================================================================================

                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
[X]  Annual report under Section 13 or 15(d) of the Securities Exchange Act of
     1934 for the fiscal year ended August 31, 2001.

[]   Transition report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

     For the transition period from __________ to __________.

                         Commission File Number: 0-15482

                          BESTNET COMMUNICATIONS CORP.
                 (Name of small business issuer in its charter)

           Nevada                                                86-1006416
(State or other jurisdiction                                  (I.R.S. Employer
      of incorporation)                                      Identification No.)

                         5075 East Cascade Road, Suite K
                          Grand Rapids, Michigan 49546
                    (Address of principal executive offices)

                                 (616) 977-9933
              (Registrant's telephone number, including area code)

              Securities registered under Section 12(g) of the Act:

Name of exchange on which registered                         Title of Each Class
------------------------------------                         -------------------
                None                                                 None

              Securities registered under Section 12(b) of the Act:
                          Common Stock, $.001 Par Value
                                (Title of Class)

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing  requirements for the past 90 days.
Yes [X] No [ ]

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     Issuer's revenues for the fiscal year ended August 31, 2001: $493,260.

     The aggregate  market value of the Common Stock of the  registrant  held by
non-affiliates as of November 7, 2001 was approximately $13,750,170 based on the
average  bid and asked  prices  for such  Common  Stock as  reported  on the OTC
Bulletin Board.

     The number of shares of Common Stock outstanding as of November 7, 2001 was
14,981,241.

     Documents Incorporated by Reference - None.

     Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]

================================================================================
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS.

     THIS ANNUAL  REPORT ON FORM 10-KSB  CONTAINS  CERTAIN  STATEMENTS  WHICH WE
BELIEVE  ARE  FORWARD-LOOKING  STATEMENTS  WITHIN THE MEANING OF THE SAFE HARBOR
PROVISIONS OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  THESE STATEMENTS RELATE
TO FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF BESTNET  COMMUNICATIONS
CORP. (FORMERLY, WAVETECH INTERNATIONAL,  INC.). IN SOME CASES, YOU CAN IDENTIFY
FORWARD-LOOKING  STATEMENTS  BY  TERMINOLOGY  SUCH AS "MAY,"  "WILL,"  "SHOULD,"
"EXPECTS,"  "PLANS,"   "ANTICIPATES,"   "BELIEVES,"   "ESTIMATES,"   "PREDICTS,"
"POTENTIAL,"  OR "CONTINUE"  OR THE NEGATIVE OF SUCH TERMS AND OTHER  COMPARABLE
TERMINOLOGY.   THESE  STATEMENTS  ONLY  REFLECT  MANAGEMENT'S  EXPECTATIONS  AND
ESTIMATES  ON THE DATE OF THIS  REPORT.  ACTUAL  EVENTS OR  RESULTS  MAY  DIFFER
MATERIALLY FROM THESE EXPECTATIONS.  IN EVALUATING THOSE STATEMENTS,  YOU SHOULD
SPECIFICALLY  CONSIDER  SEVERAL  FACTORS,  INCLUDING  THE RISKS  INCLUDED IN THE
REPORTS  FILED BY BESTNET WITH THE  SECURITIES  AND EXCHANGE  COMMISSION.  THESE
FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY FROM ANY  FORWARD-LOOKING
STATEMENTS.   BESTNET  IS  NOT   UNDERTAKING   ANY   OBLIGATION  TO  UPDATE  ANY
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT.

BUSINESS DEVELOPMENT

     Founded  on  July  10,  1986,  BestNet   Communications   Corp.,  a  Nevada
corporation   (formerly   Wavetech   International,   Inc.)  ("BestNet"  or  the
"Company"),  develops,  markets sells, and sub-licenses patented  Internet-based
telecommunications   technologies  and  services.   Substantially   all  of  our
development  activities are performed by Softalk, Inc. ("Softalk"),  an Ontario,
Canada-based  technology  company that is also a major  shareholder  of BestNet.
Although  founded in 1986, we did not commence  operations until 1995. From 1995
until June 1999, we developed  software for customized calling card services and
created an  infrastructure  to market and  distribute our products and services.
During  this  period,   BestNet's  efforts  were  primarily  focused  on  hiring
management  and other key personnel,  raising  capital,  procuring  governmental
authorizations and space in central offices, acquiring equipment and facilities,
developing,  acquiring and integrating billing and database systems. We marketed
these systems to the business  traveler and to large  organizations or companies
with a membership base. In the late 1990's,  due to the wide scale deployment of
cellular telephones with messaging  capability,  the market for business related
calling card services  greatly  diminished.  In June 1999, we  discontinued  our
calling card  services.  Since then,  we have focused  substantially  all of our
efforts and resources on developing our  BestNetcall  web-enabled  long distance
service.  On September 27, 2000,  we changed our name to BestNet  Communications
Corp.

     On April 23, 1999,  we entered  into a licensing  agreement  with  Softalk.
Softalk develops Internet-based telecommunication technologies that enable users
to  initiate  long  distance  calls from  anywhere  in the world by  accessing a
specific Internet website. This technology enables users to, among other things,
make  international  telephone calls at  substantially  reduced rates from those
offered by traditional long distance carriers.  This licensing agreement granted
BestNet certain  marketing and customer service rights with respect to Softalk's
technologies.  The licensing agreement was later amended and restated on October
25, 1999,  to grant  BestNet  exclusive  global  rights to  distribute,  market,
service,  sell,  and  sublicense  Softalk's  services and products to commercial
accounts and on a worldwide  non-exclusive  basis individual  consumer accounts.
BestNet also has the  exclusive  right to provide  billing and customer  support
services for all customer accounts.  In consideration for such licensing rights,
the Company has paid Softalk an aggregate  of $200,000  (All dollar  amounts are
denominated in U.S. currency unless otherwise stated).

     After  entering  into  the  Softalk  licensing  agreement,  with  Softalk's
assistance  BestNet  began  building  telecommunication  facilities  in Toronto,
Canada,  and in the U.S.A. in New York, New York and in Los Angeles,  California
including  the  installation  of  high-capacity  switches and Internet  servers.
Softalk,  under a separate  contract with BestNet,  completed the development of
specialized  software  used for data  management,  billing and customer  service
requirements.

                                       2
<PAGE>
     The brand name for our  web-enabled  long distance  service is Bestnetcall.
The service was first made  available  to the public on April 17,  2000.  We are
presently focusing our resources on marketing  Bestnetcall to selected companies
with international  locations and/or clients.  As of the date of this report, we
have 3,000  clients  with an aggregate of 3,500  persons  using our  Bestnetcall
service.

     Users of our Bestnetcall  service are able to do the following by accessing
our website at www.bestnetcall.com:

     *    enroll;

     *    place calls;

     *    pay for service; and

     *    access customer service immediately on the Internet.

     Bestnetcall  does not require the purchase of special  hardware or software
by the customer and uses their  existing  telephone  equipment.  Users only need
access to the  Internet  and an available  phone line.  Bestnetcall  also offers
immediate  billing to all users and accepts various payment  methods,  including
pre-paid or post-paid credit card payments and invoicing options.

     Following a telephone calls completion, the total cost for that call may be
viewed on the caller's  online  account.  Call detail  records may be printed or
copied to Word or Excel  applications.  The  Bestnetcall  service also  includes
features such as speed dialing, personalized directories,  client billing codes,
world-time country/city code lookup and immediate access to customer service via
the  website.  Account  administrators  may add or delete  users,  view a user's
calling activity and create reports detailing call activity.

BestNet Services

     During the fiscal year ended  August 31,  2001  ("Fiscal  2001"),  BestNet,
using Softalk's  patented  technology,  has contracted  Softalk to create a wide
range of  telecommunications  products and services.  Internet  devices that can
access  the  Internet  can be used by  BestNet to enable  telephone  calls.  The
Bestnetcall suite of products include the following services:

Long Distance Calling

     Organizations can decrease the cost of their long distance bill while still
retaining the toll quality required to conduct  business.  Bestnetcall  provides
the core  benefits  of lower  prices,  quality  service  and  on-line  real-time
billing.  Other  significant  benefits  include  point  and  click  FROM  and TO
directories,  point and click dialing using directories from Microsoft  Outlook,
speed dialing, email calling, billing codes, country and city code look-up, time
zone information and dialing examples.

Conference Calling

     Bestnetcall  offers  a  conference-calling  product  that  can be  used  to
initiate  immediate or scheduled  conference  calls.  The chairperson can either
launch  successive  legs for an  immediate  conference  call or  enter  and save
information for a conference call to be launched automatically at a future date.
There are no set-up or  administrative  charges for the  Bestnetcall  conference
calling facility.  This service can reduce the cost of conference calls by up to
80% as  compared  to  traditional  conferencing  services  currently  offered by
carriers.

Call Me Services

     Through  our  Bestnetcall  service  we are  able  to  offer  customers  the
following services:

                                       3
<PAGE>
     *    Customer Service Centers
          Our customer  service centers can enable  customers  worldwide to call
          about  subjects of interest  such as product  information,  enrollment
          issues and company information.

     *    Click through banner
          The banner  advertising  industry can  voice-enable  their  banners to
          achieve far more  effective  sales  results.  Potential  customers who
          access the  banner are able to click on the banner to call  through to
          the banner  provider  and obtain  more  information  about the product
          being advertised - thereby increasing the sales.

     *    Web Chat - click to join
          Through the  Bestnetcall  architecture,  Web Chat providers can enable
          users  of  their  service  to  escalate  from  on-line  chat to a live
          conversation.  In this situation,  numbers remain private and users do
          not have access to numbers of other users.

     *    Anonymous calling
          The  architecture of Bestnetcall  allows for total security  regarding
          both  the  FROM  and TO  legs.  The  FROM  and TO  numbers  are  never
          displayed,  thus it is not possible to determine  from where a call is
          being  placed.  Certain  website  providers  need both  numbers  to be
          anonymous or private,  so the callers do not know the numbers they are
          dialing,  nor should  the person  being  called  know which  number is
          dialing them.

     *    Call Shacks
          The BestNet Internet  telephony system can be used to enable telephone
          calls in  facilities  that sell minutes to consumers for use on one of
          the  telephones  within  the "call  shack"  or  "telephone  store".  A
          web-enabled  computer  can not only  launch  calls  from any number of
          extension  phones or phones  connected to direct lines within the call
          shack,  but can also  monitor  real-time  use of the  minutes  and the
          actual cost of each call.  Call shacks are used by migrant  workers in
          the U.S. to call home and in many  countries  where  consumers  do not
          have any other  access  to a  telephone.  The  BestNet  system  allows
          BestNet  to  also  monitor  real  time  activity  that  minimizes  the
          occurrence of payment fraud by the call shack.

Sales Calls

     The  Bestnetcall   architecture   provides  the  ability  to  supply  sales
organizations,  such as real estate companies and automobile sales companies,  a
telecommunications  infrastructure  whereby  customers  can call in,  review and
purchase products. Enrollment and billing infrastructures are also provided.

Satellite Calls

     Bestnetcall allows for terrestrial offices to call remote platforms such as
ships,  airplanes,  oilrigs,  etc.  Bestnetcall  has  a  direct  circuit  to  an
international  satellite uplink carrier for launching the Inmarsat satellite leg
of calls to the terminal at a remote location.

Mobile Calling

     Bestnetcall has developed a wireless  application that operates on the Palm
VII and other wireless enabled Palm devices to enable users to place calls while
away from the office.  An application  has also been developed for the Pocket PC
on Personal Digital Assistant's ("PDA's") such as the Compaq iPAQ.

     Bestnetcall also enables calls to be launched via email devices such as the
Blackberry  manufactured  by Research in Motion and mobile phones that have text
messaging.  These  capabilities  expand the target  customer-base  for BestNet's
services. We believe the increased  availability created by mobile calling makes
the product more  attractive to users.  BestNet is currently  investigating  the
opportunity to offer pager calling,  where the customer uses a pager to initiate
a phone call.

     All calls from  these  devices  are billed in the same way as calls  placed
through our web product.

                                       4
<PAGE>
MARKET STRATEGIES

     BestNet  offers its  Bestnetcall  service  through  both  direct  sales and
indirect sales channels. Our target markets include:

     *    Business and Industry;

     *    Telecommunication Carriers;

     *    Internet Service Providers;

     *    Governmental agencies;

     *    Browser Based Services such as AOL, Yahoo and Amazon.com;

     *    Affinity Groups;

     *    Other  organizations,  including charities,  religious  organizations,
          schools and alumni associations; and

     *    Individual Consumers.

     Our marketing efforts are targeted at international  long distance users in
a number of key geographic areas in the world. Initially, our marketing strategy
will focus primarily on the following geographic regions due to greatest savings
potential:

     *    Caribbean;

     *    North America;

     *    Asia Pacific;

     *    Central & South America;

     *    Europe; and

     *    Middle East.

Direct Sales

     BestNet  utilizes the following  marketing and sales strategies to generate
revenue and increase customer usage:

     *    Direct  Mail and e-mail  Solicitations  - BestNet  sends  solicitation
          materials to prequalified  potential  users.  These materials refer or
          link  the   potential   user  to   www.bestnetcall.com   and  offer  a
          subscription to the Bestnetcall service. Recipients are invited to use
          the service or request more  information.  These direct mail or e-mail
          solicitations  are  launched on a  continuous  basis  currently  by an
          in-house staff.  Future direct mail initiatives will be launched using
          a combination of in-house resources and external resources.

     *    Telemarketing - BestNet  currently markets it services through special
          incentive  offerings  to its  existing  customer  base.  Telemarketing
          operations will be initiated  through the customer service  operations
          during the fiscal year ending August 31, 2002 ("Fiscal 2002").

     *    Media Advertising and Promotion - Limited advertising in key print and
          electronic  media  targeted  at  specific  market  segments  has  been
          initiated in the form of national  magazines.  Additional  initiatives

                                       5
<PAGE>
          such as  advertising  in  specific  trade  publications  and  Internet
          advertising  will be  considered  during the  coming  year based on an
          analysis of the cost-effectiveness of these present activities; and

     *    Public Relations  Activities - A corporate  communications  and public
          relations  specialist  within BestNet is responsible  for developing a
          comprehensive  global  communications   program.  This  communications
          program will include  initiating  appropriate  news releases,  feature
          print  articles in industry  and trade  specific  publications,  local
          print media and feature editorial support. The Bestnetcom.com  website
          is being redeveloped to include a "frequently asked questions" section
          to facilitate direct  communication with  shareholders,  stakeholders,
          customers and the public-at-large.

Indirect Sales

     Indirect sales efforts will be centered  around the following four types of
organizations:

     *    Carriers - The Bestnetcall  services are being made available to other
          telecommunication  carriers,  resellers and internet service providers
          for  resale  to  their   clients.   These  types  of  indirect   sales
          organizations  will be solicited through direct mail,  e-mail, fax and
          direct sales calls by BestNet personnel;

     *    Professional  Service Firms - Accounting firms,  consultants and legal
          firms  are  being  solicited  to use our  Bestnetcall  service  and to
          provide  this  service to their  clients as a means of saving money on
          international long distance calls;

     *    Retailers and Special Service Providers - BestNet is approaching large
          retailers  and  special  service  providers  such as dating  services,
          Internet advertisers and hardware  manufacturers to offer our services
          as a value-added  service.  These  relationships  are revenue  sharing
          initiatives  with  the  client  organization  receiving  a  negotiated
          percentage of gross revenue generated by our services; and

     *    Agent/Distributors  - BestNet  is  establishing  a global  network  of
          agents and  distributors  who will market our  services  to  corporate
          organizations and consumers.

PROJECT MANAGERS

     To date,  BestNet has hired two project  managers and a sales  coordinator.
The project  managers sell,  maintain and service major accounts while the sales
coordinator is responsible for selling to special service providers and affinity
groups.

INDUSTRY BACKGROUND AND MARKET DEMAND

     The Internet is quickly  emerging not only as a fast,  reliable channel for
communication, but also as a means of telecommunication capable of replacing the
telephone network.

     We  believe  there are five key  trends  impacting  the  telecommunications
industry today. These trends are:

     *    The rapid evolution of the Internet: Fortune Magazine predicts that by
          the year 2003, 70% of the U.S.  population  will be using the Internet
          and  business-to-business  (B2B)  revenue will  approach $1.3 trillion
          (Forrester).

     *    The demand for data:  The demand for data is predicted to be two times
          that for voice  (Business Week,  January 2000).  Customers will demand
          high speed Internet access.

     *    New and improving  technology:  Telecommunications  Magazine  predicts
          that by the year 2003, U.S.  cell-phone  penetration will be 60%, with
          Japan  approaching  70%,  and  Europe  over  80%.  As  the  technology
          improves, the demand will increase.

                                       6
<PAGE>
     *    Demand for services:  Business  customers  want to focus on their core
          business,  and procure outside services for  non-strategic  functions.
          Business and consumers want to be empowered to have access to services
          and information when it is convenient to them.

     *    The  changing  regulatory  environment:  Deregulation  is  encouraging
          telecommunications  companies to enter each other's markets. Increased
          competition   stimulates   globalization  as  companies  move  to  add
          geography, customers, expertise, and technology to their business.

     The Gartner Group  predicts that  Business to Consumer  (B2C)  transactions
will reach $380  billion by 2003,  and B2B will exceed $7  trillion by 2004.  In
July 2000, Forrester Research predicted that 65% of corporate buyers plan to buy
at least some telecommunications  services on-line;  several  telecom-purchasing
managers stated that, "if their carriers are not Web-enabled in two years,  they
will switch suppliers."

