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

                                  FORM 10-KSB/A
                                (Amendment No. 1)
(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.

                                EXPLANATORY NOTE

     Pursuant to this Form 10-KSB/A, the registrant hereby amends Footnotes 2, 8
and 10 of the Notes to Consolidated  Financial  Statements set forth in "Item 7.
Financial  Statements and Supplementary  Data" of Part II of its Form 10-KSB for
the fiscal year ended August 31, 2001.

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<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

                                       2
<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

<TABLE>
<CAPTION>
                                                                                                AUGUST 31
                                            ASSETS                                                 2001
                                                                                               ------------
<S>                                                                                            <C>
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 ($1.8 million of which was acquired from a related party), net of
  accumulated depreciation of $1,630,755                                                          2,355,909
License fee (acquired from a related party), 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
                                                                                               ============
</TABLE>

          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 exercised           --       --        --       --      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 exercised           --       --        --       --       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

     All of the  Company's  communication  revenue to date has been derived from
the sale of minutes carried over its  communication  network.  Additional future
sources of revenue are expected to come from  royalties  paid under  sub-license
arrangements entered into with third parties who desire to provide the Company's
Bestnetcall  service and from customized  network  equipment sales. To date, the
Company has not derived any revenue from the sale of network equipment.

     Revenue from the  sub-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 Company's 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.

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


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
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-cancelable  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 totaled
$221,226.  On May 9, 2000, all  outstanding  shares of Series A Preferred  Stock

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


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 Company's 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.

     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.

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


     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
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>

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


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

                                    NUMBER OF                        WEIGHTED
                                     OPTIONS      OPTION PRICE    EXERCISE PRICE
                                     GRANTED       PER SHARE        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
                                    ===========     ===========      ===========

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
                                            -----------        -----------
                                            $        --        $        --
                                            ===========        ===========

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


     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
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:

Current Relationship with Softalk.

     The Company is in the business of providing communications solutions to its
customers using the network  infrastructure and applications it owns. Softalk is
a significant  shareholder of the Company, has developed all of the IP telephony
software  now owned and  utilized  by the Company and has granted the Company an
exclusive license for commercial  accounts to the internet telephony  technology
on which the Company's Bestnetcall services is based. Softalk currently provides
network  monitoring,  maintenance  and  management  services  for the  Company's
network  on a  contracted  basis.  In  addition,  Softalk  provides  programming
enhancements for the Company's  applications on a project-by-project  contracted
basis.  The  Company's  various  transactions  and  agreements  with Softalk are
discussed in more detail in the following paragraphs of this Note 8.

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.  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.

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


     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.

     The Board of Directors of the Company appointed two Softalk representatives
to the Board subsequent to the execution of the License Agreement.  As of August
31, 2001,  Softalk had  designated one individual to serve on the Company's five
person Board. One of Softalk's representatives, 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 appointed one BestNet representative to
serve on Softalk's three person board of directors.  Gerald I. Quinn,  BestNet's
Chairman  (and former CEO), is the BestNet  representative  serving on Softalk's
board.

Purchase Agreement.

     On November  13,  1999,  the Company,  through its  subsidiary  Interpretel
(Canada) Inc.,  entered into an agreement to purchase  certain assets of Softalk
in  exchange  for  4,329,004  shares of Class A  non-voting  preferred  stock of
Interpretel  (Canada).  The purchase agreement provided for the acquisition from
Softalk of a communications  network,  service  applications,  installed network
equipment,  software applications,  existing Softalk customer accounts,  certain
contracts,   rights  under  or  pursuant  to  warranties,   representations  and
guarantees  made by suppliers in connection  with the customer  accounts and all
claims,  causes of action and other related  rights to payment or to enforcement
payment  in  connection  with  the  purchase  of  the  accounts.   The  network,
applications  and  customer  accounts  are all  based  on  proprietary  internet
telephony technology patented by Softalk and licensed to the Company.  Under the
terns of the  purchase  agreement,  Softalk  also granted the Company a right of
first refusal with respect to purchasing  Softalk,  its  intellectual  property,
software  and/or  patents.  The purchase  price paid was reached  through  arms'
length negotiations with Softalk.

     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

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


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.

     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.  Under the terms of the consulting agreement,  the individual agreed to
provide  organizational  and  operational  advice and  counsel to the Company on
technical  communication  systems,  policies and procedures as well as personnel
matters.  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.

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


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.

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  (consisting of software,  hardware and applications) 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  (pursuant to the terms of a Share  Exchange  Agreement  dated
November 13, 1999) 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 preferred shares of
Interpretel  (Canada)  was  valued at  $10,000,000,  the value of the  Company's
common  shares  into  which the  Interpretel  (Canada)  preferred  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 Share
Exchange Agreement,  resulting in the issuance of 4,329,004 restricted shares of
BestNet common stock in exchange for the Class A shares.

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


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.

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.

                                      F-17
<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

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