opportunity in the communications industry. The service enables
voice communication over broadband IP networks, significantly reducing costs to end users while bundling a broad array of value-added services, e.g., voicemail, call-waiting, caller-ID, call-forwarding, auto-attendant, find-me/follow-me and roaming.

We believe we are well-positioned to capture market share as VoIP services gain popularity among traditional phone users. We have
initiated strong relationships with technology and network providers to incorporate voice over high-speed internet into our current offering. In January 2005, we commenced a marketing campaign to support our VoIP product launch. We intend to
leverage our successful dial-around business model which concentrates in the ethnic communities for international calling, the market reach of current advertising, and the ability to carry a portion or all of a call over the internet, to maximize
our VoIP initiative contribution margin potential.

Foreign Currency

Currently, 94.5% of our net revenue is derived from sales and operations in Canada. The functional currency for this revenue is the Canadian dollar. Our reporting currency for our consolidated financial statements is
the U.S. dollar. Although we expect to derive less of our total business directly from Canada in the future, exchange rates have had and may continue to have a significant, and potentially adverse, effect on our results of operations. Strengthening
of the Canadian dollar relative to the U.S. dollar could have a positive impact on our future results of operations.

Competition

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

Results of Operations

Comparison of three months
ended September 30, 2005 and 2004

The following information for the quarters ended September 30, 2005 and 2004 is provided
for informational purposes and should be read in conjunction with the Consolidated Condensed Financial Statements and Notes.

For the
Quarter Ended September 30, 2005



|                                         |  |         |  |           |  |         |  |       
|---------------------------------------- |  | ------- |  | --------- |  | ------- |  | ------
|Products                                 |  | Revenue |  | Customers |  | Minutes |  | Calls 
|                                         |  | $       |  |           |  |         |  |       
|Dial-Around/1+                           |  | 17,043  |  | 822       |  | 261,859 |  | 24,153
|LooneyCall                               |  | 1,694   |  | 63        |  | 18,205  |  | 1,401 
|Yakcell/Calling Card                     |  | 192     |  | 7         |  | 1,678   |  | 190   
|Total Core Revenue                       |  | 18,929  |  | 892       |  | 281,742 |  | 25,744
|Yak for Business                         |  | 3,360   |  |           |  |         |  |       
|Contour                                  |  | 1,219   |  |           |  |         |  |       
|WorldCity VoIP                           |  |        |  |           |  |         |  |       
|Other                                    |  |        |  |           |  |         |  |       
|Net Revenue                              |  | 23,508  |  |           |  |         |  |       
|                                        
|For the Quarter Ended September 30, 2004
|Products                                 |  | Revenue |  | Customers |  | Minutes |  | Calls 
|                                         |  | $       |  |           |  |         |  |       
|Dial-Around/1+                           |  | 14,767  |  | 772       |  | 244,282 |  | 22,750
|LooneyCall                               |  | 2,207   |  | 85        |  | 25,450  |  | 1,966 
|Yakcell/Calling Card                     |  | 85      |  | 2         |  | 811     |  | 102   
|Total Core Revenue                       |  | 17,059  |  | 859       |  | 270,543 |  | 24,818
|Yak for Business                         |  | 2,708   |  |           |  |         |  |       
|Contour                                  |  | 1,387   |  |           |  |         |  |       
|WorldCity VoIP                           |  | 3       |  |           |  |         |  |       
|Other                                    |  | 40      |  |           |  |         |  |       
|Net Revenue                              |  | 21,197  |  |           |  |         |  |       



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Revenue

Net revenue increased $2.3 million, or 10.9%, to $23.5 million for the quarter ended September 30, 2005, from $21.2 million for the quarter ended September 30, 2004. The majority of the growth came from our core dial-around and
One Plus products, which increased $2.1 million and $0.1 million respectively on a quarter over quarter basis. Our Yakcell and Calling Card products experienced strong sequential quarterly growth (126.1%), as did our VoIP product (2416.7%). However,
these products still represent an insignificant amount of our overall revenue. We believe that these products will continue to increase their relative share of total revenue as they become more entrenched in the North American marketplace.

Yak Canada

Our Canadian revenue
increased by $0.9 million, or 5.4%, to $17.7 million for the the quarter ended September 30, 2005, from $16.8 million from the quarter ended September 30, 2004. This was mainly due to the dial around product that increased $1.1
million to $15.5 million for the quarter ended September 30, 2005 from $14.4 million for the quarter ended September 30, 2004, partially offset by LooneyCall that decreased $0.5 million to $1.7 million for the quarter ended
September 30, 2005 from $2.2 million for the quarter ended September 30, 2004.

The Average Rate per Minute (ARPM) that we derive
from our core dial-around services was $0.066 for the quarter ended September 30, 2005, as compared to $0.063 for the quarter ended September 30, 2004, due to increased international traffic. However, due to the competitive nature of the
business and the fact that long distance services are increasingly a commodity product, we expect gradual, but continued erosion in our ARPM in the foreseeable future.

Yak America

Our U.S. revenue increased $1.0 million, or 455% to $1.2 million for the quarter ended
September 30, 2005, from $0.2 million from the quarter ended September 30, 2004. This increase was due to launching a marketing campaign in October 2004 to the Hispanic market in Florida through the use of a variety of media including
television and radio commercials, flyers and print media advertising. This campaign is expected to significantly increase our presence in the U.S. market. In conjunction with the above campaign, we have embarked on targeted marketing to other ethnic
communities in the U.S. thereby strengthening our presence in the U.S. market.

Yak for Business

The balance of our revenue was derived from two subsidiaries. Yak for Business contributed revenue of $3.4 million in the first quarter of fiscal year
2006 which represented an increase of $0.7 million or 24.1%, from $2.7 million in the first quarter of fiscal year 2005. The increase is primarily the result of the acquisition of the Navigata customer base.

Contour

Revenue for Contour Telecom decreased $0.2
million or 12.1% to $1.2 million for the first quarter 2006, from $1.4 million for the quarter ended September 30, 2005. This is primarily due to the price concessions provided to customers during contract renewals.

WorldCity VoIP

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



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Cost of Revenue

Our cost of revenue (which excludes depreciation and amortization in the first quarter of fiscal 2006 and 2005 of $701 thousand and $509 thousand, respectively) increased 4.5% to $14.4 million for the quarter ended
September 30, 2005, from $13.8 million for the quarter ended September 30, 2004. As a percentage of sales, the cost of revenue rate was 61.1% in first quarter of fiscal 2006 compared to the 64.9% rate in first quarter of fiscal 2005.

We have been able to maintain our margins as a result of the increased utilization of our leased line network. We have continued to
build out our network, which enables us to bring a greater share of our traffic onto our own network, resulting in a higher utilization of our fixed-cost access lines. As a result of the continual downward pressure on the price of long
distance telephony, our Company is utilizing real-time, least cost routing algorithms and contracting with various carriers in order to manage the direct costs as efficiently and as cost effectively as possible.

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



|                      |  |                                                                   |  |       |                |  |        |  |       |  
|--------------------- |  | ----------------------------------------------------------------- |  | ----- | -------------- |  | ------ |  | ----- | -
|                      |  | Breakdown of Core Revenue andDirect Cost for the three-monthended | 
|                      |  | Sept. 30, 2005                                                    |  |       | Sept. 30, 2004 | 
|(Thousands)           |  | $                                                                 |  | %     |                |  | $      |  | %     |  
|Core Revenue*         |  | 18,929                                                            |  | 100.0 | %              |  | 17,059 |  | 100.0 | %
|                      |  |                                                                   |  |      
|Long Distance Charges |  | 4,739                                                             |  | 25.2  | %              |  | 5,630  |  | 33.0  | %
|Other Fees**          |  | 6,313                                                             |  | 33.5  | %              |  | 5,046  |  | 29.6  | %
|                      |  |                                                                   |  |      
|Contribution Margin   |  | 7,877                                                             |  | 41.3  | %              |  | 6,383  |  | 37.4  | %

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

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

Cost of revenue in
our dial-around business is comprised primarily of the cost of long distance services, fees for the processing and transporting of our calls and fixed and variable line access costs. The cost of the pure long distance component of services has
decreased to $4.7 million or 25.2% of core revenues for the quarter ended September 30, 2005, from $5.6 million or 33.0% for the quarter ended September 30, 2004. The cost of the Other component of services has increased to
33.5% for the quarter ended September 30, 2005, from 29.6% for the quarter ended September 30, 2004 as a percentage of revenue. This is largely the result of a relative increase in the cost of access lines and billing and collection fees
on a quarter-over-quarter basis.

Contribution Margins

The Companys overall contribution margin rate increased by 380 basis points for the quarter ended September 30, 2005 when compared to our contribution margin rate for the quarter ended September 30,
2004. For the first quarter of fiscal 2006, the contribution margin was 38.9% as compared to 35.1% for the first quarter of fiscal 2005.

Yak Canada

The contribution margin rate for Yak Canada was 44,9% for the quarter ending September 30, 2005, compared to 38.1% for the quarter
ending September 30, 2004. While we do not anticipate that there will be significant erosion in our core margins in the short term as we continue to optimize our network efficiency and control direct costs through on-going negotiations with
various carriers, there can be no assurance that declines in our contribution margins will not occur.



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Yak America

The contribution margin rate for Yak America was negative 9.5% for the quarter ending September 30, 2005, compared to negative 2.4% for the quarter ending September 30, 2004. This is due to the increase in the long distance costs
from more traffic and non-billable revenue from call rejects.

Yak for Business

The contribution margin in the Yak for Business subsidiary was 29.0% for the quarter ending September 30, 2005, compared to 24.3% for the quarter
ending September 30, 2004. The increase is due to the acquisition of Navigatas customer base in March 2005.

Contour

The contribution margin for Contour Telecom was 23.5% for the quarter ending September 30, 2005, compared to 27.9% for the quarter ending
September 30, 2004. This decrease in contribution margin is largely the result of a contract renegotiation with a significant customer.

WorldCity
VoIP

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

General & Administrative Expenses

General and administrative expenses (G&A) increased 92% to $5.9
million for the quarter ending September 30, 2005, from $3.6 million for the quarter ending September 30, 2004. The $2.3 million increase in G&A can be attributed mainly to increases of legal, audit, Sarbanes Oxley compliance and
consulting fees ($1.5 million), salaries ($0.5 million), foreign exchange loss ($0.3 million), bad debt ($0.2 million), capital tax ($0.2 million), and Internet and Web site hosting ($0.1 million) but offset by a decrease in
organizational and start-up costs ($0.5 million).

The largest component of the increase in G&A was legal, audit, Sarbanes Oxley
compliance and consulting fees, which increased $1.5 million or 523% to $1.8 million for the quarter ended September 30, 2005 compared to $0.3 million for the quarter ending September 30, 2004. The increase is a result of Sarbanes Oxley
compliance costs, investments in the new VoIP initiatives, infrastructure to support and control the Companys growth, due diligence costs for a potential acquisition (not consummated) and costs incurred for the recent financial restatements.

Salaries increased as a result of hiring additional members of our senior management team, technology professionals to support the new
VoIP initiatives and customer service representatives to support the growth of our business. To facilitate our future growth, we added several executives with extensive telecommunications experience to the management team. In addition, as we move
aggressively into new markets and introduce new products, we have invested in technology professionals and our front-line customer support organization. Customer service has always been one of the key differentiators of our Company and we expect it
will continue to be in the future. We will continue to closely analyze and control the growth of our headcount, to maximize the return to the organization.

No organizational or start-up costs were incurred in the current quarter. As a result, organizational and start-up therefore decreased by $0.5 million to $nil for the quarter ended September 30, 2005 when
compared to the $0.5 million outlay (primarily for our VoIP initiatives) during the quarter ended September 30, 2004.

Bad debt
expenses increased by $0.2 million for the quarter ended September 30, 2005 primarily in the Yak for Business division.

Sales & Marketing

Sales and marketing expenses increased by $0.9 million or 91% to $1.9 million for the quarter ended September 30, 2005, compared
to $1.0 million for the quarter ending September 30, 2004. The cost of advertising in our Canadian markets decreased $0.4 million to $0.3 million for the quarter ended September 30, 2005; however, similar costs increased by $1.3 million in
our U.S. markets.



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Depreciation & Amortization

Depreciation and amortization increased by $0.3 million for the quarter ended September 30, 2005, as compared to the quarter ended September 30, 2004. We anticipate that depreciation will increase in the
future as the demand for further equipment to support our new products increases.

Liquidity and Capital Resources

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

For the three months ended September 30, 2005, there was a decrease in cash and cash equivalents of $0.9 million versus the $0.1 million decrease
for the three months ended September 30, 2004. Net cash provided from operating activities during the first quarter of fiscal 2006 was $0.4 million, as compared to $2.1 million for the comparable quarter in fiscal 2005. This change was
primarily due to lower earnings and cash invested in non-cash working capital.

Net cash used in investing activities decreased to $1.0
million for the three months ended September 30, 2005, as compared to $1.8 million for the three months ended September 30, 2004. Capital expenditures made in the first quarter were primarily for costs related to investments in our new
VoIP initiatives and the installation of our Tekelec/Santera switch in Miami, Florida. Though capital expenditures are expected to be lower in fiscal 2006 than in fiscal 2005, we expect to continue to add to our network and network equipment in the
coming year to support the growth of the business. In addition, we continue to actively pursue acquisitions and invest in new business initiatives that we believe will be accretive in nature to our existing business.

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

Payments Due by Period



|                        |  |       |     |                 |   |           |  |           |     |                  |   |   |  |   |  
|----------------------- |  | ----- | --- | --------------- | - | --------- |  | --------- | --- | ---------------- | - | - |  | - | -
|Contractual Obligations |  | Total |     | Less Than1 Year |   | 1-3 Years |  | 3-5 Years |     | More Than5 Years
|Operating Leases        |  | $     | 1.7 |                 | $ | 0.6       |  | $         | 1.1 |                  |   |  |  |   | 
|Carrier Commitments     |  | $     | 7.3 |                 | $ | 4.9       |  | $         | 2.4 |                  |   |  |  |   | 
|                        |  |       |     |                 |   |           |  |           |     |                  |   |   |  |   |  
|Total                   |  | $     | 9.0 |                 | $ | 5.5       |  | $         | 3.5 |                  | $ |  |  | $ | 
|                        |  |       |     |                 |   |           |  |           |     |                  |   |   |  |   |  

Net cash used by financing activities was $0.5 million for the three months ended
September 30, 2005, as compared to $0.3 million used by financing activities for the three months ended September 30, 2004. Financing activity is primarily related to reductions in the Telus deferral.

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

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

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



9



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

Restatement of Historical Financial Statements

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



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



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



| | C. | To enhance disclosure by adding a rate reconciliation according to SFAS 109;
| | -- | ----------------------------------------------------------------------------



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



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

The net effect of the restatements was to increase net income by $109 or $0.01 earnings per share for the quarter ended September 30, 2005. For the
quarter ended September 30, 2005, the cash flows from operating and investing activities were understated by $249 and $32, respectively, while the cash flows from financing activities and the effect of exchange rate changes on cash and cash
equivalents were overstated by $76 and $205, respectively. At September 30, 2005, liabilities were understated by $984 while shareholders equity was overstated by $984.

The net effect of the initial and the amended restatements was to increase net income by $303 or $0.02 earnings per share for the quarter ended
September 30, 2004. For the quarter ended September 30, 2004, the cash flows from operating, investing activities and decrease in cash and cash equivalents were understated by $91, $194 and $3 respectively, while cash flows from financing
activities and the effect of exchange rate changes on cash and cash equivalents were overstated by $81 and $201 respectively.