     The potential  benefits offered by Voice-over-IP  (VOIP) and other forms of
Web telephony have captured the interest of the media,  investors and consumers.
The appeal of Internet  telephony can be attributed to the fact that it offers a
cost-effective  alternative to services provided by traditional telecom carriers
and provides the ability to make free phone calls using the Internet.

     There are several  forms of  Internet  telephony,  including,  PC-to-phone,
PC-to-PC,   web-enhanced  telephony  and  phone-to-phone  via  PC.  PC-to-phone,
PC-to-PC,  and web-enhanced  telephony all require specific software or hardware
components. Meanwhile, phone-to-phone via PC uses an Internet connection and the
existing telephone public switch telephone network (PSTN)  infrastructure.  [All
these forms of  communication  offer  significant  cost savings when compared to
using a traditional  carrier,  however,  phone-to-phone  via PC provides  higher
quality voice because it utilizes the PSTN infrastructure.

The Challenges

     Historically,   the  Internet  telephony  market,  has  had  its  share  of
obstacles.  A major disadvantage has been inconsistent service and unpredictable
sound quality.  For instance,  some calls may be relatively clear,  while others
contain background interference and a delay in voice transfers.

     Another  perceived  disadvantage  of  Internet  telephony  is the  need  to
purchase  or install  new  hardware  and/or  software to enable the user to make
calls using the Internet.  VoIP requires a minimum of an internet connection,  a
microphone  and sound  card;  web-enhanced  telephony  requires  a minimum of an
internet connection and uses multiple  combinations of audio and video hardware.
Phone-to-phone via PC requires an Internet connection and a phone.

     Perhaps one of the biggest  challenges facing the Internet telephony market
is getting  people to change  their  habits.  Instead of using the keyboard on a
phone to place calls, vendors in this space have to convince potential customers
of the benefits of using the  keyboard on a computer to place phone  calls.  The
inducement  to make the change  presently  is the  significant  cost  savings in
placing long distance calls via our Bestnetcall Service.

     The inherent diversification of the Bestnetcall product suite addresses the
above challenges directly.

Looking Ahead

     Despite the challenges,  however, the Internet telephony market is expected
to grow  substantially over the next five years.  Moreover,  according to an IDC
report, a leading  technology  research firm, the world wide Internet  telephony
market is  estimated  to grow  from 310  million  minutes  of use in 1998 to 135
billion in 2004.  Revenues for this service are  projected to increase from $480
million in 1999 to $19  billion  by 2004.  The report  also  estimates  that the
business market will implement extensive use of Internet telephony exceeding the
consumer market by 2004.

PSTN - Toll Quality

     At the present time and for the foreseeable  future,  reliable,  consistent
toll quality voice calls are best  facilitated  using the PSTN. For this reason,

                                       7
<PAGE>
we believe  business  users will continue to use telephone  lines as the primary
carriers of long distance  service while  consumers will be the biggest users of
VoIP.  The PSTN will continue to be used by business as opposed to  alternatives
found in the Internet and cable systems for the following reasons:

     *    Speed of communication;
     *    Quality of communication;
     *    Reliability of communication; and
     *    Ease of operation.

Low Cost Rates

     The global telecommunications industry has been highly regulated.  However,
over the past  several  years,  North  America and parts of Europe have  enjoyed
significant  deregulation,  which  has  resulted  in a highly  competitive  long
distance service  industry.  The U.S. and Canada have among the lowest telephone
rates in the world and the U.S. has emerged as the lowest cost  supplier of long
distance  rates.  U.S.  deregulation  has resulted in sizable  reductions in the
wholesale cost of long distance services  available to long distance  resellers.
Although  declining  rates have been  symbolic  in the U.S.,  Canadian  and some
European long distance markets, we believe  international rates to and from many
other countries have been slow to decline for two major reasons:

     (1)  Foreign telephone  company (Telco)  management are reluctant to reduce
          their rates given their monopoly status; and

     (2)  In some  areas  of the  world,  governments  have  been  reluctant  to
          antagonize strong Telco unions.

     In the long term, it is unlikely that these high rates can be maintained as
new technologies render the Telco monopolies  ineffective.  We believe that such
new  technologies  will evolve  around the  emergence  of the Internet as a mass
communications and commerce medium.

     A number of companies started Internet telephony operations in the last few
years. The intense competition in the telecommunications  market, in addition to
the growth of e-commerce,  has necessitated a drive towards exploring new levels
of decreasing costs and resulted in the genesis of Internet telephony.

     We believe  usage and  competitive  pressures  will  drive  down  telephony
pricing on a global basis. Price,  enhanced services and quality will become the
only major differentiators in the market over the next 24 months.

     BestNet is concentrating its efforts on the corporate and business markets.
BestNet uses the Internet to enable, control and manage PSTN calls accessed from
its central  offices in New York,  Los Angeles and Toronto.  BestNet is bringing
the best  wholesale  long  distance  rates (which are in the U.S.) to the entire
world. The Company can offer access to global markets including direct access to
North American business and consumer markets to any carrier worldwide wishing to
connect to its switches in the U.S. and Canada.

The Inmarsat Telephony Market

     One of the  fastest  growing  telephony  markets  in the  world  is  global
satellite telephony  communications.  The Inmarsat communication system consists
of   four   satellites    circling   the   globe.   These   satellites   provide
telecommunication  services  through  terrestrial  uplink  carriers to areas not
covered by traditional telecommunication services.

BESTNET'S SOLUTION

     Under its licenses from Softalk,  BestNet provides commercial voice quality
Internet-enabled   long   distance   services  to  corporate   and   residential
subscribers.  Our Web-based  solution offers subscribers access to low cost long
distance  rates by using the  Internet as the means to launch  calls and to view
billing within seconds after completing a call.

                                       8
<PAGE>
     This  technology  blends the best of current  telecommunication  systems by
using  commercial  telephone  networks  for voice  quality and the  Internet for
control and access.  Our  Bestnetcall  service  provides a user  anywhere in the
world  access  to the U.S.  telecom  infrastructure  while not  infringing  upon
international telecom agreements.

     For  example,  users  making  calls from the  Caribbean  to the U.S.  would
operate  over  the same  network  as users  from  the U.S.  making  calls to the
Caribbean.  As a result,  middle  retailers  of  telecommunication  services are
eliminated. This ensures the lowest pricing structure on a long-term basis.

     BestNet  provides  customers  access to its network  through  its  switches
located in New York, Los Angeles and Toronto.  Additional  switch  locations are
planned for  deployment in major cities in North America,  Asia and Europe.  The
deployment  of these  additional  switches  will follow as demand  dictates  and
capital resources become available.

BESTNETCALL - ENHANCEMENTS

     During the past year, Bestnetcall service added a number of enhancements:

     *    Conference  Calling - This  feature  allows  users to connect up to 64
          parties on a single call,  using their  personal  computer to initiate
          the  calls.   Conference   calls  may  be  launched   immediately   or
          prescheduled  for a specific time and date. All conference  calls will
          display the status to the conference administrator via the Bestnetcall
          website and offer substantial rate reductions compared to conventional
          conference   call  services   provided  by  the  major  long  distance
          providers;

     *    An improved  graphical  user  interface - This feature allows the user
          access to more  information,  as well as provides  much  quicker  load
          times, which is critical where Internet connections are slow;

     *    A desktop application - This feature was designed for networked office
          users  without a  dedicated  Internet  connection,  or where  Internet
          connections  are very slow.  The  desktop  application  resides on the
          user's personal computer and uses small-packet transmission to quickly
          initiate calls. Furthermore,  this feature saves time by not requiring
          a browser, website navigation or log-in; and

     *    Wireless Personal Digital Assistant - Designed for micro-web browsers,
          such as  employed  by the  Palm  VII,  users  can  launch  Bestnetcall
          telephone  calls or conference  calls at any time using their wireless
          device.

     In August 2001, we  introduced  the  availability  of our long distance and
conference calling services via e-mail. These services allow a user to initiate,
on demand, a long distance telephone call by sending an e-mail.  This service is
available  through cell phones and other hand-held  devices that are equipped to
send e-mail.

     Additionally,  in  August  2001,  we  introduced  the  availability  of our
conference  calling  services  designed for handheld  devices using Palm OS. The
free software that can be downloaded from the  bestnetcall.com  website,  allows
Palm users to initiate conference calls from any convenient  telephone,  such as
their office, home or cellular phone.

BESTNETCALL - FUTURE PRODUCT STRATEGY

     According to industry sources,  approximately 22 million personal computers
are  connected to the Internet in North  America.  These  sources,  furthermore,
predict that by 2002,  an additional 23 million  non-personal  computer  devices
will be used to access the  Internet.  Recognizing  this trend,  the Company has
contracted with Softalk to customize and develop  variations of Bestnetcall that
use alternative methods for accessing our service, including the following:

                                       9
<PAGE>
     *    Two Way Paging - We are developing  applications for two-way paging to
          launch  calls  transmitting  packets  from paging  networks to our web
          server and switching matrix;

     *    Internet   Devices  -  Bestnetcall   services  will  be  designed  for
          non-personal computer Internet devices, such as Set-top boxes, like as
          WebTV; Smart phones, like as iPhone; and Appliances, like I-Opener;

     and any device  that can access the  Internet  can be enabled by BestNet to
provide access to Bestnetcall services. No assurance, however, can be given that
we will be able to successfully  develop or, if developed,  commercially exploit
any of the above-referenced devices.

NETWORK STRUCTURE

PHASE I - INITIAL DEPLOYMENT

     BestNet's  network  equipment  is  currently  located  in a central  office
facility located in New York, Los Angeles and Toronto. Our system is designed to
initially  support 20 million minutes of voice traffic per month. Our system can
be increased as support needs increase.  Full network monitoring and diagnostics
are employed on a 24 x 7 basis.

     BestNet's  web  server is hosted  by  UUNet.  UUNet has one of the  largest
telecommunications   infrastructures  in  North  America.  Our  current  network
configuration will support 25,000  simultaneous hits and may easily be expanded.
UUNet provides support on a 24 x 7 basis and backup power is supplied by on-site
battery and off-site generators to ensure system survivability.

     BestNet's  switching  matrix is located in its central office facility with
direct T-1  connectivity to the wholesale PSTN. The initial  deployment of 1,000
ports is configured  for rapid  expansion  capability of up to 10,000 ports.  We
work closely with the Softalk  telecom and network  engineers and their software
development team to monitor and maintain the system in New York, Los Angeles and
Toronto.

PHASE II - EXPANDING POINTS OF PRESENCE

     BestNet intends to expand its network  worldwide.  Additional  locations of
network equipment will be deployed in key strategic locations to facilitate web,
voice  and  data  traffic.  These  additional  locations  will  provide  network
redundancy and least inexpensive cost routing for voice traffic.

     The point-of-presence in New York, at 60 Hudson Street, is the East Coast's
principal  gateway for  international  telecommunication  traffic.  The New York
location contains a switching matrix. Each of these  points-of-presence  contain
telecommunications  switches  that can be expanded up to 10,000  ports.  The New
York  switching  matrix is  connected  to several  international  public  switch
telephone network carriers  including the uplink carrier for Inmarsaat  traffic.
From these  locations  BestNet offers  inexpensive  international  long distance
services to or from anywhere in the world using North American wholesale rates.

     During the past year, BestNet also expanded its  points-of-presence  to Los
Angeles at 1 Wilshire  Boulevard,  the West  Coast's  gateway for  international
telecommunication  traffic. The equipment and facility is similar to that of our
New  York  central  offices.   These  three  central  offices  provide  complete
redundancy  for one  another in the event of a failure by one or two  locations.
The cost of deploying a central  office or  point-of-presence  is  approximately
$250,000.

     BestNet  has also  deployed  two  additional  web host  servers in Texas to
provide complete redundancy for website access.

                                       10
<PAGE>
PHASE III - VIRTUAL PRIVATE NETWORK

     As voice traffic  increases,  BestNet plans on deploying gateway servers to
better facilitate growing international traffic between certain locations.  This
strategy will allow the Company to install a virtual private network along these
high-traffic routes to reduce costs for voice traffic.  Employing dedicated data
circuits  between these  gateways  will allow voice calls to be  compressed  and
transmitted using data packets,  which significantly reduces the cost of routing
over normal telephone network channels.

TRANSACTIONS WITH SOFTALK

     Our current and future business  activities are substantially  dependent on
the continuation of our relationship with Softalk. As discussed more fully below
and elsewhere in this Report,  our ability to offer the  Bestnetcall  service is
subject  to  a  license  agreement  with  Softalk,  which  may  be  unilaterally
terminated  by  Softalk  upon the  occurrence  of certain  events.  We have also
contracted  with Softalk to perform  substantially  all of our  development  and
engineering activities with respect to the rollout,  enhancement and maintenance
of the Bestnetcall service,  related product offerings and the deployment of our
telecommunication network. Accordingly, we believe any disruption or termination
in our  relationship  with Softalk would have a material  adverse  effect on our
business, prospects, financial condition and results of operations.

LICENSE AGREEMENT.

     On October 25, 1999, BestNet and Softalk amended their license agreement to
grant BestNet and its subsidiaries a worldwide, exclusive license to distribute,
market,  service,  sell  and  sublicense  Softalk's  services  and  products  to
commercial accounts. This agreement also grants BestNet a worldwide nonexclusive
license to distribute,  market,  service, sell and sublicense Softalk's services
and  products to  individual  customer  accounts.  In  exchange  for the license
amendments,  BestNet  issued to Softalk  five-year  warrants  to  purchase up to
5,246,753  shares of BestNet  common stock;  3,246,753 of which have an exercise
price of $3.25 per share,  1,000,000  have an exercise price of $5.00 per share,
and the remaining 1,000,000 have an exercise price of $10.00 per share.

     Under the terms of the amended license agreement (the "license agreement"),
we paid an initial license fee of $200,000. We are also obligated to pay Softalk
an  amount  equal to the sum of (a) 100% of  Softalk's  actual  direct  expenses
incurred in connection with the sale,  license and delivery of Softalk  products
and (b) a five percent (5%) markup of the total  traffic on the  wholesale  long
distance per minute lines costs on a monthly basis.

     The  amended  license  agreement  may be  terminated  under  the  following
conditions:

     *    Either party has the right to  terminate  the license  agreement  upon
          thirty  (30) days  written  notice to the other  party,  if such other
          party  fails  to  comply  in any  material  respect  with  any term or
          condition of the license  agreement  and such failure to comply is not
          corrected within such thirty (30) day notice period;

     *    Either party has the right to terminate  the license  agreement in the
          event  the  other  party  becomes  bankrupt  or  insolvent,  suffers a
          receiver to be appointed,  or makes an  assignment  for the benefit of
          its creditors; and

     *    Softalk has the right to terminate  the license  agreement  upon sixty
          (60) days  written  notice  following  a change of control of BestNet.
          Under the license  agreement,  a "change of control" is deemed to have
          occurred:

          When,  after the date of the  license  agreement,  any person (as such
          term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange
          Act of 1934,  as  amended  (the  "Exchange  Act")) is or  becomes  the
          beneficial  owner (as  defined  in Rule  l3d-3 of the  Exchange  Act),
          directly  or  indirectly,   of  securities  of  BestNet   representing
          fifty-one  percent  (51%)  or more of the  combined  voting  power  of
          BestNet's  then  outstanding  securities,  other than (i) an  employee
          benefit plan  established  or maintained by BestNet or a subsidiary of
          BestNet,  or (ii) any  person  who  presently  owns such  quantity  of

                                       11
<PAGE>
          securities as of the date hereof,

          or

          upon  the  approval  by  BestNet's  stockholders  of (1) a  merger  or
          consolidation of BestNet with or into another  corporation (other than
          a merger or consolidation the definitive  agreement for which provides
          that  at  least  a  majority  of the  directors  of the  surviving  or
          resulting corporation immediately after the transaction are continuing
          directors,  (ii) a sale or disposition of all or substantially  all of
          BestNet's  assets,  or (iii) a plan of  liquidation  or dissolution of
          BestNet.

          Individuals who, as of the date of the license  agreement,  constitute
          the Board of Directors of BestNet (the  "Incumbent  Board")  cease for
          any reason to constitute at least 80% of the Board; provided, however,
          that any person becoming a member of the Board  subsequent to the date
          hereof  whose  election,  or  nomination  for  election  by  BestNet's
          stockholders,  was  approved  by a vote of at least 80% of the members
          then  comprising  the  Incumbent  Board  (other  than an  election  or
          nomination of an individual  whose initial  assumption of office is in
          connection with an actual or threatened  election  contest relating to
          the election of  directors of BestNet,  as such terms are used in Rule
          14a-11 of  Regulation  14A  promulgated  under the Exchange Act or any
          successor  provision  thereto)  shall be, for purposes of this License
          Agreement,  considered  as  though  such  person  were a member of the
          Incumbent Board.

          Upon termination of the license  agreement for any reason  whatsoever,
          BestNet is permitted to continue using Softalk's intellectual property
          in   providing   services  to  all  its  existing  (at  the  point  of
          termination) clients.

PURCHASE AGREEMENT.

