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                    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, 2002

[ ] 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 Cascade Road SE, 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. [ ]

     Issuer's revenues for the fiscal year ended August 31, 2002: $1,060,582.

     The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of November 7, 2002 was approximately $11,704,095 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, 2002 was
19,059,839.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

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                                TABLE OF CONTENTS

                                     PART I

Item 1    Description of Business...........................................   1
Item 2    Description of Property...........................................  10
Item 3    Legal Proceedings.................................................  11
Item 4    Controls and Procedures...........................................  11
Item 5    Submission of Matters to a Vote of Security Holders...............  11

                                     PART II

Item 6    Market for Registrant's Common Equity and Related Stockholder.....  11
Item 7    Management's Discussion and Analysis of Financial Condition
            and Results of Operations.......................................  12
Item 8    Financial Statements and Supplementary Data.......................  21
Item 9    Changes In and Disagreements with Accountants on Accounting
            and Financial Disclosure........................................  22

                                    PART III

Item 10   Directors and Executive Officers of the Registrant................  22
Item 11   Executive Compensation............................................  23
Item 12   Security Ownership of Certain Beneficial Owners and Management....  26
Item 13   Certain Relationships and Related Transactions....................  27

                                     PART IV

Item 14   Exhibits, Lists and Reports on Form 8-K...........................  28

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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

     UNLESS  OTHERWISE  INDICATED THE INDUSTRY DATA CONTAINED HEREIN ARE DERIVED
FROM PUBLICLY  AVAILABLE  INDUSTRY TRADE JOURNALS AND REPORTS AND OTHER PUBLICLY
AVAILABLE SOURCES WHICH WE HAVE NOT INDEPENDENTLY  VERIFIED BUT WHICH WE BELIEVE
TO BE RELIABLE.

     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  FORWARD-LOOKING
STATEMENTS  APPEAR  THROUGHOUT THIS REPORT.  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 ARE BASED UPON MANAGEMENT'S BELIEFS, AS WELL AS ON
ASSUMPTIONS  MADE BY AND  INFORMATION  CURRENTLY  AVAILABLE TO  MANAGEMENT,  AND
INVOLVE  VARIOUS  RISKS AND  UNCERTAINTIES,  WHICH ARE BEYOND OUR  CONTROL.  OUR
ACTUAL   RESULTS   COULD  DIFFER   MATERIALLY   FROM  THOSE   EXPRESSED  IN  ANY
FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF US. FACTORS THAT COULD CAUSE
ACTUAL  RESULTS  TO  DIFFER  INCLUDE  THOSE  FACTORS   IDENTIFIED  IN  "ITEM  7.
MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATION  -  FACTORS  THAT  MAY  AFFECT  OUR  FUTURE  RESULTS.  BESTNET  IS NOT
UNDERTAKING ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED IN
THIS REPORT.

     ALL  REFERENCES TO "WE," "OUR," "US,"  "BESTNET" OR THE "COMPANY"  REFER TO
BESTNET COMMUNICATIONS CORPORATION, AND ITS PREDECESSORS AND SUBSIDIARIES.

     FOR A  DISCUSSION  OF  CERTAIN  RISKS  ASSOCIATED  WITH OUR  BUSINESS,  SEE
"MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS" IN ITEM 7 OF THIS REPORT, AND SPECIFICALLY, "ADDITIONAL FACTORS THAT
MAY AFFECT OUR RESULTS" INCLUDED IN ITEM 7.

     BESTNETCALL   IS  A   REGISTERED   TRADEMARK   OF  BESTNET   COMMUNICATIONS
CORPORATION. ALL OTHER TRADEMARKS,  SERVICE MARKS AND TRADE NAMES REFERRED TO IN
THIS REPORT ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.

COMPANY OVERVIEW

     BestNet is a facilities-based, global communication solutions provider. The
Company's patented, proprietary technology uses widely available Internet access
to control,  enable,  and manage voice  communications  over the public switched
telecommunication   network  (PSTN).   BestNet  views  its  role  as  a  product
development,  marketing,  sales,  sub-licensing,  customer  service  and billing
organization for patented, packet-based Internet telephony software applications
that  control,  manage and enable  global  telecommunications  services.  We are
presently  focusing  substantially  all of our financial and other  resources on
marketing and  development  of  Bestnetcall  services to individual  clients and
selected companies with international  locations and/or clients worldwide. As of
the date of this Report, we have approximately 13,000 clients, making calls from
142 countries and calling to 198 countries.

     We  develop,  market and sell  patented  Internet-based  telecommunications
applications,  technologies  and services to corporate and  residential  clients
worldwide.  Bestnetcall, the Company's flagship product, is the industry's first
patented (phone-to-phone) Internet-enabled long distance service, which combines
global internet access and the public switched  telephone network (PSTN) via our
internet  website at  Bestnetcall.com.  This service was first made available to
the public on April 17, 2000 and is marketed under the brand name "Bestnetcall."

     Although  founded  as a Nevada  corporation  on July 10,  1986,  we did not
commence operations until 1995. From 1995 until 1999, we operated under the name
"Wavetech  International,  Inc." and developed  software for customized  calling
card  services  and  created  an  infrastructure  to market and  distribute  our
products and services. During this period, our 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
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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 and commercializing
our Bestnetcall  web-enabled  long distance  service.  On September 27, 2000, we
changed our name to BestNet Communications Corp.

BESTNET SOLUTIONS

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

          *    Register

          *    Access and launch communication applications

          *    Access current rate tables and time zone charts

          *    Access a full suite of call management features

          *    Access customer service immediately via the Internet

          *    Maintain call account security

          *    Obtain real time billing detail

     Bestnetcall  does not require the purchase of special  hardware or software
by the customer and uses existing telephone equipment. Users only need access to
the Internet and an available  phone line (land line or  cellular).  Bestnetcall
also offers  immediate real time billing detail to all users and accepts various
payment  methods,  including  pre-paid or  post-paid  credit card  payments  and
invoicing  options.  The  architecture of Bestnetcall  allows for total security
regarding  both the FROM and TO legs of each call.  The FROM and TO numbers  are
never  displayed,  thus it is impossible to determine from where a call is being
placed.

     Following the completion of a telephone  call, the total cost for that call
can 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
our  website.  Account  administrators  may add or delete  users,  view a user's
calling activity and create reports detailing call activity.

     The technology upon which our Bestnetcall  service is based is subject to a
license  agreement  with  Softalk,  Inc.,  an Ontario,  Canada-based  technology
company.  We entered  into this  licensing  arrangement  in April 1999 and later
amended and restated that  arrangement  in October 1999.  Under the terms of our
license  agreement  with  Softalk,  we were granted  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 to
individual consumer accounts.

     We own and operate  facilities  in Toronto,  Canada and New York,  New York
including  high-capacity  switches,  web  servers,  data base  servers,  calling
servers and security systems. In addition,  we make use of specialized  software
for  data  management,  billing  and  customer  service  requirements.  For cost
optimization  reasons,  we shut down our  facilities in Los Angeles in the third
quarter of fiscal  2002.  The  equipment  remains  ready for  redeployment  when
necessary.

PRODUCT SUITE

     Our  Bestnetcall  service  includes the  following  suite of  communication
features:

     BestNet WEBCALL - Long Distance Calling

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     Clients  utilizing our  Bestnetcall  service can decrease the cost of their
long  distance  service  while  still  retaining  the toll  quality  for  global
communication  needs.  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,  e-mail  calling,  billing
codes,  country  and city  code  look-up,  time  zone  information  and  dialing
examples.

     BestNet CONFERENCECALL - 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.  We have  compared  the value of this  conference-calling  service  to
similar  services  available  in the  marketplace  and  believe  it to be highly
competitive.

     BestNet DESKTOPCALL - Desktop Application

     Bestnetcall also has a desktop  application that can be downloaded from our
website. Calls can then be launched from the desktop application instead of from
a web  browser.  This  feature  is  particularly  useful for  clients  with slow
Internet connections. Calls are launched in a similar manner to our web product.
All calls are still charged to the same account and on-line billing  information
may also be viewed.  Calls can also be launched  directly from Microsoft Outlook
using a Bestnetcall Outlook add-in and the desktop.

     BestNet EMAILCALL - E-mail Application

     Bestnetcall  e-mail  application can be used from any e-mail device such as
MS Outlook,  Blackberry and cell phones to initiate calls.  This  patent-pending
technology  uses simple  commands  sent by e-mail to launch  calls to any nearby
phone,  such as a pay phone,  home phone or cell phone.  Clients  enter  defined
calling  instructions  to the  destination  of their choice.  EmailCall has many
convenience  features,  such as using  your  personal  webCall  directories  and
billing codes.

     BestNet SATCALL - Satellite Calls

     Bestnetcall  has a direct  circuit  to an  international  satellite  uplink
carrier for launching the Inmarsat satellite leg of calls. This circuit provides
our  Bestnetcall  service  with the  capability  to  complete  calls  to  remote
platforms  such  as  ships,   airplanes  and  oil  rigs  via  our  web  site  at
www.bestnetsat.com.