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

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|--------------------------------------------------- |  | -------------------------------- |  | ------ | - |  | ------ |  | ------ |  | ------ |  | ------ |  | ----------------------------
|                                                    |  | September 30,2005 Initial filing |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |  | September 30,2005 (Restated)
|(in $ thousands)                                    |  | $                                |  | $      |   |  | $      |  | $      |  | $      |  | $      |  | $                           
|ASSETS                                              |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Current                                             |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Cash and cash equivalents                           |  | 15,890                           |  |       |   |  |       |  |       |  |       |  |       |  | 15,890                      
|Accounts receivable, net                            |  | 16,943                           |  |       |   |  |       |  |       |  |       |  |       |  | 16,943                      
|Prepaid expenses and other assets                   |  | 1,166                            |  |       |   |  |       |  |       |  |       |  |       |  | 1,166                       
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Total Current Assets                                |  | 33,999                           |  |       |   |  |       |  |       |  |       |  |       |  | 33,999                      
|Property and equipment, net                         |  | 14,510                           |  |       |   |  |       |  |       |  |       |  |       |  | 14,510                      
|Intangibles, net                                    |  | 1,947                            |  |       |   |  |       |  |       |  |       |  |       |  | 1,947                       
|Goodwill                                            |  | 527                              |  |       |   |  |       |  |       |  |       |  |       |  | 527                         
|Deferred income taxes                               |  | 3,870                            |  |       |   |  |       |  |       |  |       |  |       |  | 3,870                       
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 54,853                           |  |       |   |  |       |  |       |  |       |  |       |  | 54,853                      
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|LIABILITIES                                         |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Current                                             |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Accounts payable and accrued liabilities            |  | 11,271                           |  |       |   |  |       |  |       |  |       |  |       |  | 11,271                      
|Income taxes payable                                |  | 5,060                            |  |       |   |  |       |  |       |  |       |  |       |  | 5,060                       
|Advances from TELUS Communications Inc.             |  | 45                               |  |       |   |  |       |  |       |  |       |  |       |  | 45                          
|Current portion of obligations under capital leases |  | 511                              |  |       |   |  |       |  |       |  |       |  |       |  | 511                         
|Unearned revenue                                    |  | 894                              |  |       |   |  |       |  |       |  |       |  |       |  | 894                         
|Obligations under warrants                          |  |                                 |  | 984    |   |  |       |  |       |  |       |  |       |  | 984                         
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 17,781                           |  | 984    |   |  |       |  |       |  |       |  |       |  | 18,765                      
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Non-Current Liabilities                             |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Deferred income taxes                               |  | 1,853                            |  |       |   |  |       |  |       |  |       |  |       |  | 1,853                       
|Obligations under capital leases                    |  | 912                              |  |       |   |  |       |  |       |  |       |  |       |  | 912                         
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 2,765                            |  |       |   |  |       |  |       |  |       |  |       |  | 2,765                       
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 20,546                           |  | 984    |   |  |       |  |       |  |       |  |       |  | 21,530                      
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|STOCKHOLDERS EQUITY                                |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Common Stock                                        |  | 225                              |  |       |   |  |       |  |       |  |       |  |       |  | 225                         
|Additional paid-in capital                          |  | 16,754                           |  | 260    |   |  |       |  |       |  |       |  |       |  | 17,014                      
|Common stock purchase warrants                      |  | 2,433                            |  | (2,433 | ) |  |       |  |       |  |       |  |       |  |                            
|Accumulated Other Comprehensive Income              |  | 2,530                            |  |       |   |  |       |  |       |  |       |  |       |  | 2,530                       
|Retained Earnings                                   |  | 12,365                           |  | 1,189  |   |  |       |  |       |  |       |  |       |  | 13,554                      
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 34,307                           |  | (984   | ) |  |       |  |       |  |       |  |       |  | 33,323                      
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 54,853                           |  |       |   |  |       |  |       |  |       |  |       |  | 54,853                      
|                                                    |  |                                  |  |        |   |  |        |  |        |  |        |  |        |  |                             



10



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------ | - |  | ------ | - |  | ------ |  | ------ |  | ------ |  | ------ |  | -------------------------------------------- | -
|                                                             |  | Three monthsendedSeptember 30,2005Initial filing |   |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |  | Three monthsendedSeptember 30,2005(Restated) |  
|(in $ thousands)                                             |  | $                                                |   |  | $      |   |  | $      |  | $      |  | $      |  | $      |  | $                                            |  
|NET REVENUE                                                  |  | 23,508                                           |   |  |       |   |  |       |  |       |  |       |  |       |  | 23,508                                       |  
|COST OF REVENUE                                              |  | 14,375                                           |   |  |       |   |  |       |  |       |  |       |  |       |  | 14,375                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|GROSS MARGIN                                                 |  | 9,133                                            |   |  |       |   |  |       |  |       |  |       |  |       |  | 9,133                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|OPERATING EXPENSES                                           |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|General and administration                                   |  | 5,928                                            |   |  |       |   |  |       |  |       |  |       |  |       |  | 5,928                                        |  
|Sales and marketing                                          |  | 1,895                                            |   |  |       |   |  |       |  |       |  |       |  |       |  | 1,895                                        |  
|Depreciation and amortization                                |  | 844                                              |   |  |       |   |  |       |  |       |  |       |  |       |  | 844                                          |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|TOTAL OPERATING EXPENSES                                     |  | 8,667                                            |   |  |       |   |  |       |  |       |  |       |  |       |  | 8,667                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|INCOME FROM OPERATIONS                                       |  | 466                                              |   |  |       |   |  |       |  |       |  |       |  |       |  | 466                                          |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|OTHER EXPENSES (INCOME)                                      |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|Interest expense                                             |  | 35                                               |   |  |       |   |  |       |  |       |  |       |  |       |  | 35                                           |  
|Interest income                                              |  | (116                                             | ) |  |       |   |  |       |  |       |  |       |  |       |  | (116                                         | )
|Change in fair value of obligation under warrants            |  |                                                 |   |  | (109   | ) |  |       |  |       |  |       |  |       |  | (109                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|                                                             |  | (81                                              | ) |  | (109   | ) |  |       |  |       |  |       |  |       |  | (190                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 547                                              |   |  | 109    |   |  |       |  |       |  |       |  |       |  | 656                                          |  
|PROVISION FOR INCOME TAXES                                   |  | 333                                              |   |  |       |   |  |       |  |       |  |       |  |       |  | 333                                          |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|NET EARNINGS                                                 |  | 214                                              |   |  | 109    |   |  |       |  |       |  |       |  |       |  | 323                                          |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | 1,187                                            |   |  |       |   |  |       |  |       |  |       |  |       |  | 1,187                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|COMPREHENSIVE INCOME                                         |  | 1,401                                            |   |  | 109    |   |  |       |  |       |  |       |  |       |  | 1,510                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|BASIC EARNINGS PER SHARE                                     |  | 0.02                                             |   |  | 0.01   |   |  |       |  |       |  |       |  |       |  | 0.03                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.02                                             |   |  | 0.01   |   |  |       |  |       |  |       |  |       |  | 0.03                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,897                                           |   |  | 12,897 |   |  |       |  |       |  |       |  |       |  | 12,897                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,897                                           |   |  | 12,897 |   |  |       |  |       |  |       |  |       |  | 12,897                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |  |                                              |  



11



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------ | - |  | ------- | - |  | ------ |  | ------ |  | ------ | - |  | ------ |  | -------------------------------------------- | -
|                                                             |  | Three monthsendedSeptember 30,2005 Initialfiling |   |  | Note 4A |   |  | Note4B |  | Note4C |  | Note4D |   |  | Note4E |  | Three monthsendedSeptember 30,2005(Restated) |  
|(in $ thousands)                                             |  | $                                                |   |  | $       |   |  | $      |  | $      |  | $      |   |  | $      |  | $                                            |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Net earnings                                                 |  | 214                                              |   |  | 109     |   |  |       |  |       |  |       |   |  |       |  | 323                                          |  
|Adjustments for                                              |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Depreciation and amortization                                |  | 844                                              |   |  |        |   |  |       |  |       |  |       |   |  |       |  | 844                                          |  
|Foreign exchange loss                                        |  |                                                 |   |  |        |   |  |       |  |       |  | 101    |   |  |       |  | 101                                          |  
|Deferred income taxes                                        |  | (1,220                                           | ) |  |        |   |  |       |  |       |  | 70     |   |  |       |  | (1,150                                       | )
|Stock-based compensation expense                             |  | 62                                               |   |  |        |   |  |       |  |       |  |       |   |  |       |  | 62                                           |  
|Changes in fair value of obligation under warrants           |  |                                                 |   |  | (109    | ) |  |       |  |       |  |       |   |  |       |  | (109                                         | )
|Changes in non-cash working capital                          |  | 215                                              |   |  |        |   |  |       |  |       |  | 78     |   |  |       |  | 293                                          |  
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows from operating activities                         |  | 115                                              |   |  |        |   |  |       |  |       |  | 249    |   |  |       |  | 364                                          |  
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES               |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Purchase of property and equipment                           |  | (1,046                                           | ) |  |        |   |  |       |  |       |  | 32     |   |  |       |  | (1,014                                       | )
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in investing activities                      |  | (1,046                                           | ) |  |        |   |  |       |  |       |  | 32     |   |  |       |  | (1,014                                       | )
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES               |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Repayments on obligations under capital leases               |  | (65                                              | ) |  |        |   |  |       |  |       |  | (67    | ) |  |       |  | (132                                         | )
|Repayments on advances from TELUS Communications Inc.        |  | (337                                             | ) |  |        |   |  |       |  |       |  | (9     | ) |  |       |  | (346                                         | )
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in financing activities                      |  | (402                                             | ) |  |        |   |  |       |  |       |  | (76    | ) |  |       |  | (478                                         | )
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  | 472                                              |   |  |        |   |  |       |  |       |  | (205   | ) |  |       |  | 267                                          |  
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|DECREASE IN CASH AND CASH EQUIVALENTS                        |  | (861                                             | ) |  |        |   |  |       |  |       |  |       |   |  |       |  | (861                                         | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               |  | 16,751                                           |   |  |        |   |  |       |  |       |  |       |   |  |       |  | 16,751                                       |  
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                     |  | 15,890                                           |   |  |        |   |  |       |  |       |  |       |   |  |       |  | 15,890                                       |  
|                                                             |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Supplemental disclosure of cash flow information:            |  |                                                  |   |  |         |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Interest paid                                                |  | 35                                               |   |  |        |   |  |       |  |       |  |       |   |  |       |  | 35                                           |  
|Income taxes paid                                            |  | 259                                              |   |  |        |   |  |       |  |       |  |       |   |  |       |  | 259                                          |  



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|--------------------------------------------------------- |  | ------------------------------- |  | ------ | - |  | ------ |  | ------ |  | ------ |  | ------ |  | -------------------------------
|                                                          |  | June 30, 2005InitialRestatement |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |  | June 30, 2005AmendedRestatement
|(in $ thousands)                                          |  | $                               |  | $      |   |  | $      |  | $      |  | $      |  | $      |  | $                              
|ASSETS                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|Current                                                   |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|Cash and cash equivalents                                 |  | 16,751                          |  |       |   |  |       |  |       |  |       |  |       |  | 16,751                         
|Accounts receivable, net                                  |  | 16,220                          |  |       |   |  |       |  |       |  |       |  |       |  | 16,220                         
|Prepaid expenses and other current assets                 |  | 1,413                           |  |       |   |  |       |  |       |  |       |  |       |  | 1,413                          
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|Total Current Assets                                      |  | 34,384                          |  |       |   |  |       |  |       |  |       |  |       |  | 34,384                         
|Property and equipment, net                               |  | 13,559                          |  |       |   |  |       |  |       |  |       |  |       |  | 13,559                         
|Intangibles, net                                          |  | 2,005                           |  |       |   |  |       |  |       |  |       |  |       |  | 2,005                          
|Goodwill                                                  |  | 503                             |  |       |   |  |       |  |       |  |       |  |       |  | 503                            
|Deferred income taxes                                     |  | 2,787                           |  |       |   |  |       |  |       |  |       |  |       |  | 2,787                          
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 53,238                          |  |       |   |  |       |  |       |  |       |  |       |  | 53,238                         
|LIABILITIES                                               |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|Current                                                   |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|Accounts payable and accrued liabilities                  |  | 11,891                          |  |       |   |  |       |  |       |  |       |  |       |  | 11,891                         
|Income taxes payable                                      |  | 3,547                           |  |       |   |  |       |  |       |  |       |  |       |  | 3,547                          
|Current portion of advances from TELUS Communications Inc |  | 382                             |  |       |   |  |       |  |       |  |       |  |       |  | 382                            
|Current portion of obligations under capital leases       |  | 511                             |  |       |   |  |       |  |       |  |       |  |       |  | 511                            
|Unearned revenue                                          |  | 1,096                           |  |       |   |  |       |  |       |  |       |  |       |  | 1,096                          
|Obligations under warrants                                |  |                                |  | 1,093  |   |  |       |  |       |  |       |  |       |  | 1,093                          
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 17,427                          |  | 1,093  |   |  |       |  |       |  |       |  |       |  | 18,520                         
|LONG-TERM DEBT                                            |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|Deferred income taxes                                     |  | 1,990                           |  |       |   |  |       |  |       |  |       |  |       |  | 1,990                          
|Obligations under capital leases                          |  | 977                             |  |       |   |  |       |  |       |  |       |  |       |  | 977                            
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 2,967                           |  |       |   |  |       |  |       |  |       |  |       |  | 2,967                          
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 20,394                          |  | 1,093  |   |  |       |  |       |  |       |  |       |  | 21,487                         
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|STOCKHOLDERS EQUITY                                      |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|Common stock                                              |  | 225                             |  |       |   |  |       |  |       |  |       |  |       |  | 225                            
|Additional paid incapital                                |  | 16,692                          |  | 260    |   |  |       |  |       |  |       |  |       |  | 16,952                         
|Common stock purchase warrants                            |  | 2,433                           |  | (2,433 | ) |  |       |  |       |  |       |  |       |  |                               
|Accumulated other comprehensive income                    |  | 1,343                           |  |       |   |  |       |  |       |  |       |  |       |  | 1,343                          
|Retained earnings                                         |  | 12,151                          |  | 1,080  |   |  |       |  |       |  |       |  |       |  | 13,231                         
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 32,844                          |  | (1,093 | ) |  |       |  |       |  |       |  |       |  | 31,751                         
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 53,238                          |  |       |   |  |       |  |       |  |       |  |       |  | 53,238                         
|                                                          |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                                



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------ | - |  | ------ | - |  | ------ |  | ------ |  | ------ |  | ------ | - |  | -------------------------------------------- | -
|                                                             |  | Three monthsendedSeptember 30,2004Initial filing |   |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |   |  | Three monthsendedSeptember 30,2004(Restated) |  
|(in $ thousands)                                             |  | $                                                |   |  | $      |   |  | $      |  | $      |  | $      |  | $      |   |  | $                                            |  
|NET REVENUE                                                  |  | 21,197                                           |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 21,197                                       |  
|COST OF REVENUE                                              |  | 13,758                                           |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 13,758                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|GROSS MARGIN                                                 |  | 7,439                                            |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 7,439                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|OPERATING EXPENSES                                           |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|General and administration                                   |  | 3,610                                            |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 3,610                                        |  
|Sales and marketing                                          |  | 991                                              |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 991                                          |  
|Accounts receivable financing                                |  | 121                                              |   |  |       |   |  |       |  |       |  |       |  | (121   | ) |  |                                             |  
|Depreciation and amortization                                |  | 562                                              |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 562                                          |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|TOTAL OPERATING EXPENSES                                     |  | 5,284                                            |   |  |       |   |  |       |  |       |  |       |  | (121   | ) |  | 5,163                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|INCOME FROM OPERATIONS                                       |  | 2,155                                            |   |  |       |   |  |       |  |       |  |       |  | 121    |   |  | 2,276                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|OTHER EXPENSES (INCOME)                                      |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|Interest expense                                             |  | 142                                              |   |  |       |   |  |       |  |       |  |       |  | 121    |   |  | 263                                          |  
|Interest income                                              |  | (78                                              | ) |  |       |   |  |       |  |       |  |       |  |       |   |  | (78                                          | )
|Income from joint marketing agreement                        |  | (141                                             | ) |  |       |   |  |       |  |       |  |       |  |       |   |  | (141                                         | )
|Long-term debt discount amortization                         |  | 131                                              |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 131                                          |  
|Change in fair value of obligation under warrants            |  |                                                 |   |  | (303   | ) |  |       |  |       |  |       |  |       |   |  | (303                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|                                                             |  | 54                                               |   |  | (303   | ) |  |       |  |       |  |       |  | 121    |   |  | (128                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 2,101                                            |   |  | 303    |   |  |       |  |       |  |       |  |       |   |  | 2,404                                        |  
|PROVISION FOR INCOME TAXES                                   |  | 734                                              |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 734                                          |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|NET EARNINGS                                                 |  | 1,367                                            |   |  | 303    |   |  |       |  |       |  |       |  |       |   |  | 1,670                                        |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | (364                                             | ) |  |       |   |  |       |  |       |  |       |  |       |   |  | (364                                         | )
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|COMPREHENSIVE INCOME                                         |  | 1,003                                            |   |  | 303    |   |  |       |  |       |  |       |  |       |   |  | 1,306                                        |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|BASIC EARNINGS PER SHARE                                     |  | 0.11                                             |   |  | 0.02   |   |  |       |  |       |  |       |  |       |   |  | 0.13                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.11                                             |   |  | 0.02   |   |  |       |  |       |  |       |  |       |   |  | 0.13                                         |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,893                                           |   |  | 12,893 |   |  |       |  |       |  |       |  |       |   |  | 12,893                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,984                                           |   |  | 12,984 |   |  |       |  |       |  |       |  |       |   |  | 12,984                                       |  
|                                                             |  |                                                  |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|----------------------------------------------------------------------- |  | ------------------------------------------------ | - |  | ------ | - |  | ------ |  | ------ |  | ------ | - |  | ------ |  | -------------------------------------------- | -
|                                                                        |  | Three monthsendedSeptember 30,2004Initial filing |   |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |   |  | Note4E |  | Three monthsendedSeptember 30,2004(Restated) |  
|(in $ thousands)                                                        |  | $                                                |   |  | $      |   |  | $      |  | $      |  | $      |   |  | $      |  | $                                            |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Net earnings                                                            |  | 1,367                                            |   |  | 303    |   |  |       |  |       |  |       |   |  |       |  | 1,670                                        |  
|Adjustments for                                                         |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Amortization of discount on notes payable                               |  | 131                                              |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 131                                          |  
|Depreciation and amortization                                           |  | 562                                              |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 562                                          |  
|Deferred income taxes                                                   |  | (84                                              | ) |  |       |   |  |       |  |       |  | 17     |   |  |       |  | (67                                          | )
|Stock-based compensation expense                                        |  | 13                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 13                                           |  
|Changes in fair value of obligation under warrants                      |  |                                                 |   |  | (303   | ) |  |       |  |       |  |       |   |  |       |  | (303                                         | )
|Changes in non-cash working capital                                     |  | 28                                               |   |  |       |   |  |       |  |       |  | 74     |   |  |       |  | 102                                          |  
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows from operating activities                                    |  | 2,017                                            |   |  |       |   |  |       |  |       |  | 91     |   |  |       |  | 2,108                                        |  
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                          |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Purchase of property and equipment                                      |  | (2,050                                           | ) |  |       |   |  |       |  |       |  | 194    |   |  |       |  | (1,856                                       | )
|Proceeds from sale of property and equipment, and software              |  | 10                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 10                                           |  
|Loan receivable                                                         |  | 31                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 31                                           |  
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in investing activities                                 |  | (2,009                                           | ) |  |       |   |  |       |  |       |  | 194    |   |  |       |  | (1,815                                       | )
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                          |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Repayments on obligations under capital leases                          |  | (32                                              | ) |  |       |   |  |       |  |       |  | (84    | ) |  |       |  | (116                                         | )
|Repayments on advances from TELUS Communications Inc.                   |  | (234                                             | ) |  |       |   |  |       |  |       |  | (84    | ) |  |       |  | (318                                         | )
|Repayments on notes payable                                             |  | (67                                              | ) |  |       |   |  |       |  |       |  | (230   | ) |  |       |  | (297                                         | )
|Receipt of principal portion of joint venture receivable                |  | 70                                               |   |  |       |   |  |       |  |       |  | 317    |   |  |       |  | 387                                          |  
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in financing activities                                 |  | (263                                             | ) |  |       |   |  |       |  |       |  | (81    | ) |  |       |  | (344                                         | )
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  | 191                                              |   |  |       |   |  |       |  |       |  | (201   | ) |  |       |  | (10                                          | )
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                   |  | (64                                              | ) |  |       |   |  |       |  |       |  | 3      |   |  |       |  | (61                                          | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          |  | 22,149                                           |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 22,149                                       |  
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  | 22,085                                           |   |  |       |   |  |       |  |       |  | 3      |   |  |       |  | 22,088                                       |  
|                                                                        |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Supplemental disclosure of cash flow information:                       |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Interest paid                                                           |  | 183                                              |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 183                                          |  
|Income taxes paid                                                       |  | 177                                              |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 177                                          |  
|Supplemental disclosure of non-cash investing and financing activities: |  |                                                  |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Capital leases for acquisition of furniture and equipment               |  | 355                                              |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 355                                          |  
|Notes payable on purchase of software                                   |  | (130                                             | ) |  |       |   |  |       |  |       |  |       |   |  |       |  | (130                                         | )
|Joint venture receivable on purchase of software                        |  | (23                                              | ) |  |       |   |  |       |  |       |  |       |   |  |       |  | (23                                          | )