     On November 13, 1999, BestNet, through its subsidiary, Interpretel (Canada)
Inc.,  purchased  all existing  products and accounts of Softalk in exchange for
4,329,004 shares of Class A non-voting preferred stock of Interpretel  (Canada).
Under this  agreement,  Softalk  granted  BestNet a right of first  refusal with
respect to  purchasing  Softalk,  its  intellectual  property,  software  and/or
patents.  The  shares  issued  under  this  agreement  were  exchangeable  on  a
one-for-one basis for shares of BestNet's common stock at any time by the holder
thereof.  The issuance of the Class A shares of Interpretel  (Canada) was valued
at $10,000,000,  the value of BestNet's common shares into which the Interpretel
(Canada) shares could be converted.  On November 10, 2000, Softalk exercised its
exchange  rights,  resulting in the issuance of 4,329,004  restricted  shares of
BestNet  common  stock  in  exchange  for a like  number  of  shares  of Class A
Non-voting preferred stock of Interpretel  (Canada).  As of November 7, 2001 and
November 30, 2000, Softalk held approximately 29% and 53%, respectively,  of the
issued and outstanding shares of BestNet common stock.

CROSS CORPORATE CONTROL.

     Softalk  has the right to  designate  up to two  directors  to the Board of
Directors of BestNet. As of the date of this 10-KSB,  Softalk has designated one
person to serve on BestNet's  five person Board of  Directors.  BestNet also has
been  granted the right to appoint one  director  to the three  person  Board of
Directors of Softalk. BestNet has appointed Gerald I. Quinn, BestNet's Chairman,
to Softalk's board.

LOAN FACILITY.

     On August 6,  1999,  BestNet  entered  into a loan  facility  with  Softalk
pursuant to which BestNet agreed to loan Softalk up to $2 million at an interest
rate of prime plus 1%. As of November 7, 2001,  the  outstanding  balance of the
loan was  $1,384,000.  Under the original terms of this loan,  Softalk could pay
back the loan  principal  plus  interest on or before August 6, 2000, or convert
any  amounts  outstanding,  plus  interest,  on the loan into  shares of Softalk
common stock in full  satisfaction  of money owed to BestNet  under the loan. On
September 8, 2000, the Board of Directors  approved  amending the loan to extend
the term of the loan to August 6, 2001. As of the date of this Report,  the loan
remains outstanding and is due and payable upon demand by BestNet.

                                       12
<PAGE>
COMPETITION

     The communications  industry is highly competitive,  and one of the primary
purposes  of the U.S.  Telecommunications  Act of 1996 (the  "Telecommunications
Act") is to foster  further  competition.  In each of the  markets  we intend to
operate,  we will compete  principally  with the established  telephone  company
serving such market. We currently do not have a significant  market share in any
of  our  markets.   The  established   telephone  companies  have  long-standing
relationships with their clients,  financial,  technical and marketing resources
substantially  greater than ours and the potential to fund competitive  services
with cash  flows  from a variety  of  businesses,  and  currently  benefit  from
existing   regulations   that  favor  the   established   telephone   companies.
Furthermore,  one large group of established  telephone companies,  the regional
Bell  operating  companies,  have been  granted,  under  particular  conditions,
pricing  flexibility  from federal  regulators with regard to some services with
which we  compete.  This may present  established  telephone  companies  with an
opportunity to subsidize services that compete with portions of our services and
offer competitive services at lower prices.

     We expect to experience  declining prices and increasing price competition.
We cannot  assure  that we will be able to achieve or maintain  adequate  market
share or  margins,  or compete  effectively,  in any of our  markets.  Moreover,
substantially  all of our  current and  potential  competitors  have  financial,
technical,  marketing,  personnel  and other  resources,  including  brand  name
recognition,  substantially  greater  than  ours as well  as  other  competitive
advantages over our business, financial condition and results of operations. Any
of the foregoing  factors could have a material  adverse effect on our business,
financial condition, results of operation and prospects.

REGULATION

     The following summary of regulatory  developments and legislation describes
the primary  present and  proposed  federal,  state,  and local  regulation  and
legislation  that is  related to the  Internet  service  and  telecommunications
industries and could have a material  effect on our business.  Existing  federal
and state regulations are currently subject to judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which our industries  operate.  We cannot predict the outcome of these
proceedings  or their  impact upon the Internet  service and  telecommunications
industries.

OVERVIEW

     Telecommunications  services are  generally  subject to federal,  state and
local  regulation.  The  Federal  Communications  Commission  ("FCC")  exercises
jurisdiction  over all  facilities  and  services of  telecommunications  common
carriers  to the extent  those  facilities  are used to provide,  originate,  or
terminate   interstate  or   international   communications.   State  regulatory
commissions  exercise  jurisdiction  over  facilities and services to the extent
those  facilities  are  used  to  provide,  originate  or  terminate  intrastate
communications.   In   addition,   as  a   result   of   the   passage   of  the
Telecommunications  Act, state and federal  regulators share  responsibility for
implementing  and  enforcing  the  domestic   pro-competitive  policies  of  the
Telecommunications  Act.  In  particular,   state  regulatory  commissions  have
substantial    oversight   over   the   provisions   of   interconnection    and
non-discriminatory  network access to  established  telephone  companies.  Local
governments often regulate public rights-of-way necessary to install and operate
networks.

                                       13
<PAGE>
FEDERAL REGULATION

     We do not believe our Internet  operations are currently  subject to direct
regulation  by the  FCC  or  any  other  telecommunications  regulatory  agency,
although they are subject to  regulations  applicable  to businesses  generally.
However,  the future Internet service provider regulatory status continues to be
uncertain.  In an April 1998 report,  the FCC concluded that while some Internet
service  providers should not be treated as  telecommunications  carriers,  some
services offered over the Internet,  such as  phone-to-phone  telephony,  may be
functionally   indistinguishable  from  traditional  telecommunications  service
offerings,  and that  their  non-regulated  status  may have to be  re-examined.
Despite the FCC's  decision  not to allow local  telephone  companies  to impose
per-minute access charges on Internet service providers, and that decision being
upheld by the reviewing court, further regulatory and legislative  consideration
of this issue is likely.  An  imposition  of an access  charges would affect our
costs of serving dial-up clients and could have a material adverse effect on our
business,  financial condition and results of operations. In addition,  Congress
and other federal entities have adopted or are considering other legislative and
regulatory  proposals that would further  regulate the Internet.  Various states
have adopted and are considering  Internet-related  legislation.  Increased U.S.
regulation  of the  Internet may slow its growth or reduce  potential  revenues,
particularly if other  governments  follow suit,  which may in turn increase the
cost of doing business over the Internet.

EMPLOYEES

     As of November 7, 2001, we had eleven employees.  BestNet believes that our
future  success will depend on our ability to attract and retain highly  skilled
and qualified  employees.  None of our employees  are currently  represented  by
collective  bargaining   agreements.   BestNet  believes  that  it  enjoys  good
relationships with the employees.

ITEM 2. DESCRIPTION OF PROPERTY

     The  Company  has  terminated  the lease for its office and  administrative
space,  at 5210 E.  Williams  Circle,  Suite 200,  Tucson,  Arizona  85711.  The
administrative  function has been relocated to 5075 E. Cascade  Drive,  Suite K,
Grand  Rapids,  Michigan  49546.  The leases for the Grand  Rapids space is on a
month-to-month  basis,  at which time when the management  team expands a larger
space will be procured. The monthly expense is $1,500. The Company has relocated
its  finance  and  accounting  department  to 1910 N. La Canada,  Suite 2, Green
Valley,  Arizona 85614.  The lease for the Arizona  location expires October 31,
2002, and requires the Company to make monthly  payments of  approximately  $500
over the term of the lease.

ITEM 3. LEGAL PROCEEDINGS

     The  Company is  involved in legal  actions in the  ordinary  course of its
business.  Although the outcome of any such legal action cannot be predicted, in
the opinion of  management  there is no legal  proceeding  pending or threatened
against  or  involving  the  Company,  the  outcome of which is likely to have a
material adverse effect upon the consolidated  financial  position or results of
operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were  submitted to a vote of security  holders during the fiscal
year ended August 31, 2001.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The Company's  common stock was quoted on the Nasdaq  SmallCap Market until
May 4,  1999,  and then on the OTC  Bulletin  Board  from  June 28,  1999 to the
present.  The high and low bid prices of the Company's  common stock as reported
from September 1, 1999 through  August 31, 2001 by fiscal  quarters  (i.e.,  1st
Quarter = September 1 through  November  30) were as follows,  as adjusted for a
one-for-six reverse split effective December 18, 1998.

                                       14
<PAGE>
                                                  High         Low
                                                  ----         ---
          FISCAL YEAR ENDED:
          August 31, 1999
          First Quarter                          3.5625          1.5
          Second Quarter                         3.5625          2.0
          Third Quarter                          2.9375        0.125
          Fourth Quarter                          2.625          0.5

          FISCAL YEAR ENDED:
          August 31, 2000
          First Quarter                            4.25      1.46875
          Second Quarter                          10.25        4.125
          Third Quarter                             9.5         5.00
          Fourth Quarter                           7.25         3.81

          FISCAL YEAR ENDED:
          August 31, 2001
          First Quarter                           6.125         .875
          Second Quarter                          3.375        .5625
          Third Quarter                            3.60          .55
          Fourth Quarter                           4.40         2.05

     The bid and asked prices of the Company's common stock on November 7, 2001,
were $2.00 and $2.20, respectively.

     As of November 7, 2001, the Company had 115  shareholders  of record of its
common stock.  As of November 7, 2001, the Company had 1,982  shareholders  that
beneficially own the stock in the name of various brokers.

     The Company  has never  declared  any cash  dividends  on common  stock and
currently plans to retain future earnings, if any, for its business operations.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

OPERATIONS OVERVIEW

COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 2001 AND AUGUST 31, 2000.

     REVENUES.  Revenues  increased  to $493,260 in Fiscal 2001 from  $28,670 in
2000.  Current year revenues were derived from customer usage of the Bestnetcall
and  Bestnetravel  services.  Prior year  revenues  were from beta  testing  and
customer usage of the Bestnetcall services.

     COST OF SALES.  Costs of sales  increased  to  $497,663 in Fiscal 2001 from
$51,722 in the fiscal year ended August 31, 2000  ("Fiscal  2000").  These costs
consisted of long distance fees from carriers for the Bestnetcall  service.  The
increase is due to growth in revenues on our Bestnetcall service.

     GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Operating  expenses  increased  to
$2,044,720  in  Fiscal  2001  from  $1,188,032  in Fiscal  2000.  Marketing  and
advertising fees increased to $327,099 in Fiscal 2001 from $110,855 in the prior
year due to costs  associated with the creation of agent web pages and marketing
efforts of the Bestnetcall  service.  Investor  relations  expense  increased by
$234,750  to  $240,750  from  $6,000 in  Fiscal  2000 due to the  signing  of an

                                       15
<PAGE>
investor relations agreement. Payroll expense increased by $7,660 to $321,111 in
Fiscal  2001,  from  $313,551  in the  prior  fiscal  year due to the  hiring of
additional  staff.  Consulting  fees  increased  to $105,718 in Fiscal 2001 from
$48,558 in Fiscal  2000 due to the  hiring of  consultants  for the  Bestnetcall
product.  Rent expense increased by $41,679 due to the increase in the operating
lease and the addition of a corporate  apartment.  Bad debt expense  increase to
$27,178 in Fiscal 2001 from zero in Fiscal 2000 due to the use of stolen  credit
cards on the Bestnetcall  web site. The Company has also  established a bad debt
allowance equal to 3% of quarterly sales.

     DEPRECIATION  AND  AMORTIZATION  EXPENSES.  Depreciation  and  amortization
expenses increased to $1,979,975 for Fiscal year 2001 from $1,545,636 for Fiscal
year 2000.  This increase was due to amortization on the higher level of license
fees and  depreciation for the additional  purchases of equipment,  software and
computer hardware.

     INTEREST INCOME.  Interest income increased to $227,691 in Fiscal 2001 from
$76,129 in fiscal 2000 due to the recording of $166,218 from Softalk on interest
accrued on the Loan Facility.

     INTEREST  EXPENSE.  Interest expense  decreased to $36 for Fiscal 2001 from
$60,512 in Fiscal  2000.  The  decrease  in  interest  expense  was related to a
short-term  $2,000,000  promissory  note  executed on  December  21,  1999.  The
principal and accrued interest on this note were repaid on May 4, 2000.

     PREFERRED STOCK CONVERSION PENALTY. The Company incurred monthly liquidated
damages to the holder of its Series A Convertible Preferred Stock (the "Series A
Preferred  Stock")  equal  to 3% (or  $18,000)  of  the  purchase  price  of the
Preferred  Stock  ($600,000)  for each month in the quarter.  The issuance  cost
increased in Fiscal 2000 to $221,226;  on May 9, 2000,  the remaining  shares of
Series A Preferred  Stock were converted  into common stock.  All shares due for
accrued penalties payable were issued on November 15, 2000.

     PREFERRED DECLARED AND DEEMED DIVIDENDS.  Preferred  dividends decreased to
$212,013  for Fiscal  2001,  from  $2,602,046  for Fiscal  2000.  A decrease  of
$2,309,033  was due to dividends  payable on a decreased  number of  outstanding
shares on Series B Preferred Stock due to conversion to common shares. Dividends
accumulate,  with  respect to the  outstanding  shares of the Series B Preferred
Stock,  at a rate of six percent  (6%) per annum,  and may be paid in cash or in
shares of common stock of the Company,  at the Company's option. The decrease of
$2.5 million  resulted from a beneficial  conversion of deemed  dividends of the
Series B Preferred Stock in May 2000. Dividends for the Series A Preferred Stock
were $21,234 for fiscal 2000. Dividends accumulate, with respect to the Series A
Preferred  Stock,  at a rate of six  percent  (6%) per  annum,  and are  payable
quarterly.  The Company has elected to pay the  dividends  by issuing  shares of
common stock equal to the  aggregate  amount of dividends  owed for such period.
All  remaining  shares of Series A Preferred  Stock were  converted  into common
stock on May 9,  2000.  All  shares of  common  stock  issuable  in  payment  of
dividends accrued under the terms of the Series A Preferred Stock were issued on
May 15,  2000.  On May 1, 2000,  the  Company  completed  a  $5,000,000  private
placement of Series B Preferred Stock and common stock purchase warrants with an
accredited  investor.  The remaining  Series B Preferred  Stock were redeemed on
October 2, 2001.

     On October 17, 2001, the Company  completed a $500,000 private placement of
Series C Preferred  Stock and common stock purchase  warrants with an accredited
investor. The private placement yielded net proceeds to the Company of $409,250.

     INCOME  TAXES.  At August 31, 2001,  the Company had federal net  operating
loss carryforwards  totaling  approximately  $16,200,000 and state net operating
loss  carryforwards  of  approximately  $9,200,000.  The  federal  and state net
operating loss  carryforwards  expire in various  amounts  beginning in 2011 for
federal  purposes  and 2000 for state  purposes.  Additionally,  the Company has
capital loss  carryforwards of approximately  $216,000 which will expire in 2004
unless  offset  by  capital  gains.  No tax  benefit  has been  recorded  in the
financial  statements  since  realization of these loss  carryforwards  does not
appear likely.

                                       16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.  As of August 31, 2001, the Company had working
capital of $197,796,  compared to working  capital of  $2,394,852  at August 31,
2000.

     As of  November  7, 2001,  the Company  believes  that its current  working
capital and funds generated from operations are sufficient to fund the Company's
operations  for the  next  four  to six  months.  In the  absence  of  achieving
profitable  operations in future periods,  obtaining  additional capital through
asset sales, securing a revolving credit facility,  debt or equity offerings, or
a  combination  of the  foregoing,  the  Company  will be  unable  to  fund  its
operations  and  will  experience  defaults  under  certain  of its  contractual
agreements, including its lease agreements for its corporate headquarters. These
agreements are subject to  termination  in the event of default.  Certain of the
parties to these  agreements  could take legal  action  against  the  Company to
collect amounts owed to them.  Accordingly,  the Company's  financial  condition
could require that the Company seek the protection of applicable  reorganization
laws in order to avoid or delay actions by third parties, which could materially
adversely affect,  interrupt or cause the cessation of the Company's operations.
The  Company's  independent  certified  public  accountants  have issued a going
concern  opinion on the financial  statements of the Company for the fiscal year
ended August 31, 2001.

     As of  November  7,  2001,  the  Company  had,  on a fully  diluted  basis,
24,091,699 shares  outstanding in stock,  options and warrants and is authorized
to issue  50,000,000  common  shares.  The Company has 5,000  Series C preferred
shares outstanding and is authorized to issue 10,000,000 preferred shares.

INFLATION.  Although the Company's operations are influenced by general economic
trends  and,   specifically,   technology  advances  in  the  telecommunications
industry,  the Company  does not believe that  inflation  has had or will have a
material impact on its limited operations.

ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

BESTNET  DEPENDS  ON  ITS  STRATEGIC   RELATIONSHIP  WITH  SOFTALK,   WHICH,  IF
TERMINATED, WOULD HAVE A MATERIAL ADVERSE EFFECT ON BESTNET'S BUSINESS.

     BestNet depends in large part on its joint product  development efforts and
contractual  relationships with Softalk. See "Item 1. DESCRIPTION OF BUSINESS --
Transactions with Softalk".  Softalk may terminate its license  arrangement with
BestNet under certain  conditions  discussed  above.  BestNet's loss of this key
strategic  relationship,  or the  failure to develop  new  relationships  in the
future,  would  have a  material  adverse  effect  on its  business,  prospects,
financial condition and results of operations.