     BestNet PDACALL - Mobile Calling

     Bestnetcall  has  developed  a Palm OS  application,  which  is  ideal  for
wireless PDA devices, including devices offered by Palm, Handspring and Kyocera.
Our software,  which emulates our BestNet  desktop  service,  gives the user the
ability to launch  low-cost long distance calls or conference  calls using a PDA
device  to  control  the  call.   Applications  also  have  been  developed  for
micro-browser equipped PDA's such as Compaq's iPAQ.

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

MARKETING STRATEGIES

     We offer our  Bestnetcall  service  through  both direct sales and indirect
sales channels. Our initial target markets include:

          *    Large Corporate / Enterprise Clients

          *    Internet Service Providers

          *    Mid-sized to SOHO Business (Small Office Home Office)

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          *    Marketing and Channel Partners

          *    Reseller, VAR and Integrators

          *    Technology and Telecommunications Consultants

          *    Consumers

     Our  marketing  efforts are  targeted at  international  long  distance and
conference calling clients in a number of key geographic areas in the world. Our
priorities are focused primarily on the following geographic regions:

          *    Central and South America

          *    North America

          *    Asia Pacific

          *    Europe

          *    Middle East

          *    Caribbean

DIRECT SALES

     Our direct sales  activities  are comprised of the following  marketing and
sales strategies designed to generate revenue and increase customer usage of our
Bestnetcall service:

     *    Web Channel - This method of marketing,  which represents the majority
          of our  revenue,  consists of  marketing  all of our  branded  service
          offerings to  individuals  and  businesses  through a  combination  of
          Internet-based marketing and third party sales relationships.

     *    Sales Calls - We call directly on potential clients whom we believe we
          can  create  value  for,  and  where  relationships  are built to help
          establish a user base that has synergy with BestNet's product line.

     *    Direct Mail and E-mail Solicitations - We send solicitation  materials
          to  pre-qualified  potential users of our Bestnetcall  service.  These
          materials refer or link the potential user to  www.Bestnetcall.com  to
          facilitate  activation  of our  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.

     *    Media   Advertising   and  Promotion  -  We  have  initiated   limited
          advertising in print and electronic  media targeted at specific market
          segments  in the form of national or  international  publications.  We
          will consider  additional  initiatives such as advertising in specific
          trade  publications and Internet  advertising during Fiscal 2003 based
          on an analysis of the  cost-effectiveness and results of these initial
          activities.

     *    Public Relations  Activities - We have a corporate  communications and
          public  relations  strategy in place for  developing  a  comprehensive
          communications  program.  This  communications  program  will  include
          initiating  appropriate  news  releases,  feature  print  articles  in
          industry  and  trade  specific  publications,  local  print  media and
          editorial   support.   Our   Bestnetcom.com   website  is  also  being
          redeveloped  to  include  a  frequently  asked  questions  section  to
          facilitate direct  communication with shareholders,  customers and the
          public-at-large. In Fiscal 2002 we retained an investor relations firm
          to deal specifically with shareholders and the investment community.

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INDIRECT SALES

     Our  indirect  sales  efforts are centered on the  following  four types of
organizations:

     *    Agent/Distributors  - We are  establishing  a global network of agents
          and   distributors   who  will  market  our   services  to   corporate
          organizations and consumers via private labeled Internet web sites.

     *    Telecom Providers - The Bestnetcall  services are being made available
          to other telecommunication providers,  resellers, and Internet service
          providers for resale to their  clients.  These types of indirect sales
          organizations  solicit  through direct mail,  e-mail,  fax, and direct
          sales calls by their personnel.

     *    Professional   Service   Firms  -   Accounting   firms,   consultants,
          integrators 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.

     *    Licensed  Services  Channel  - Seek to  offer a  sub-licensed  program
          through this sales channel in an effort to generate additional revenue
          and to offer  others in our  industry the features and benefits of our
          intellectual property.

INDUSTRY BACKGROUND AND MARKET DEMAND

     The  Internet  is  the  significant   interactive   worldwide   medium  for
communications,  collaborative technologies,  and the telecommunications market.
Meanwhile,  global deregulation,  the proliferation of new technologies enabling
convergence  between computers,  applications,  Internet,  and the telephone are
significantly expanding the world's voice market.

     We believe there are key trends influencing the telecommunications industry
and Internet  deployment  today. We expect the following trends to have a direct
and  positive   effect  on  the   communications   market  and  demand  for  our
applications:

     *    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.
          Business-to-business  revenue is projected to approach  $1.3  trillion
          according to Forrester Research.

     *    Globalization  of the world's  economies  increase  the  international
          mobility of workforces, and the opportunities that exist in the global
          Internet  roaming  marketplace are vast. A recent report  published by
          Frost & Sullivan  projected that the global roaming services market is
          set to grow from $285 million in 2000 to $7.6 billion in 2006.

     *    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 for cell phones is likely to increase.

     *    Worldwide, STRATEGY ANALYTICS expects cellular subscribers to increase
          from nearly 900 million at the end of 2001,  to 1.9 billion by the end
          of 2006.

     *    The global conferencing  market,  which is negligible today, will grow
          to $11 billion by 2005 according to multimedia  consultancy  Wainhouse
          Research.

     *    Internet  application  sales, which includes both devices that connect
          to the Internet via a television  and Internet  terminals are expected
          to grow at a rate of more than 40% per year and soar to $1.3 billion.

     *    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.

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     *    The Gartner Group predicts that business-to-consumer transactions will
          reach $380 billion by 2003, and business-to-business transactions will
          exceed $7 trillion by 2004.

     *    Forrester  Research has predicted that 65% of corporate buyers planned
          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.

     We believe  the above  market  trends and  projections  reflect a large and
growing market for potential users of Internet  telephony  services.  We believe
these market trends and  projections  will translate  into increased  demand for
providers  of Internet  telephony  services and that we are well  positioned  to
capture a portion of this market with our Bestnetcall services.

     We believe  these  market  trends  strongly  favor use of our  products and
services.  Our ability to offer a cost effective,  highly  efficient and dynamic
product in terms of features and  capabilities is of key importance  during poor
economic periods as companies are forced to find ways to trim budgets. Companies
also have a general  reticence  towards  air travel  during  such poor  economic
periods,  as well as  following  the events of September  11,  2001.  We hope to
capture the promise of this sector.

THE OPPORTUNITY

     We believe our most  strategic  business  opportunity  is in servicing  the
telecommunication  needs of the business and mobile markets, which still rely on
traditional  carriers  for  supplying  their  international  long  distance  and
conferencing services.  There exists a notable price disparity between the costs
of long  distance  originating  from the  U.S.,  versus  origination  from  most
international locations.  The advantage of BestNet's service is three-fold.  The
first advantage is our web-based  interface,  which provides universal access to
our network without the requirement for special  software.  The second advantage
is  our  patented  methodology,  which  uses a  two-leg  call  (origination  and
destination  leg),  which works with any telephone or legacy phone  system.  The
third  advantage is our  long-distance  transport.  Our  intelligent  network is
connected to multiple  tier-1  carriers  where routes are chosen on the basis of
price and quality. With our network architecture, we can easily route calls over
Voice over  Internet  Protocol  (VoIP)  networks - if there is an advantage  for
certain routes.

     This hybrid approach to routing calls allows the universal  access and cost
advantages associated with VoIP transport, without any of the disadvantages. For
this reason,  business and mobile users in over 142 countries rely on BestNet to
provide a simple,  viable  alternative to their existing long distance provider.
BestNet  provides its service without  contracts or hidden charges.  Our service
easily integrates within any existing legacy or PBX system.

     BestNet's approach to the marketplace is based on:

     *    Speed of communication - easy deployment within any environment
     *    Quality  of  communication  -  interconnection  with  tier-1  carriers
          ensures highest standards
     *    Reliability  of  communication  -  carrier-class   network  with  full
          redundancy
     *    Ease of operation - user adoption is simple and straight forward
     *    Interoperability  -  operation  with legacy  systems,  fixed or mobile
          phones
     *    Capital requirement - investment by users is not required

     We use the  Internet  to enable,  control  and  manage  the  public  switch
telephone  network  calls  accessed  from our  central  offices  in New York and
Toronto.  Accordingly, our technology allows us to bring the best wholesale long
distance rates,  which are in the U.S., to the entire world. We can offer access
to global  markets  including  direct  access  to North  American  business  and
consumer markets to any carrier  worldwide wishing to connect to our switches in
the U.S. and Canada.

INTERNET AND TELEPHONY

     We believe  Voice over  Internet  Protocol  (VoIP) has  changed the face of
global telephony,  as such technology has provided millions of users worldwide a
viable  alternative  to  expensive  long-distance  services  provided  in highly
regulated or closed  markets.  Use of the  Internet to transport  voice has many
advantages,  including global access and low cost per minute rates. Providers of

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VoIP services,  more  specifically  PC-to-phone  services (which terminate calls
over the public switched  network),  have  experienced the greatest  adoption by
personal home users,  versus  business  users.  However,  the  disadvantages  of
PC-to-phone  services are notable.  VoIP is not available for cellular users and
is  difficult to use with legacy PBX systems.  Other  disadvantages  include the
requirement  to buy software,  configuration  of hardware and reduction in voice
quality - notably echoes and delay. The new VoIP technology has greatly improved
the quality - however  interoperability  within legacy phone systems remains the
biggest challenge. For this reason, the business market has been slower to adopt
VoIP on any large scale.

     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 worldwide  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.