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Correction of the error in the accounting for Next Generation Software initially restated on June 1,
2005 and subsequently amended on September 28, 2005.

Initial software transaction

On June 20, 2003, the Companys wholly-owned subsidiary, Yak Communications (Canada) Inc. (Yak Canada), acquired certain
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) $0.6 million in cash was paid at the closing of the transaction; (b) delivery of a short-term promissory note executed in favour of Consortio,
Inc. in the principal amount of $0.4 million providing for equal monthly payments of $40 and (c) the balance of the purchase price was evidenced by a long-term promissory note executed in favour of Consortio, Inc. in the principal amount of
$8.5 million bearing interest at 7.25% per annum. Under the long-term note, interest and principal were payable quarterly in the amount of $175 commencing September 30, 2003 with the balance due July 15, 2012. The sole recourse of the
lender under the long-term note was the subject software. Yak Canada was also issued a warrant to purchase up to 8% of the issued and outstanding common stock of Convenxia Limited, with an exercise period ending June 30, 2012. The exercise
price is based on a predetermined formula using a calculation of fair value of the grantor at the time of exercise.

In addition to the
purchase of the software, Yak Canada and the Sellers entered into a joint venture agreement under which an exclusive license was granted to the Sellers for the use of the software for telecommunication services outside Canada to non-Yak customers.
Under the joint venture agreement, Yak Canada was entitled to receive 4% of all gross revenue arising from the sale of services using the acquired software pursuant to such license with minimum quarterly payments of $150 through June 30, 2006
and, thereafter, 2.75% of gross revenue with minimum quarterly payments of $175. The expiration date of the joint venture was July 15, 2015.

Restatement of June 30, 2003 and 2004 Financial Statements

During the fourth quarter of
fiscal 2005, the Company determined that the assumptions on which the valuations of this software acquisition were made and the agreement recorded were in error. On May 31, 2005, the financial statements for fiscal years ended June 30,
2003 and 2004 were amended and restated. As a result, in its June 30, 2003 amended Annual Report on Form 10-K/A filed on May 31, 2005, the Company estimated the fair value of each of the components of the software transaction as follows:



|                         |  |   |            
|------------------------ |  | - | -----------
|Software                 |  | $ | 1.7 million
|Warrants                 |  |   | 0.1 million
|Joint venture receivable |  |   | 5.0 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 assumptions underlying the restatement of the software and warrant fair values were as follows:



| |  | Software - The Company valued the acquired software at $5.9 million, which is the mid-point of a range of $5.4 million to $6.4 million as determined by management
based on a third-party valuation. Applying by analogy the concepts of Statement of Financial Accounting Standards No. 141 (FAS 141), the Company allocated, on a pro rata basis, the excess of the fair
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | value of the assets acquired over the fair value of the consideration paid ($4.2 million) to reduce the amounts that otherwise would have been assigned to
the non-financial acquired asset (the software). As a result, the amount recorded for the acquired software was reduced for accounting purposes from its estimated fair value of $5.9 million to its carrying value of $1.7 million;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Warrants  The fair value of the Convenxia Limited warrants was derived using the Black-Scholes valuation model. The range of possible cash outcomes varied based on estimated
future revenues of Convenxia Limited. Because Convenxia Limited 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;
and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Estimates of the fair value of the joint venture receivable, the short-term note payable and the long-term note payable were based on the guidance of Statement of Financial
Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements (SFAC No. 7) which provides a framework for using future cash flows and present value as the basis for accounting
measurements of fair value. Consistent with the methodology of SFAC No. 7, the Company used the expected cash flow approach to estimate fair value, focusing on explicit assumptions regarding the range of possible cash outcomes and their
respective probabilities. These fair values are based on the following assumptions:
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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. The present value of
contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost of capital plus 200 basis points;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Short-term note payable: The present value of contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost of capital; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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. The present value of contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost
of capital.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Subsequent to the May 31, 2005 filing of its amended June 30, 2003 and 2004 annual reports, and in
conjunction with its continued discussions with the Office of the Chief Accountant (OCA) of the Securities and Exchange Commission in connection with the Companys request for guidance in this regard, management discovered that a
calculation error was made in its determination of the fair value of various components of the Convenxia transaction. On September 27, 2005, Yaks Board of Directors approved managements recommendation to correct this accounting. For
additional details see comments under Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements included in this Annual Report below.

Effect of 2004 Strategic Change

In the fourth quarter of fiscal 2004, the Company made the determination that the development of the software for Yaks own internal use would require the full time and effort of all involved parties. The Company
believed that the continuing development of the software for internal use over the next several years would be the key aspect of the software transaction and not its commercialization. In addition, the Company became increasingly aware that
whichever software was developed for VoIP, it was more likely than not to become obsolete on or before the due date of the balloon payment on the long-term note (June 2012).

Given these two issues, in its amended Annual Report on Form 10-K/A for fiscal year 2004, the Company modified the probability assumptions for the range of possible cash outcomes related to the fair value calculations
of the receivable from the joint venture and the long-term note payable. The probabilities that the cash flows from the joint venture would be received, or that the $7.3 million balloon payment otherwise due in 2012 on the long-term note would be
paid by Yak were reduced to zero probability (from a 20% probability in prior assumptions). Accordingly, in its amended Annual Report on Form 10-K/A for fiscal year 2004, the Company reduced the fair value of the long-term note payable at
June 30, 2004 by $1.7 million, from $5.8 million to $4.1 million and concurrently recorded an impairment in the fair value of the joint venture receivable of $0.6 million, from $4.6 million to $4.0 million. Because the note liability was not
legally extinguished and only the expected cash flow inflows and outflows changed, the resultant net gain of $1.1 million was deferred and classified on the fiscal year 2004 balance sheet as Deferred Revenue. There was no impact on the
Companys Consolidated Statements of Income nor on the Consolidated Statements of Cash Flows for the three months ended June 30, 2004.

As discussed above, subsequent to its recent (May 31, 2005) filing of its amended financial statements for fiscal year 2004, and in conjunction with its continued discussions with the OCA, management determined that the reduction in fair
value of the long-term note payable and the deferral of the loss on impairment of the joint venture receivable were errors in



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accounting. As stated above, Yaks Board of Directors has approved managements recommendation to correct this accounting. For additional details
see comments under Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements included in this Annual Report below.

March 2005 Note Settlement

On March 3, 2005, the Company entered into a settlement agreement with the Sellers. Pursuant to the settlement agreement, Yak paid $150 to the Sellers and committed to complete $350 of further development of the
software in exchange for a discharge of any further obligation under the long-term note, which note had a principal amount of $8.4 million outstanding at December 31, 2004. Pursuant to the settlement agreement, all guaranteed payments made
under the joint venture agreement would also cease. Accordingly, the Company reduced the amount recorded for the fair value of the long-term note payable at March 31, 2005 by $4.1 million, to $150 and concurrently recorded an impairment of fair
value of the joint venture receivable of $3.8 million, reducing the carrying value to zero. Because the note liability was legally extinguished, the resultant net gain of $300 and the previously deferred gain of $1.1 million from the fourth fiscal
quarter of 2004 were recognized in the third fiscal quarter of 2005. A total gain on early extinguishment of debt of $1.4 million was recognized in the Companys Consolidated Statements of Income for the quarter ended March 31, 2005.

As discussed above, subsequent to its recent (May 31, 2005) filing of its amended financial statements for the quarter ended March 31, 2005, and in
conjunction with its continued discussions with the OCA, management determined that the gain recognized on early extinguishment of debt was overstated by $200. As stated above, Yaks Board of Directors approved managements recommendation
to correct this accounting. For additional details see comments under Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements included in this Annual Report below.

Second Restatement of Amounts Previously Reported in June 30, 2003 and 2004 Financial Statements included in this Annual Report

Subsequent to the May 31, 2005 filing of its amended Annual Report on Form 10-K/A for fiscal years 2003 and 2004, and as a result of our continuing
discussions with the OCA, the Company discovered errors in its amended filings. Yaks Board of Directors has approved managements recommendation to correct its accounting for the Convenxia software transaction. The errors originated from:



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



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



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



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

As a result of these corrections, the Company in its Annual Report filed on Form 10-K for the year-ended June 30, 2005 has restated the amounts
previously reported in its financial statements for fiscal years 2003 and 2004, as well as each of the quarters in fiscal years 2004 and 2005.

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

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



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As a result of this error, liabilities at September 30, 2005 were understated by $984, while
shareholders equity at September 30, 2005 was overstated by $984. Further, the standards require the Company to re-measure the fair value of the Warrants at the end of each reporting period with the resulting increase or decrease to the
liability reported as a component of the Statement of Income and Comprehensive Income. As a result of a decrease in the value of the Warrants since issuance, the net income of the Company for the quarters ended September 30, 2005 and 2004 were
previously understated by $109 and $303 or $0.01 per share and $0.02 per share, respectively.

B. Enhancement of disclosure by adding a rate
reconciliation according to SFAS 109

The Company has included an income tax statutory rate reconciliation to enhance disclosures. There
was no effect on the assets, liabilities, shareholders equity or Statement of Income and Comprehensive Income of the Company as a result of this change.

C. Correction for disclosure deficiencies under SFAS 131

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

D. Correction for errors in its Cash Flow Statements

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

For the quarter ending September 30, 2005, the cash flows from operating and investing activities were understated by $249 and $32 respectively,
while the cash flows from financing activities and the effect of exchange rate changes on cash and cash equivalents were overstated by $76 and $205, respectively.

For the quarter ending September 30, 2004, the cash flows from operating activities, investing activities, decrease in cash and cash equivalents were understated by $91, $194 and $3 respectively, while the cash
flows from financing activities and the effect of exchange rate changes on cash and cash equivalents were overstated by $81 and $201, respectively.

E.
Misclassification of financing costs as operating expense

The Company misclassified financing costs relating to factoring of trade
accounts receivable as operating expenses for the quarter ending September 30, 2004 versus disclosing such costs below the line as an element of interest expense as discussed by the AICPAs Special Committee on Classification of
Items of Comprehensive Income. The effect of this misclassification was an overstatement of operating expenses and understatement of income from operations in the amount of $121. There was no effect on the net income, earnings per share,
assets, liabilities or shareholders equity as a result of this change.

Inflation.

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

Off-Balance Sheet Transactions.

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

Risk Factors

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

Our actual results may differ materially from those
expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause our actual results to differ materially from those in the forward-looking statements, include, but are not limited to:



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



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| |  |  | our ability to respond to growing competition in our markets for discount long distance services as well as the extent, timing and success of such competition;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | customer acceptance and effectiveness of us as a discount long distance provider and our ability to assimilate new technology and to adapt to technological change in the
telecommunications industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



| |  |  | changes in our accounting assumptions that regulatory agencies, including the Securities and Exchange Commission, may require or that result from changes in the accounting rules or
their application, which could result in an impact on our earnings;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

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

Our future growth depends on our ability to attract new customers.

Our success will depend on our ability to effectively anticipate and adapt to customer requirements and offer products and services
that meet customer demands. Any failure of our current or prospective customers to purchase products from us for any reason, including a downturn in their economic fortunes, would seriously harm our ability to grow our business. Increasingly, our
growth will depend on our ability to successfully fund and develop and introduce new and enhanced products. The development of new or enhanced products is a costly, complex and uncertain process that requires us to anticipate accurately future
technological and market trends. We cannot be sure whether our new product offerings will be successfully developed and introduced to the market on a timely basis, or at all. If we do not develop these products in a timely manner, our competitive
position and financial condition could be adversely affected.

In addition, as we introduce new or enhanced products, we must also manage
the transition from older products to newer products. If we fail to do so, we may disrupt customer ordering patterns or may not be able to ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Any
failure to effectively manage this transition may cause us to lose current and prospective customers.

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

The international telecommunications industry is changing rapidly due to deregulation,
technological improvements, and expansion of telecommunications infrastructure, privatization and the globalization of national economies. There can be no assurance that one or more of these factors will not vary in a manner that could have a
material adverse effect on us. In addition, deregulation of any particular market may cause such market to shift unpredictably. There can be no assurance that we will be able to compete effectively or adjust our contemplated plan of development to
meet changing market conditions.



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The market for our services and the telecommunications industry generally is in a period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing transmission capacity for services similar to those provided by us. Failure to respond in a timely and cost-effective way to these technological developments could result in serious harm to our business
and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from providing telecommunications services that are based upon current technologies which are capable of adapting to future
technologies. As a result, our success will depend, in part, on our ability to afford the cost of acquiring new hardware and software associated with new technologies, develop and market service offerings that have significant customer demand,
respond in a timely manner to the technological advances of our customers, evolving industry standards and changing client preferences. Our profitability will depend on our ability to offer, on a timely and cost-effective basis, services that meet
evolving industry standards. There can be no assurance that we will be able to access or adapt to such technological changes at a competitive price, maintain competitive services or obtain new technologies on a timely basis or on satisfactory terms.

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

Recently, telecommunications providers have increased the range of telecommunication services they offer to customers. This activity and the potential
continuing trend towards offering new services may lead to a greater ability among our competitors to provide a comprehensive range of telecommunications services, which could lead to a reduction in demand for our services. Moreover, by offering
certain services to end users, competitors could reduce the number of our current or potential customers and increase the bargaining power of our remaining customers, which may adversely impact our business.

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

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

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

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

The telecommunications regulatory environment.

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



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

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

Yak does not currently offer any 911 services in the United States, and may not be able to provide E-911 services, as required by the FCC Order, by November 28, 2005. Compliance with the FCC Order will require
Yak to negotiate and secure expensive routing arrangements with traditional local exchange carriers and Public Safety Answering Points throughout the United States. Yak is engaging a third-party provider of E-911 services for compliance purposes but
no third-party provider currently offers a comprehensive nationwide solution.