IF OUR  BESTNETCALL  SERVICE IS NOT ACCEPTED BY TARGETED  CUSTOMERS,  OUR FUTURE
OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED.

     BestNet has  operated at a loss for the last eight years.  The  Bestnetcall
service is a new product for BestNet  and  therefore  has very little  operating
history  upon which an  evaluation  of BestNet and its  prospects  can be based.
Further,   BestNet   has  no   meaningful   prior   operating   history  in  the
telecommunications industry.

     Our Bestnetcall service may never achieve commercial acceptance by Internet
users.  The failure to achieve market  acceptance  would have a material adverse
effect on BestNet's  business,  financial  condition and results of  operations.
BestNet's risks include the following:

     *    evolving and unpredictable business models;

     *    management and funding of growth;

     *    BestNet's ability to anticipate and adapt to development markets;

     *    acceptance by Internet users;

     *    establishment of business to business user of BestNet's services;

     *    the  ability of BestNet to  establish  relationships  with  additional
          strategic partners; and

     *    the maintenance of BestNet's relationship with Softalk.

To address these risks BestNet must, among other things:

     *    attract and retain an audience  of frequent  users of its  services in
          its target markets;

     *    maintain its business customer base;

     *    attract  a  significant  number  of new  Internet  telephony  business
          customers in target markets;

                                       17
<PAGE>
     *    expand  its  sales of  voice,  fax and  value-added  telecom  services
          through Bestnetcall;

     *    successfully respond to competitive developments;

     *    continue  to form and  maintain  relationships  with  telecom  carrier
          partners;

     *    continue to attract, retain and motivate qualified personnel;

     *    provide superior customer service; and

     *    continue to develop and upgrade its technologies and commercialize its
          services incorporating such technologies.

A FAILURE BY PARTIES THAT MAINTAIN PHONE AND DATA LINES TO SERVICE SUCH LINES OR
AN  INCREASE  IN THE PRICE FOR  MAINTAINING  PHONE  AND DATA  LINES MAY  DISRUPT
BESTNET'S BUSINESS.

     BestNet's  business strategy depends on the availability of the Internet to
transmit  data  packets  for voice and fax calls.  BestNet  also relies on third
parties who provide  traditional  phone lines.  Some of these third  parties are
national telephone carriers. If any of these carriers increase their charges for
using  these  lines,  which  has  become  increasingly  likely  in  light of the
deregulation,   then  BestNet's   profitability  will  be  materially  adversely
affected.  They may also fail to  properly  maintain  their  lines  and  disrupt
BestNet's  ability to provide  service to its  customers.  Any  failure by these
third  parties to  maintain  these lines and  networks  that leads to a material
disruption of BestNet's ability to complete calls over the Internet would have a
material adverse affect on BestNet's  business,  financial condition and results
of operations.  The Company may be unable to continue  purchasing  such services
from these third parties on acceptable terms, if at all. If BestNet is unable to
purchase the necessary  services to maintain and expand its network as currently
configured,  then  BestNet's  business,   financial  condition  and  results  of
operations would be materially adversely affected.

THE TELECOMMUNICATIONS  INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL  REGULATION
AND LEGAL  UNCERTAINTIES  WHICH,  IF  INCREASED  OR  CHANGED,  COULD  MATERIALLY
ADVERSELY AFFECT THE COMPANY'S BUSINESS.

     While the FCC has tentatively  decided that information  service providers,
including Internet telephony providers, are not telecommunications  carriers for
regulatory purposes,  various companies have challenged that decision.  Congress
continues to review the conclusions of the FCC, and the FCC could impose greater
or lesser regulation on BestNet's  industry.  For Example,  the FCC is currently
considering,  whether to impose  surcharges  or other  regulations  upon certain
providers  of  Internet  telephony,   primarily  those  which  provide  Internet
telephone  services to end-users  located within the U.S. The imposition of such
surcharges or the regulation of Internet telephony  providers could increase the
cost of doing  business  over  the  Internet  and  materially  adversely  affect
BestNet's business, financial condition and results of operations.

     Aspects of  BestNet's  operations  may be, or  become,  subject to state or
federal  regulations   governing   universal  service  funding,   disclosure  of
confidential  communications,  copyright  and  excise  taxes.  There  can  be no
assurance  that  government  agencies will not  increasingly  regulate  Internet
related services. Increased regulation of the Internet may slow its growth. Such
regulation  may also  negatively  impact  the cost of  doing  business  over the
Internet and materially adversely affect BestNet's business, financial condition
and results of operations.

THE  TELECOMMUNICATIONS   INDUSTRY  IS  SUBJECT  TO  INTERNATIONAL  GOVERNMENTAL
REGULATION  AND LEGAL  UNCERTAINTIES  WHICH COULD  MATERIALLY  ADVERSELY  AFFECT
BESTNET'S BUSINESS.

     BestNet  intends on marketing  its service to  international  long distance
callers.  Because it will be  conducting  business  internationally,  BestNet is
subject to certain direct or indirect risks. These risks would include:

                                       18
<PAGE>
     *    unexpected changes in regulatory  requirements for the Internet and/or
          Internet telephony;

     *    foreign  currency  fluctuations,  which  could  increase  or  decrease
          operating expenses and increase or decrease revenue;

     *    foreign taxation; and

     *    the  burdens  of  complying  with a variety  of  foreign  laws,  trade
          standards, tariffs and trade barriers.

BESTNET  HAS A HISTORY  OF  OPERATING  LOSSES AND MAY NEVER  GENERATE  OPERATING
INCOME FROM THE SALE OF ITS BESTNETCALL SERVICE.

     As of August 31, 2001,  BestNet had an accumulated  deficit of $17,020,532.
Prior years'  financial  information has no particular  bearing on future years'
results  because the focus of the  Company's  business  has changed from calling
card services to Internet telephony.

     BestNet believes that its future  profitability  and success will depend in
large part on its ability to generate  sufficient  revenue  from the sale of its
Bestnetcall  service and websites to businesses.  Revenues are also  anticipated
from the sub-licensing of its internet telephony technology and business systems
to  partners  setting up Internet  telephony  services  in  partner-led  foreign
markets. The profitability and success of BestNet will depend on:

     *    its  ability to  maintain  existing  relationships  and enter into new
          relationships   with   Postal   Telephone   &   Telegraph   operators,
          administrations  and  other  carriers  for  which  it  sells  Internet
          telephony services;

     *    its ability to obtain or retain the right to sell  Internet  telephony
          services and related value-added telecom services online;

     *    its ability to  effectively  maintain  relationships  if any, with its
          multinational partners;

     *    its ability to successfully enter into new strategic relationships for
          distribution  and  increased  usage of the  Bestnetcall  and  Internet
          telephony services; and

     *    its ability to generate sufficient online traffic and sales volume.

     Accordingly, BestNet expects to expend significant financial and management
resources  on the roll-out of the Internet  telephony  service,  and on-site and
content  development on its  Bestnetcall  websites,  integration of the Internet
telephony and  Bestnetcall  services,  strategic  relationships,  technology and
operating  infrastructure.  As a result,  BestNet  expects to incur  significant
additional  losses and  continued  negative  cash flow from  operations  for the
foreseeable  future. If such losses continue to occur,  then BestNet's  revenues
may not increase or even continue at their current levels. Further,  BestNet may
not achieve or maintain profitability or generate cash from operations in future
periods.  In view of the rapidly  evolving  nature of  BestNet's  business,  the
limited  operating  history of both Internet  telephony and  Bestnetcall and the
risks  associated  with  integrating  these  businesses,  BestNet  believes that
period-to-period  comparisons of operating results are not meaningful and should
not be relied upon as an indication of future performance.

CONFLICTS OF INTEREST MAY ARISE WHICH MATERIALLY  ADVERSELY AFFECT BESTNET,  ITS
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     Conflicts  of  interest  may  arise  between  BestNet  and its  affiliates,
including Softalk, in areas relating to past, ongoing and future  relationships,
including:

     *    the Bestnetcall license agreement, corporate opportunities,  indemnity
          arrangements, tax and intellectual property matters;

     *    potential acquisitions or financing transactions; and

                                       19
<PAGE>
     *    sales or other dispositions by BestNet principals.

     These  conflicts also may include  disagreements  regarding the Bestnetcall
license  agreement,  including  with  respect  to  possible  amendments  to,  or
modifications  or waivers of  provisions  of such  agreement.  Such  amendments,
modifications  or waivers may adversely  affect  BestNet's  business,  financial
condition  and  results of  operations.  Ownership  interests  of  directors  or
officers  in BestNet  common  stock,  or serving as both a  director/officer  of
BestNet and a  director/officer/employee  of Softalk,  could create or appear to
create  potential  conflicts of interest  when  directors and officers are faced
with decisions that could have different implications for BestNet and Softalk.

OUR  INABILITY  TO  BE  COMPETITIVE  INTERNATIONALLY  OR TO  SATISFY  REGULATORY
REQUIREMENTS  WHEN WE EXPAND  GLOBALLY  COULD  MATERIALLY  ADVERSELY  AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     A  significant  aspect of our growth  strategy  is to expand  our  business
internationally,  through the Internet.  Such  expansion  will place  additional
burdens upon our management,  personnel and financial resources and may cause us
to incur losses. We will also face different and additional competition in these
international markets with which we have no prior experience.  These risks could
impair our ability to expand  internationally as well as have a material adverse
effect upon our overall business operations, growth and financial condition.

ON-LINE SECURITY BREACHES OR FAILURES MAY MATERIALLY ADVERSELY AFFECT BESTNET.

     In  order  to  successfully  provide  services  over  the  Internet,  it is
necessary  that we are able to ensure the secure  transmission  of  confidential
customer information over public telecommunications  networks. We employ certain
technology in order to protect such information,  including customer credit card
information.  However, we may be unable to ensure that such information will not
be intercepted  illegally.  Advances in cryptography or other  developments that
could compromise the security of confidential  customer information could have a
direct negative impact upon our electronic commerce business.  In addition,  the
perception by consumers that communicating over the Internet is not secure, even
if unfounded,  means that fewer consumers are likely to communicate through that
medium. Finally, any breach in security,  whether or not a result of our acts or
omissions,  may cause us to be the  subject of  litigation,  which could be very
time-consuming and expensive to defend.

OUR  OUTSTANDING  SHARES MAY BE DILUTED  RESULTING IN LESS  PERCENTAGE OF SHARES
HELD BY EACH SHAREHOLDER AND A LOWER MARKET PRICE PER SHARE OF OUR COMMON STOCK.

     In our Articles of Incorporation,  the Company is authorized to issue up to
50,000,000  million  shares of common  stock.  The Board of Directors  may issue
shares of stock for such  consideration as it deems adequate.  Additional shares
of common stock may be issued to raise capital,  to purchase property or rights,
and upon exercise of warrants,  options,  or other derivative  instruments.  The
Company is also authorized to issue up to 10,000,000 million shares of preferred
stock, in one or more series,  and to determine the price,  rights,  preferences
and  privileges  of the shares of each such series  without any further  vote or
action by the  stockholders.  The rights of the holders of common  stock will be
subject to, and may be  adversely  affected by, the rights of the holders of any
shares of preferred stock that may be issued in the future.  Preferred stock may
be issued that is convertible  into shares of common stock at conversion  prices
that might not be related to the then current market price.  The market price of
our common stock may  decrease as more shares of common  stock become  available
for  trading.  The equity  interest of the  shareholders  in BestNet also may be
reduced through the issuance of new common stock.

THE CURRENT CAPITALIZATION COULD DELAY, DEFER, OR PREVENT A CHANGE OF CONTROL.

     The Company is authorized to issue up to 50,000,000  shares of common stock
and up to 10,000,000  shares of preferred  stock, in one or more series,  and to
determine the price,  rights,  preferences  and privileges of the shares of each
such series without any further vote or action by the stockholders. The issuance
of preferred stock could have the effect of making it more difficult for a third
party to acquire a majority  of the  outstanding  voting  stock of the  Company,
thereby delaying, deferring, or preventing a change of control of the Company.

                                       20
<PAGE>
THE  FORWARD-LOOKING  STATEMENTS  IN THIS  REPORT  MAY NOT COME TRUE AND  ACTUAL
RESULTS COULD MATERIALLY DIFFER FROM THE ANTICIPATED RESULTS.

     This report  contains  forward-looking  statements  that involve  risks and
uncertainties. These statements may include BestNet's plans:

     *    to grow its Internet-based communications businesses;

     *    to expand the range of services it offers;

     *    to increase  the number of customers  and revenues  using its services
          and the  minutes  of use and  price per  minute of use of the  traffic
          booked through BestNet's websites and network;

     *    to otherwise expand its business  activities in new cities and foreign
          countries; and

     *    to retain key personnel or otherwise to implement its strategy as well
          as its beliefs  regarding  consumer  acceptance  of the  Internet as a
          means  of  commerce  and  the  use  of the  Internet  as a  source  of
          advertising.

     These forward looking statements reflect the belief or current  expectation
of  BestNet's  management  and are  necessarily  based on  management's  current
understanding  of the markets and  industries  in which BestNet  operates.  That
understanding  could  change  or could  prove  to be  inconsistent  with  actual
developments.  BestNet's actual results could differ materially from the results
discussed  in this  report,  including  those  anticipated  in or implied by any
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences  include those discussed above, as well as those discussed elsewhere
in this report.

                                       21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                          BestNet Communications Corp.
                          Audited Financial Statements
                           Year ended August 31, 2001

                                    Contents

Report of Semple & Cooper, LLP, Independent Auditors                         F-1
Audited Financial Statements

     Consolidated Balance Sheet                                              F-2
     Consolidated Statements of Operations                                   F-3
     Consolidated Statements of Changes in Stockholders' Equity              F-4
     Consolidated Statements of Cash Flows                                   F-5
     Notes to Consolidated Financial Statements                              F-7

                                       22
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

To The Stockholders and Board of Directors of
BestNet Communications Corp.

     We have  audited the  accompanying  consolidated  balance  sheet of BestNet
Communications  Corp.  as of  August  31,  2001,  and the  related  consolidated
statements  of  operations,  stockholders'  equity  and cash flows for the years
ended  August  31,  2001  and  2000.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance  about  whether  the  financial  statements  are free from
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
BestNet Communications Corp. as of August 31, 2001, and the consolidated results
of its operations,  changes in stockholders'  equity, and its and its cash flows
for the  years ended  August  31,  2001 and 2000 in  conformity  with  generally
accepted accounting principles.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As discussed in Note
12  to  the  consolidated   financial  statements,   the  Company  has  incurred
significant  losses from operations,  anticipated  additional losses in the next
year and has  insufficient  working  capital as of August  31,  2001 to fund the
anticipates  loss. These conditions raise substantial doubt as to the ability of
the  Company  to  continue  as a going  concern.  These  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


                                        /s/ Semple & Cooper, LLP

October 19, 2001
Phoenix, AZ

                                       F-1
<PAGE>
                  BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 AUGUST 31, 2001


                                                                     AUGUST 31
                                     ASSETS                            2001
                                                                   ------------
Current assets:
  Cash and cash equivalents                                        $    285,518
  Accounts receivable, less allowance of $3,539                          18,529
  Certificate of deposit                                                 21,282
  Prepaid expenses and other assets                                      36,663
                                                                   ------------

      Total current assets                                              361,992

Property and equipment, net of accumulated depreciation
  of $1,630,755                                                       2,355,909
License fee, net of amortization of $2,548,153                        7,126,615
Note receivable from affiliate                                        1,384,000
Note receivable from shareholder/director                                10,160
Deposits and other assets                                                26,280
                                                                   ------------

      Total assets                                                 $ 11,264,956
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                            $    153,736
  Deferred revenue                                                       10,460
                                                                   ------------

    Total current liabilities                                           164,196

Stockholders' equity:
  Series B preferred stock, 6% cumulative, par value
    $.001 per share; 10,000,000 shares authorized,
    532 shares issued and outstanding                                         5
  Common stock, par value $.001 per share; 50,000,000 shares
    authorized, 11,772,313 shares issued and outstanding                 11,772
  Additional paid in capital                                         28,109,515
  Accumulated deficit                                               (17,020,532)
                                                                   ------------

      Total stockholders' equity                                     11,100,760
                                                                   ------------

      Total liabilities and stockholders' equity                   $ 11,264,956
                                                                   ============

          See accompanying notes to consolidated financial statements.