     Our  technology  simply  requires  Internet  access.  No special  hardware,
software,  or start up costs are required.  The inherent  diversification of our
product suite addresses the above challenges directly.

INMARSAT TELEPHONY MARKET

     One of the  fastest  growing  telephony  markets  in the  world  is  global
satellite telephony  communications.  The Inmarsat communication system consists
of five  geostationary  satellites  circling the globe. These satellites provide
voice  and data  services  to  remote  locations  through  a global  network  of
terrestrial  uplink  carriers.  The major  sectors for  satellite  communication
include maritime,  land and aeronautical  markets,  with oil and gas, mining and
merchant marine industry the largest customers. According to Inmarsat, there are
currently  240,000  Inmarsat  terminals in use,  distributed  in 150  countries,
generating an estimated $1.3 billion in long distance charges.

     In 2000,  BestNet  developed a site  specifically  for the Inmarsat  market
called  Bestnetsat.com.  In 2002,  BestNet  upgraded its service to interconnect
directly with Stratos Global, a leading Land Earth Station operator and Inmarsat
carrier.  The direct connectivity to Stratos (and to the Inmarsat network) gives
BestNet  a  pricing  advantage  over  other  providers  -  particularly  foreign
telecoms.   This   pricing   advantage,    coupled   with   BestNet's   patented
call-initiation  methodology,  gives  the  Company  a unique  advantage  in this
market.  BestNet is actively  developing new customer  relationships and markets
for the BestNetSat.com  service,  as the tangible cost benefits  associated with
its  patented  technology  is  easily  quantified  in a highly  competitive  and
lucrative global market.

FUTURE PRODUCT STRATEGY

     Communication  around  the  globe is  rapidly  changing,  as voice and data
networks  converge,  and as  mediums  such as  instant  messaging  and  Internet
delivery  cross  from the  domain  of  desktop  users  to  mobile  devices.  The
Internet's reach is wider than imagined and its growth faster than expected. The
Internet  has become one of the world's  largest  distribution  systems.  It was
designed  and  engineered  to have an  abundance  of  routes,  connections,  and
elasticity.  Recognizing  this  trend,  we  continue to look for new value added
service  applications  for  Bestnetcall  to bring  to our  existing  and  future
clients.

     The growth  and  universal  acceptance  of the  Internet  is  creating  new
opportunities for BestNet,  where its core technology can be leveraged in unique
and creative ways. BestNet is a highly efficient interface,  linking traditional
circuit  switched  networks  (PSTN)  with the  global  access  of the  Internet.
BestNet's goal is to make access to its long distance and conference  network as
transparent  as  possible,  using a  variety  of  interfaces  and  devices.  For
enterprise  markets,  this  could  include  integration  into CRM  applications,
company Intranet's,  websites,  PBX systems and IP devices.  For personal users,
the BestNet  application  can be easily  integrated  into  Internet  appliances,
PDA's,  and  mobile  devices,  using  technology  such  as WAP,  SMS or  instant
messaging as a conduit to BestNet's network.

     BestNet  intends  to further  develop  its core  network to be a  universal
interface,  where  intelligence  and  functionality  can  easily be added to the
front-end,  without  having  to  modify  its  core  database  and  call  control
functionality.  As an example,  this universal interface can be a platform where
third parties, using industry compliant standards,  develop customized web-based
services such as foreign currency billing and directories that are localized for
specific customers, or foreign markets.

                                       7
<PAGE>
     In fiscal 2003,  we plan to introduce a variety of new services and product
enhancements - all based on its core technology platform. These new services and
products include the following:

     *    Call Button - Currently on the Bestnetcall  website as a feature,  the
          BestNet  subscriber can configure a graphical  button to be used as an
          alternative  1-800  service.  The  button  can be sent via  e-mail  or
          included  in  an  electronic  document  such  as a  Word  document  or
          PowerPoint  presentation.  Unlike conventional toll-free services, the
          subscriber  will pay less per minute,  can direct the incoming call to
          any phone,  protect the privacy of their own phone  number and provide
          access  beyond  the  geographic  limitations  imposed  by  traditional
          services.

     *    Call-enabled  websites  / banners - Similar in  operation  to the Call
          Button - the underlying technology can be used to enable a web visitor
          to click on an icon,  or a banner to initiate a call.  For example,  a
          sales  organization can have an icon on its website,  inviting foreign
          customers  to  initiate a toll-free  call to the sales  organization's
          call center.  We believe the market  potential for this application is
          promising.  According  to  Datamonitor,  e-retailers  will  spend $460
          million on e-service  solutions.  In addition,  Forrester Research has
          reported that 67% of online  transactions  are aborted because of poor
          interactivity.  BestNet's  technology  is an  ideal  solution  to poor
          interactivity and inefficient access to customer service.

     *    Mobile  Access--Recognizing  the enormous  growth in the mobile market
          and wide-scale  adoption of  data-communication,  such as SMS and WAP.
          BestNet  intends to  introduce  services  specific to the needs of the
          mobile market. SMS (short messaging service),  which was introduced to
          allow  simple   user-to-user   communication,   can  be  an  efficient
          communication  medium to BestNet's network.  Text messaging has caught
          fire in Europe  and Asia.  The U.S market is  lagging  behind,  but is
          poised to  catch-up.  According  to Mobile  Lifestreams,  monthly  SMS
          volume will reach 62.4 billion by the end of the year.

     *    Conferencing--Over  the  last  year,  use  of  BestNet's  conferencing
          application has increased dramatically. BestNet's conferencing service
          can connect up to 64  participants,  which is easily  controlled  by a
          conference  host  using the  Desktop,  Web or Palm  (OS)  application.
          BestNet can connect any phone,  including home,  office or mobile,  to
          the conference.  As a result of customer feedback,  BestNet intends to
          enhance  the  functionality  of its  service.  This  may  include  the
          addition of dial-in capability (800 or toll), call recording, operator
          services and collaborative white-boards.

NETWORK STRUCTURE

     Our network  equipment is  currently  housed in central  office  facilities
located in New York and  Toronto.  Our  system is  designed  to support  over 15
million  minutes of voice traffic per month.  Our system  capacity can be easily
increased as demand for our services  increases.  Currently we have  substantial
excess  capacity.   We  are  now  performing  our  own  network  monitoring  and
maintenance functions, which were previously performed by Softalk.

     Texas  Net,  located  in  Austin,   Texas,  hosts  our  Web  servers.   Our
configuration has redundant servers with load balancing for optimum performance.
Texas Net provides web server monitoring on a 24 x 7 basis.

     Our  switching  matrix is  located in our  central  office  facilities  and
includes  direct  connectivity  to tier-1  carriers.  We have  multiple  carrier
connections at each switch location,  which provides  excellent back-up coverage
and the  ability to  reroute  calls to obtain the  highest  quality  connections
available.  Our carrier  configuration  also allows us to take  advantage of the
highest value (highest  quality/lowest price) service offered by our carriers to
each country and region we service.

     For cost optimization  reasons,  we shut down our facilities in Los Angeles
in the third  quarter of our fiscal year,  which ended August 31, 2002  ("Fiscal
2002").  As a result  of the  available  capacity  of our New  York and  Toronto
facilities,  together  with  accessibility  to carriers at these  locations,  we
determined that our Los Angeles facility was not needed at this time.  Equipment
has been stored for easy deployment when it is needed in the future.

     Currently  all of our voice  traffic is carried by our tier-1  carriers via
their preferred traffic routes. As VoIP continues to evolve, we will continue to
evaluate  its  application  as a means of  delivering  quality  service  for our
customers.

                                       8
<PAGE>
SOFTALK LICENSE AGREEMENT

     Under the terms of our license agreement with Softalk,  we are 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 line costs on a monthly basis.

     Both  parties  have the right to  terminate  the  license  agreement  under
certain conditions, including:

     *    Upon 30 days written  notice to the other  party,  if such other party
          fails  to  comply  in any  material  respect  with  certain  terms  or
          conditions of the license  agreement and such failure to comply is not
          corrected within such 30 day notice period;

     *    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.

     Softalk also has the right to terminate the license  agreement upon 60 days
written  notice  following  a change  of  control  (as  defined  in the  license
agreement) of BestNet.

     Upon termination of the license agreement for any reason whatsoever, we are
permitted  to  continue  using  Softalk's  intellectual  property  in  providing
services to all our existing clients, upon the point of termination.

     We  currently  have  several  ongoing  disputes  with  Softalk over matters
involving  the  license   agreement  and  related  aspects  of  our  contractual
agreements  with  Softalk.  These  disputes  include  allegations  by Softalk to
terminate the license  agreement.  We believe Softalk's  allegations are without
merit and intend to vigorously defend against them. See the disclosure under the
caption  "Item 13.  Certain  Relationships  and Related  Transactions"  for more
information  regarding the various  agreements  entered into between BestNet and
Softalk.  See also  the  disclosure  under  "Item 3.  Legal  Proceedings"  for a
discussion regarding our present legal issues with Softalk.

COMPETITION

     The communications  industry is highly competitive,  and one of the primary
purposes  of the  U.S.  Telecommunications  Act of  1996  is to  foster  further
competition.  In the  markets  we  currently  and  will  compete  in the  future
competition is intense.  Competitors range from large well established telephone
companies to upstart service  providers.  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  flexibility  may  present  established
telephone  companies with an opportunity to subsidize services that compete with
segments of our services and offer competitive  services at lower prices. To the
extent such  activities  occur,  they may have a material  adverse affect on our
business prospects and results of operations.