Numerous similarly situated VoIP providers have argued to
the FCC that it is not practical for VoIP providers to meet the FCCs November 28, 2005 E-911 service deadline given the absence of a legal obligation on the part of the traditional local exchange carriers to provide access to the E-911
routing system to VoIP providers, the absence of a legal obligation on public safety answering point (PSAPs) to accept VoIP E-911 calls, the extraordinary expense and effort required to establish the routing and functionalities required, and the
inability, to date, of any third-party emergency services provider to offer E-911 solutions to VoIP providers. Several companies have appealed the FCCs order to the United States Court of Appeals for the District of Columbia. Other companies
have filed petitions for reconsideration of the Order at the FCC. Several parties in these and other filings have argued that the significant technical and cost barriers make it impractical for VoIP providers to meet the November 28, 2005
deadline and have urged the FCC to extend or modify its requirements. In response to a Notice of Proposed Rulemaking released by the FCC seeking public input on how the VoIP E-911 requirements should be expanded or modified, several parties have
urged the FCC to narrow the scope of its requirements or to otherwise modify its rules to reduce the burden of complying with the FCCs new VoIP E-911 rules. These appeals, petitions for reconsideration, and additional rulemaking are pending
and Yak cannot predict the outcome of those proceedings. Yak also cannot predict whether the FCC would act favorably on requests for waiver or extension or act to modify the requirements as the deadline draws near. If Yak is not able to implement a
comprehensive E-911 solution by the November 28, 2005 deadline, it may be compelled to modify its existing offerings to fall outside the FCC requirements, seek an extension or waiver of the requirements, cease providing VoIP service, cease
providing VoIP services in areas where its third party provider does not have E-911 capability or be in material violation of the FCC rules at risk for substantial enforcement penalties.

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

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



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

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

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

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

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

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

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

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

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

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

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

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



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

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

The factors outside of our control include:



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



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



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



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



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

The
factors substantially within our control include:



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



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

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

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

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

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

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



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



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



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



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

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

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

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



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



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



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

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

Critical Accounting Policies

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

Revenue Recognition

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

Allowance for Doubtful Accounts

As of
September 30, 2005, we had $16,943 of net trade accounts receivable. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends, analyses of receivable portfolios by business unit and
by reviewing specific accounts and make adjustments in the allowance as necessary. Changes in economic conditions or dramatic changes in the telecommunications industry could have an impact on the collection of receivable balances or future
allowance considerations.



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Income Taxes

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

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

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

Customer Lists

As of
September 30, 2005, customer lists were recorded at a net book value of $1,947, representing the unamortized cost of customer lists purchased as part of the Argos (now Yak for Business) and Contour acquisitions in July 2003 as well as the
customer base purchased from Navigata Communications Ltd. in March 2005, as discussed above. Customer lists are amortized on a straight-line basis over five years, which represents the estimated customer life-cycle in the telecom industry. If the
retention rate for acquired customers is less than initially estimated, accelerated amortization or impairment may be necessary.

Impairment of
Long-lived Assets and Goodwill

As of September 30, 2005, our long-lived assets were comprised primarily of $14,510 of property and
equipment and $527 of goodwill. We review the carrying value of long-lived assets and goodwill according to Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assetsand SFAS 142 Goodwill and Other Intangible Assets. Our estimate of useful lives on property and equipment are based on assumptions using historical data and industry trends. Impairment is recorded on long-lived assets when assets are
identified for disposal or other events suggesting impairment occur and if the carrying value of the long-lived asset exceeds its anticipated undiscounted future net cash flows. Impairment is recorded on goodwill when the carrying value of a
reporting unit exceeds the anticipated undiscounted future net cash flows of that reporting unit. In each case, if an impairment loss is recognized, it is based on the difference between the assets fair value and its carrying value.

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

Obligation Under Warrants and Registration Rights Agreement

The Company accounts for the detachable Warrants issued in 2004 in accordance with the provisions of SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133) along with related interpretations EITF No. 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19) and EITF No. 05-2 The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19 (EITF 05-2). SFAS No. 133 requires every derivative instrument (including certain derivative
instruments embedded in other contracts) to be recorded in the Balance Sheet as either an asset or liability measured at its fair value, with changes in the derivatives fair value recognized currently in earnings unless specific hedge
accounting criteria are met. We made the determination that the detachable Warrants issued in 2004 are a derivative instrument and measured its value at $2,173 at inception. Additionally, at the end of each reporting period, the accounting standard
requires the Company to



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record the outstanding derivatives at fair value, resulting in an adjustment to the recorded liability of the Warrants, and a gain or loss in the applicable
reporting period. Since the inception of the Warrants, the fair value under the Black-Scholes method of valuation has declined and the Company has recorded a cumulative pre-tax gain of $1,408. The Company values the Warrants using the Black-Scholes
option-pricing model to determine fair value. This model requires management to make assumptions on the expected volatility rates, risk-free interest rates and the instruments expected remaining life. These assumptions require significant
management judgment. The Company also recorded an obligation in 2005 of $540 related to a breach of the registration rights agreement related to the Warrants.

Estimating Fair Value

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

New Accounting Pronouncements

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

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123(R) Share-Based Payments, which is
a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123 (R) supersedes Accounting Principal Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees,
and amends FASB No. 95, Statement of Cash Flows. Generally, the approach to accounting in Statement 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The Company adopted Statement 123(R) on July 1, 2005 using the modified prospective transition method. Prior to adoption, the Company accounted for these payments under the intrinsic value
provisions of APB No. 25 with expense recognition in the financial statements for the difference between the strike price and market value on the date stock options were granted. As of September 30, 2005, there was $666 of total
unrecognized compensation costs related to granted stock options. That cost is expected to be recognized over a weighted-average period of 2.72 years.

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

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

We are exposed to financial statement
fluctuations as a result of translating the operating results and financial position of our Canadian subsidiary. We translate the Canadian dollar statements of operations into U.S. dollar using the average exchange rate during the reporting period.
Changes in foreign exchange rates affect our reported profits and losses and cash



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flows and may distort comparisons from year to year. As an example, if the U.S. dollar were to strengthen relative to the Canadian dollar, it would take a
greater amount of revenue and profits in Canadian dollars to achieve a similar level of results in U.S. dollars compared to the previous year.

For example, during the Quarter ended September 30, 2005 and 2004, the U.S. dollar weakened compared to the Canadian dollar. As a result, the revenue from our Canadian subsidiary decreased ($0.6 million) or (2.4%) in Canadian
dollars, but increased $1.3 million or 6.2% when stated in U.S. dollars.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

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

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

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



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



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



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



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



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

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



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



| |  |  | has completed the implementation of a new general ledger accounting system; and
| | - |  | -------------------------------------------------------------------------------



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

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

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



| |  |  | Misapplication of SFAS 133, SFAS 150, and EITF 00-19. Detachable warrants were previously erroneously classified as an equity instrument. This instrument has now been
classified as a liability in accordance with the application of the provisions of SFAS 133, SFAS 150, and EITF 00-19. As a result of this error, liabilities at September 30, 2005 were understated by $984, while shareholders equity at
September 30, 2005 was overstated by $984. Further, the standards require the Company to re-measure the value of the Warrants at the end of each reporting period with the resulting increase or decrease to the liability reported as a component
of the Statement of Income and Comprehensive Income. As a result of a decrease in the value of the Warrants since issuance, the net income of the Company for the quarters ended September 30, 2005 and 2004 were previously understated by $109 and
$303 or $0.01 per share and $0.02 per share, respectively;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Enhancement of disclosure by adding a rate reconciliation according to SFAS 109.The Company included an income tax statutory rate reconciliation to enhance disclosure. There
was no effect on the assets, liabilities, shareholders equity or Statement of Income and Comprehensive Income of the Company as a result of this change;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Correction of errors in Cash Flow Statements. The Company has modified its cash flow statements to correct for disclosure inaccuracies resulting from errors
in the exchange rates used to translate foreign currency cash flows to the Companys reporting currency For the quarter ending September 30, 2005, the cash flows from operating and investing activities were understated by $249 and $32
respectively, while
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | the cash flows from financing activities and the effect of exchange rate changes on cash and cash equivalents were overstated by $76 and $205, respectively.
For the quarter ending September 30, 2004, the cash flows from operating activities, investing activities, decrease in cash and cash equivalents were understated by $91, $194 and $3 respectively, while the cash flows from financing activities
and the effect of exchange rate changes on cash and cash equivalents were overstated by $81 and $201, respectively; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Correction for the misclassification of financing expenses related to assignment of accounts receivable. The Company misclassified financing costs relating to factoring of
trade accounts receivable as operating expenses for the quarter ending September 30, 2004 versus disclosing such costs below the line as an element of interest expense as discussed by the AICPAs Special Committee on Classification
of Items of Comprehensive Income. The effect of this misclassification was an overstatement of operating expenses and understatement of income from operations in the amount of $121. There was no effect on the net income, earnings per share,
assets, liabilities or shareholders equity as a result of this change.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



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PART II

Item 6. Exhibits.



|     |  |                                                                                                                                                                                                        
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.    
|     | 
|31.2 |  | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                     
|     | 
|32.2 |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                 

SIGNATURES

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



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



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CONSOLIDATED FINANCIAL STATEMENTS

YAK COMMUNICATIONS INC.

September 30, 2005



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                    |  |                               |  |                         
|--------------------------------------------------- |  | ----------------------------- |  | ------------------------
|                                                    |  | September 30, 2005 (Restated) |  | June 30, 2005 (Restated)
|(in $ thousands)                                    |  | $                             |  | $                       
|ASSETS                                              |  |                               |  |                         
|Current                                             |  |                               |  |                         
|Cash and cash equivalents                           |  | 15,890                        |  | 16,751                  
|Accounts receivable, net                            |  | 16,943                        |  | 16,220                  
|Prepaid expenses and other assets                   |  | 1,166                         |  | 1,413                   
|                                                    |  |                               |  |                         
|Total Current Assets                                |  | 33,999                        |  | 34,384                  
|                                                    |  |                              
|Property and equipment, net                         |  | 14,510                        |  | 13,559                  
|                                                    |  |                              
|Intangibles, net                                    |  | 1,947                         |  | 2,005                   
|                                                    |  |                              
|Goodwill                                            |  | 527                           |  | 503                     
|                                                    |  |                              
|Deferred income taxes                               |  | 3,870                         |  | 2,787                   
|                                                    |  |                               |  |                         
|                                                    |  | 54,853                        |  | 53,238                  
|                                                    |  |                               |  |                         
|LIABILITIES                                         |  |                               |  |                         
|Current                                             |  |                               |  |                         
|Accounts payable and accrued liabilities            |  | 11,271                        |  | 11,891                  
|Income taxes payable                                |  | 5,060                         |  | 3,547                   
|Advances from TELUS Communications Inc.             |  | 45                            |  | 382                     
|Current portion of obligations under capital leases |  | 511                           |  | 511                     
|Unearned revenue                                    |  | 894                           |  | 1,096                   
|Obligations under warrants                          |  | 984                           |  | 1,093                   
|                                                    |  |                               |  |                         
|                                                    |  | 18,765                        |  | 18,520                  
|                                                    |  |                               |  |                         
|Non-Current Liabilities                             |  |                               |  |                         
|Deferred income taxes                               |  | 1,853                         |  | 1,990                   
|Obligations under capital leases                    |  | 912                           |  | 977                     
|                                                    |  |                               |  |                         
|                                                    |  | 2,765                         |  | 2,967                   
|                                                    |  |                               |  |                         
|                                                    |  | 21,530                        |  | 21,487                  
|                                                    |  |                               |  |                         
|STOCKHOLDERS EQUITY                                |  |                               |  |                         
|Common Stock                                        |  | 225                           |  | 225                     
|                                                    |  |                              
|Additional paid-in capital                          |  | 17,014                        |  | 16,952                  
|                                                    |  |                              
|Accumulated Other Comprehensive Income              |  | 2,530                         |  | 1,343                   
|                                                    |  |                              
|Retained Earnings                                   |  | 13,554                        |  | 13,231                  
|                                                    |  |                               |  |                         
|                                                    |  | 33,323                        |  | 31,751                  
|                                                    |  |                               |  |                         
|                                                    |  | 54,853                        |  | 53,238                  
|                                                    |  |                               |  |                         

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



F-1



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

As at September 30, 2005

(Unaudited)



|                                                              |  |                    |  |                          |  |        |                                     |  |       |                  |  |                          |  |        |  
|------------------------------------------------------------- |  | ------------------ |  | ------------------------ |  | ------ | ----------------------------------- |  | ----- | ---------------- |  | ------------------------ |  | ------ | -
|                                                              |  | Common stock1, 2 |  | Additionalpaid-incapital |  |        | Accumulatedothercomprehensiveincome |  |       | Retainedearnings |  | Totalstockholdersequity | 
|                                                              |  | Shares             |  | Amount                   |  |        |                                     |  |       |                  |  |                          |  |        |  
|(in thousands)                                                |  |                    |  | $                        |  | $      |                                     |  | $     |                  |  | $                        |  | $      |  
|Balance, June 30, 2003 (Restated)                             |  | 9,133              |  | 199                      |  | 2,050  |                                     |  | 477   |                  |  | 3,002                    |  | 5,728  |  
|Foreign currency translation adjustment                       |  |                   |  |                         |  |       |                                     |  | (364  | )                |  |                         |  | (364   | )
|Common stock issued to obtain note payable                    |  | 20                 |  |                         |  | 90     |                                     |  |      |                  |  |                         |  | 90     |  
|Common stock issued in exchange for stock options surrendered |  | 2,261              |  | 11                       |  | (11    | )                                   |  |      |                  |  |                         |  |       |  
|Common stock issued for services rendered                     |  | 9                  |  |                         |  | 51     |                                     |  |      |                  |  |                         |  | 51     |  
|Stock-based compensation expense                              |  |                   |  |                         |  | 26     |                                     |  |      |                  |  |                         |  | 26     |  
|Common stock issued for cash                                  |  | 1,470              |  | 15                       |  | 14,636 |                                     |  |      |                  |  |                         |  | 14,651 |  
|Net earnings                                                  |  |                   |  |                         |  |       |                                     |  |      |                  |  | 5,466                    |  | 5,466  |  
|                                                              |  |                    |  |                          |  |        |                                     |  |       |                  |  |                          |  |        |  
|Balance, June 30, 2004 (Restated)                             |  | 12,893             |  | 225                      |  | 16,842 |                                     |  | 113   |                  |  | 8,468                    |  | 25,648 |  
|Foreign currency translation adjustment                       |  |                   |  |                         |  |       |                                     |  | 1,230 |                  |  |                         |  | 1,230  |  
|Common stock issued for services rendered                     |  | 4                  |  |                         |  | 29     |                                     |  |      |                  |  |                         |  | 29     |  
|Stock-based compensation expense                              |  |                   |  |                         |  | 81     |                                     |  |      |                  |  |                         |  | 81     |  
|Net earnings                                                  |  |                   |  |                         |  |       |                                     |  |      |                  |  | 4,763                    |  | 4,763  |  
|                                                              |  |                    |  |                          |  |        |                                     |  |       |                  |  |                          |  |        |  
|                                                              |  |                    |  |                          |  |       
|Balance, June 30, 2005 (Restated)                             |  | 12,897             |  | 225                      |  | 16,952 |                                     |  | 1,343 |                  |  | 13,231                   |  | 31,751 |  
|Foreign currency translation adjustment                       |  |                   |  |                         |  |       |                                     |  | 1,187 |                  |  |                         |  | 1,187  |  
|Stock-based compensation expense                              |  |                   |  |                         |  | 62     |                                     |  |      |                  |  |                         |  | 62     |  
|Net earnings                                                  |  |                   |  |                         |  |       |                                     |  |      |                  |  | 323                      |  | 323    |  
|                                                              |  |                    |  |                          |  |        |                                     |  |       |                  |  |                          |  |        |  
|                                                              |  |                    |  |                          |  |       
|Balance, September, 2005 (Restated)                           |  | 12,897             |  | 225                      |  | 17,014 |                                     |  | 2,530 |                  |  | 13,554                   |  | 33,323 |  
|                                                              |  |                    |  |                          |  |        |                                     |  |       |                  |  |                          |  |        |  