                                       F-2
<PAGE>
                  BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED AUGUST 31, 2001 AND AUGUST 31, 2000

<TABLE>
<CAPTION>
                                                                        2001           2000
                                                                     -----------    -----------
<S>                                                                  <C>            <C>
Revenues                                                             $   493,260    $    28,670

Expenses:
  Cost of sales (exclusive of depreciation and
    amortization shown separately below)                                 497,663         51,722
                                                                     -----------    -----------

        Gross loss                                                        (4,403)       (23,052)
                                                                     -----------    -----------
  General and administrative                                           2,044,720      1,188,032
  Depreciation and amortization                                        1,979,975      1,545,636
                                                                     -----------    -----------

        Total operating expenses                                       4,024,695      2,733,668
                                                                     -----------    -----------
        Net loss from operations                                      (4,029,098)    (2,756,720)
                                                                     -----------    -----------
Other income (expense):
  Interest income                                                        227,691         76,129
  Interest expense                                                           (36)       (60,512)
  Miscellaneous income                                                        43          4,014
  Rental income                                                              300         22,500
  Income tax expense                                                         (50)            --
  Preferred stock conversion penalty                                          --       (221,226)
  Exchange (loss)                                                         (1,647)            --
                                                                     -----------    -----------

        Total other income (expense)                                     226,301       (179,095)
                                                                     -----------    -----------
        Net loss before preferred dividends                           (3,802,797)    (2,935,815)

Cumulative preferred dividends declared                                  212,013      2,602,046
                                                                     -----------    -----------

Net loss available to common shareholders                            $(4,014,810)   $(5,537,861)
                                                                     ===========    ===========

Net loss per common share, basic and diluted                         $     (0.45)   $     (1.72)
                                                                     ===========    ===========

  Weighted average number of shares outstanding, basic and diluted     9,013,669      3,221,225
                                                                     ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>
                          BESTNET COMMUNICATIONS CORP.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  FOR THE YEARS ENDED AUGUST 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                      PREFERRED STOCK
                              ---------------------------------------------------------
                                 SERIES A          SERIES B           COMMON STOCK        ADDITIONAL
                              ---------------   ----------------   --------------------     PAID-IN     ACCUMULATED
                              SHARES   AMOUNT   SHARES    AMOUNT     SHARES     AMOUNT      CAPITAL       DEFICIT         TOTAL
                              ------   ------   -------   ------   ----------   -------   -----------   ------------   ------------
<S>                          <C>     <C>        <C>       <C>       <C>         <C>       <C>           <C>               <C>
Balances, September 1, 1999     600     $  1         --   $   --    3,021,288   $ 3,021   $ 8,757,946   $ (7,467,861)     1,293,107
Net loss                         --       --         --       --           --        --            --     (2,935,815)    (2,935,815)
Conversion of Series A         (600)      (1)        --       --      150,993       151          (150)            --             --
preferred stock
Issuance of Series B             --       --      1,000        5           --        --     4,446,147             --      4,446,152
Preferred stock
Preferred stock dividends        --       --         --       --       27,897        28       122,301       (122,329)            --
Preferred stock conversion
  penalty                        --       --         --       --       19,869        20        99,464             --         99,484
Preferred stock conversion
  benefit                        --       --         --       --           --        --     2,479,717     (2,479,717)            --
Common stock issued for
  services                       --       --         --       --        4,000         4         7,496             --          7,500
Warrants issued                  --       --         --       --           --        --       154,000             --        154,000
Softalk Purchase
  Agreement                      --       --         --       --           --        --    10,000,000             --     10,000,000
Stock options excercised         --       --         --       --      179,666       180       587,717             --        587,897
                               ----     ----    -------   ------   ----------   -------   -----------   ------------   ------------

Balances, August 31, 2000        --       --      1,000        5    3,403,713     3,404    26,654,638    (13,005,722)    13,652,325

Net loss                         --       --         --       --           --        --            --     (3,802,797)    (3,802,797)
Conversion of Series B
  preferred stock                               (467.61)    (.46)   3,477,400     3,477        (3,477)            --             --
Preferred stock dividends        --       --         --       --      227,265       227       211,786       (212,013)            --
Preferred stock conversion
  penalty                        --       --         --       --       74,431        74       121,668             --        121,742
Common stock issued for
  services                       --       --         --       --      162,000       162       453,538             --        453,700
Share exchange                   --       --         --       --    4,329,004     4,329        (4,329)            --             --
Warrants issued                  --       --         --       --           --        --       221,700             --        221,700
Stock options issued for
  services and software          --       --         --       --           --        --       355,590             --        355,590
Stock options excercised         --       --         --       --       98,500        99        98,401             --         98,500
                               ----     ----    -------   ------   ----------   -------   -----------   ------------   ------------
Balance, August 31, 2001         --     $ --     532.39   $ 4.54   11,772,313   $11,772   $28,109,515   $(17,020,532)  $ 11,100,760
                               ====     ====    =======   ======   ==========   =======   ===========   ============   ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                       F-4
<PAGE>
                  BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
     FOR THE TWELVE-MONTH PERIODS ENDED AUGUST 31, 2001 AND AUGUST 31, 2000

<TABLE>
<CAPTION>
                                                                2001             2000
                                                             -----------      -----------
<S>                                                          <C>              <C>
Operating activities:
  Net loss                                                   $(3,802,797)     $(2,935,815)
  Adjustments to reconcile net loss to net cash
  used in operating activities:
  Depreciation and amortization                                1,979,975        1,545,636
  Non cash transactions                                          682,490            7,500
  Changes in assets and liabilities:
     Accounts receivable                                         (18,529)              --
     Prepaid expenses and other assets                            85,685          (34,080)
     Deferred Revenue                                             10,460               --
     Accounts Payable and accrued expenses                       (55,212)        (117,887)
                                                             -----------      -----------

         Net cash used in operating activities                (1,117,928)      (1,534,646)

Investing activities:
  Purchase of property and equipment                          (1,398,535)        (554,348)
  Issuance of notes receivable from affiliate                         --       (1,284,000)
  Issuance of notes receivable from related party                (10,160)         (32,000)
  Repayment of notes receivable from related party                32,000               --
  Purchase of certificate of deposit                             (20,000)              --
                                                             -----------      -----------

         Net cash used in investing activities                (1,396,695)      (1,870,348)

Financing activities:
  Notes payable                                                       --          (13,000)
  Principal payments on capital lease obligation                  (1,593)         (23,667)
  Sale of Common Stock                                            98,500          587,897
  Proceeds from preferred stock issued                                --        4,446,152
  Issuance of Common Stock for Preferred Stock penalties         121,742           99,484
                                                             -----------      -----------

         Net cash provided by financing activities               218,649        5,096,866

         Net (decrease) increase in cash                      (2,295,974)       1,691,872

Cash and cash equivalents, beginning of period               $ 2,581,492      $   889,620
                                                             -----------      -----------

Cash and cash equivalents, end of period                     $   285,518      $ 2,581,492
                                                             ===========      ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>
Supplemental disclosure of cash flow information:

                                                     2001         2000
                                                    -------      -------
     Cash paid during the year for:

     Interest                                       $    36      $65,412
     Taxes                                          $    50      $    50

          See accompanying notes to consolidated financial statements.

                                       F-6
<PAGE>
                          BestNet Communications Corp.
                   Notes to Consolidated Financial Statements


1.   ORGANIZATION

     BestNet Communications Corp., a Nevada corporation (the Company), (formerly
Wavetech  International,  Inc.) is currently conducting minimal operations while
actively  pursuing  the  implementation  of its  business  strategy of providing
Internet  telephony  services.  The Company has recorded net operating losses in
each of the previous  eight years and does not  anticipate  realization  of full
operations until its strategy is fully implemented.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly owned subsidiaries, Interpretel, Inc. (Interpretel),  Interpretel
Canada Inc., Telplex International Communications,  Inc. and Bestnetravel,  Inc.
All significant intercompany accounts and transactions have been eliminated.

     On March 8, 1995, the Company  entered into an agreement  with  Interpretel
pursuant to which the Company agreed to issue  6,000,000  (pre-split)  shares of
its common stock in exchange  for 100% of the  outstanding  1,532,140  shares of
common stock of Interpretel. The transaction resulted in the former shareholders
of  Interpretel  owning  approximately  80% of  the  outstanding  shares  of the
Company. In accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations,"  the acquisition was accounted for as a reverse  acquisition with
Interpretel deemed to be the acquiring entity of the Company.  The common shares
issued in  connection  with the  acquisition  were assigned no value because the
Company had no assets or liabilities at the date of the acquisition.

Cash and Cash Equivalents

     The Company  considers  all highly  liquid  instruments  with a maturity of
three months or less when purchased  (money market accounts and  certificates of
deposit) to be cash equivalents.

Property and Equipment

     Property and equipment is recorded at cost. Depreciation is provided for on
the straight-line and accelerated methods over the estimated useful lives of the
related assets as follows:

               Furniture and fixtures             7 years
               Computer equipment                 5 years
               Software                           3 to 5 years

     The costs of maintenance, repairs and minor renewals are charged to expense
in the year incurred.  Expenditures  that increase the useful lives of the asset
are capitalized. When items are retired or disposed of, the cost and accumulated
depreciation  are removed  from the accounts and any gain or loss is included in
income.

License Fees

     Fees to license  certain  communications  software are recorded at cost and
amortized  over the seven year life of the  underlying  agreement.  The  Company
evaluates  the  continuing  carrying  value of the license  fees at each balance
sheet date and records write down if the continuing  value has become  impaired.
An impairment is determined if the anticipated cash flow attributed to the asset
is less than the  carrying  value.  The asset is then reduced to the net present
value of the anticipated future cash flows.

Income Taxes

     Income taxes are  determined  using the asset and  liability  method.  This
method  gives  consideration  to the future  tax  consequences  associated  with
temporary differences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax purposes.

                                       F-7
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


Credit Risk and Fair Value of Financial Instruments

     The Company  maintained  the majority of its cash balances in bank accounts
at  various  financial  institutions.  Deposits  not to exceed  $100,000  at the
financial institutions are insured by the Federal Deposit Insurance Corporation.
As of August 31, 2001, the Company had approximately $213,000 of unsecured cash.

     The carrying amounts for cash and cash  equivalents,  accounts  receivable,
and accounts  payable  approximate  fair value because of the short  maturity of
these instruments.  The Company does not hold or issue financial instruments for
trading purposes. The Company has a note receivable with a related party bearing
an interest rate equal to prime plus 1% which management  believes  approximates
the current rate.

Revenue Recognition

     Revenue from the sale of licensing  agreements is recognized  over the term
of the agreement.  Revenue from the installation of equipment is recognized when
delivered.  Revenue from the resale of minutes is recorded  when the minutes are
used by the customer.  Cost of sales includes  expenses  directly related to the
operation  and  maintenance  of  the  telephony   platform.   Depreciation   and
amortization expense are separately stated.

Advertising Costs

     Advertising  costs are charged to operations  when incurred.  During fiscal
years ended August 31, 2001 and 2000,  total  advertising  cost equaled $327,099
and $110,855, respectively.

Stock-Based Compensation

     The Company accounts for its employee stock-based compensation arrangements
under the  provisions of APB No. 25,  ACCOUNTING  FOR STOCK ISSUED TO EMPLOYEES.
Stock Options are granted to employees and directors under its Stock Option Plan
with  an  exercise  price  equal  to  fair  value  at the  date  of  grant  and,
accordingly, recognizes no compensation expense in connection with such grants.

Net Loss Per Common Share

     Diluted  loss per share is equal to basic  loss per  share for all  periods
presented as the effect of all applicable  securities  (preferred  stock,  stock
options and warrants; see Note 5) is anti-dilutive  (decrease the loss per share
amount).

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

Pending Accounting Pronouncements

In June 2001 the Financial Accounting Standards Board adopted Opinion No. 141,
Business Combinations, and Opinion No. 142, Goodwill and Other Intangibles. The
pronouncements provide for the cessation of the pooling method of accounting for
business combinations as well as providing that goodwill and other intangible
assets that have indefinite useful lives will not be amortized but rather will
be tested at least annually for impairment. The Company has yet to determine
what effect, if any, the adoption of these financial standards will have on the
financial statements. The effective dates for Financial Accounting Standards
Nos. 141 and 142 are July 1, 2001 and for fiscal years beginning after December
15, 2001, respectively.

In September 2001 the Financial Accounting Standards Board adopted Opinion No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. The
pronouncement provides a single, comprehensive accounting model for impairment

                                       F-8
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


and disposal of long-lived assets and discounted operations. The Company does
not expect the adoption of the standards to have a material effect on the
financial statements. The standard is effective for fiscal years beginning after
December 15, 2001.

3.   PROPERTY AND EQUIPMENT

     Property and equipment is composed of the following at August 31, 2001:

     Furniture and fixtures                                    $    97,311
     Computer equipment                                            767,652
     Software                                                    1,637,218
     Equipment                                                   1,484,483
                                                               -----------
     Total property and equipment, at cost                       3,986,664
     Less: accumulated depreciation and amortization            (1,630,755)
                                                               -----------
                                                               $ 2,355,909
                                                               ===========

     For the fiscal years ended August 31, 2001 and 2000,  depreciation  expense
related to property and equipment  equaled $597,868 and $388,938,  respectively.
Amortization  expense  related to assets held under  capital  leases was $176 in
2000. There were no such expenses in 2001.

4.   COMMITMENTS

Leases:

     The Company has entered into  non-cancellable  operating lease arrangements
for office space and a corporate apartment.

Future lease commitments as of August 31, 2001 are as follows:

                                                                 Operating
                                                                   leases
                                                                  --------
     2002                                                         $ 61,354
     2003                                                           40,800
     2004                                                           37,400
                                                                  --------
                                                                  $139,854
                                                                  ========

     Total rent expense under operating leases in 2001 and 2000 was $189,805 and
$148,125,  respectively.  Subsequent  to the  balance  sheet  date,  the Company
entered into a new  operating  lease for office  space.  The new monthly rent is
$500 per month. The term of the lease is for one year.

5.   STOCKHOLDERS' EQUITY

Preferred Stock:

     Series A  Preferred  Stock:  The  Company  issued  600  shares  of Series A
Convertible  Preferred  Stock  in 1998 at  $1,000  per  share.  The 6%  Series A
Preferred  stockholders were entitled to receive annual cumulative  dividends of
$60 per share per annum, accrued daily and payable quarterly in arrears on March
31, June 30,  September  30, and  December 31 of each year,  in  preference  and
priority to any payment to any other class or series of stock of the Company. In
2000, a portion of these dividends were settled by the issuance of common stock.
Series A Preferred stockholders do not have any voting rights.

In the fiscal year ended August 31, 2000  ("Fiscal  2000"),  the Company  issued
19,869 shares of  common  stock in  payment  of  liquidating  damages  valued at
$99,484.  In fiscal year 2001,  the Company issued 74,431 shares of common stock
in payment of the remaining  balance of the liquidating  damages, which totalled

                                       F-9
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


$221,226.  On May 9, 2000, all  outstanding  shares of Series A Preferred  Stock
were  converted to shares of common stock of the Company.  There were no similar
expenses in the fiscal year ended August 31, 2001 ("Fiscal 2001").

     Series  B  Preferred  Stock:  On May  1,  2000,  the  Company  completed  a
$5,000,000  private  placement  of Series B  Preferred  Stock and  common  stock
purchase  warrants (the  "Warrant") with an accredited  investor.  The financing
consisted of 1,000 shares of Series B Preferred  Stock and a Warrant to purchase
160,000 shares of common stock.  The Series B Preferred Stock carries a dividend
of 6%. The Preferred Stock is convertible by the holder at anytime following the
issuance  date based on a conversion  price equal to the lesser of eight dollars
and  seven  cents  ($8.07)  or 80% of the  average  closing  bid  prices  of the
Company's  common stock as reported by Bloomberg LP for the three lowest trading
days of the 10  consecutive  trading days  immediately  preceding the conversion
date. A beneficial conversion feature of approximately  $2,500,000 resulted in a
charge to retained earnings in 2000.

     The  Series  B  Preferred  stockholders  are  entitled  to  receive  annual
cumulative  dividends of $300 per share per annum,  accrued daily and payable in
preference  and priority to any payment to any other class or series of stock of
the  Corporation,  excluding  the Series A Preferred  Stock.  In Fiscal  2001, a
portion of these  dividends  were  settled  by the  issuance  of 227,265  common
shares. Series B Preferred stockholders do not have any voting rights.

     The Series B  Preferred  Stock is  redeemable  at the option of the Company
prior  to the  conversion  date  and  after  the  date on  which a  registration
statement  under the  Securities  Act of 1933,  as  amended,  has been  declared
effective,  provided  the Company has given at least 5 days written  notice.  On
September 28, 2001 the Company  entered into an agreement with the holder of the
Series B  preferred  stock.  The  holder  exchanged  the 532  shares of Series B
preferred stock for 2,938,927  shares of the Company's  common stock. The shares
issued  reflect the dividend that had accrued  through that date. In addition to
the exchange,  the former  holder of the preferred  stock was given a warrant to
purchase  225,000  additional  shares of the companys  common stock at $3.00 per
share  and a warrant  to  purchase  225,000  shares  at $4.00  per  share.  This
transaction has not been reflected in the accompanying financial statements.

     The  Warrants  held by the Series B Preferred  stockholders  have a term of
three years and are  exercisable  at a price of $0.01 for all 160,000  shares of
common stock of the Company. The Holder may designate a cashless exercise of the
Warrant  and  surrender  a portion of the Warrant  having an  aggregate  current
market value equal to the aggregate exercise price at the exercise date.

     The Company also issued a warrant to purchase 43,371 shares of common stock
to the placement agent in the private placement (the "Agent Warrant"). The Agent
Warrant has a term of three years and a per share exercise price of $8.07.