     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.

     However, recent competitor operating performance has been poor resulting in
price increases for services like long distance and conference  calling.  We, in
response,  have held prices  steady and therefore  increased/improved  our value
proposition to current and potential clients.

                                       9
<PAGE>
REGULATORY OVERVIEW

     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.

APPLICABLE REGULATIONS

     Telecommunications  services are  generally  subject to federal,  state and
local regulation.  The Federal Communications  Commission 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 of 1996,  state and
federal  regulators  share  responsibility  for  implementing  and enforcing the
domestic  pro-competitive  policies of the  Telecommunications  Act of 1996.  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.

FEDERAL REGULATION

     We do not believe our Internet  operations are currently  subject to direct
regulation   by   the   Federal   Communication    Commission   or   any   other
telecommunications  regulatory agency,  although they are subject to regulations
applicable  to businesses  generally.  However,  the future of Internet  Service
Provider  regulatory status continues to be uncertain.  In an April 1998 report,
the Federal Communication  Commission 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 Federal
Communication  Commission'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  our  cost  of  doing  business  over  the  Internet.  In
preparation of this report,  we  specifically  sought any changes in regulations
and or tax  relative to services  we provide in the United  States.  We found no
changes.

EMPLOYEES

     On November 7, 2002,  we employed 10  full-time  employees.  We believe 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.  We believe our relations with employees to be
good.

ITEM 2. DESCRIPTION OF PROPERTY

     We terminated the lease for our office and administrative space, at 5210 E.
Williams Circle, Suite 200, Tucson, Arizona 85711 in October 2001. Our corporate
headquarters  has been relocated to 5075 Cascade Road SE, Suite K, Grand Rapids,
Michigan  49546,  along with our Customer  Service  Department and various other
administrative  functions.  We have also consolidated our Finance and Accounting
Department,  formerly  located  at 1910 N. La  Canada,  Suite 2,  Green  Valley,
Arizona 85614,  to the Cascade Road location in Grand Rapids.  The lease for our
Green  Valley  location  expired on October  31, 2002 and was not  renewed.  The
current lease for our Grand Rapids space is for three years beginning  August 1,

                                       10
<PAGE>
2002, with flexibility for further expansion. Monthly lease costs are $3,025. We
also  entered  into a  one-year  sublease  for an  operations  office at 477 Mt.
Pleasant Road, Suite 400, Toronto,  Ontario, Canada, M4S 2L9. This lease expires
on July 31, 2003 and carries a monthly  payment of  $1,612.00.  Flexibility  for
further expansion exists.

ITEM 3. LEGAL PROCEEDINGS

     In September 2002, we began legal  proceedings in Canada against Softalk to
address numerous breaches of its obligations  under our various  agreements with
Softalk.  In  September  2002,  we obtained a court  order/injunction  requiring
Softalk to monitor and maintain our communication  network during a commercially
reasonable  transition  period.   Softalk  failed  to  comply  with  this  court
order/injunction  and,  instead,  responded  by  making  allegations  of its own
against Bestnet. We believe Softalk's  allegations are without merit. BestNet is
properly  responding and asserting our rights under our present  agreements with
Softalk.  We have moved under our  contractual  agreements to resolve matters in
arbitration  proceedings  with Softalk.  During  October 2002, we sought to have
Softalk  stop  support and shut down  various  competitive  websites,  including
InternetOperator.com,  using BestNet proprietary intellectual property developed
for BestNet by Softalk. We sought in arbitration immediate injunctive relief via
the  shutdown of these  websites.  This  relief was not granted on an  immediate
basis due to the complexity of the issues involved and remains to be resolved as
part of the overall arbitration  proceedings,  which are ongoing. We continue to
pursue all of our rights  under the  agreements  in place  between  BestNet  and
Softalk, and at law.

     On September 21, 2001,  BestNet  filed a complaint  against Mr. Joe Vazquez
and Infinity  Financial  Group related to certain  breaches of an agreement with
Infinity  Financial Group and Mr.  Vazquez.  We recently filed a motion with the
U.S.  District  Court,  for the  Southern  District  of  Florida,  to  enforce a
settlement  agreement  between  Mr.  Vazquez  and  BestNet.  The  terms  of  the
settlement are confidential.

ITEM 4. CONTROLS AND PROCEDURES

     Within the 90 days  prior to the date of this  report,  we  carried  out an
evaluation,  under the supervision and with the participation of our management,
including  our  President  and  Chief  Executive  Officer  along  with our Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of our
disclosure  controls and procedures pursuant to Rule 13a-14 under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation,  our President and
Chief  Executive  Officer  along  with our  Company's  Chief  Financial  Officer
concluded  that our  disclosure  controls and procedures are effective in timely
alerting  them to  material  information  relating  to  BestNet  (including  its
consolidated  subsidiary)  required to be included in the Company's periodic SEC
filings.  There have been no significant  changes in our internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date that we carried out our evaluation.

ITEM 5. 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, 2002.

                                     PART II

ITEM 6. 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, 2000 through  August 31, 2002 by fiscal  quarters  (i.e.,  1st
Quarter = September 1 through November 30) were as follows.

                                       11
<PAGE>
                                              HIGH         LOW
                                              ----         ---
          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

          FISCAL YEAR ENDED:
          August 31, 2002
          First Quarter                       3.00          1.55
          Second Quarter                      1.56           .65
          Third Quarter                       1.58           .35
          Fourth Quarter                      2.50           .71

     The bid and asked  prices of our common  stock on  November  7, 2002,  were
$1.06 and $1.12, respectively.

     As of November 7, 2002, the Company had 148  shareholders  of record of its
common stock.  As of November 7, 2002, the Company had 2,001  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 business growth.

     Nasdaq  Delisting.  Our common stock was delisted from the NASDAQ Small Cap
Market  on May 4,  1999,  due to the fact  that we were not in  compliance  with
Nasdaq's $1.00 minimum bid price  requirements.  Since June 28, 1999, our common
stock has been traded on the OTC Bulletin Board under the symbol BESC.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

     The following  discussion and analysis  should be read in conjunction  with
our  selected  consolidated   financial  data  and  our  Consolidated  Financial
Statements and notes appearing elsewhere in this report.

INTRODUCTION

     We derive our revenue primarily from fees charged for customer usage of our
Bestnetcall  service.  Both business and personal accounts grew by 153% over the
previous  fiscal  year.  At 2002  fiscal  year  end the  Company  had a total of
approximately 13,000 accounts,  of which 7,000 new active accounts were enrolled
this year,  in comparison  to 4,500 new active  accounts in the previous  fiscal
year.  Bestnetcall  users  presently  make calls from 142  countries  and to 198
countries.  Fees for our services  include  long  distance  calling,  along with
conference calling, completed through our network.

CRITICAL ACCOUNTING POLICIES

     "Management's Discussion and Analysis of Financial Condition and Results of
Operations"  discusses  our  consolidated  financial  statements  that have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and  assumptions  that affect the reported amount of assets
and  liabilities  at the date of the  financial  statements,  the  disclosure of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to  revenue  recognition,   valuation  allowances  for  inventory  and  accounts
receivable,  warranty and impairment of long-lived assets. We base our estimates
and  judgments on  historical  experience  and on various other factors that are
believed to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making  conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources.  Actual
results  may  differ  from  these  estimates  under  different   assumptions  or
conditions.  The SEC suggests  that all  registrants  list their most  "critical

                                       12
<PAGE>
accounting  policies"  in  Management's  Discussion  and  Analysis.  A  critical
accounting  policy  is one  which  is both  important  to the  portrayal  of the
Company's  financial  condition  and  results  and  requires  management's  most
difficult,  subjective  or complex  judgments,  often as a result of the need to
make  estimates  about the  effect of  matters  that are  inherently  uncertain.
Management  believes the following critical  accounting policies affect its more
significant  judgments  and  estimates in the  preparation  of its  consolidated
financial statements.

     These policies  include,  but are not limited to, the carrying value of the
Softalk license fee, which is dependant upon future profitable  operations;  and
the ultimate resolution of the note receivable from Softalk, an affiliate.  Both
of these  items may be  affected  by the  pending  arbitration  proceeding  with
Softalk, as discussed in Part I, Item 3. Legal Proceedings.

COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 2002 AND AUGUST 31, 2001

     REVENUES

     Revenues  increased by 194% to  $1,060,582  in the fiscal year ended August
31, 2002 ("Fiscal 2002") from $360,615 for the fiscal year ended August 31, 2001
("Fiscal  2001").  Revenue  growth was seen in both long distance and conference
calling services. All of our communication revenue to date has been derived from
the sale of minutes carried over our communication network.

     COST OF SALES

     Costs of sales  increased  to  $1,432,196  in Fiscal 2002 from  $382,298 in
Fiscal 2001.  These costs  consisted of long distance fees from carriers for our
Bestnetcall  service along with other variable and fixed costs  associated  with
maintaining  our service  network.  The  increase in cost of sales is  primarily
attributable to growth in revenues from our Bestnetcall service. Development and
maintenance expenses paid to Softalk,  and not capitalized,  also contributed to
the  increase in cost of sales.  Going  forward,  we have taken over our network
maintenance   functions   and  expect  our  costs  in  this  area  to   decrease
substantially in future periods.