---

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

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



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                         |  |                                  |   |  |                 |  
|-------------------------------------------------------- |  | -------------------------------- | - |  | --------------- | -
|                                                         |  | Three months ended September 30, |  
|                                                         |  | 2005 (Restated)                  |   |  | 2004 (Restated) |  
|(in $ thousands, except share and per share amounts)     |  | $                                |   |  | $               |  
|Net revenue                                              |  | 23,508                           |   |  | 21,197          |  
|Cost of revenue(1)                                       |  | 14,375                           |   |  | 13,758          |  
|                                                         |  |                                  |   |  |                 |  
|Contribution margin                                      |  | 9,133                            |   |  | 7,439           |  
|                                                         |  |                                  |   |  |                 |  
|Operating expenses                                       |  |                                  |   |  |                 |  
|General and administration                               |  | 5,928                            |   |  | 3,610           |  
|Sales and marketing                                      |  | 1,895                            |   |  | 991             |  
|Depreciation and amortization                            |  | 844                              |   |  | 562             |  
|                                                         |  |                                  |   |  |                 |  
|Total operating expenses                                 |  | 8,667                            |   |  | 5,163           |  
|                                                         |  |                                  |   |  |                 |  
|Income from operations                                   |  | 466                              |   |  | 2,276           |  
|                                                         |  |                                  |   |  |                 |  
|Other expenses (income)                                  |  |                                  |   |  |                 |  
|Interest expense                                         |  | 35                               |   |  | 263             |  
|Interest income                                          |  | (116                             | ) |  | (78             | )
|Income from joint marketing agreement                    |  |                                 |   |  | (141            | )
|Long-term debt discount amortization                     |  |                                 |   |  | 131             |  
|Change in fair value of obligation under warrants        |  | (109                             | ) |  | (303            | )
|                                                         |  |                                  |   |  |                 |  
|                                                         |  | (190                             | ) |  | (128            | )
|                                                         |  |                                  |   |  |                 |  
|Earnings before income taxes                             |  | 656                              |   |  | 2,404           |  
|                                                         |  |                                 
|Provision for income taxes                               |  | 333                              |   |  | 734             |  
|                                                         |  |                                  |   |  |                 |  
|Net earnings                                             |  | 323                              |   |  | 1,670           |  
|                                                         |  |                                 
|Other comprehensive income (loss)                        |  | 1,187                            |   |  | (364            | )
|                                                         |  |                                  |   |  |                 |  
|Comprehensive income                                     |  | 1,510                            |   |  | 1,306           |  
|                                                         |  |                                  |   |  |                 |  
|Basic earnings per share                                 |  | 0.03                             |   |  | 0.13            |  
|                                                         |  |                                  |   |  |                 |  
|Diluted earnings per share                               |  | 0.03                             |   |  | 0.13            |  
|                                                         |  |                                  |   |  |                 |  
|Weighted average number of common shares outstanding     |  | 12,897                           |   |  | 12,893          |  
|                                                         |  |                                  |   |  |                 |  
|Weighted average number of common shares  fully diluted |  | 12,897                           |   |  | 12,984          |  
|                                                         |  |                                  |   |  |                 |  

---

|1. | Excludes depreciation and amortization of $701 and $509 for the three months ended September 30, 2005 and 2004 respectively.
|-- | ----------------------------------------------------------------------------------------------------------------------------

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



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YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                                        |  |                                  |   |  |                |  
|----------------------------------------------------------------------- |  | -------------------------------- | - |  | -------------- | -
|                                                                        |  | Three months ended September 30, |  
|                                                                        |  | 2005(Restated)                   |   |  | 2004(Restated) |  
|(in $ thousands)                                                        |  | $                                |   |  | $              |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |                                  |   |  |                |  
|Net earnings                                                            |  | 323                              |   |  | 1,670          |  
|Adjustments for                                                         |  |                                  |   |  |                |  
|Amortization of discount on note payable                                |  |                                 |   |  | 131            |  
|Depreciation and amortization                                           |  | 844                              |   |  | 562            |  
|Foreign exchange loss                                                   |  | 101                              |   |  |               |  
|Deferred income taxes                                                   |  | (1,150                           | ) |  | (67            | )
|Stock-based compensation expense                                        |  | 62                               |   |  | 13             |  
|Change in fair value of obligation under warrants                       |  | (109                             | ) |  | (303           | )
|                                                                        |  |                                 
|Changes in non-cash working capital                                     |  | 293                              |   |  | 102            |  
|                                                                        |  |                                  |   |  |                |  
|Cash flows from operating activities                                    |  | 364                              |   |  | 2,108          |  
|                                                                        |  |                                  |   |  |                |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                          |  |                                  |   |  |                |  
|Purchase of property and equipment                                      |  | (1,014                           | ) |  | (1,856         | )
|Proceeds from sale of property and equipment, and software              |  |                                 |   |  | 10             |  
|Loan receivable                                                         |  |                                 |   |  | 31             |  
|                                                                        |  |                                  |   |  |                |  
|Cash flows used in investing activities                                 |  | (1,014                           | ) |  | (1,815         | )
|                                                                        |  |                                  |   |  |                |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                          |  |                                  |   |  |                |  
|Repayments on obligations under capital leases                          |  | (132                             | ) |  | (116           | )
|Repayments on advances from TELUS Communications Inc.                   |  | (346                             | ) |  | (318           | )
|Repayments on notes payable                                             |  |                                 |   |  | (297           | )
|Receipt of principal portion of joint venture receivable                |  |                                 |   |  | 387            |  
|                                                                        |  |                                  |   |  |                |  
|Cash flows used in financing activities                                 |  | (478                             | ) |  | (344           | )
|                                                                        |  |                                  |   |  |                |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  | 267                              |   |  | (10            | )
|                                                                        |  |                                  |   |  |                |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                   |  | (861                             | ) |  | (61            | )
|                                                                        |  |                                 
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          |  | 16,751                           |   |  | 22,149         |  
|                                                                        |  |                                  |   |  |                |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  | 15,890                           |   |  | 22,088         |  
|                                                                        |  |                                  |   |  |                |  
|Supplemental disclosure of cash flow information:                       |  |                                  |   |  |                |  
|Interest paid                                                           |  | 35                               |   |  | 183            |  
|Income taxes paid                                                       |  | 259                              |   |  | 177            |  
|                                                                        |  |                                 
|Supplemental disclosure of non-cash investing and financing activities: |  |                                  |   |  |                |  
|Capital leases for acquisition of furniture and equipment               |  |                                 |   |  | 355            |  
|Notes payable on purchase of software                                   |  |                                 |   |  | (130           | )
|Joint venture receivable on purchase of software                        |  |                                 |   |  | (23            | )

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



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##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(in
$ thousands, except where otherwise noted)

Note 1  Description of Business and Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Yak Communications Inc. and its wholly owned subsidiaries Yak Communications (Canada)
Inc., Yak Communications (America) Inc. and Contour Telecom Inc. These entities combined are referred to as Yak or the Company in these unaudited condensed consolidated financial statements. Yak Communications Inc. was
incorporated in the State of Florida on December 24, 1998 and operates as a holding company of its wholly-owned subsidiaries in the United States and Canada.

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

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

Note 2  Summary of Significant Accounting Policies

Basis of presentation

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

These interim consolidated financial statements have been prepared using accounting policies that are consistent with
policies used in preparing the Companys audited consolidated financial statements for the year ended June 30, 2005, except that during the three months ended September 30, 2005, the Company adopted FASB Statement No. 123(R),
Share-Based Payment (Statement 123(R)).

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

The results of operations for the three month period ended September 30, 2005 are not necessarily indicative of those
to be expected for the entire year ending June 30, 2006.

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

Stock-based compensation

At September 30, 2005, the Company has
a stock-based compensation plan, which is described more fully in note 10 to these financial statements. Prior to July 1, 2005, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations (Opinion 25), as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123).



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Effective July 1, 2005, the Company adopted the fair value recognition provisions of Statement 123(R), using the
modified-prospective-transition method. Under that transition method, compensation cost recognized in fiscal 2006 will include:

(a) compensation cost
for all share-based payments granted prior to, but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based
payments granted, modified, repurchased, or cancelled subsequent to July 1, 2005. Results for prior periods are not restated. No options were granted, modified, repurchased or cancelled during the three months ended September 30, 2005.

As a result of adopting Statement 123(R) on July 1, 2005, the Companys income before income taxes and net income for the first quarter ended
September 30, 2005, is $50 lower, than if it has continued to account for share based compensation under Opinion 25. The tax effect of the adoption of Statement 123 (R) on the Companys net income is not considered significant. Basic
and diluted earnings per share for the quarter ended September 30, 2005 would have been unchanged had the Company not adopted Statement 123(R).

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

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



|                                                                                                                                            |  |                                     |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ----- | -
|                                                                                                                                            |  | Three monthsended September 30,2004 |      
|Net Earnings, (restated)                                                                                                                    |  | $                                   | 1,670 |  
|Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects.                               |  |                                     | 13    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                     | (56   | )
|                                                                                                                                            |  |                                     |       |  
|Pro Forma Net Earnings                                                                                                                      |  | $                                   | 1,627 |  
|                                                                                                                                            |  |                                     |       |  
|Earnings per share                                                                                                                          |  |                                     |       |  
|Basic  as reported                                                                                                                         |  | $                                   | 0.13  |  
|                                                                                                                                            |  |                                     |       |  
|Basic  pro forma                                                                                                                           |  | $                                   | 0.13  |  
|                                                                                                                                            |  |                                     |       |  
|Diluted  as reported                                                                                                                       |  | $                                   | 0.13  |  
|                                                                                                                                            |  |                                     |       |  
|Diluted  pro forma                                                                                                                         |  | $                                   | 0.13  |  
|                                                                                                                                            |  |                                     |       |  

Revenue Recognition

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

Provision for doubtful accounts

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

Cash and cash equivalents

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



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Advertising costs

Advertising production costs are expensed the first time the advertisement is run. Media (television and print) placement costs are expensed in the month the advertising appears. The Company expensed $1,895 and $991 in advertising costs for
the three months ended September 30, 2005 and 2004, respectively.

Income taxes

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

The Company operates throughout North America and is therefore subject to income taxes in multiple jurisdictions. The income tax expense reported in the
statement of operations is based on a number of different estimates made by management. The effective tax rate can change from year to year based on the mix of income or loss among the different jurisdictions in which the Company operates, changes
in tax laws in these jurisdictions, and changes in the estimated values of deferred tax assets and liabilities recorded on the balance sheet. The income tax expense reflects an estimate of cash taxes expected to be paid in the current year, as well
as a provision for changes arising this year in the value of deferred tax assets and liabilities. The likelihood of recovering value from deferred tax assets such as loss carryforwards and the future tax depreciation of capital assets is assessed at
each quarter-end and a valuation allowance may be established or modified. Changes in the amount of the valuation allowance required can materially increase or decrease the tax expense in a period. Significant judgment is applied to determine the
appropriate amount of valuation allowance to record.

Obligation Under Warrants and Registration Rights Agreement

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

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

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



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

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

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

Concentrations

Concentrations of risk with third party providers:

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

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

Concentrations of credit risk

The Companys retail telecommunications subscribers are primarily residential and small business subscribers in Canada and the United States. The Companys customers are generally concentrated in the areas of highest population in
Canada and the United States. No single customer accounted for over 10% of revenues in the three month period ending September 30, 2005 or 2004. The Company monitors the credit worthiness of its larger carriers and retail business customers.

Comparative figures

Certain of the comparative figures have been restated to conform to current periods presentation.



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Note 3  Property and equipment

Property and equipment consist of the following:



|                                                     |  |                   |   |  |              |  
|---------------------------------------------------- |  | ----------------- | - |  | ------------ | -
|                                                     |  | September 30,2005 |   |  | June 30,2005 |  
|                                                     |  | $                 |   |  | $            |  
|Telecommunication switching systems                  |  | 8,860             |   |  | 8,353        |  
|Telecommunication software                           |  | 4,303             |   |  | 4,067        |  
|Billing, administration and customer service systems |  | 4,801             |   |  | 3,657        |  
|Installed lines                                      |  | 2,041             |   |  | 1,963        |  
|Office furniture and equipment                       |  | 3,380             |   |  | 3,329        |  
|Carrier identification codes loading                 |  | 834               |   |  | 834          |  
|Leasehold improvements                               |  | 783               |   |  | 723          |  
|Hardware infrastructure                              |  | 16                |   |  |             |  
|                                                     |  |                   |   |  |              |  
|Total Cost                                           |  | 25,018            |   |  | 22,926       |  
|                                                     |  |                  
|Accumulated Amortization                             |  | (10,508           | ) |  | (9,367       | )
|                                                     |  |                   |   |  |              |  
|Net Book Value                                       |  | 14,510            |   |  | 13,559       |  
|                                                     |  |                   |   |  |              |  

Telecom switching systems include assets under capital leases having a gross value of approximately
$1,778 and a net book value of approximately $1,432 as at September 30, 2005 and $1,756 and $1,463 as at June 30, 2005, respectively. Office furniture and equipment includes assets under capital leases having a gross value of approximately
$384 and a net book value of approximately $301 as at September 30, 2005. At June 30, 2005 these leases had a gross value of approximately $366 and a net book value of approximately $300.

Note 4  Restatement

The Company has restated its previously
issued financial statements to correct for the errors and deficiencies described below in its amended financial statements and accompanying notes as follows:



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



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



| | C. | To enhance disclosure by adding a rate reconciliation according to SFAS 109;
| | -- | ----------------------------------------------------------------------------



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



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

The net effect of the restatements was to increase net income by $109 or $0.01 earnings per share for the quarter ended September 30, 2005. For the quarter ended
September 30, 2005, the cash flows from operating and investing activities were understated by $249 and $32, respectively, while the cash flows from financing activities and the effect of exchange rate changes on cash and cash equivalents were
overstated by $76 and $205, respectively. At September 30, 2005, liabilities were understated by $984 while shareholders equity was overstated by $984.

The net effect of the initial and the amended restatements was to increase net income by $303 or $0.02 earnings per share for the quarter ended September 30, 2004. For the quarter ended September 30, 2004, the cash flows from
operating activities, investing activities and decrease in cash and cash equivalents were understated by $91, $194, and $3 respectively, while cash flows from financing activities and the effect of exchange rate changes on cash and cash equivalents
were overstated by $81 and $201 respectively.



F-9



---

##### Table of Contents

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

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|--------------------------------------------------- |  | ------------------------------- |  | ------ | - |  | ------ |  | ------ |  | ------ |  | ------ |  | ----------------------------
|                                                    |  | September 30,2005 Initialfiling |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |  | September 30,2005 (Restated)
|(in $ thousands)                                    |  | $                               |  | $      |   |  | $      |  | $      |  | $      |  | $      |  | $                           
|ASSETS                                              |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Current                                             |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Cash and cash equivalents                           |  | 15,890                          |  |       |   |  |       |  |       |  |       |  |       |  | 15,890                      
|Accounts receivable, net                            |  | 16,943                          |  |       |   |  |       |  |       |  |       |  |       |  | 16,943                      
|Prepaid expenses and other assets                   |  | 1,166                           |  |       |   |  |       |  |       |  |       |  |       |  | 1,166                       
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Total Current Assets                                |  | 33,999                          |  |       |   |  |       |  |       |  |       |  |       |  | 33,999                      
|Property and equipment, net                         |  | 14,510                          |  |       |   |  |       |  |       |  |       |  |       |  | 14,510                      
|Intangibles, net                                    |  | 1,947                           |  |       |   |  |       |  |       |  |       |  |       |  | 1,947                       
|Goodwill                                            |  | 527                             |  |       |   |  |       |  |       |  |       |  |       |  | 527                         
|Deferred income taxes                               |  | 3,870                           |  |       |   |  |       |  |       |  |       |  |       |  | 3,870                       
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 54,853                          |  |       |   |  |       |  |       |  |       |  |       |  | 54,853                      
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|LIABILITIES                                         |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Current                                             |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Accounts payable and accrued liabilities            |  | 11,271                          |  |       |   |  |       |  |       |  |       |  |       |  | 11,271                      
|Income taxes payable                                |  | 5,060                           |  |       |   |  |       |  |       |  |       |  |       |  | 5,060                       
|Advances from TELUS Communications Inc.             |  | 45                              |  |       |   |  |       |  |       |  |       |  |       |  | 45                          
|Current portion of obligations under capital leases |  | 511                             |  |       |   |  |       |  |       |  |       |  |       |  | 511                         
|Unearned revenue                                    |  | 894                             |  |       |   |  |       |  |       |  |       |  |       |  | 894                         
|Obligations under warrants                          |  |                                |  | 984    |   |  |       |  |       |  |       |  |       |  | 984                         
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 17,781                          |  | 984    |   |  |       |  |       |  |       |  |       |  | 18,765                      
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Non-Current Liabilities                             |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Deferred income taxes                               |  | 1,853                           |  |       |   |  |       |  |       |  |       |  |       |  | 1,853                       
|Obligations under capital leases                    |  | 912                             |  |       |   |  |       |  |       |  |       |  |       |  | 912                         
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 2,765                           |  |       |   |  |       |  |       |  |       |  |       |  | 2,765                       
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 20,546                          |  | 984    |   |  |       |  |       |  |       |  |       |  | 21,530                      
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|STOCKHOLDERS EQUITY                                |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|Common Stock                                        |  | 225                             |  |       |   |  |       |  |       |  |       |  |       |  | 225                         
|Additional paid-in capital                          |  | 16,754                          |  | 260    |   |  |       |  |       |  |       |  |       |  | 17,014                      
|Common stock purchase warrants                      |  | 2,433                           |  | (2,433 | ) |  |       |  |       |  |       |  |       |  |                            
|Accumulated Other Comprehensive Income              |  | 2,530                           |  |       |   |  |       |  |       |  |       |  |       |  | 2,530                       
|Retained Earnings                                   |  | 12,365                          |  | 1,189  |   |  |       |  |       |  |       |  |       |  | 13,554                      
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 34,307                          |  | (984   | ) |  |       |  |       |  |       |  |       |  | 33,323                      
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             
|                                                    |  | 54,853                          |  |       |   |  |       |  |       |  |       |  |       |  | 54,853                      
|                                                    |  |                                 |  |        |   |  |        |  |        |  |        |  |        |  |                             