     On October 17, 2001, the Company  completed a $500,000 private placement of
Series C Preferred  Stock and common stock purchase  warrants with an accredited
investor.  The financing  consisted of 5,000 shares of Series C Preferred  Stock
and a Warrant to purchase 25,000 shares of common stock.  The Series C Preferred
Stock  carries a dividend of 8%. The number of shares of Common  Stock  issuable
upon  conversion  of each share of Series C Preferred  Stock shall equal (i) the
sum of (A) the Stated Value per share and (B) at the Holder's  election  accrued
and unpaid  dividends on such share,  divided by (ii) the Conversion  Price. The
Conversion  Price shall be (i) until 45 days from the date  hereof,  $2.40,  and
(ii) on and after 45 days from the date hereof,  the lower of (x) $2.40;  or (y)
eighty  percent (80%) of the average of the three lowest  closing prices for the
Common Stock on the NASD OTC Bulletin  Board,  NASDAQ  SmallCap  Market,  NASDAQ
National  Market  System,  American Stock  Exchange,  or New York Stock Exchange
(whichever  of the foregoing is at the time the  principal  trading  exchange or
market for the Common  Stock,  the  "Principal  Market"),  or on any  securities
exchange  or other  securities  market on which the  Common  Stock is then being
listed or traded,  for the thirty (30) trading  days prior to but not  including
the Conversion  Date.  The shares of Series C Preferred  Stock and dividends may
not be converted without the consent of the Holder.

                                      F-10
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


     The Company  incurred  issuance costs associated with the completion of the
Series C Preferred Stock private placement for commission, escrow fees and legal
fees totaling $50,000, $750, and $40,000, respectively.

     The  Warrants  held by the Series C Preferred  stockholders  have a term of
five years and are  exercisable  at a price yet to be determined  for all 25,000
shares of common  stock of the  Company.  The  Holder may  designate  a cashless
exercise  of the  Warrant  and  surrender  a portion  of the  Warrant  having an
aggregate  current  market value equal to the  aggregate  exercise  price at the
exercise date.

     Common Stock:  During Fiscal 2001,  the Company  issued  162,000  shares of
common stock in satisfaction  of services  valued at $453,700.  The value of the
services were charged to expenses during the period incurred.

     The following summarizes Warrant activity in 2001 and 2000:

                                               Number       Exercise Price
                                             ----------     ---------------
     Outstanding, September 1, 1999             348,333     $ 2.76 - $ 9.00
     Expired                                   (344,999)    $ 2.76 - $ 9.00
     Issued                                   5,540,124     $  .01 - $10.00
                                             ----------     ---------------
     Outstanding, August 31, 2000             5,543,458     $  .01 - $10.00
     Expired                                     (3,333)         $3.18
     Issued                                     250,000     $ 1.00 - $ 5.00
                                             ----------     ---------------
     Outstanding, August 31, 2001             5,790,125     $  .01 - $10.00
                                             ==========     ===============

     Stock  Incentive  Plan:  The Company is  authorized  to issue up to 766,667
shares of common stock under its 1997 Stock Incentive Plan. Shares may be issued
as incentive  stock options,  non-statutory  stock options,  deferred  shares or
restricted  shares.  Options are granted at the fair market  value of the common
stock on the date of the grant; options have terms of up to ten years.

     The Company is authorized  to issue up to 5,000,000  shares of common stock
under its 2000 Stock  Incentive  Plan.  Shares may be issued as incentive  stock
options,  non-statutory  stock options,  deferred  shares or restricted  shares.
Options are granted at the fair market  value of the common stock on the date of
the grant; options have terms of up to ten years.

     The fair value of these options were estimated at the date of grant using a
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions:  risk-free interest rate of 5.60%, dividend yield of 0%, volatility
factor of the expected market price of the Company's common stock ranged between
 .776 to  2.682,  and a  weighted-average  expected  life of the  options  ranged
between 2 years to 3 years.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating  the fair value of traded  options that have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.   Because  the   Company's   stock   options  have   characteristics
significantly  different from those traded  options,  and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

     Statement of Financial  Accounting Standard No. 123 requires the Company to
present pro forma  disclosure  for options  granted  subsequent  to 1995.  These
disclosures  are not indicative of future  amounts,  as options granted prior to

                                      F-11
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


1995 have not been  included as provided  by SFAS No. 123.  For  purposes of pro
forma  disclosure,  the  estimated  fair value of stock options was amortized to
expense over the vesting period.

     Pro forma net loss and loss per share are as follows:

<TABLE>
<CAPTION>
                                                                 2001             2000
                                                              -----------      -----------
<S>                                                           <C>              <C>
Net loss available to common stockholders, as reported        $(4,014,810)     $(5,537,861)
Pro forma compensation expense for stock options                 (314,548)      (1,065,708)
                                                              -----------      -----------
Pro forma net loss available to common stockholders           $(4,329,358)     $(6,603,569)
                                                              ===========      ===========
Pro forma loss per share available to common stockholders     $      (.48)     $     (2.05)
                                                              ===========      ===========
</TABLE>

A summary  of the  Company's  stock  option  activity  (including  non-statutory
options) is as follows:

                                   Number of     Option Price  Weighted Exercise
                                Options Granted   Per Share     Price Per Share
                                  ----------     ------------   ---------------
Outstanding, September 1, 1999     2,044,168     $1.00 - 6.00          1.43
Granted                              313,664      2.94 - 8.00          5.14
Exercised                           (179,665)     1.00 - 6.00          2.45
Canceled                            (237,833)     1.00 - 4.56          2.39
                                  ----------     ------------       -------
Outstanding August 31, 2000        1,940,334     $1.00 - 8.00          1.81
Granted                            1,735,000     $ .65 - 3.55          1.58
Exercised                            (98,500)        1.00              1.00
Canceled                             (36,500)        1.00              1.00
                                  ----------     ------------       -------
Outstanding August 31, 2001        3,540,334      $.65 - 8.00          1.73
                                  ==========     ============       =======

     The remaining contractual life of options outstanding as of August 31, 2001
was 8.55 years.  Options for the purchase of 1,830,333 and 1,801,667 shares were
immediately  exercisable  on August  31,  2001 and 2000 with a  weighted-average
price of $1.84 and $1.38 per share.

     The weighted  average fair values of stock options  granted during 2001 and
2000 for which the  exercise  price  was equal to the fair  market  value of the
stock were $1.55 and $4.59 per share, respectively.

6.   SEGMENT INFORMATION

     The following  represents  the  reportable  segments of the Company for the
twelve months ended August 31, 2001.  There was no such segment  information for
the same period  ended August 31, 2000,  as all  activity  was  attributable  to
BestNet Communications.

                                                  OPERATING
                                  NET SALES    (LOSS) INCOME    TOTAL ASSETS
                                  ---------    -------------    ------------
     BestNet Communications      $   360,615    $(3,820,077)    $11,245,812
     BestNetravel Inc.               132,645         17,280          19,144
                                 -----------    -----------     -----------

          Total                  $   493,260    $(3,802,797)    $11,264,956
                                 ===========    ===========     ===========

                                      F-12
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


7.   INCOME TAXES

     As of  August  31,  2001,  the  Company  has  federal  net  operating  loss
carryforwards  totaling  approximately  $16,200,000 and state net operating loss
carryforwards of approximately  $9,200,000.  The federal and state net operating
loss  carryforwards  expire in various  amounts  beginning  in 2011 for  federal
purposes and 2000 for state  purposes.  Certain of the  Company's  net operating
loss  carryforwards  may  be  subject  to  annual  restrictions  limiting  their
utilization in accordance with Internal  Revenue Code Section 382, which include
limitations based on changes in control. In addition,  approximately  $3,200,000
of net operating loss carryforwards are further limited to activities in a trade
or business in which the Company is not presently  involved.  Additionally,  the
Company has capital loss  carryforwards  of  approximately  $216,000  which will
expire in 2004 unless offset by capital gains.  No tax benefit has been recorded
in the financial  statements since realization of these loss  carryforwards does
not appear likely.

     The income tax benefit for the years ended  August 31, 2001 is comprised of
the following amounts:

                                                 2001              2000
                                              ----------        ----------
     Current                                  $       --        $       --

     Deferred
     Federal                                    (976,600)       (1,285,000)
     State                                      (108,400)         (140,000)
                                              ----------        ----------
                                              (1,085,000)       (1,425,000)
     Valuation Allowance                       1,085,000         1,425,000
                                              ----------        ----------
                                              $       --        $       --
                                              ==========        ==========

     The Company's  tax benefit  differs from the benefit  calculated  using the
federal statutory income tax rate for the following reasons:

                                                 2001              2000
                                              ----------        ----------
     Statutory tax rate                             34.0%             34.0%
     State income taxes                              5.3%              5.3%
     Change in valuation allowance                 (39.3)%           (39.3)%
                                              ----------        ----------
     Effective tax rate                              0.0%              0.0%
                                              ==========        ==========

The components of the net deferred tax assets are as follows:

                                                 2001             2000
                                              -----------      -----------
     Deferred tax asset:
     Amortization of Intangibles              $   309,000      $   267,000
     Net Capital Loss                              85,000           85,000
     Other                                          7,000            2,000
     Net operating loss carryforward            5,983,000        4,945,000
                                              -----------      -----------
                                                6,384,000        5,299,000
     Valuation allowance                       (6,384,000)      (5,299,000)
                                              -----------      -----------
                                              $        --      $        --
                                              ===========      ===========

Income taxes of $50 were paid in both 2001 and 2000, respectively.

     Statement of Financial  Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES,  requires a valuation  allowance  to reduce the  deferred  tax assets if,
based on the weight of the evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.  After consideration of all the

                                      F-13
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


evidence,  both  positive  and  negative,   management  has  determined  that  a
$6,384,000  valuation allowance as of August 31, 2001 is necessary to reduce the
deferred  tax assets to the amount that will more  likely than not be  realized.
The change in the valuation allowance for the current year is $1,085,000.

8.   RELATED PARTY TRANSACTIONS AND SIGNIFICANT CONCENTRATIONS:

Transactions with Softalk.

     During 1999 and 2000,  the Company  entered  various  license and  purchase
agreements  with  Softalk,   Inc.,  a  private   Ontario,   Canada   corporation
("Softalk").  Softalk is a developer of various internet  telephony software and
technology. Softalk provides approximately 100% of the service and software used
by the  Company in its  internet  telephony  operations.  A  termination  of the
Softalk agreements would cause a delay in the Company's operations,  which would
ultimately affect operating results.
Original and Restated License Agreement.

     On April 23, 1999, the Company and Softalk entered into a license agreement
granting the Company and its  subsidiaries a non-exclusive  right to distribute,
market, service and sublicense Softalk's services and products to commercial and
individual customer accounts.

     On July 31, 1999, the original  license  agreement was amended and restated
to define the term of the license  agreement  to seven  years with an  automatic
renewal.  Total consideration given for the non-exclusive  license agreement was
$200,000.  Additionally,  the Company  agreed to pay Softalk an amount  equal to
100% of Softalk's  actual direct expenses  incurred in connection with the sale,
license and delivery of Softalk  products plus a five percent (5%) markup of the
total traffic on the wholesale  long distance per minute line costs on a monthly
basis.

Amendment No. 1 to Restated License Agreement.

     On October 25, 1999, the Company and Softalk further amended their restated
license  agreement  to  grant  the  Company  and its  subsidiaries  a  worldwide
exclusive license to distribute,  market, service, sell and sublicense Softalk's
services and products to commercial  accounts.  This  agreement  also grants the
Company a worldwide  nonexclusive license to distribute,  market,  service, sell
and sublicense  Softalk's services and products to individual customer accounts.
In exchange for the license amendments,  the Company issued to Softalk five-year
warrants to purchase  up to  5,246,753  shares of the  Company's  common  stock;
3,246,753 of which have an exercise price of $3.25 per share,  1,000,000 have an
exercise price of $5.00 per share, and the remaining  1,000,000 have an exercise
price of $10.00 per share.  In 2000, the fair value of the warrants  issued were
capitalized to the license agreement equaling $154,000.

     For Fiscal 2001 and 2000, amortization expense to the license agreement was
$50,582 and $46,901, respectively.

     Under the license  agreement,  Softalk has the right to designate up to two
directors  to the Board of  Directors  of the  Company.  As of August 31,  2001,
Softalk had  designated  one  individual to serve on the  Company's  five person
Board of  Directors.  Ms. Atan  resigned as a director of the Company  effective
September 27, 2000. Ms. Atan is a shareholder,  director and officer of Softalk.
Softalk  also has granted  the Company the right to appoint one  director to the
three  person Board of Directors  of Softalk.  BestNet has  appointed  Gerald I.
Quinn, BestNet's Chairman (and former CEO), to Softalk's board.

Purchase Agreement.

     On November  13,  1999,  the Company,  through its  subsidiary  Interpretel
(Canada)  Inc.,  purchased  all  existing  products  and  accounts of Softalk in
exchange  for  4,329,004  shares  of  Class  A  non-voting  preferred  stock  of
Interpretel (Canada). Under this agreement,  Softalk granted the Company a right
of first refusal with respect to purchasing Softalk, its intellectual  property,
software and/or patents.

                                      F-14
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


     At August  31,  2000,  the total  consideration  given  under the  purchase
agreement  was  capitalized  to the license  agreement  and equipment in amounts
equal to $9,320,768 and $679,232, respectively. Amortization expense relating to
the license agreement  equaled  $1,331,538 and $1,109,621 at August 31, 2001 and
August 31, 2000 respectively.

     On May 1, 2000,  as part of the private  placement of Series B  Convertible
Preferred  Stock,  Softalk agreed not to sell,  offer,  transfer or exchange the
Interpretel  (Canada) shares until May 1, 2001,  unless Softalk is given consent
to do so by the  investor  involved in the private  placement.  Such consent was
obtained in connection with Softalk's exchange of Interpretel shares for BestNet
common stock.

Product Development Agreement.

     Effective  June 14,  2000,  the Company and Softalk  entered into a product
development  agreement.  The agreement engages Softalk to customize the software
it  develops  for the  Company,  enhance  the  performance  and  features of the
Bestnetcall  services and to provide  installation  and  maintenance  of certain
hardware and  software.  The term of the  agreement is for a period of one year.
Total  consideration  given for the  agreement  is  $500,000,  which was paid in
advance in the form of a retainer.  In addition, if the work performed under the
agreement  exceeds the retainer as  calculated at the rate of $70 per person per
hour,  then the Company has agreed to compensate  Softalk at the rate of $85 per
person  per  hour  for the work  performed  beyond  the  amount  covered  by the
retainer.  Additional  services provided outside the scope of the agreement will
be  compensated  at the rate of $100 per person per hour. As of August 31, 2000,
the Company had paid Softalk $100,000 under the agreement. The Company estimated
that projects  developed  during the term of this agreement would  approximately
equal $1,260,000 upon completion and delivery of the customized software.  Total
consideration paid under this agreement as of August 31, 2001 equals $1,620,039.

Loan Facility.

     On August 6, 1999, the Company entered into a loan facility  agreement with
Softalk,  Inc.  Under the facility,  the Company agreed to loan Softalk up to $2
million at an  interest  rate  equal to prime  plus 1%.  Under the terms of this
loan,  Softalk may pay back the loan principal plus interest on or before August
6, 2000, or convert any amounts  outstanding,  plus  interest,  on the loan into
shares of  Softalk  common  stock in full  satisfaction  of money owed under the
loan.  The number of shares of Softalk  common  stock which may be issued to the
Company for repayment of the full $2 million would be equal to ten percent (10%)
of the value of Softalk at the time of repayment.

     In the event  Softalk  does not require  the full $2 million  loan from the
Company, any amounts advanced to Softalk may be converted to Softalk shares on a
pro rata basis. As of August 31, 2001, the  outstanding  balance of the loan was
$1,384,000.  On September 8, 2000,  the  Company's  Board of Directors  approved
amending  the loan to extend the term of the loan for an  additional  year.  The
loan is due and owing but the Company has agreed to accept the interest payments
without any capital  repayment.  As of August 31,  2001,  accrued  interest  was
recorded in the amount of $166,218. Currently, capital is being paid off through
the provision of services from Softalk. The Company anticipates the loan will be
paid off over the next year.

As of August 31, 2001, total amounts due to Softalk included in accounts payable
totaled $28,472.

Note Receivable Related Party:

     On March 1, 2000,  a director of the Company and an officer,  director  and
shareholder  of  Softalk  executed a  promissory  note  payable in the  original
principal amount of $32,000. Total outstanding principal and accrued interest is
due on March 1, 2002. The note bears interest at the rate of 7.75% per annum. On
March 1, 2001, the loan was repaid with accrued interest of $2,480.

                                      F-15
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


     On September 1, 2000, the Company loaned  $10,160 to Kelvin  Wilbore,  Vice
President and director of the Company.  Total outstanding  principal and accrued
interest is due on September 1, 2003. The loan was made pursuant to an unsecured
promissory note that is due and payable  September 1, 2003 and bears interest at
the rate of 8.50% per annum.

Consulting Agreement With Related Party:

     Effective  June 22, 2000, the Company  entered into a consulting  agreement
with a director  of the  Company and an officer,  director  and  shareholder  of
Softalk.  The  consulting  agreement  provides  that all staff in the  Company's
Tucson,  Arizona  office will report to the  President  of the Company  directly
through the individual.  Additionally, the individual is to make recommendations
to Company  management  on any matter  relating to the  Company's  organization,
operations,  finance  and  personnel.  Total  consideration  for the  consulting
agreement equals $30,000 per year.

The  consulting  agreement  terminates  upon 30 day written notice by either the
Company  or  the  individual  for  any  reason.  The  consulting  agreement  was
terminated on September 10, 2001.

9.   LOSS ON ASSET IMPAIRMENT

     None.