     GENERAL AND ADMINISTRATIVE EXPENSES

     Operating  expenses  decreased to $2,028,732 in Fiscal 2002 from $2,044,720
in Fiscal 2001.  Investor  relations expense decreased by $148,712 to $92,038 in
Fiscal 2002,  compared to $240,750 in Fiscal 2001.  Payroll expense increased by
$420,964  to $742,075  in Fiscal  2002,  compared to $321,111 in Fiscal 2001 due
principally to the hiring of key executive employees.  Consulting fees increased
to $121,777 in Fiscal 2002 from $105,718 in Fiscal 2001. Rent expense  decreased
by $30,241 in Fiscal 2002 due to facility  consolidation.  Bad debt expense also
decreased  to $6,662 in Fiscal  2002,  compared  to $27,178  in Fiscal  2001 due
primarily to the implementation of procedures to detect fraudulent activity on a
real-time  basis.  We also have reduced our bad debt  allowance to .7% of annual
sales  compared to 1.0% in Fiscal 2001.  This decrease is a direct result of our
improved fraud detection procedures.

     DEPRECIATION AND AMORTIZATION EXPENSES

     Depreciation and amortization  expenses  increased to $2,277,525 for Fiscal
2002 from $1,979,975 for Fiscal 2001. This increase was due to amortization  and
depreciation on additional purchases of equipment,  software, computer hardware,
and applications.

     INTEREST INCOME

     Interest income  decreased to $3,023 in Fiscal 2002 from $227,691 in Fiscal
2001.  Interest  income recorded on a note receivable from Softalk during Fiscal
2002 was  recorded  as  deferred  revenue  since  this note has  matured  and is
callable at any time.  During 2002,  interest was deferred due to the note being
past due and the fact that the Company is currently in arbitration with Softalk.
See Item 3, Legal Proceedings for further information.

                                       13
<PAGE>
     INTEREST EXPENSE

     Interest expense increased to $764,688 in Fiscal 2002, $15,571 of which was
paid to investors in Fiscal 2002. Total interest expense paid in Fiscal 2001 was
$36. The increase in booked interest  expense was due to short term  convertible
promissory  notes  resulting in $900,000  worth of  financing.  The  outstanding
balance of these  convertible  promissory notes at August 31, 2002 was $203,125.
All of the  convertible  promissory  notes were converted into shares of BestNet
common stock by November 1, 2002.  Therefore,  the non-cash interest expense was
booked as a beneficial conversion.

     DISCONTINUED OPERATIONS

     In Fiscal  2002,  BestNet  exited the  highly  competitive  travel  service
business by shutting down its subsidiary Bestnetravel. Revenues for Bestnetravel
during Fiscal 2002 were $36,715, compared with $132,644 in Fiscal 2001. The cost
of goods  sold  associated  with  these  revenues  were  $36,252  and  $115,364,
respectively.  Management  considered this business to be  non-strategic  to the
overall goals of the corporation.

     PREFERRED STOCK CONVERSION PENALTY

     We incurred  liquidated  damages to the holder of our Series C  Convertible
Preferred Stock (the "Series C Preferred Stock") equal to $35,944. There were no
conversion penalties in Fiscal 2001. On November 8, 2002, we issued common stock
in payment of this penalty.

     PREFERRED DECLARED AND DEEMED DIVIDENDS

     Preferred  dividends  increased to $958,723 for Fiscal 2002,  from $212,013
for Fiscal 2001.  The increase of $746,710 was due primarily to the recording of
deemed dividends from beneficial  conversions of Series B and Series C Preferred
Stock.  Dividends  accumulated,  with respect to the  outstanding  shares of the
Series B  Preferred  Stock,  at a rate of six  percent  (6%) per annum,  and are
payable  in cash or shares  of common  stock of the  Company,  at the  Company's
option. Dividends for the Series B Preferred Stock were $12,253 for Fiscal 2002.
Dividends  accumulated,  with respect to the outstanding  shares of the Series C
Preferred  Stock, at a rate of eight percent (8%) per annum,  and are payable in
cash or in shares of  common  stock of the  Company,  at the  Company's  option.
Dividends  for the Series C Preferred  Stock were $14,233 for Fiscal  2002.  The
Company also recorded a deemed dividend of $665,487  resulting from a conversion
premium on its Series B Preferred Stock and $141,750  related to warrants issued
upon  redemption  on September  28, 2001.  The  remaining  $125,000 in dividends
resulted from a beneficial conversion feature of deemed dividends for the Series
C Preferred Stock.

     INCOME TAXES.

     At  August  31,  2002,   the  Company  had  federal  net   operating   loss
carryforwards  totaling  approximately  $20,104,000 and state net operating loss
carryforwards of approximately $11,447,000.  The federal and state net operating
loss  carryforwards  expire in various amounts beginning in 2003.  Additionally,
the Company has capital loss  carryforwards of approximately  $216,000 that 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.

     LIQUIDITY AND CAPITAL RESOURCES

     During fiscal 2002,  we incurred a net loss of  $5,503,925  compared with a
net loss of $3,820,077 in fiscal 2001. Cash used in operating activities totaled
$1,739,834 in fiscal 2002 and $996,186 in 2001.

     On  August  31,  2002,  we had  cash  of  $351,784,  total  liabilities  of
$1,046,125  and  stockholders'  equity of $8,454,275.  Our total  liabilities at
August 31, 2002 included  $203,125 owed on 8% Convertible  Promissory  Notes and
$450,889 owed to Softalk. All of the convertible promissory notes were converted
into common stock on or before  November 1, 2002. The balance owed to Softalk is
the subject of ongoing  arbitration  proceedings in Canada. Also included in the
total  liabilities is $129,323 of deferred  interest  income accrued on the note
receivable with Softalk.

     Our  ability to service our  long-term  debt and to fund  working  capital,
capital expenditures and business development efforts will depend on our ability
to generate  cash from  operating  activities,  which is subject to, among other

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<PAGE>
things,  our  future  operating  performance  as  well as to  general  economic,
financial,  competitive,  legislative,  regulatory and other conditions, some of
which may be beyond our control.

     Currently,  if we do not generate sufficient cash from operations,  we will
need to raise  additional  equity  or borrow  additional  funds to  achieve  our
longer-term business  objectives.  There can be no assurance that such equity or
borrowings  will be  available  or,  if  available,  will be at rates or  prices
acceptable to us. Although there can be no assurances, we believe that cash flow
from operating  activities  coupled with existing cash balances will be adequate
to fund our operating and capital  needs  through  February  2003. To the extent
that actual results or events differ from our financial  projections or business
plans,  our  liquidity  may be  adversely  impacted.  Funding for the balance of
Fiscal 2003 will most likely come from additional  convertible debt, the sale of
equity or a combination of the two.

     Historically,  we have financed our cash requirements  principally  through
the sale of debt and equity  securities,  and the exercise of stock options.  In
Fiscal  2002,  the Company  raised  $1,970,111  from the sale of debt and equity
securities  compared with  $218,649 in Fiscal 2001 by  completing  the following
financing transactions.

     *    October  17,  2001 - The  Company  completed  a private  placement  of
          $500,000  of  Series C  Preferred  Stock  and  common  stock  purchase
          warrants.  A total of 5,000  shares  of Series C  Preferred  Stock and
          warrants to purchase an  aggregate  of 25,000  shares of common  stock
          were issued in this October 2001 transaction.  The warrants have a per
          share exercise price of $2.90.

     *    January  30, 2002 - The Company  completed a private  placement  of an
          additional  $115,000  of Series C  Preferred  Stock and  common  stock
          purchase warrants. A total of 1,150 shares of Series C Preferred Stock
          and  warrants to purchase an aggregate of 5,750 shares of common stock
          were issued in this January 2002 transaction.  The warrants have a per
          share exercise price of $1.19.

     *    March 8, 2002 - The Company obtained $100,000 in financing through the
          issuance of two $50,000 8% Subordinated  Convertible  promissory notes
          due June 8, 2002.

     *    March 14, 2002 - The Company  completed a private placement of 519,750
          shares of common  stock,  yielding  net  proceeds  to the  Company  of
          $225,905.

     *    April 23, 2002 - The Company  obtained  $800,000 in financing  through
          the  issuance of 8% Senior  Secured  Promissory  Notes due November 1,
          2002.  The Company  also issued  warrants to purchase an  aggregate of
          1,000,000  shares of common  stock at a per  share  exercise  price of
          $0.50. This note was convertible to stock at $.40 per share.

     *    August 30, 2002 - The Company completed a private placement of 264,550
          shares of  restricted  common  stock,  yielding  net  proceeds  to the
          Company of $250,000.

     During the fiscal year ended August 31, 2002,  cash flow used by continuing
operations was approximately $1,734,190 resulting primarily from maintenance and
carrier  costs  of  the  Bestnetcall  systems  and  salaries  of  the  Company's
employees.

     Cash provided by financing activities was approximately  $1,953,114 for the
fiscal year ended August 31, 2002,  primarily due to the following:  the Company
raised  $475,905  through  two private  placements  of common  stock.  We raised
$507,000  through  the  sale  of  convertible   preferred  stock  to  accredited
investors.  We raised  $900,000  through the issuance of convertible  promissory
notes. The remaining amounts were raised through the exercise of stock options.