F-10



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------- | - |  | ------- | - |  | ------ |  | ------ |  | ------ |  | ------ |  | -------------------------------------------- | -
|                                                             |  | Three monthsendedSeptember 30,2005 Initial filing |   |  | Note 4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |  | Three monthsendedSeptember 30,2005(Restated) |  
|(in $ thousands)                                             |  | $                                                 |   |  | $       |   |  | $      |  | $      |  | $      |  | $      |  | $                                            |  
|NET REVENUE                                                  |  | 23,508                                            |   |  |        |   |  |       |  |       |  |       |  |       |  | 23,508                                       |  
|COST OF REVENUE                                              |  | 14,375                                            |   |  |        |   |  |       |  |       |  |       |  |       |  | 14,375                                       |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|GROSS MARGIN                                                 |  | 9,133                                             |   |  |        |   |  |       |  |       |  |       |  |       |  | 9,133                                        |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|OPERATING EXPENSES                                           |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|General and administration                                   |  | 5,928                                             |   |  |        |   |  |       |  |       |  |       |  |       |  | 5,928                                        |  
|Sales and marketing                                          |  | 1,895                                             |   |  |        |   |  |       |  |       |  |       |  |       |  | 1,895                                        |  
|Depreciation and amortization                                |  | 844                                               |   |  |        |   |  |       |  |       |  |       |  |       |  | 844                                          |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|TOTAL OPERATING EXPENSES                                     |  | 8,667                                             |   |  |        |   |  |       |  |       |  |       |  |       |  | 8,667                                        |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|INCOME FROM OPERATIONS                                       |  | 466                                               |   |  |        |   |  |       |  |       |  |       |  |       |  | 466                                          |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|OTHER EXPENSES (INCOME)                                      |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|Interest expense                                             |  | 35                                                |   |  |        |   |  |       |  |       |  |       |  |       |  | 35                                           |  
|Interest income                                              |  | (116                                              | ) |  |        |   |  |       |  |       |  |       |  |       |  | (116                                         | )
|Change in fair value of obligation under warrants            |  |                                                  |   |  | (109    | ) |  |       |  |       |  |       |  |       |  | (109                                         | )
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|                                                             |  | (81                                               | ) |  | (109    | ) |  |       |  |       |  |       |  |       |  | (190                                         | )
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 547                                               |   |  | 109     |   |  |       |  |       |  |       |  |       |  | 656                                          |  
|PROVISION FOR INCOME TAXES                                   |  | 333                                               |   |  |        |   |  |       |  |       |  |       |  |       |  | 333                                          |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|NET EARNINGS                                                 |  | 214                                               |   |  | 109     |   |  |       |  |       |  |       |  |       |  | 323                                          |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | 1,187                                             |   |  |        |   |  |       |  |       |  |       |  |       |  | 1,187                                        |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|COMPREHENSIVE INCOME                                         |  | 1,401                                             |   |  | 109     |   |  |       |  |       |  |       |  |       |  | 1,510                                        |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|BASIC EARNINGS PER SHARE                                     |  | 0.02                                              |   |  | 0.01    |   |  |       |  |       |  |       |  |       |  | 0.03                                         |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.02                                              |   |  | 0.01    |   |  |       |  |       |  |       |  |       |  | 0.03                                         |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,897                                            |   |  | 12,897  |   |  |       |  |       |  |       |  |       |  | 12,897                                       |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,897                                            |   |  | 12,897  |   |  |       |  |       |  |       |  |       |  | 12,897                                       |  
|                                                             |  |                                                   |   |  |         |   |  |        |  |        |  |        |  |        |  |                                              |  



F-11



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------- | - |  | ------ | - |  | ------ |  | ------ |  | ------ | - |  | ------ |  | -------------------------------------------- | -
|                                                             |  | Three monthsendedSeptember 30,2005 Initial filing |   |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |   |  | Note4E |  | Three monthsendedSeptember 30,2005(Restated) |  
|(in $ thousands)                                             |  | $                                                 |   |  | $      |   |  | $      |  | $      |  | $      |   |  | $      |  | $                                            |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Net earnings                                                 |  | 214                                               |   |  | 109    |   |  |       |  |       |  |       |   |  |       |  | 323                                          |  
|Adjustments for                                              |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Depreciation and amortization                                |  | 844                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 844                                          |  
|Foreign exchange loss                                        |  |                                                  |   |  |       |   |  |       |  |       |  | 101    |   |  |       |  | 101                                          |  
|Deferred income taxes                                        |  | (1,220                                            | ) |  |       |   |  |       |  |       |  | 70     |   |  |       |  | (1,150                                       | )
|Stock-based compensation expense                             |  | 62                                                |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 62                                           |  
|Changes in fair value of obligation under warrants           |  |                                                  |   |  | (109   | ) |  |       |  |       |  |       |   |  |       |  | (109                                         | )
|Changes in non-cash working capital                          |  | 215                                               |   |  |       |   |  |       |  |       |  | 78     |   |  |       |  | 293                                          |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows from operating activities                         |  | 115                                               |   |  |       |   |  |       |  |       |  | 249    |   |  |       |  | 364                                          |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES               |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Purchase of property and equipment                           |  | (1,046                                            | ) |  |       |   |  |       |  |       |  | 32     |   |  |       |  | (1,014                                       | )
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in investing activities                      |  | (1,046                                            | ) |  |       |   |  |       |  |       |  | 32     |   |  |       |  | (1,014                                       | )
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES               |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Repayments on obligations under capital leases               |  | (65                                               | ) |  |       |   |  |       |  |       |  | (67    | ) |  |       |  | (132                                         | )
|Repayments on advances from TELUS Communications Inc.        |  | (337                                              | ) |  |       |   |  |       |  |       |  | (9     | ) |  |       |  | (346                                         | )
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in financing activities                      |  | (402                                              | ) |  |       |   |  |       |  |       |  | (76    | ) |  |       |  | (478                                         | )
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  | 472                                               |   |  |       |   |  |       |  |       |  | (205   | ) |  |       |  | 267                                          |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|DECREASE IN CASH AND CASH EQUIVALENTS                        |  | (861                                              | ) |  |       |   |  |       |  |       |  |       |   |  |       |  | (861                                         | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD               |  | 16,751                                            |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 16,751                                       |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                     |  | 15,890                                            |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 15,890                                       |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Supplemental disclosure of cash flow information:            |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Interest paid                                                |  | 35                                                |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 35                                           |  
|Income taxes paid                                            |  | 259                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 259                                          |  



F-12



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited)



|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|--------------------------------------------------------- |  | -------------------------------- |  | ------- | - |  | ------ |  | ------ |  | ------ |  | ------ |  | -------------------------------
|                                                          |  | June 30,2005 Initial Restatement |  | Note 4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |  | June 30, 2005AmendedRestatement
|(in $ thousands)                                          |  | $                                |  | $       |   |  | $      |  | $      |  | $      |  | $      |  | $                              
|ASSETS                                                    |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|Current                                                   |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|Cash and cash equivalents                                 |  | 16,751                           |  |        |   |  |       |  |       |  |       |  |       |  | 16,751                         
|Accounts receivable, net                                  |  | 16,220                           |  |        |   |  |       |  |       |  |       |  |       |  | 16,220                         
|Prepaid expenses and other current assets                 |  | 1,413                            |  |        |   |  |       |  |       |  |       |  |       |  | 1,413                          
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|Total Current Assets                                      |  | 34,384                           |  |        |   |  |       |  |       |  |       |  |       |  | 34,384                         
|                                                          |  |                                  |  |         |   |  |       
|Property and equipment, net                               |  | 13,559                           |  |        |   |  |       |  |       |  |       |  |       |  | 13,559                         
|Intangibles, net                                          |  | 2,005                            |  |        |   |  |       |  |       |  |       |  |       |  | 2,005                          
|Goodwill                                                  |  | 503                              |  |        |   |  |       |  |       |  |       |  |       |  | 503                            
|Deferred income taxes                                     |  | 2787                             |  |        |   |  |       |  |       |  |       |  |       |  | 2,787                          
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 53,238                           |  |        |   |  |       |  |       |  |       |  |       |  | 53,238                         
|LIABILITIES                                               |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|Current                                                   |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|Accounts payable and accrued liabilities                  |  | 11,891                           |  |        |   |  |       |  |       |  |       |  |       |  | 11,891                         
|Income taxes payable                                      |  | 3,547                            |  |        |   |  |       |  |       |  |       |  |       |  | 3,547                          
|Current portion of advances from TELUS Communications Inc |  | 382                              |  |        |   |  |       |  |       |  |       |  |       |  | 382                            
|Current portion of obligations under capital leases       |  | 511                              |  |        |   |  |       |  |       |  |       |  |       |  | 511                            
|Unearned revenue                                          |  | 1,096                            |  |        |   |  |       |  |       |  |       |  |       |  | 1,096                          
|Obligations under warrants                                |  |                                 |  | 1,093   |   |  |       |  |       |  |       |  |       |  | 1,093                          
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 17,427                           |  | 1,093   |   |  |       |  |       |  |       |  |       |  | 18,520                         
|LONG-TERM DEBT                                            |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|Deferred income taxes                                     |  | 1,990                            |  |        |   |  |       |  |       |  |       |  |       |  | 1,990                          
|Obligations under capital leases                          |  | 977                              |  |        |   |  |       |  |       |  |       |  |       |  | 977                            
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 2,967                            |  |        |   |  |       |  |       |  |       |  |       |  | 2,967                          
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 20,394                           |  | 1,093   |   |  |       |  |       |  |       |  |       |  | 21,487                         
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|STOCKHOLDERS EQUITY                                      |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|Common stock                                              |  | 225                              |  |        |   |  |       |  |       |  |       |  |       |  | 225                            
|Additional paid incapital                                |  | 16,692                           |  | 260     |   |  |       |  |       |  |       |  |       |  | 16,952                         
|Common stock purchase warrants                            |  | 2,433                            |  | (2,433  | ) |  |       |  |       |  |       |  |       |  |                               
|Accumulated other comprehensive income                    |  | 1,343                            |  |        |   |  |       |  |       |  |       |  |       |  | 1,343                          
|Retained earnings                                         |  | 12,151                           |  | 1,080   |   |  |       |  |       |  |       |  |       |  | 13,231                         
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 32,844                           |  | (1,093  | ) |  |       |  |       |  |       |  |       |  | 31,751                         
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                
|                                                          |  | 53,238                           |  |        |   |  |       |  |       |  |       |  |       |  | 53,238                         
|                                                          |  |                                  |  |         |   |  |        |  |        |  |        |  |        |  |                                



F-13



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited)



|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|------------------------------------------------------------ |  | ------------------------------------------------- | - |  | ------ | - |  | ------ |  | ------ |  | ------ |  | ------ | - |  | -------------------------------------------- | -
|                                                             |  | Three monthsendedSeptember 30,2004 Initial filing |   |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |  | Note4E |   |  | Three monthsendedSeptember 30,2004(Restated) |  
|(in $ thousands)                                             |  | $                                                 |   |  | $      |   |  | $      |  | $      |  | $      |  | $      |   |  | $                                            |  
|NET REVENUE                                                  |  | 21,197                                            |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 21,197                                       |  
|COST OF REVENUE                                              |  | 13,758                                            |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 13,758                                       |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|GROSS MARGIN                                                 |  | 7,439                                             |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 7,439                                        |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|OPERATING EXPENSES                                           |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|General and administration                                   |  | 3,610                                             |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 3,610                                        |  
|Sales and marketing                                          |  | 991                                               |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 991                                          |  
|Accounts receivable financing                                |  | 121                                               |   |  |       |   |  |       |  |       |  |       |  | (121   | ) |  |                                             |  
|Depreciation and amortization                                |  | 562                                               |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 562                                          |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|TOTAL OPERATING EXPENSES                                     |  | 5,284                                             |   |  |       |   |  |       |  |       |  |       |  | (121   | ) |  | 5,163                                        |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|INCOME FROM OPERATIONS                                       |  | 2,155                                             |   |  |       |   |  |       |  |       |  |       |  | 121    |   |  | 2,276                                        |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|OTHER EXPENSES (INCOME)                                      |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|Interest expense                                             |  | 142                                               |   |  |       |   |  |       |  |       |  |       |  | 121    |   |  | 263                                          |  
|Interest income                                              |  | (78                                               | ) |  |       |   |  |       |  |       |  |       |  |       |   |  | (78                                          | )
|Income from joint marketing agreement                        |  | (141                                              | ) |  |       |   |  |       |  |       |  |       |  |       |   |  | (141                                         | )
|Long-term debt discount amortization                         |  | 131                                               |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 131                                          |  
|Change in fair value of obligation under warrants            |  |                                                  |   |  | (303   | ) |  |       |  |       |  |       |  |       |   |  | (303                                         | )
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|                                                             |  | 54                                                |   |  | (303   | ) |  |       |  |       |  |       |  | 121    |   |  | (128                                         | )
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|EARNINGS BEFORE INCOME TAXES                                 |  | 2,101                                             |   |  | 303    |   |  |       |  |       |  |       |  |       |   |  | 2,404                                        |  
|PROVISION FOR INCOME TAXES                                   |  | 734                                               |   |  |       |   |  |       |  |       |  |       |  |       |   |  | 734                                          |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|NET EARNINGS                                                 |  | 1,367                                             |   |  | 303    |   |  |       |  |       |  |       |  |       |   |  | 1,670                                        |  
|OTHER COMPREHENSIVE INCOME (LOSS)                            |  | (364                                              | ) |  |       |   |  |       |  |       |  |       |  |       |   |  | (364                                         | )
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|COMPREHENSIVE INCOME                                         |  | 1,003                                             |   |  | 303    |   |  |       |  |       |  |       |  |       |   |  | 1,306                                        |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|BASIC EARNINGS PER SHARE                                     |  | 0.11                                              |   |  | 0.02   |   |  |       |  |       |  |       |  |       |   |  | 0.13                                         |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|DILUTED EARNINGS PER SHARE                                   |  | 0.11                                              |   |  | 0.02   |   |  |       |  |       |  |       |  |       |   |  | 0.13                                         |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  | 12,893                                            |   |  | 12,893 |   |  |       |  |       |  |       |  |       |   |  | 12,893                                       |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  | 12,984                                            |   |  | 12,984 |   |  |       |  |       |  |       |  |       |   |  | 12,984                                       |  
|                                                             |  |                                                   |   |  |        |   |  |        |  |        |  |        |  |        |   |  |                                              |  



F-14



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)



|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|----------------------------------------------------------------------- |  | ------------------------------------------------- | - |  | ------ | - |  | ------ |  | ------ |  | ------ | - |  | ------ |  | -------------------------------------------- | -
|                                                                        |  | Three monthsendedSeptember 30,2004 Initial filing |   |  | Note4A |   |  | Note4B |  | Note4C |  | Note4D |   |  | Note4E |  | Three monthsendedSeptember 30,2004(Restated) |  
|(in $ thousands)                                                        |  | $                                                 |   |  | $      |   |  | $      |  | $      |  | $      |   |  | $      |  | $                                            |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Net earnings                                                            |  | 1,367                                             |   |  | 303    |   |  |       |  |       |  |       |   |  |       |  | 1,670                                        |  
|Adjustments for                                                         |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Amortization of discount on notes payable                               |  | 131                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 131                                          |  
|Depreciation and amortization                                           |  | 562                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 562                                          |  
|Deferred income taxes                                                   |  | (84                                               | ) |  |       |   |  |       |  |       |  | 17     |   |  |       |  | (67                                          | )
|Stock-based compensation expense                                        |  | 13                                                |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 13                                           |  
|Changes in fair value of obligation under warrants                      |  |                                                  |   |  | (303   | ) |  |       |  |       |  |       |   |  |       |  | (303                                         | )
|Changes in non-cash working capital                                     |  | 28                                                |   |  |       |   |  |       |  |       |  | 74     |   |  |       |  | 102                                          |  
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows from operating activities                                    |  | 2,017                                             |   |  |       |   |  |       |  |       |  | 91     |   |  |       |  | 2,108                                        |  
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                          |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Purchase of property and equipment                                      |  | (2,050                                            | ) |  |       |   |  |       |  |       |  | 194    |   |  |       |  | (1,856                                       | )
|Proceeds from sale of property and equipment, and software              |  | 10                                                |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 10                                           |  
|Loan receivable                                                         |  | 31                                                |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 31                                           |  
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in investing activities                                 |  | (2,009                                            | ) |  |       |   |  |       |  |       |  | 194    |   |  |       |  | (1,815                                       | )
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                          |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Repayments on obligations under capital leases                          |  | (32                                               | ) |  |       |   |  |       |  |       |  | (84    | ) |  |       |  | (116                                         | )
|Repayments on advances from TELUS Communications Inc.                   |  | (234                                              | ) |  |       |   |  |       |  |       |  | (84    | ) |  |       |  | (318                                         | )
|Repayments on notes payable                                             |  | (67                                               | ) |  |       |   |  |       |  |       |  | (230   | ) |  |       |  | (297                                         | )
|Receipt of principal portion of joint venture receivable                |  | 70                                                |   |  |       |   |  |       |  |       |  | 317    |   |  |       |  | 387                                          |  
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Cash flows used in financing activities                                 |  | (263                                              | ) |  |       |   |  |       |  |       |  | (81    | ) |  |       |  | (344                                         | )
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  | 191                                               |   |  |       |   |  |       |  |       |  | (201   | ) |  |       |  | (10                                          | )
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                   |  | (64                                               | ) |  |       |   |  |       |  |       |  | 3      |   |  |       |  | (61                                          | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          |  | 22,149                                            |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 22,149                                       |  
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  | 22,085                                            |   |  |       |   |  |       |  |       |  | 3      |   |  |       |  | 22,088                                       |  
|                                                                        |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Supplemental disclosure of cash flow information:                       |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Interest paid                                                           |  | 183                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 183                                          |  
|Income taxes paid                                                       |  | 177                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 177                                          |  
|Supplemental disclosure of non-cash investing and financing activities: |  |                                                   |   |  |        |   |  |        |  |        |  |        |   |  |        |  |                                              |  
|Capital leases for acquisition of furniture and equipment               |  | 355                                               |   |  |       |   |  |       |  |       |  |       |   |  |       |  | 355                                          |  
|Notes payable on purchase of software                                   |  | (130                                              | ) |  |       |   |  |       |  |       |  |       |   |  |       |  | (130                                         | )
|Joint venture receivable on purchase of software                        |  | (23                                               | ) |  |       |   |  |       |  |       |  |       |   |  |       |  | (23                                          | )



F-15



---

##### Table of Contents

Correction of the error in the accounting for Next Generation Software initially restated on June 1,
2005 and subsequently amended on September 28, 2005.