10.  STATEMENTS OF CASH FLOW

     During Fiscal 2001 and 2000, the Company recognized investing and financing
activities that affected assets and stockholders'  equity, but did not result in
cash receipts or payments.

For the Fiscal 2001, these non-cash activities are as follows

     The Company  issued 227,265 shares of common stock in payment of its Series
B Preferred Stock dividend for $212,013.

     On January 1, 2001,  the Company issued options to purchase an aggregate of
10,000  shares of common  stock of the Company in  consideration  for  marketing
services.  The options vest, if ever, on January 1, 2002.  The fair value of the
options expensed equaled $2,590.

     On January 11, 2001, the Company issued options to purchase an aggregate of
500,000  shares of common  stock of the  Company in  consideration  for  product
customization  services.  The options vest,  if ever,  equally over a three-year
period. The fair value of the options expensed is $185,000.

     On April 23, 2001,  the Company  issued options to purchase an aggregate of
400,000   shares  of  common   stock  of  the  Company  in   consideration   for
telecommunication  and marketing. The options vest, if ever,  over a three-year
period. The fair value of the options expensed equaled $168,000.

     On April 24,  2001  Company  issued  five-year  warrants  to purchase up to
200,000 shares of the Company's common stock;  100,000 of which have an exercise
price of $1.00 per share,  100,000 have an exercise price of $3.00 per share. Of
the 200,0000 warrants,  100,000 vest immediately and the remaining 100,000, vest
if ever, upon the holder promoting the Company's  internet telephony products in
certain markets. The fair value of the warrants expensed equaled $72,000.

     On August 24,  2001,  the  Company  issued  five year  warrants to purchase
50,000  shares of the Company's  common stock;  30,000 of which have an exercise
price of $3.05 per share,  10,000 have an exercise price of $4.00 per share, and
10,000 have an exercise price of $5.00 per share. The fair value of the warrants
expensed equaled $149,700.

                                      F-16
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


For Fiscal 2000, these non-cash activities are as follows:

     During 2000,  all the issued and  outstanding  shares of Series A Preferred
Stock  were  converted  into  150,993  shares  of the  Company's  common  stock.
Additionally,  the Company  issued  4,400 and 19,869  shares of common  stock in
payment of the Series A Preferred  Stock  dividend  of $21,234  and  liquidating
damages of $99,484, respectively.

     The Company issued 23,497 shares of common stock in payment of its Series B
Preferred  Stock dividend for $101,095.  Additionally,  a beneficial  conversion
feature  calculated  on the Series B  Preferred  Stock  resulted  in a charge to
retained earnings totaling $2,479,717.

     On October 25, 1999, the Company issued  five-year  warrants to purchase up
to 5,246,753  shares of the Company's  common stock;  3,246,753 of which have an
exercise price of $3.25 per share, 1,000,000 have an exercise price of $5.00 per
share, and the remaining 1,000,000 have an exercise price of $10.00 per share in
association  with the restated  license  agreement  with Softalk,  Inc. The fair
value of the  warrants  equaled  $154,000  and were  capitalized  to the license
agreement.

     The Company,  through its subsidiary  Interpretel  (Canada) Inc., purchased
all existing  products and accounts of Softalk in exchange for 4,329,004  shares
of Class A non-voting preferred stock of Interpretel (Canada). The shares issued
under the agreement are  exchangeable  on a one-for-one  basis for shares of the
Company's  common stock at any time by the holder  thereof.  The issuance of the
shares of  Interpretel  (Canada)  was  valued at  $10,000,000,  the value of the
Company's  common  shares  into which the  Interpretel  (Canada),  shares can be
converted.  As of August  31,  2001,  the total  consideration  given  under the
purchase  agreement was  capitalized  to the license  agreement and equipment in
amounts equaling $9,320,768 and $679,232, respectively.

On November 10, 2000,  Softalk  exercised its exchange rights under the purchase
agreement,  resulting in the issuance of 4,329,004  restricted shares of BestNet
common stock in exchange for the Class A shares.

11.  SUBSEQUENT EVENTS

     On October 3, 2001, the Company  redeemed all of the outstanding  shares of
its Series B convertible  preferred  stock (the  "preferred  stock") through the
issuance  of  shares  of  restricted  common  stock.  The  preferred  stock  was
originally  issued in connection  with the Company's $5 million  dollar  private
placement completed in May 2000.

     On October 17, the Company  entered  into a strategic  financing  agreement
with the Laurus  Family of Funds.  This  agreement  resulted  in  initial  gross
proceeds  to  BestNet  of  $500,000.   Laurus  and  BestNet  are  exploring  the
possibility of additional  $5,000,000 financing over the next 12 month period if
required.

                                      F-17
<PAGE>
12. GOING CONCERN

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming  that the Company  will  continue as a going  concern.  The Company has
incurred  significant losses from operations,  anticipated  additional losses in
the next year and has insufficient working capital as of August 31, 2001 to fund
the anticipated loss. These conditions raise substantial doubt as to the ability
of the Company to continue as a going concern.

     Subsequent to August 31, 2001,  the Company  managed to raise an additional
$409,250,  net of  expenses  for  working  capital  purposes.  With these  funds
management  believes the Company has sufficient capital to fund operations for a
period of four to six  months.  Management  is in the process of  arranging  for
additional  funding  and a  possible  strategic  partner.  However,  there is no
certainty that such additional funding will be available.

ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
        DISCLOSURES.

     None

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; COMPLIANCE WITH SECTION
        16(a) OF THE EXCHANGE ACT

DIRECTORS AND OFFICERS

The current directors and executive officers of the Company are as follows:

            Name              Age          Position held with Company
            ----              ---          --------------------------
     Robert A. Blanchard       46      President and Chief Executive Officer
     Gerald I. Quinn           58      Chairman of the Board
     Alexander C. Lang         48      Director
     Kelvin C. Wilbore         47      Vice President and Director
     Kevin England             49      Director
     Herman Haenert            62      Director

     ROBERT A.  BLANCHARD  was named  President/CEO  of  BestNet  Communications
Corp.,  on August 20, 2001.  From July 1999 to August,  2001, Mr.  Blanchard was
President and Chief Operating  Officer of ProNet Global,  Inc., a privately-held
corporation  dedicated to world-wide strategic growth and support of independent
business owners  affiliated  with Quixtar,  a leading  e-commerce  organization.
Through  ProNet,  Mr.  Blanchard  was  President  and CEO of the  e-Alliance,  a
worldwide   strategic   alliance  of  marketing   organizations   and  strategic
partnerships representing approximately $2 billion in annual sales. From 1998 to
1999, Mr. Blanchard was Vice President of Strategy and Business  Development for
Reliable  Energy,  Inc.,  a  management   consulting  firm  for  commercial  and
industrial  users  of  natural  gas and  electricity.  From  1997 to  1998,  Mr.
Blanchard  has  also  served  as  Corporate  Director  for US  Xchange,  LLC,  a
facilities  based provider of competitive  telecommunications  services  (CLEC),
Director of  Administration  for W.K.  Kellogg  Foundation from 1994 to 1997 and
Director  of  North  America  for  Amway  Corporation.  Robert  holds a MBA from
Northwestern University and Baccalaureate from Central Michigan University.

     GERALD  I.  QUINN  has  been  the  President  of  Interpretel  (Canada),  a
subsidiary of the Company,  since 1995.  From May 1996 to August 2001, Mr. Quinn
served as President and Chief Executive Officer and Chairman of the Company.  In
August 2001,  Mr. Quinn  resigned from his positions as President and CEO of the
Company,  but continues to serve as the Company's  Chairman of the Board. He has
been a director of the Company since May of 1996.  From 1986 to 1994,  Mr. Quinn
was Vice  President of University  Affairs and  Development at the University of
Guelph,  which is one of Canada's  leading  teaching and research  universities.
While  at the  University  of  Guelph,  Mr.  Quinn's  responsibilities  included
marketing,  image  development,   constituent  relations  and  media  relations,
including  systems  development,  telemarketing  and the development of affinity
programs.

                                       23
<PAGE>
     From 1975 until 1986, Mr. Quinn held many senior  administrative  positions
with  Canada's  largest  college  of  applied  arts  and  technology,  including
positions  relating to the development and  commercialization  of technology and
multimedia-based interactive learning programs. Since 1984, Mr. Quinn has served
as a  consultant  to  Cableshare  Interactive  Technology,  Inc., a Canadian TSE
listed  public  company that  operates in the  interactive  television  industry
("Cableshare").  Mr. Quinn has been a director of Cableshare  since 1993 and has
chaired its board  committee  on mergers and  acquisitions.  In 1997,  Mr. Quinn
negotiated a merger of Cableshare with Source Media,  (NASDAQ:SRCM)  culminating
in Source Media owning 100% of Cableshare. Mr. Quinn is active in numerous civic
and  professional  organizations  and  has  been  recognized  for  his  work  in
marketing, sales, promotion and public relations by various trade organizations.
Mr. Quinn has two arts degrees with majors in English,  Economics  and Political
Science.

     ALEXANDER C. (CHRIS) LANG was appointed to the Company's Board of Directors
in July 1999. Mr. Lang resigned from the Board  effective  October 22, 2001. Mr.
Lang has been in the  telecommunications  business for 22 years, holding various
technical  positions  related to marketing and product design.  From 1993 to the
present,   Mr.  Lang  has  served  as  President  of  Softalk  Inc.,  a  private
telecommunications   and  web-based  software  development  company,   where  he
introduced  products which have worldwide  reach through the use of the Internet
for control and management. Mr. Lang is also a principal shareholder of Softalk.

     KELVIN C. WILBORE has served as a director of the Company  since  September
2000. Mr. Wilbore began working with the Company as a project manager in January
2000. Mr. Wilbore is in charge of product  commercialization for the Company. He
has 20 years  experience  in business  requirements  specification,  application
development, project management, customer relationship management and management
consulting.  Mr.  Wilbore  previously  served as a Senior Manager in the telecom
sector at Arthur  Andersen LLP from 1998 to 2000.  From April 1997 to July 1998,
he was in  charge  of call  center  analysis  for  the  Canadian  subsidiary  of
Technology  Solutions  Company  (TSC).  From  1994 to 1997,  he  worked  for NCR
Corporation in Toronto as an implementation analyst for NCR self serving banking
systems. From 1987 to 1994, Mr. Wilbore worked in the financial sector,  serving
as Vice  President,  Business  Solutions  at  Amalgamated  Banks of South Africa
(ABSA),  the largest  banking group in Africa.  Mr.  Wilbore holds a Bachelor of
Science degree in Mathematics and Mathematical Statistics from Rhodes University
and a Master of Business Administration degree from the University of Cape Town.

     KEVIN ENGLAND has served as a director of the Company since September 2000.
Mr.  England also is  president  and owner of The England  Group,  a real estate
acquisition  and management  company in Vancouver,  Canada,  which he started in
1987.  Mr.  England  has been active in real  estate  acquisition,  development,
securitization and management for over 18 years. He is also president of England
Securities  Ltd.  and holds a Partner and  Director's  License  from the British
Columbia  Securities  Commission.  Since founding The England Group, Mr. England
has acquired a U.S. and Canadian revenue property  portfolio valued in excess of
$350,000,000 which generates gross annual income in excess of $47,000,000.  From
1981 to 1986,  Mr.  England  held  senior  management  positions  with two major
western  Canadian  development  and  syndication  firms.  From 1977 to 1981, Mr.
England worked in product development,  marketing and management for IBM Canada.
Mr. England  graduated from Carlton  University in 1977 with a Bachelors of Arts
degree.

     HERMAN  HAENERT has served as  director  of the  Company  since March 2001.
Herman was the founder and past president of Rockford,  Illinois based Wholesale
Veterinary  Supply Inc., a company acquired by ConAgra.  During his tenure,  the
company grew to $100,000,000 in annual revenues. Herman was a founding member of
St.  Joseph,  Missouri  based Agri  Laboratories  and  currently  serves as Vice
President,  Business  Development.  He is past  president  and  Chairman of AVDA
(American Veterinary Distributing Association).

                                       24
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION

     The following table summarizes all compensation paid to the Company's Chief
Executive  Officer (the "Named Executive  Officer") for services rendered in all
capacities to the Company during each of the fiscal years ended August 31, 2001,
2000 and 1999. None of the Company's other  employees  received  compensation in
excess of $100,000  during the last  completed  fiscal year.  Share figures have
been adjusted to reflect the one-for-six split effected in December 1998.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                      Annual Compensation                          Long Term Compensation
                               ----------------------------------   --------------------------------------------------
                                                                            Awards                   Payouts
                                                                    -----------------------    -----------------------
                                                     Other Annual                Securities
                                                         Bonus      Restricted   Underlying     LTIP        All Other
     Name and                                Bonus   Compensation     Stock       Options/     Payouts    Compensation
Principal Position     Year    Salary ($)     ($)         ($)       Awards ($)    SARs ($)       ($)          ($)
------------------     ----    ----------    -----   ------------   ----------   ----------    -------    ------------
<S>                    <C>     <C>           <C>        <C>           <C>        <C>            <C>          <C>
Gerald I. Quinn(1)     2001    $  85,000      $0          $0            -0-            -0-       -0-          -0-
                       2000    $  85,000      $0          $0            -0-            -0-       -0-          -0-
                       1999    $  85,000      $0          $0            -0-        500,000(2)    -0-          -0-

Robert A. Blanchard    2001    $   7,308(3)   $0          $0            -0-      1,450,000(4)    -0-          -0-
</TABLE>

----------
(1)  Mr. Quinn served as President  and CEO of the Company from May 1996 through
     August 20, 2001.
(2)  On July 19,  1999,  the Named  Executive  Officer  was  granted  options to
     purchase  500,000  shares at a per share  exercise  price of $1.00.  All of
     these shares vested on July 19, 2000.
(3)  Mr. Blanchard was appointed  President and CEO of the Company on August 20,
     2001. Mr. Blanchard's annual salary is $190,000.
(4)  On June 19,  2001,  Robert A.  Blanchard  was  granted  options to purchase
     500,000 shares at a per share exercise price of $2.90.  The shares vest, if
     ever, over a three year period.

     The  following  table  sets  forth  certain   information   concerning  the
aggregated value of the unexercised  options of the Named Executive  Officers as
of August 31, 2001.

                                       25
<PAGE>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
                               (Individual Grants)

<TABLE>
<CAPTION>
                          Number of
                         Securities      Percent Of Total
                         Underlying    Options/SARs Granted
                        Options/SARs      To Employees In     Exercise Or Base
        Name             Granted (#)        Fiscal Year         Price ($/Sh)     Expiration Date
        ----             -----------        -----------         ------------     ---------------
<S>                        <C>                <C>                 <C>            <C>
Robert A. Blanchard        50,000             [28.8%]              2.90          [June 19, 2004]
</TABLE>

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                                                      Value Of
                                                                                     Unexercised
                                                           Number of Securities      In-The-Money
                                                          Underlying Unexercised   Options/SARs At
                          Shares                          Options/SARs At FY-End       FY-End ($)
                       Acquired On                           (#) Exercisable/         Exercisable/
       Name            Exercise (#)   Value Realized ($)      Unexercisable         Unexercisable
       ----            ------------   ------------------      -------------         -------------
<S>                       <C>             <C>                  <C>                     <C>
Gerald I. Quinn            -0-             $-0-                 633,333(1)              $900,000
Robert A. Blanchard        -0-             $-0-                 500,000(2)                $-0-
</TABLE>

----------
(1)  This total include 133,333 options exercisable at any time prior to January
     2007 at a price of $3.96 per share, and 500,000 options  exercisable at any
     time prior to July 19, 2009 at a price of $1.00 per share.
(2)  These  options will vest,  if ever,  over a three year period at a price of
     $2.90 per share.

COMPENSATION PURSUANT TO PLANS

None.

EMPLOYMENT CONTRACTS

     On June 19, 2001, the Board of Directors  approved a three year  employment
agreement with Robert A. Blanchard for services as President and Chief Executive
Officer.  The  agreement  requires Mr.  Blanchard to devote his full time to the
Company  and  provides  for a base salary of  $190,000.  Mr.  Blanchard  is also
entitled to receive any fringe benefits  generally  extended to the employees of
the  Company,  including  medical,  disability  and  life  insurance  as well as
relocation expenses.  The agreement terminates upon the occurrence of any of the
following  events:  (i)  executive's  gross  and  willful  misconduct  which  is
injurious to the Company;  (ii) executive has engaged in fraudulent conduct with
respect to the  Company's  business or in conduct of a criminal  nature that may
have an adverse  impact on the  Company's  standing  and  reputation;  (iii) the
continued and unjustified  failure or refusal by executive to perform the duties
required of him by this  Agreement  which  failure or refusal shall not be cured
within  fifteen (15) days  following (A) receipt by executive of written  notice
specifying the factors or events constituting such failure or refusal, and (B) a
reasonable  opportunity  for  Executive  to  correct  such  deficiencies;   (iv)
executive's  use of drugs and/or  alcohol in  violation of then current  Company
policy or  Executive's  failure to comply with other Company  policies in effect
from time to time including,  without  limitation,  policies  relating to sexual
harassment;  or (v)  executive's  breach of his duties  under which shall not be
cured within fifteen (15) days after written notice thereof to executive.