     Cash used in  investing  activities  was,  approximately  $147,014  for the
fiscal year ended August 31, 2002,  primarily  due to the purchase of equipment,
applications  and  assets  necessary  to improve  the  Bestnetcall  product  and
services.

     On September 26, 2002, the Company entered into a Note and Warrant purchase
agreement with several accredited investors, which resulted in gross proceeds to
BestNet of $665,000.

     There  can be no  assurance  that we  will  meet  our  targeted  levels  of
operating  cash  flow  or  that  we will  not  incur  significant  unanticipated
liabilities. Similarly, there can be no assurance that we will be able to obtain
additional  debt or equity  financing  on terms  satisfactory  to us, or at all,
should cash flow from  operations  and our existing cash  resources  prove to be

                                       15
<PAGE>
inadequate.  We do not have  access to  borrowings  under any credit  facilities
other than our sale of debt  securities from time to time. If we are required to
seek  additional  financing,  any such  arrangement  may  involve  material  and
substantial  dilution to existing  stockholders  resulting  from,  amongst other
things,  issuance of equity  securities or the conversion of debt to equity.  In
such  event,  the  percentage  ownership  of our  current  stockholders  will be
materially reduced,  and such equity securities may have rights,  preferences or
privileges senior to our current common  stockholders.  If we require additional
financing but are unable to obtain it, our business,  financial condition,  cash
flows and results of operations may be materially adversely affected.

PENDING ACCOUNTING PRONOUNCEMENTS

     In August 2001, the Financial  Accounting  Standards  Board ("FASB") issued
Statement of Financial  Accounting  Standards ("SFAS") No. 144,  "Accounting for
the Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed  of," and  amends  "Accounting  Principles  Board  Opinion  No. 30,
Reporting  the Results of  Operations  - Reporting  the Effects of Disposal of a
Segment of a Business  and  Extraordinary,  Unusual and  Infrequently  Occurring
Events  and  Transactions."  The  new  rules  apply  to the  classification  and
impairment analysis conducted on long-lived assets other than certain intangible
assets,  resolve existing conflicting  treatment on the impairment of long-lived
assets and provide  implementation  guidance regarding impairment  calculations.
SFAS No. 144 also expands the scope to include all distinguishable components of
an  entity  that  will be  eliminated  from  ongoing  operations  in a  disposal
transaction.  We  have  adopted  the  standard  and  as a  result  completed  an
independent  SFAS  No.  144  review  of our  intangible  assets  by a  certified
valuation  firm.  The  adoption  of this  standard  has not had an impact on the
carrying value of the Company's capitalized license fee.


     In May 2002, the FASB issued SFAS No. 145,  "Rescission of FASB  Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
as of April 2002",  that,  among other things,  rescinded SFAS No. 4, "Reporting
Gains And Losses From  Extinguishment  Of Debt." With the rescission of SFAS No.
4, companies generally will no longer classify early  extinguishments of debt as
an extraordinary  item. The provision related to the rescission is effective for
fiscal years beginning after May 15, 2002, and early  application is encouraged.
We will adopt the standard at such time and do not expect that the adoption will
have a significant impact on our financial position or results of operations.


     In July  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated  with Exit or Disposal  Activities,"  which replaces  Emerging Issues
Task  Force  Issue  No.  94-3,  "Liability   Recognition  for  Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (Including  Certain
Costs  Incurred in a  Restructuring)."  The new standard  requires  companies to
recognize  costs  associated  with  exit or  disposal  activities  when they are
incurred  rather than at the date of a commitment  to an exit or disposal  plan.
The provisions of SFAS 146 are effective for disposals  after December 31, 2002.
We will adopt the standard at such time and do not expect that the adoption will
have a significant impact on our financial position or results of operations.

INFLATION

     Although our  operations  are  influenced by general  economic  trends and,
specifically,  technological advances in the telecommunications  industry, we do
not  believe  that  inflation  has had or will  have a  material  impact  on our
operations.

ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

WE ARE DEPENDENT ON COMPONENTS OF OUR LICENSE AGREEMENT WITH SOFTALK,  WHICH, IF
MATERIAL CHANGES IN THIS AGREEMENT OCCURRED, COULD ADVERSELY IMPACT OUR BUSINESS
AND FUTURE OPERATIONS.

     We are dependent on components of our license agreement with Softalk, which
gives us a worldwide exclusive license to distribute,  market, service, sell and
sublicense  current and future  Softalk  communication  software  to  commercial
accounts.  This  agreement  also grants us a worldwide  nonexclusive  license to
distribute,  market,  service,  sell and  sublicense  current and future Softalk
communication software to individual customer accounts. In September of 2002, we
began legal  proceedings  against Softalk in Canada to address numerous breaches
of its obligations under the various  agreements in place between our companies.
In September  2002, we obtained a court  order/injunction  requiring  Softalk to
monitor and  maintain  BestNet's  communication  network  during a  commercially
reasonable transition period. Softalk failed to comply with this court

                                       16
<PAGE>
order/injunction  and has, instead,  responded by making  allegations of its own
against BestNet for alleged breaches of the Softalk license agreement. On making
its allegations,  Softalk has threatened to terminate the license agreement.  We
believe  Softalk's  allegations  are  without  merit and  BestNet is  responding
properly and asserting our rights under our agreements  with Softalk and at law.
We have moved under the contractual agreements to resolve matters in arbitration
proceedings  with Softalk.  Although at this point  unlikely,  in the event such
proceedings,  or any  other  proceedings  arising  out of the  context  of these
arbitration  proceedings,  result in material changes in the agreements,  or the
termination  thereof,  such an outcome  could  materially  adversely  impact our
business and future 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 ten years.  The  Bestnetcall
service is a unique value-generating  product. Based on our marketing efforts to
date it is still too early to determine if the  Bestnetcall  service will likely
achieve broad  commercial  acceptance by Internet users.  The failure to achieve
broad  market  acceptance  will 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 developing  international
          markets;

     *    acceptance by Internet users;

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

     *    the  maintenance  of  BestNet's  network at a high level of quality to
          support commercial acceptance of the Bestnetcall service.

To address these risks BestNet must, among other things:

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

     *    continue to provide  value  creating  services  for current and future
          customers;

     *    grow usage by our existing customer base;

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

     *    expand value-added services;

     *    successfully respond to competitive developments;

     *    continue to form and maintain relationships with strategic partners;

     *    continue to attract, retain and motivate qualified personnel;

     *    provide superior customer service; and

     *    continue to develop and upgrade  technologies and commercialize  value
          creating Internet based services.

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.

                                       17
<PAGE>
     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 that provide Internet telephone
services  to  end-users  located  within the U.S. To date this has not been done
however,  the  imposition  of such  surcharges  or the  regulation  of  Internet
telephony providers both in the U.S. and internationally 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 is marketing its service to international  long distance callers in
over 140  countries  around the world.  Because it will be  conducting  business
internationally,  BestNet is subject to certain direct or indirect risks.  These
risks could include:

     *    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.

     *    Changes  in  regulations  and tax  could  have an  adverse  effect  on
          BestNet's revenue and costs.

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

     As of August 31, 2002,  BestNet had an accumulated  deficit of $23,488,980.
Prior year's  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.

                                       18
<PAGE>
     BestNet believes that its future  profitability  and success will depend in
large part on its ability to generate  revenue from the sale of its  Bestnetcall
service to businesses.  Revenues are also anticipated from the  sub-licensing of
proprietary  technology and business  systems to partners around the world.  The
profitability and success of BestNet will depend on:

     *    our  ability to  maintain  existing  corporate  relationships  and our
          ability to enter  into new  relationships.  Our  ability to retain the
          right to sell value added Internet based services;

     *    our ability to  effectively  create and  maintain  relationships  with
          multinational partners;

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

     *    our ability to generate sufficient sales volume.

     Accordingly,  BestNet expects to continue to expend  significant  financial
and management resources on the roll-out of the Bestnetcall  service,  strategic
relationships,  sales and marketing  along with operating  improvements  to meet
specific  client  needs.  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.

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

     Conflicts  of  interest  could  continue to 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 ownership matters;

     *    potential acquisitions or financing transactions; and

     *    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  arising out of the
active  arbitration.  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 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.

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
international   markets.   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. In addition,  international
regulations  continue  to change and could  adversely  affect  business  that we
currently have along with business that we will develop in the future.

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 both voice and data. 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

                                       19
<PAGE>
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 the Internet is not secure,  even if  unfounded,
means  that  fewer  consumers  might use our  services.  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.
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 required to further
fund our company.

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.

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 businesses;

     *    to expand the range of services it offers;

     *    to increase  the number of customers  and revenues  using its services
          and the price of services;

     *    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 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.