Initial software transaction

On June 20, 2003, the Companys wholly-owned subsidiary, Yak Communications (Canada) Inc. (Yak Canada), acquired certain 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) $0.6 million in cash was paid at the closing of the transaction; (b) delivery of a short-term promissory note executed in favour of Consortio, Inc. in the principal
amount of $0.4 million providing for equal monthly payments of $40 and (c) the balance of the purchase price was evidenced by a long-term promissory note executed in favour of Consortio, Inc. in the principal amount of $8.5 million bearing
interest at 7.25% per annum. Under the long-term note, interest and principal were payable quarterly in the amount of $175 commencing September 30, 2003 with the balance due July 15, 2012. The sole recourse of the lender under the
long-term note was the subject software. Yak Canada was also issued a warrant to purchase up to 8% of the issued and outstanding common stock of Convenxia Limited, with an exercise period ending June 30, 2012. The exercise price is based on a
predetermined formula using a calculation of fair value of the grantor at the time of exercise.

In addition to the purchase of the software, Yak Canada
and the Sellers entered into a joint venture agreement under which an exclusive license was granted to the Sellers for the use of the software for telecommunication services outside Canada to non-Yak customers. Under the joint venture agreement, Yak
Canada was entitled to receive 4% of all gross revenue arising from the sale of services using the acquired software pursuant to such license with minimum quarterly payments of $150 through June 30, 2006 and, thereafter, 2.75% of gross revenue
with minimum quarterly payments of $175. The expiration date of the joint venture was July 15, 2015.

Restatement of June 30, 2003 and 2004
Financial Statements

During the fourth quarter of fiscal 2005, the Company determined that the assumptions on which the valuations of this
software acquisition were made and the agreement recorded were in error. On May 31, 2005, the financial statements for fiscal years ended June 30, 2003 and 2004 were amended and restated. As a result, in its June 30, 2003 amended
Annual Report on Form 10-K/A filed on May 31, 2005, the Company estimated the fair value of each of the components of the software transaction as follows:



|                         |  |   |            
|------------------------ |  | - | -----------
|Software                 |  | $ | 1.7 million
|Warrants                 |  |   | 0.1 million
|Joint venture receivable |  |   | 5.0 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 |  | $ | 6.8million 



F-16



---

##### Table of Contents

The assumptions underlying the restatement of the software and warrant fair values were
as follows:



| |  | Software - The Company valued the acquired software at $5.9 million, which is the mid-point of a range of $5.4 million to $6.4 million as determined by management based on a
third-party valuation. Applying by analogy the concepts of Statement of Financial Accounting Standards No. 141 (FAS 141), the Company allocated, on a pro rata basis, the excess of the fair value of the assets acquired over the fair
value of the consideration paid ($4.2 million) to reduce the amounts that otherwise would have been assigned to the non-financial acquired asset (the software). As a result, the amount recorded for the acquired software was reduced for
accounting purposes from its estimated fair value of $5.9 million to its carrying value of $1.7 million.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Warrants  The fair value of the Convenxia Limited warrants was derived using the Black-Scholes valuation model. The range of possible cash outcomes varied based on estimated
future revenues of Convenxia Limited. Because Convenxia Limited 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.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Estimates of the fair value of the joint venture receivable, the short-term note payable and the long-term note payable were based on the guidance of Statement of Financial
Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements (SFAC No. 7) which provides a framework for using future cash flows and present value as the basis for accounting
measurements of fair value. Consistent with the methodology of SFAC No. 7, the Company used the expected cash flow approach to estimate fair value, focusing on explicit assumptions regarding the range of possible cash outcomes and their
respective probabilities. These fair values are based on the following assumptions:
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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. The present value of
contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost of capital plus 200 basis points.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Short-term note payable: The present value of contractual cash flows was calculated 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. The present value of contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost
of capital.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Subsequent to the May 31, 2005 filing of its amended June 30, 2003 and 2004 annual reports, and in conjunction with
its continued discussions with the Office of the Chief Accountant (OCA) of the Securities and Exchange Commission in connection with the Companys request for guidance in this regard, management discovered that a calculation error
was made in its determination of the fair value of various components of the Convenxia transaction. On September 27, 2005, Yaks Board of Directors approved managements recommendation to correct this accounting. For additional
details see comments under Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements included in this Annual Report below.

Effect of 2004 Strategic Change

In the fourth quarter of fiscal 2004, the Company made the determination that the development of the software for Yaks own internal use would require the full time and effort of all involved parties. The Company believed that the
continuing development of the software for internal use over the next several years would be the key aspect of the software transaction and not its commercialization. In addition, the Company became increasingly aware that whichever software was
developed for VoIP, it was more likely than not to become obsolete on or before the due date of the balloon payment on the long-term note (June 2012).

Given these two issues, in its amended Annual Report on Form 10-K/A for fiscal year 2004, the Company modified the probability assumptions for the range of possible cash outcomes related to the fair value calculations of the receivable from
the joint venture and the long-term note payable. The probabilities that the cash flows from the joint venture would be received, or that the $7.3 million balloon payment otherwise due in 2012 on the long-term note would be paid by Yak were reduced
to zero probability (from a 20% probability in prior assumptions). Accordingly, in its amended Annual Report on Form 10-K/A for fiscal year 2004, the Company reduced the fair value of the long-term note payable at June 30, 2004 by $1.7 million,
from $5.8 million to $4.1 million and concurrently recorded an impairment in the fair value of the joint venture receivable of $0.6 million, from $4.6 million to $4.0 million. Because the note liability was not legally extinguished and only the
expected cash flow inflows and outflows changed, the resultant net gain of $1.1 million was deferred and classified on the fiscal year 2004 balance sheet as Deferred Revenue. There was no impact on the Companys Consolidated
Statements of Income nor on the Consolidated Statements of Cash Flows for the three months ended June 30, 2004.



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##### Table of Contents

As discussed above, subsequent to its recent (May 31, 2005) filing of its amended financial statements for fiscal year
2004, and in conjunction with its continued discussions with the OCA, management determined that the reduction in fair value of the long-term note payable and the deferral of the loss on impairment of the joint venture receivable were errors in
accounting. As stated above, Yaks Board of Directors has approved managements recommendation to correct this accounting. For additional details see comments under Second Restatement of Amounts Previously Reported in June 30,
2003 and June 30, 2004 Financial Statements included in this Annual Report below.

March 2005 Note Settlement

On March 3, 2005, the Company entered into a settlement agreement with the Sellers. Pursuant to the settlement agreement, Yak paid $150 to the Sellers and committed
to complete $350 of further development of the software in exchange for a discharge of any further obligation under the long-term note, which note had a principal amount of $8.4 million outstanding at December 31, 2004. Pursuant to the
settlement agreement, all guaranteed payments made under the joint venture agreement would also cease. Accordingly, the Company reduced the amount recorded for the fair value of the long-term note payable at March 31, 2005 by $4.1 million, to
$150 and concurrently recorded an impairment of fair value of the joint venture receivable of $3.8 million, reducing the carrying value to zero. Because the note liability was legally extinguished, the resultant net gain of $300 and the previously
deferred gain of $1.1 million from the fourth fiscal quarter of 2004 were recognized in the third fiscal quarter of 2005. A total gain on early extinguishment of debt of $1.4 million was recognized in the Companys Consolidated Statements of
Income for the quarter ended March 31, 2005.

As discussed above, subsequent to its recent (May 31, 2005) filing of its amended financial statements
for the quarter ended March 31, 2005, and in conjunction with its continued discussions with the OCA, management determined that the gain recognized on early extinguishment of debt was overstated by $200. As stated above, Yaks Board of
Directors approved managements recommendation to correct this accounting. For additional details see comments under Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements
included in this Annual Report below.

Second Restatement of Amounts Previously Reported in June 30, 2003 and 2004 Financial Statements
included in this Annual Report

Subsequent to the May 31, 2005 filing of its amended Annual Report on Form 10-K/A for fiscal years 2003 and
2004, and as a result of our continuing discussions with the OCA, the Company discovered errors in its amended filings. Yaks Board of Directors has approved managements recommendation to correct its accounting for the Convenxia software
transaction. The errors originated from:



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



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



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



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

As a result of these corrections, the Company in its Annual Report filed on Form 10-K for the year-ended June 30, 2005 has restated the amounts previously reported
in its financial statements for fiscal years 2003 and 2004, as well as each of the quarters in fiscal years 2004 and 2005.

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

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



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##### Table of Contents

As a result of this error, liabilities at September 30, 2005 were understated by $984, while shareholders
equity at September 30, 2005 was overstated by $984. Further, the standards require the Company to re-measure the fair value of the Warrants at the end of each reporting period with the resulting increase or decrease to the liability reported
as a component of the Statement of Income and Comprehensive Income. As a result of a decrease in the value of the Warrants since issuance, the net income of the Company for the quarters ended September 30, 2005 and 2004 were previously
understated by $109 and $303 or $0.01 per share and $0.02 per share, respectively.

B. Enhancement of disclosure by adding a rate reconciliation
according to SFAS 109

The Company has included an income tax statutory rate reconciliation to enhance disclosure. There was no effect on the assets,
liabilities, shareholders equity or Statement of Income and Comprehensive Income of the Company as a result of this change.

C. Correction for
disclosure deficiencies under SFAS 131

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

D. Correction for errors in its Cash Flow Statements

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

For the quarter ending September 30, 2005, the cash flows from operating and investing activities were understated by $249 and $32 respectively, while the cash flows from financing activities and the effect of exchange rate changes on
cash and cash equivalents were overstated by $76 and $205, respectively.

Comparative statements for the quarter ending September 30, 2004, the cash
flows from operating activities, investing activities, decrease in cash and cash equivalents were understated by $91, $194 and $3 respectively, while the cash flows from financing activities and the effect of exchange rate changes on cash and cash
equivalents were overstated by $81 and $201, respectively.

E. Misclassification of financing costs as operating expense

The Company misclassified financing costs relating to factoring of trade accounts receivable as operating expenses for the quarter ending September 30, 2004 versus
disclosing such costs below the line as an element of interest expense as discussed by the AICPAs Special Committee on Classification of Items of Comprehensive Income. The effect of this misclassification was an overstatement of
operating expenses and understatement of income from operations in the amount of $121. There was no effect on the net income, earnings per share, assets, liabilities or shareholders equity as a result of this change.

Note 5  Goodwill and Intangible assets

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

The straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. Total
amortization expense related to intangible assets during the quarter ended September 30, 2005 and 2004, was $150 and $105, respectively. As of September 30, 2005, future estimated amortization expense related to amortizable customer lists
will be:



|                          |  |        |    
|------------------------- |  | ------ | ---
|Year ending September 30, |  | Amount
|2006                      |  | $      | 616
|2007                      |  | $      | 616
|2008                      |  | $      | 499
|2009                      |  | $      | 148
|2010                      |  | $      | 68 



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##### Table of Contents

Note 6  Advances from Telus Communications Inc. (Telus)

In fiscal 2003, in return for the Companys commitment to promote, advertise and market Telus services, Telus (a third party network line provider) provided
the Company with a payment deferral right of amounts due to Telus to a total maximum value of $3,250. The deferral was calculated as 25% of the value of monthly billed revenue to the Company by Telus in the preceding month to a maximum of $270 per
month. This deferral right applies on billings over the period from July 2002 to October 2005. This deferral is based on the requirement that 75% of the Companys long-distance business is allocated to Telus. Repayment of the deferred amounts
end on October 15, 2005 and up until September 30, 2005, the Companys monthly payments have been the minimum amount.

Note 7 
Obligations under Capital Leases

The Companys capital leases are for terms of 24 to 60 months at annual interest rates ranging from 9.25% to
15.00%. The year ending June 30, 2007 includes a buyout of $255.

The future minimum lease payments as at
September 30, 2005 required under capital lease agreements are as follows:



|                               |  |      
|------------------------------ |  | -----
|                               |  | $    
|Year ending September 30, 2006 |  | 639  
|Year ending September 30, 2007 |  | 499  
|Year ending September 30, 2008 |  | 422  
|Year ending September 30, 2009 |  | 39   
|Year ending September 30, 2010 |  |     
|                               |  |      
|Total minimum lease payments   |  | 1,599
|Amount representing interest   |  | 176  
|                               |  |      
|Total Obligations              |  | 1,423
|Current portion                |  | 511  
|                               |  |      
|                               |  | 912  
|                               |  |      

Note 8  Common Stock

Common stock, par value of $0.01, 100,000,000 shares authorized.

Series A preferred stock, no par value, 1,000,000 shares authorized.

On July 15, 2003, 20,000 common shares were issued, as consideration for a short-term loan in the amount of $714 due December 31, 2003, to an unrelated party.

On December 30, 2003, pursuant to a stock option granted in December 2000, the Company issued 2,260,934 shares of its common stock to its chief executive officer
and director. The option provided for the issuance of 2,568,000 shares of common stock. The exercise price was funded by the surrender of 307,066 shares of common stock which was the number of shares determined by an independent valuator on
December 5, 2003, based on a market price of $5.67 per share as of November 30, 2003. The transaction was accounted for as a cashless exercise of the option as the option holder held 1,523,800 common shares prior to December 30, 2003.

On December 31, 2003, 9,000 common shares were issued to directors for services rendered with a value of $51.

On January 29, 2004 a two-for-one stock split of 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 received 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 $18,008 less direct costs associated with the transaction of $997 for net proceeds of
$17,011. An additional $187 of costs were incurred in the quarter ended June 30, 2004 bringing the final net proceeds to $16,824. 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. The warrants include a put feature that can be exercised in certain circumstances. According to the guidance of EITF No. 00-19, this feature meets the definition
of a derivative. Accordingly, the Company bifurcated the derivative from the host contract and recorded the liability at its fair value of $2,173 with a corresponding entry to stockholders equity. The warrants were valued using the
Black-Scholes option pricing model.



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##### Table of Contents

On October 14, 2004, 4,000 common shares were issued to directors for services
rendered of $29.

Note 9  Income Taxes

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



|                                                                |  |                                                 |  
|--------------------------------------------------------------- |  | ----------------------------------------------- | -
|                                                                |  | Three months endedSeptember 30, 2005 (Restated) |  
|                                                                |  | $                                               |  
|Earnings before income taxes                                    |  | 656                                             |  
|                                                                |  |                                                 |  
|Income tax expense, based on a statutory income tax rate of 34% |  | 223                                             |  
|Increase (decrease) in income taxes resulting from:             |  |                                                 |  
|Impact of tax rate changes                                      |  | (145                                            | )
|Stock option expense not benefited                              |  | 20                                              |  
|Other non-deductible items                                      |  | (36                                             | )
|Interest and penalties                                          |  | 271                                             |  
|                                                                |  |                                                 |  
|Actual income tax provision                                     |  | 333                                             |  
|                                                                |  |                                                 |  
|                                                                | 
|Represented by:                                                 |  |                                                 |  
|Current income tax provision                                    |  | 1,483                                           |  
|Deferred income tax recovery                                    |  | (1,150                                          | )
|                                                                |  |                                                 |  
|Provision for Income Taxes                                      |  | 333                                             |  
|                                                                |  |                                                 |  

Deferred tax asset:



|                                                                           |  |                                     |   |  |                               |  
|-------------------------------------------------------------------------- |  | ----------------------------------- | - |  | ----------------------------- | -
|                                                                           |  | As at September 30, 2005 (Restated) |   |  | As at June 30, 2005(Restated) |  
|United States                                                              |  |                                     |   |  |                               |  
|Unrealized United States tax loss carryforward                             |  | 3,870                               |   |  | 2,787                         |  
|                                                                           |  |                                    
|Canada                                                                     |  |                                     |   |  |                               |  
|Accounting value of Canadian property and equipment in excess of tax basis |  | (1,853                              | ) |  | (1,990                        | )
|                                                                           |  |                                     |   |  |                               |  
|Net deferred tax asset                                                     |  | 2,017                               |   |  | 797                           |  
|                                                                           |  |                                     |   |  |                               |  

Note 10  Stock Option Plan

Effective June 30, 1999, the Company adopted a Stock Option Plan (the Plan) which permits the issuance of stock options to selected employees and directors. As indicated in note 2, the Company adopted
the fair value recognition provisions of Statement 123(R) on July 1, 2005. The compensation cost that was recorded for the three months ended September 30, 2005 was $62 pursuant to the transition provisions of Statement 123 (R), and $13
pursuant to Opinion 25 for the three months ended September 30, 2004. The total income tax benefit recognized in the income statement related to options issued under the Plan was insignificant for the three-month periods ended
September 30, 2005 and 2004 respectively.