     In the event of any  Corporate  Transaction  or Change  of  Control  of the
Company (each as defined in the Agreement), the common stock at the time subject
to each outstanding  option, but not otherwise vested,  shall automatically vest
in full, so that each such option shall, immediately prior to the effective date

                                       26
<PAGE>
of such Corporate Transaction or Change of Control, become fully exercisable for
all of the common shares at the time subject to the option, and may be exercised
for all or any portion of those shares as fully vested common stock.

     In May  2000,  the  Board  of  Directors  approved  a  one-year  employment
agreement  with Gerald I. Quinn for  services as President  and Chief  Executive
Officer. The agreement requires Mr. Quinn to devote his full time to the Company
and provides for a base salary of $85,000. Mr. Quinn is also entitled to receive
any  fringe  benefits  generally  extended  to the  employees  of  the  Company,
including medical, disability and life insurance.

     After the initial term, the  above-described  agreement  continues at will,
terminable  upon ninety days written  notice by either  party to the other.  The
agreement  terminates upon the occurrence of any of the following events: (i) if
the employee  voluntarily  terminates;  (ii) if the employee dies;  (iii) if the
employee is unable to properly  discharge his  obligations  under his employment
agreement due to illness, disability or accident for three consecutive months or
for a period aggregating six months in any continuous twelve months; (iv) if the
employee is  convicted  of a crime of moral  turpitude  by a court of  competent
jurisdiction; (v) if the employee is convicted of a felony, except to the extent
that the charge  arises from an act taken at the board's  direction;  or (vi) if
the employee is grossly negligent or guilty of willful  misconduct in connection
with the performance of his duties, which negligence or misconduct,  if curable,
is not cured  within  fifteen  (15) days of a notice of cure by the Board or the
Chairman of the Board. The above-described  agreement provides that the employee
shall not compete with the Company  during the term of the  agreement  and for a
period of one year thereafter.

     In the event of any  Corporate  Transaction  or Change  of  Control  of the
Company (each as defined in the Agreement), the common stock at the time subject
to each outstanding  option, but not otherwise vested,  shall automatically vest
in full, so that each such option shall, immediately prior to the effective date
of such Corporate Transaction or Change of Control, become fully exercisable for
all of the common shares at the time subject to the option, and may be exercised
for all or any portion of those shares as fully vested common  stock.  On August
19, 2001, Mr. Quinn resigned from his position as President and Chief  Executive
Officer. He will remain Chairman to the Board.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section  16(a)  of  the  Exchange  Act  requires  the  Company's  executive
officers,  directors,  and  persons  who  own  more  than  10% of the  Company's
outstanding  Common  Stock to file initial  reports of ownership  and changes in
ownership  with  the  Commission.  Officers,  directors,  and  greater  than 10%
stockholders are required by Commission  regulations to furnish the Company with
copies of all  Section  16(a)  forms they file.  Based  solely  upon a review of
copies of such filings or written  representations  that no forms were  required
that  were  furnished  to the  Company,  the  Company  believes  that all of the
Company's  executive  officers,  directors,  and greater  than 10%  stockholders
complied during Fiscal 2000 with the reporting requirements of Section 16(a).

     Due to an inadvertent  error,  Alexander  Chris Lang, a former  director of
BestNet,  failed to timely  file a Form 3 for July 1999,  a Form 4 for  warrants
received in November  1999,  a Form 4 for options  received in December  1999, a
Form 4 for the  acquisition  of shares in November 2000 and a Form 4 for options
received in January 2001; Rosnani Atan, a former director of BestNet,  failed to
timely  file a Form 3 in July 1999,  a Form 4 for  options  received in December
1999, and a Form 4 for options exercised in June and October 2001; Kevin England
and Kevin Wilbore  failed to timely file a Form 3 for September  2000 and Gerald
I. Quinn failed to timely file a Form 4 for the sale of shares in July 2001.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of November 7, 2001, certain  information
with regard to the  beneficial  ownership of the  Company's  Common Stock by (i)
each  shareholder  known by the  Company to  beneficially  own 5% or more of the
Company's outstanding Common Stock, (ii) each Director  individually,  (iii) the
Named Executive  Officer and (iv) all Officers and Directors of the Company as a
group:

                                       27
<PAGE>
         Name and Address                  Amount and Nature           Percent
     of Beneficial Owner (1)            of Beneficial Owner(2)(3)    of Class(3)
     -----------------------            -------------------------    -----------
Gerald I. Quinn                                   690,872                4.42

Alexander Christopher Lang
c/o Softalk, Inc.
370 Queens Quay West
Toronto, Ontario
Canada, M5V3J3                                 10,014,423(4)            48.46

Kelvin C. Wilbore                                 123,334                 .82

Kevin England                                      25,000                 .17

Herman Haenert                                     45,500                 .30

Robert A. Blanchard                                   -0-                 -0-

Cedar Avenue LLC
c/o Citco Trustees Cayman LTD
P.O. Box 31106 SMB Grand Cayman
Cayman, BVT                                     4,001,498               26.71

All directors and executive officers
as a group (6 person)                          10,889,129               50.82

----------
(1)  Unless  otherwise  noted,  the address of each holder is 5075 East  Cascade
     Drive, Suite K, Grand Rapids, Michigan 49546.
(2)  A person is deemed to be the  beneficial  owner of  securities  that can be
     acquired  within 60 days from  November 7, 2001 through the exercise of any
     option,  warrant or other right. Shares of Common Stock subject to options,
     warrants or rights which are currently exercisable or exercisable within 60
     days are deemed  outstanding  solely for  computing  the  percentage of the
     person  holding  such  options,  warrants  or  rights,  but are not  deemed
     outstanding for computing the percentage of any other person.
(3)  The amounts and percentages in the table are based upon  14,981,241  shares
     of Common Stock outstanding as of November 7, 2001.
(4)  Includes 4,329,004 shares of common stock and shares underlying warrants to
     purchase  5,246,753  shares of common  stock held by Softalk.  Mr. Lang has
     sole voting and  dispositive  power over such  shares.  Under SEC rules and
     regulations, Mr. Lang is deemed to beneficially own such shares.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1999 and 2000, the Company entered into various license and purchase
agreements  with  Softalk.  Softalk is developer of various  internet  telephony
software.  Softalk provides  approximately 100% of the service and software used
by Company in its internet telephony operations. A termination of the agreements
would cause a delay in the Company's  operations,  which would ultimately affect
operating results. See "Item 1 - Transactions with Softalk."

ORIGINAL AND RESTATED LICENSE AGREEMENT

     On April 23, 1999, the Company and Softalk entered into a license agreement
granting the Company and its  subsidiaries a non-exclusive  right to distribute,
market, service and sublicense Softalk's services and products to commercial and
individual  customer accounts.  On July 31, 1999, the original license agreement
was restated to define the term of the license  agreement to seven years with an
automatic  renewal.  Total  consideration  given for the  non-exclusive  license
agreement  was  $200,000.  Additionally,  the  Company  agreed to pay Softalk an
amount equal to 100% of Softalk's actual direct expenses  incurred in connection
with the sale, license and delivery of Softalk products plus a five percent (5%)
markup of the total traffic on the wholesale long distance per minute line costs
on a monthly basis.

                                       28
<PAGE>
AMENDMENT NO. 1 TO RESTATED LICENSE AGREEMENT

     On October 25, 1999, the Company and Softalk amended their restated license
agreement  to grant the  Company  and its  subsidiaries  a  worldwide  exclusive
license to distribute,  market,  service, sell and sublicense Softalk's services
and products to commercial  accounts.  This  agreement also grants the Company a
worldwide  nonexclusive  license  to  distribute,   market,  service,  sell  and
sublicense  Softalk's services and products to individual customer accounts.  In
exchange for the license  amendments,  the Company  issued to Softalk  five-year
warrants to purchase  up to  5,246,753  shares of the  Company's  common  stock;
3,246,753 of which have an exercise price of $3.25 per share,  1,000,000 have an
exercise price of $5.00 per share, and the remaining  1,000,000 have an exercise
price of $10.00 per share.  In 2000, the fair value of the warrants  issued were
capitalized to the license agreement equaling $154,000.  Mr. Lang, a director of
the Company, is a principal shareholder, officer and director of Softalk.

Under  the  license  agreement,  Softalk  has the right to  designate  up to two
directors to the Board of Directors of the Company.  At August 31, 2000, Softalk
has designated  Rosnani Atan and A. Christopher Lang individuals to serve on the
Company's five person Board of Directors. Ms. Atan resigned as a Director of the
Company effective  September 27, 2000. Ms. Atan is a director and shareholder of
Softalk.  Softalk  also has been  granted  the  Company the right to appoint one
director to the three  person  Board of Directors  of Softalk.  Mr.  Quinn,  the
Company's Chairman of the Board, is BestNet's designer to Softalk's board.

PURCHASE AGREEMENT

     On November  13,  1999,  the Company,  through its  subsidiary  Interpretel
(Canada)  Inc.,  purchased  all  existing  products  and  accounts of Softalk in
exchange  for  4,329,004  shares  of  Class  A  non-voting  preferred  stock  of
Interpretel (Canada). Under this agreement,  Softalk granted the Company a right
of first refusal with respect to purchasing Softalk, its intellectual  property,
software and/or patents.

On November 10, 2000, Softalk exercised its right under the purchase  agreement,
resulting in the issuance of 4,329,004 restricted shares of BestNet common stock
in exchange for a like number of shares of Class A non-voting preferred stock of
Interpretel  (Canada).  As of the  date  of  this  Form  10-KSB,  Softalk  holds
approximately 29% of the issued and outstanding shares of BestNet common stock.

PRODUCT DEVELOPMENT AGREEMENT

     Effective  June 14,  2000,  the Company and Softalk  entered into a product
development  agreement.  The agreement engages Softalk to customize the software
it  develops  for the  Company,  enhance  the  performance  and  features of the
Bestnetcall  services and to provide  installation  and  maintenance  of certain
hardware and  software.  The term of the  agreement is for a period of one year.
Total  consideration  given for the agreement is $500,000.  In addition,  if the
work  performed  under the  agreement  exceeds the retainer as calculated at the
rate of $70 per person per hour, then the Company will compensate Softalk at the
rate of $85 per person per hour for the work performed beyond the amount covered
by the retainer. Additional services provided outside the scope of the agreement
will be  compensated  at the rate of $100  per  person  per  hour.  The  Company
estimated that projects  developed during the term of this agreement would equal
$1,260,000  upon  completion and delivery of the software.  Total  consideration
paid under this agreement as of August 31, 2001 equals $1,620,039.

LOAN FACILITY

     On August 6, 1999, the Company entered into a loan facility  agreement with
Softalk,  Inc.  Under the facility,  the Company agreed to loan Softalk up to $2
million at an  interest  rate  equal to prime  plus 1%.  Under the terms of this
loan,  Softalk may pay back the loan principal plus interest on or before August
6, 2000, or convert any amounts  outstanding,  plus  interest,  on the loan into
shares of  Softalk  common  stock in full  satisfaction  of money owed under the
loan.  The number of shares of Softalk  common stock  issuable to the Company in
repayment of the full $2 million  would equal ten percent  (10%) of the value of
Softalk at the time of repayment.

     In the event  Softalk  does not require  the full $2 million  loan from the
Company, any amounts advanced to Softalk may be converted to Softalk shares on a

                                       29
<PAGE>
pro rata basis. As of August 31, 2001, the  outstanding  balance of the loan was
$1,384,000.  On September 8, 2001,  the  Company's  Board of Directors  approved
amending  the loan to extend the term of the loan for an  additional  year.  The
loan is due and owing but the Company has agreed to accept the interest payments
without any capital repayment.  As of August 31, 2001, accrued interest was paid
in the amount of  $166,218.  Currently,  capital is being paid off  through  the
provision of services from  Softalk.  The Company  anticipates  the loan will be
paid off over the next year.

NOTE RECEIVABLE

     On March 1, 2000,  Rosnani Atan, a director and  shareholder of the Company
and an officer, director,  and shareholder of Softalk executed a promissory note
payable in the original principal amount of $32,000. Total outstanding principal
and accrued  interest  is due on March 1, 2002.  The  interest  rate on the note
equals 7.75%. Ms. Atan resigned as a director of the Company effective September
27,  2000.  Ms. Atan is the spouse of Mr. Lang.  On March 1, 2001,  the loan was
repaid with accrued interest of $2,480.

     On September 1, 2000, the Company loaned  $10,160 to Kelvin  Wilbore,  Vice
President and director of the Company.  Total outstanding  principal and accrued
interest is due on September 1, 2003. The loan was made pursuant to an unsecured
promissory note that is due and payable  September 1, 2003 and bears interest at
the rate of 8.50% per annum.

CONSULTING AGREEMENT WITH RELATED PARTY

     Effective  June 22, 2000, the Company  entered into a consulting  agreement
with Rosnani  Atan, a director  and  shareholder  of the Company and an officer,
director,  and shareholder of Softalk.  The consulting  agreement  indicates all
staff in the Company's  Tucson,  Arizona  office will report to the President of
the Company directly through the individual.  Additionally, the individual is to
make  recommendations  to  Company  management  on any  matter  relating  to the
Company's organization,  operations,  finance and personnel. Total consideration
for the consulting  agreement equals $30,000 per year. The consulting  agreement
terminates upon a 30 day written notice by either the Company or the individual.
The consulting agreement was terminated on September 10, 2001.

                                     PART IV

                ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.

(a)(1) the financial  statements listed in the index set forth in Item 7 of this
Form 10-KSB are filed as part of this report.

(a)(2) Exhibits

    Number                     Description of Filing                      Method
    ------                     ---------------------                      ------
     3.1       Articles of Incorporation, as originally filed with
               the Nevada Secretary of State on February 19, 1998,
               and as amended to date                                       (1)

     3.2       Bylaws of Wavetech International, Inc.                       (1)

     4         2000 Incentive Stock Plan                                    (2)

     4.1       Certificate of Designations, Rights, Preferences and
               Limitations of the Series B Convertible Preferred Stock      (3)

     4.2       Form of Warrant issued to investor in private placement      (3)

     4.3       Form of Warrant issued to Thomson Kernaghan & Co.
               Limited as Placement Agent in the private placement          (3)

                                       30
<PAGE>
    Number                     Description of Filing                      Method
    ------                     ---------------------                      ------
    10.1       Securities Purchase Agreement between Wavetech and the
               investor and the Placement Agent                             (3)

    10.2       Registration Rights Agreement between Wavetech, the
               Investor and the Placement Agent                             (3)

    10.3       Registration Right Agreement                                 (3)

    10.4       Securities Purchase Agreement                                (3)

    10.5       Product Customization Agreement                              (4)

    10.6       Purchase Agreement by and among Softalk, Inc.,
               Interpretel (Canada) Inc. and Wavetech International,
               Inc. dated October 25, 1999                                  (5)

    10.7       Amendment No. 1 to Amended and Restated License Agreement    (5)

    10.8       Amended and Restated License Agreement                       (5)

    10.9       Share Exchange Agreement by and among Wavetech
               International, Inc., Interpretel (Canada) Inc. and
               Softalk, Inc. dated November 13, 1999                        (5)

    21         Subsidiaries of the Registrant                                *

----------
*    Filed herewith
(1)  Incorporated  by reference from the like numbered  exhibit to Form 10-Q for
     the quarter ended February 28, 1998.
(2)  Incorporated  by reference  from the like  numbered  exhibit to Form S-8 as
     filed on May 29, 2001.
(3)  Incorporated by reference from the like numbered  exhibit to Form 8-K filed
     on May 16, 2000.
(4)  Incorporated  by reference from the Form 10-K for the year ended August 31,
     2000,  exhibit 10.5 was numbered exhibit 10.1 in the Form 10-K for the year
     ended August 31, 2000.
(5)  Incorporated  by reference from the Form 10-K for the year ended August 31,
     1999, exhibits 10.6, 10.7, 10.8 and 10.9 were numbered exhibits 10.1, 10.2,
     10.3 and 10.4  respectively  in the Form 10-K for the year ended August 31,
     1999.

(b)  Reports on Form 8-K Filed During the Last Quarter of The Period Covered by
     This Report are as Follows:

     On  August  30,  2001,  the  Company  filed a Form 8-K  reporting  that the
Company,  effective  July 1, 2001,  entered  into a  Telecommunications  Service
Agreement with a large multi-billion dollar company with global operations.

     On  August  30,  2001,  the  Company  filed a Form 8-K  reporting  that the
Company, effective August 20, 2001, had appointed Mr. Robert A. Blanchard as its
President and CEO.

                                       31
<PAGE>
                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                        BESTNET COMMUNICATIONS CORP.


Date: November 19, 2001                 By: /s/ Robert A. Blanchard
                                            ------------------------------------
                                            Name:  Robert A. Blanchard
                                            Title: President & CEO


     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.


Date: November 19, 2001                 By: /s/ Robert A. Blanchard
                                            ------------------------------------
                                            Robert A. Blanchard, President &
                                            Chief Executive Officer
                                            (Principal Executive Officer)


Date: November 19, 2001                 By: /s/ Gerald I. Quinn
                                            ------------------------------------
                                            Gerald I. Quinn, Chairman, Director


Date: November 19, 2001                 By: /s/ Kelvin C. Wilbore
                                            ------------------------------------
                                            Kelvin C. Wilbore, Director


Date: November 19, 2001                 By: /s/ Kevin England
                                            ------------------------------------
                                            Kevin England, Director


Date: November 19, 2001                 By: /s/ Herman Haenert
                                            ------------------------------------
                                            Herman Haenert, Director

                                       32