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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                          BestNet Communications Corp.
                          Audited Financial Statements
                           Year ended August 31, 2002

                                    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-6
          Notes to Consolidated Financial Statements                     F-8

                                       21
<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,  2002,  and the  related  consolidated
statements  of  operations,  stockholders'  equity  and cash flows for the years
ended  August  31,  2002  and  2001.   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  auditing  standards  generally
accepted in the United States of America.  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, 2002, and the consolidated results
of its operations,  changes in stockholders'  equity, and its cash flows for the
years ended August 31, 2002 and 2001 in conformity  with  accounting  principles
generally accepted in the United States of America.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that the Company will continue as a going concern. As discussed in Note
13  to  the  consolidated   financial  statements,   the  Company  has  incurred
significant  losses from operations,  anticipates  additional losses in the next
year and has  insufficient  working  capital as of August  31,  2002 to fund the
anticipated  losses.  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 16, 2002
Phoenix, AZ

                                      F-1
<PAGE>
                  BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                 AUGUST 31, 2002

                                                                    AUGUST 31,
                                     ASSETS                            2002
                                                                   ------------
Current assets:
  Cash and cash equivalents                                        $    351,784
  Certificate of deposit                                                 22,773
  Accounts receivable, less allowance of $7,826                          72,844
  Prepaid expenses and other current assets                              71,801
                                                                   ------------

      Total current assets                                              519,202

Property and equipment, net of accumulated depreciation
  of $2,335,732                                                       1,625,348
License fee, net of amortization of $3,930,258                        5,744,510
Note receivable from Softalk, an affiliate                            1,508,043
Deposits and other assets                                               103,297
                                                                   ------------

      Total assets                                                 $  9,500,400
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                            $    700,270
  Notes payable - net of discount of $96,875                            203,125
  Deferred interest income                                              129,323
  Deferred revenue                                                       13,407
                                                                   ------------

    Total current liabilities                                         1,046,125

Stockholders' equity:
  Common stock, par value $.001 per share; 50,000,000 shares
    authorized, 16,530,005 shares issued and outstanding                 16,530
  Additional paid-in capital                                         31,041,961
  Accumulated deficit                                               (23,488,980)
  Common stock subscribed, underlying common shares of 1,866,842        884,764
                                                                   ------------

      Total stockholders' equity                                      8,454,275
                                                                   ------------

      Total liabilities and stockholders' equity                   $  9,500,400
                                                                   ============

          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, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                         2002            2001
                                                                     ------------    ------------
<S>                                                                  <C>             <C>
Revenues                                                             $  1,060,582    $    360,615

Expenses:
  Cost of revenues (exclusive of depreciation and
    amortization shown separately below)                                1,432,196         382,298
                                                                     ------------    ------------

        Gross loss                                                       (371,614)        (21,683)
                                                                     ------------    ------------
  General and administrative expenses                                   2,028,732       2,044,720
  Depreciation and amortization                                         2,277,525       1,979,975
                                                                     ------------    ------------

        Total operating expenses                                        4,306,257       4,024,695
                                                                     ------------    ------------
        Net loss from operations                                       (4,677,871)     (4,046,378)
                                                                     ------------    ------------
Other income (expense):
  Interest income                                                           3,023         227,691
  Interest expense                                                       (764,688)            (36)
  Foreign asset tax expense                                               (30,050)            (50)
  Preferred stock conversion penalty                                      (35,944)             --
  Gain on sale of fixed assets                                              2,405              --
  Other                                                                      (800)         (1,304)
                                                                     ------------    ------------

        Total other income (expense)                                     (826,054)        226,301
                                                                     ------------    ------------
        Loss from continuing operations                                (5,503,925)     (3,820,077)
                                                                     ------------    ------------

Discontinued Operations:
  Operating (loss) income from discontinued operations                     (5,468)         17,280
  Loss on sale of discontinued operations                                    (332)             --
                                                                     ------------    ------------
        (loss) income from discontinued operations                         (5,800)         17,280
                                                                     ------------    ------------

        Loss from operations                                           (5,509,725)     (3,802,797)

Preferred stock dividends (See Note 12)                                   958,723         212,013
                                                                     ------------    ------------

Loss available to common shareholders                                $ (6,468,448)   $ (4,014,810)
                                                                     ============    ============

Earnings (loss) per common share, basic and diluted
       Continuing operations                                         $      (0.41)   $      (0.45)
       Discontinued operations                                       $      (0.00)   $       0.00
                                                                     ------------    ------------
Net loss attributable to common shareholders                         $      (0.41)   $      (0.45)
                                                                     ============    ============

  Weighted average number of shares outstanding, basic and diluted     15,933,908       9,013,669
                                                                     ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
                          BESTNET COMMUNICATIONS CORP.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                       FOR THE YEAR ENDED AUGUST 31, 2002

<TABLE>
<CAPTION>
                                                PREFERRED STOCK
                                        SERIES C              SERIES B               COMMON STOCK
                                   SHARES     AMOUNT     SHARES     AMOUNT       SHARES       AMOUNT
                                  -------     ------     ------     ------     ----------    --------
<S>                               <C>         <C>        <C>        <C>        <C>           <C>
Balances, August 31, 2001              --         --        532      $   5     11,772,313    $ 11,772

Net loss                               --         --         --         --             --          --
Conversion of Series B
   Preferred Stock                     --         --       (532)        (5)     2,342,516       2,342
Conversion of notes payable
   into Common Stock                   --         --         --         --             --          --
Issuance of Series C
   Preferred Stock                  6,150          6         --         --             --          --
Conversion of Series C
   Preferred Stock                 (6,150)        (6)        --         --        985,689         986
Preferred stock dividends              --         --         --         --         33,582          33
Conversion penalties - Series
   C Preferred Stock                   --         --         --         --         11,912          12
Common stock issued for
   services                            --         --         --         --         58,614          59
Common Stock purchase
   agreements                          --         --         --         --        519,750         520
Warrants issued                        --         --         --         --             --          --
Warrants exercised                     --         --         --         --        160,000         160
Conversion premium-Series B
   Preferred Stock                     --         --         --         --        585,628         586
Beneficial conversion feature-
   Series C Preferred Stock            --         --         --         --             --          --
Beneficial conversion feature-
   Subordinated Convertible
   Promissory Notes                    --         --         --         --             --          --
Beneficial conversion feature-
   Senior Secured Convertible
   Promissory Notes                    --         --         --         --             --          --

Stock options exercised                --         --         --         --         60,001          60
                                  -------     ------     ------     ------     ----------    --------
Balances, August 31, 2002              --     $   --         --     $   --     16,530,005    $ 16,530
                                  =======     ======     ======     ======     ==========    ========

                                   ADDITIONAL
                                    PAID-IN         ACCUMULATED     COMMON STOCK
                                    CAPITAL           DEFICIT        SUBSCRIBED        TOTAL
                                  ------------     ------------     ------------    ------------

Balances, August 31, 2001         $ 28,109,515     $(17,020,532)    $         --    $ 11,100,760

Net loss                                    --       (5,509,725)              --      (5,509,725)
Conversion of Series B
   Preferred Stock                      (2,337)              --               --              --
Conversion of notes payable
   into Common Stock                        --               --          600,000         600,000
Issuance of Series C
   Preferred Stock                     506,994               --               --         507,000
Conversion of Series C
   Preferred Stock                        (980)              --               --              --
Preferred stock dividends               25,344          (26,486)           1,109              --
Conversion penalties - Series
   C Preferred Stock                     3,737               --           32,195          35,944
Common stock issued for
   services                             99,641               --               --          99,700
Common Stock purchase
   agreements                          225,385               --          250,000         475,905
Warrants issued                        850,014         (141,750)              --         660,800
Warrants exercised                        (160)              --               --          47,464
Conversion premium-Series B
   Preferred Stock                     664,901         (665,487)              --              --
Beneficial conversion feature-
   Series C Preferred Stock            125,000         (125,000)              --              --
Beneficial conversion feature-
   Subordinated Convertible
   Promissory Notes                     42,858               --               --          42,858
Beneficial conversion feature-
   Senior Secured Convertible
   Promissory Notes                    323,360               --               --         323,360

Stock options exercised                 68,689               --            1,460          70,209
                                  ------------     ------------     ------------    ------------
Balances, August 31, 2002         $ 31,041,961     $(23,488,980)    $    884,764    $  8,454,275
                                  ============     ============     ============    ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>
                          BESTNET COMMUNICATIONS CORP.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                       FOR THE YEAR ENDED AUGUST 31, 2001

<TABLE>
<CAPTION>
                                                PREFERRED STOCK
                                    SERIES C              SERIES B              COMMON STOCK
                               SHARES     AMOUNT     SHARES     AMOUNT      SHARES         AMOUNT
                               ------     ------     ------     ------    ----------      --------
<S>                           <C>         <C>        <C>        <C>       <C>           <C>
Balances, August 31, 2000          --        --       1,000     $   5      3,403,713    $  3,404,713
Net loss                           --        --          --        --             --              --
Conversion of Series B
  Preferred Stock                                      (468)       --      3,477,400       3,477,400
Preferred stock dividends          --        --          --        --        227,265         227,265
Preferred stock conversion
  penalty                          --        --          --        --         74,431          74,431
Common stock issued for
  services                         --        --          --        --        162,000         162,000
Share exchange                     --        --          --        --      4,329,004       4,329,004
Warrants issued                    --        --          --        --             --              --
Stock options issued for
  services and software            --        --          --        --             --              --


Stock options exercised            --                    --        --             --      98,500,500
                                          -----      ------     -----     ----------    ------------
Balances, August 31, 2001          --     $  --         532     $   5     11,772,313    $ 11,772,313
                              =======     =====      ======     =====     ==========    ============