The Company reserved 640,000 shares of common stock for grant under the Plan. The Companys policy is
to issue new shares to satisfy stock option exercises. Options granted may be either nonqualifed or incentive stock options and will expire no later than 20 years from the date of grant (10 years for incentive options). Options generally vest over
four to five years, with an equal percentage of options vesting each year. The straight-line recognition method is used to recognize compensation expense over the vesting period. Compensation expense for the quarter ended September 30, 2005 is
based on the fair value of the options on the date of grant, estimated using a Black-Scholes-Merton option-pricing formula.

During the three months ended
September 30, 2004, 50,000 options were granted. The expected term used in the formula was five years and was based on the contractual term of the options and the expected or historical exercise behaviour of the employees. The volatility rate
assumption was 79.3% and was based on the historical stock prices of the Company. Expected dividends were assumed to be nil, and the risk-free rate was assumed to be 3% based on the U.S. treasury note. Weighted average grant date fair value of the
options granted in the three months ended September 30, 2004 was $7.30. No options were exercised during this current period.



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##### Table of Contents

During the three months ended September 30, 2005, no options were granted, exercised, forfeited, or expired.
Information relating to options outstanding as of September 30, 2005, which are vested or expected to vest, is as follows:



|                                |  |         |  |                              |  |                                                 |  |                         |  
|------------------------------- |  | ------- |  | ---------------------------- |  | ----------------------------------------------- |  | ----------------------- | -
|                                |  | Shares  |  | WeightedAverageExercisePrice |  | WeightedAverageRemainingContractualTerm (Years) |  | AggregateIntrinsicValue
|Outstanding, September 30, 2005 |  | 280,000 |  | 6.50                         |  | 3.40                                            |  | $                       | 
|                                |  |         |  |                              |  |                                                 |  |                         |  
|Exercisable, September 30, 2005 |  | 57,500  |  | 6.50                         |  | 3.40                                            |  | $                       | 
|                                |  |         |  |                              |  |                                                 |  |                         |  

As of September 30, 2005, there was $685 of total unrecognized compensation costs related to
stock options granted under the Plan. That cost is expected to be recognized over a weighted average period of 1.86 years.

Note 11  Commitment
and Contingencies

Commitments

The Company has
operating lease commitments for its premises, service vehicles and operating lease commitments for its network access lines which expire at various dates through July 2009. The future minimum lease payments (exclusive of operating costs and payments
for additional usage) as at September 30, 2005 for the next twelve months, are as follows:



|                 |  |                    |  |                          |  |                 
|---------------- |  | ------------------ |  | ------------------------ |  | ----------------
|Expiring through |  | TelecomObligations |  | Facility/RentObligations |  | OtherCommitments
|2006             |  | 4,914              |  | 546                      |  | 32              
|2007             |  | 1,958              |  | 498                      |  | 32              
|2008             |  | 352                |  | 384                      |  | 14              
|2009             |  | 60                 |  | 196                      |  | 1               
|2010             |  |                   |  |                         |  |                

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

Legal Proceedings

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.

Note 12  Related Party Transactions



| | (a) | The Company paid professional fees for consulting and executive search services for the three months ended September 30, 2005 of $36 to a director and minority shareholder.
This director became a related party in October 2004 and as of September 30, 2005 there was no balance outstanding.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The Company paid professional fees for legal services for the three months ended September 30, 2005 and 2004 of $34 and $35, respectively to a director and minority
shareholder. For the three months ended September 30, 2005 there was no balance owing.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | The Company paid marketing and design fees for the three months ended September 30, 2005 and 2004 of nil and $7, respectively to a corporation controlled by a former officer
and minority shareholder. For the three months ended September 30, 2005 there was no balance owing.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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##### Table of Contents

Note 13  Economic Dependence

The Company is dependent in Canada upon carriers to provide billing and collection services to its customers under renewable agreements. The Company is also dependent upon Telus to provide billing, transport and
handling services under a renewable agreement which expires in June 2007. Management expects that these agreements will be renewed.

The Company purchases
long-distance services from a number of carriers and does not believe that there is an economic dependence on any one carrier.

Note 14  Earnings
per share

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

Earnings per share for the quarter ended September 30, 2005 and 2004 are calculated as follows:



|                                                           |  |                 |        |                 |   |       
|---------------------------------------------------------- |  | --------------- | ------ | --------------- | - | ------
|                                                           |  | 2005 (Restated) |        | 2004 (Restated)
|                                                           |  | $               |        | $              
|Net earnings applicable to common stockholders - basic     |  |                 | 323    |                 |   | 1,670 
|                                                           |  |                 |        |                 |   |       
|Net earnings applicable to common stockholders - diluted   |  |                 | 323    |                 |   | 1,670 
|                                                           |  |                 |        |                 |   |       
|Average shares outstanding:                                |  |                 |        |                 |   |       
|Weighted average number of common shares outstandingbasic |  |                 | 12,897 |                 |   | 12,893
|Effect of dilutive securities:                             |  |                 |        |                 |   |       
|Stock options and warrants                                 |  |                 |       |                 |   | 91    
|                                                           |  |                 |        |                 |   |       
|                                                           |  |                 | 12,897 |                 |   | 12,984
|                                                           |  |                 |        |                 |   |       
|Basic earnings per share                                   |  | $               | 0.03   |                 | $ | 0.13  
|                                                           |  |                 |        |                 |   |       
|Diluted earnings per share                                 |  | $               | 0.03   |                 | $ | 0.13  
|                                                           |  |                 |        |                 |   |       

There were no incremental shares during the period ended September 30, 2005 as the outstanding stock options and
warrants currently have no intrinsic value.

Note 15  Consolidated statement of cash flows

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



|                                            |  |                                  |   |  |                 |  
|------------------------------------------- |  | -------------------------------- | - |  | --------------- | -
|                                            |  | Three months ended September 30, |  
|                                            |  | 2005 (Restated)                  |   |  | 2004 (Restated) |  
|                                            |  | $                                |   |  | $               |  
|Decrease (increase) in current assets:      |  |                                  |   |  |                 |  
|Accounts receivable                         |  | 418                              |   |  | 810             |  
|Prepaid expenses and other assets           |  | (104                             | ) |  | (465            | )
|Increase (decrease) in current liabilities: |  |                                  |   |  |                 |  
|Unearned revenue                            |  | (249                             | ) |  | (7              | )
|Accounts payable and accrued liabilities    |  | (1,299                           | ) |  | (194            | )
|Due to Factor                               |  |                                 |   |  | (675            | )
|Income taxes payable                        |  | 1,527                            |   |  | 633             |  
|                                            |  |                                  |   |  |                 |  
|                                            |  | 293                              |   |  | 102             |  
|                                            |  |                                  |   |  |                 |  



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##### Table of Contents

Note 16  Segment Reporting

The Company has five reportable segments: Yak Canada, Yak for Business, Contour, Yak America and VoIP. Segment sales and profit data that follow are consistent with the Companys current management reporting
structure. The Yak Canada and Yak America segments provide products such as Dial-Around, 1+, LooneyCall, YakCell and Calling Card. The Yak for Business segment provides voice and data products, including local lines, long distance, data
management and point-to-point private lines. The Contour segment provides telecommunication management services. The WorldCity VoIP segment provides VoIP services to residential customers. The Eliminations and Other column includes corporate head
office assets, management fees, interest income, warrant revaluation, and any other costs and expenses not allocated to individual segments. The companys selling, general and administrative expenses and cost of revenues, excluding corporate
expense, are charged to each segment based on where the expenses are incurred. Segment results for the periods ended September 30, 2005 are as follows (in thousands):



|                                          |  |                                       |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |   |  |                       |   |  |        |  
|----------------------------------------- |  | ------------------------------------- |  | --------------- | - |  | ------- | - |  | ---------- | - |  | ------------- | - |  | ------------- | - |  | --------------------- | - |  | ------ | -
|                                          |  | Three months ended September 30, 2005 | 
|                                          |  | YakCanada                             |  | Yak forBusiness |   |  | Contour |   |  | YakAmerica |   |  | WorldCityVoIP |   |  | TotalSegments |   |  | Eliminationsand other |   |  | Total  |  
|                                          |  | $                                     |  | $               |   |  | $       |   |  | $          |   |  | $             |   |  | $             |   |  | $                     |   |  | $      |  
|Revenues                                  |  | 17,702                                |  | 3,360           |   |  | 1,219   |   |  | 1,227      |   |  |              |   |  | 23,508        |   |  |                      |   |  | 23,508 |  
|Cost of Revenues(1)                       |  | 9,708                                 |  | 2,384           |   |  | 931     |   |  | 1,344      |   |  | 8             |   |  | 14,375        |   |  |                      |   |  | 14,375 |  
|                                          |  |                                       |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |   |  |                       |   |  |        |  
|Contribution Margin                       |  | 7,994                                 |  | 976             |   |  | 288     |   |  | (117       | ) |  | (8            | ) |  | 9,133         |   |  |                      |   |  | 9,133  |  
|General and administration                |  | 2,825                                 |  | 948             |   |  | 117     |   |  | 357        |   |  | 344           |   |  | 4,591         |   |  | 1,337                 |   |  | 5,928  |  
|Sales and marketing                       |  | 342                                   |  |                |   |  |        |   |  | 1,465      |   |  | 88            |   |  | 1,895         |   |  |                      |   |  | 1,895  |  
|Other Expenses (Income)                   |  | 23                                    |  | (6              | ) |  | (3      | ) |  | (43        | ) |  | (9            | ) |  | (38           | ) |  | (152                  | ) |  | (190   | )
|Depreciation and Amortization             |  | 562                                   |  | 173             |   |  | 5       |   |  | 31         |   |  | 73            |   |  | 844           |   |  |                      |   |  | 844    |  
|                                          |  |                                       |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |   |  |                       |   |  |        |  
|Segment Earnings (Loss) Before Income Tax |  | 4,242                                 |  | (139            | ) |  | 169     |   |  | (1,927     | ) |  | (504          | ) |  | 1,841         |   |  | (1,185                | ) |  | 656    |  
|                                          |  |                                       |  |                 |   |  |         |   |  |            |   |  |               |   |  |               |   |  |                       |   |  |        |  
|Segment Assets                            |  | 37,366                                |  | 6,595           |   |  | 2,785   |   |  | 5,973      |   |  | 1,690         |   |  | 54,409        |   |  | 444                   |   |  | 54,853 |  
|Long-Lived Assets                         |  | 11,837                                |  | 2,847           |   |  | 108     |   |  | 598        |   |  | 1,594         |   |  | 16,984        |   |  |                      |   |  | 16,984 |  

---

|(1) | Excludes depreciation and amortization of $701
|--- | ----------------------------------------------



|                                          |           |                                       |   |                 |       |   |         |       |            |       |   |               |      |   |               |        |   |                       |       |   |       |        |  
|----------------------------------------- | --------- | ------------------------------------- | - | --------------- | ----- | - | ------- | ----- | ---------- | ----- | - | ------------- | ---- | - | ------------- | ------ | - | --------------------- | ----- | - | ----- | ------ | -
|                                          |           | Three months ended September 30, 2004 |  
|                                          | YakCanada |                                       |   | Yak forBusiness |       |   | Contour |       | YakAmerica |       |   | WorldCityVoIP |      |   | TotalSegments |        |   | Eliminationsand other |       |   | Total |       
|                                          | $         |                                       |   | $               |       |   | $       |       | $          |       |   | $             |      |   | $             |        |   | $                     |       |   | $     |       
|Revenues                                  |           | 16,838                                |   |                 | 2,708 |   |         | 1,387 |            | 221   |   |               | 3    |   |               | 21,157 |   |                       | 40    |   |       | 21,197 |  
|Cost of Revenues (1)                      |           | 10,430                                |   |                 | 2,049 |   |         | 1,000 |            | 246   |   |               |     |   |               | 13,725 |   |                       | 33    |   |       | 13,758 |  
|                                          |           |                                       |   |                 |       |   |         |       |            |       |   |               |      |   |               |        |   |                       |       |   |       |        |  
|Contribution Margin                       |           | 6,408                                 |   |                 | 659   |   |         | 387   |            | (25   | ) |               | 3    |   |               | 7,432  |   |                       | 7     |   |       | 7,439  |  
|General and administration                |           | 1,487                                 |   |                 | 690   |   |         | 228   |            | 269   |   |               | 638  |   |               | 3,312  |   |                       | 298   |   |       | 3,610  |  
|Sales and marketing                       |           | 710                                   |   |                 | 6     |   |         |      |            | 185   |   |               |     |   |               | 901    |   |                       | 90    |   |       | 991    |  
|Other Expenses (Income)                   |           | (187                                  | ) |                 |      |   |         | 5     |            | (19   | ) |               | 12   |   |               | (189   | ) |                       | 61    |   |       | (128   | )
|Depreciation and Amortization             |           | 400                                   |   |                 | 124   |   |         | 4     |            | 29    |   |               |     |   |               | 557    |   |                       | 5     |   |       | 562    |  
|                                          |           |                                       |   |                 |       |   |         |       |            |       |   |               |      |   |               |        |   |                       |       |   |       |        |  
|Segment Earnings (Loss) Before Income Tax |           | 3,998                                 |   |                 | (161  | ) |         | 150   |            | (489  | ) |               | (647 | ) |               | 2,851  |   |                       | (447  | ) |       | 2,404  |  
|                                          |           |                                       |   |                 |       |   |         |       |            |       |   |               |      |   |               |        |   |                       |       |   |       |        |  
|Segment Assets                            |           | 42,399                                |   |                 | 4,298 |   |         | 2,837 |            | 1,498 |   |               | 777  |   |               | 51,809 |   |                       | 4,673 |   |       | 56,482 |  
|Long-Lived Assets                         |           | 9,751                                 |   |                 | 2,289 |   |         | 310   |            | 697   |   |               | 777  |   |               | 13,824 |   |                       | 98    |   |       | 13,922 |  

---

|(1) | Excludes depreciation and amortization of $509
|--- | ----------------------------------------------



F-24



---

##### Table of Contents

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



|                                    |  |                                 |   |  |                          |  
|----------------------------------- |  | ------------------------------- | - |  | ------------------------ | -
|                                    |  | Three months ended September 30 |  
|                                    |  | 2005 (Restated)                 |   |  | 2004 (Restated)          |  
|                                    |  | $                               |   |  | $                        |  
|Net revenue                         |  |                                 |   |  |                          |  
|Canada                              |  | 22,281                          |   |  | 20,897                   |  
|United States                       |  | 1,227                           |   |  | 221                      |  
|International                       |  |                                |   |  | 79                       |  
|                                    |  |                                 |   |  |                          |  
|                                    |  | 23,508                          |   |  | 21,197                   |  
|                                    |  |                                 |   |  |                          |  
|Earnings (loss) before income taxes |  |                                 |   |  |                          |  
|Canada                              |  | 3,768                           |   |  | 3,373                    |  
|United States                       |  | (3,112                          | ) |  | (936                     | )
|International                       |  |                                |   |  | (33                      | )
|                                    |  |                                 |   |  |                          |  
|                                    |  | 656                             |   |  | 2,404                    |  
|                                    |  |                                 |   |  |                          |  
|                                    |  |                                
|                                    |  | September 30, 2005 (Restated)   |   |  | June 30, 2005 (Restated) |  
|                                    |  | $                               |   |  | $                        |  
|Long-lived assets                   |  |                                 |   |  |                          |  
|Canada                              |  | 15,893                          |   |  | 15,437                   |  
|United States                       |  | 1,091                           |   |  | 630                      |  
|                                    |  |                                 |   |  |                          |  
|                                    |  | 16,984                          |   |  | 16,067                   |  
|                                    |  |                                 |   |  |                          |  

The Canadian assets include goodwill as at September 30, 2005 and June 30, 2005 of $527 and $503,
respectively and other intangible assets of $1,947 and $2,005, respectively.

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



F-25



---

##### Table of Contents

Exhibit Index



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