                               ADDITIONAL
                                PAID-IN         ACCUMULATED     COMMON STOCK
                                CAPITAL           DEFICIT        SUBSCRIBED          TOTAL
                              ------------     ------------     ------------     ------------

Balances, August 31, 2000     $ 26,654,638     $(13,005,722)    $         --     $ 13,652,325
Net loss                                --       (3,802,797)                       (3,802,797)
Conversion of Series B
  Preferred Stock                   (3,477)              --               --               --
Preferred stock dividends          211,786         (212,013)              --               --
Preferred stock conversion
  penalty                          121,668               --               --          121,742
Common stock issued for
  services                         453,538               --               --          453,700
Share exchange                      (4,329)              --               --               --
Warrants issued                    221,700               --               --          221,700
Stock options issued for
  services and software            355,590               --               --          355,590

                                                                                       98,500
Stock options exercised                 99           98,401               --               --
                              ------------     ------------     ------------     ------------
Balances, August 31, 2001     $ 28,109,515     $(17,020,532)    $         --     $ 11,100,760
                              ============     ============     ============     ============
</TABLE>

           See accompanying notes to consolidated financial statements

                                      F-5
<PAGE>
                  BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  FOR THE YEARS ENDED AUGUST 31, 2002 AND 2001

<TABLE>
<CAPTION>
                                                                 2002            2001
                                                             -----------     -----------
<S>                                                          <C>             <C>
Operating activities:
  Loss from operations                                       $(5,509,725)    $(3,802,797)
     Less: income (loss) from discontinued operations             (5,800)         17,280
                                                             -----------     -----------
     Loss from continuing operations                          (5,503,925)     (3,820,077)

  Adjustments to reconcile net loss to net cash
    used in operating activities:
  Depreciation and amortization                                2,277,525       1,979,975
  Gain on sale of fixed assets                                    (2,405)             --
  Non-cash transactions (See Note 11)                          1,111,760         804,232
  Changes in assets and liabilities:
     Accounts receivable                                         (54,471)        (18,373)
     Prepaid expenses and other current assets                   (35,138)        (12,761)
     Deposits and other assets                                   (77,017)         98,446
     Accounts payable and accrued expenses                       546,534         (55,213)
     Deferred revenue                                              2,947          10,460
                                                             -----------     -----------
         Net cash used in operating activities from
           continuing operations                              (1,734,190)     (1,013,311)
         Net cash provided by (used in) operating
           activities from discontinued operations                (5,644)         17,125
                                                             -----------     -----------
         Net cash used in operating activities                (1,739,834)       (996,186)
                                                             -----------     -----------
Investing activities:
  Purchase of property and equipment                            (175,404)     (1,397,693)
  Cash received from sale of property and equipment               12,650              --
  Purchase of a certificate of deposit                                --         (20,000)
  Repayment of notes receivable from related parties              15,440          21,840
                                                             -----------     -----------
         Net cash used in investing activities from
           continuing operations                                (147,314)     (1,395,853)
         Net cash (used) provided by investing activities
           from discontinued operations                              300            (842)
                                                             -----------     -----------
         Net cash used in investing activities                  (147,014)     (1,396,695)
                                                             -----------     -----------
Financing activities:
  Proceeds from issuance of convertible notes payable            900,000              --
  Principal payments on capital lease obligations                     --          (1,593)
  Proceeds from the sale of common stock                         475,905              --
  Proceeds from the issuance of Series C Preferred Stock         507,000              --
  Proceeds from the exercise of stock options                     70,209          98,500
                                                             -----------     -----------

         Net cash provided by financing activities             1,953,114          96,907
                                                             -----------     -----------

         Net increase (decrease) in cash                          66,266      (2,295,974)

Cash and cash equivalents, beginning of year                 $   285,518     $ 2,581,492
                                                             -----------     -----------

Cash and cash equivalents, end of year                       $   351,784     $   285,518
                                                             ===========     ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>
Supplemental disclosure of cash flow information:

                                                       2002         2001
                                                       ----         ----
     Cash paid during the year for:

     Interest                                        $15,571        $ 36
     Taxes                                           $   453        $ 50

          See accompanying notes to consolidated financial statements.

                                      F-7
<PAGE>
1. ORGANIZATION

     BestNet  Communications  Corp.,  a Nevada  corporation  (the  "Company" and
formerly  Wavetech  International,  Inc.),  is currently  actively  pursuing the
implementation of its business strategy of providing Internet  application based
communication services. The Company has recorded net operating losses in each of
the previous ten years and does not anticipate achieving profitability 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.
During Fiscal 2002 the  operations of  Bestnetravel  were shut down, as it was a
non-profitable, non-strategic business.

     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 (3) 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  method over the estimated useful lives of the related assets
as follows:

                 Furniture and fixtures            7 years
                 Computer equipment                5 years
                 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 a write down if the carrying  value has become  impaired.
An impairment is determined if the  anticipated  net 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.  Specifically,  this year,
BestNet contracted with Economic Valuation  Advisors,  LLC, a consulting firm in
the business of completing SFAS No. 144 impairment tests,  among other services.
Economic  Valuation  Advisors,  LLC tested the fair value of  BestNet's  license
agreement  with  Softalk,  and no  impairment  was found due to an option in the
Agreement  allowing  BestNet  to renew  the  Agreement  upon  expiration  of the
original term with no additional consideration required.

                                       F-8
<PAGE>
     Additionally,  the lack of  impairment  contemplates  that  BestNet will be
successful  in its  ongoing  arbitration  with  Softalk to the  extent  that the
license with  Softalk  will not be effected in a negative  manner as a result of
the   arbitration.   See  Note  8,  Related  Party   Transactions,   Significant
Concentrations and Contingencies for further  information related to the ongoing
Softalk arbitration.

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.

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, 2002, the Company had approximately $322,000 of uninsured 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%  (5.75% on August  31,  2002)  which
management believes approximates the current rate.

REVENUE RECOGNITION

     The Company's  revenue is derived from  customers' use of our  applications
and network on a per minute  basis.  Minutes are recorded and charged when used.
Cost  of  sales  includes   expenses  directly  related  to  the  operation  and
maintenance of the Company's  service  network.  Depreciation  and  amortization
expense are separately stated.

STOCK-BASED COMPENSATION

     As permitted under Statement of Financial  Accounting  Standards (SFAS) No.
123,  Accounting  for  Stock-Based  Compensation,  the Company  accounts for its
stock-based  compensation  to employees in  accordance  with the  provisions  of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees.  As such,  compensation expense is recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise price.
Certain  pro forma net income and EPS  disclosures  for  employee  stock  option
grants are also included in the notes to the financial statements as if the fair
value method as defined in SFAS No. 123 had been applied. Transactions in equity
instruments  with  non-employees  for goods or services are accounted for by the
fair value method.

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 6) is anti-dilutive (decreases the loss per share
amount).

     A reconciliation of the net loss per common share is as follows:

                                                         AUGUST 31,  AUGUST 31,
                                                           2002        2001
                                                          ------      ------
     Loss from continuing operations                      $(0.35)     $(0.43)
     Preferred stock dividends                             (0.06)      (0.02)
                                                          ------      ------
     Loss per share - continuing operations                (0.41)      (0.45)

     Loss per share - discontinued operations              (0.00)       0.00
                                                          ------      ------
     Net loss attributable to common shareholders         $(0.41)     $(0.45)
                                                          ======      ======

                                      F-9
<PAGE>
USE OF ESTIMATES

     Use of Estimates - The preparation of the Company's financial statements in
conformity with accounting principles generally accepted in the United States of
America requires the Company's management to make estimates and assumptions that
affect the  amounts  reported in these  financial  statements  and  accompanying
notes. Actual results could differ from those estimates.

     The Company makes significant  assumptions concerning the carrying value of
the license fee, which is dependent upon future profitable  operations;  and the
ultimate resolution of the note receivable from Softalk,  an affiliate.  Both of
these items may be affected by the pending arbitration  proceeding with Softalk,
as  discussed   in  Note  8.  Related   Party   Transactions   and   Significant
Concentrations, and Contingencies.

RECLASSIFICATIONS

     Certain  reclassifications  have been made to the August 31, 2001 financial
statements to conform to the August 31, 2002 classifications.

PENDING ACCOUNTING PRONOUNCEMENTS

     In August 2001, the FASB issued SFAS No. 144, Accounting For The Impairment
Or Disposal Of Long-Lived Assets,  which supercedes SFAS No. 121, Accounting For
The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of,
and amends Accounting  Principles Board Opinion No. 30, Reporting The Results Of
Operations  - Reporting  The Effects Of Disposal Of A Segment Of A Business  And
Extraordinary,  Unusual And Infrequently Occurring Events And Transactions.  The
new rules apply to the  classification  and  impairment  analysis  conducted  on
long-lived  assets  other  than  certain  intangible  assets,  resolve  existing
conflicting  treatment  on the  impairment  of  long-lived  assets  and  provide
implementation  guidance regarding  impairment  calculations.  SFAS No. 144 also
expands the scope to include all  distinguishable  components  of an entity that
will be  eliminated  from  ongoing  operations  in a disposal  transaction.  The
Company has adopted the standard and as a result  completed an independent  SFAS
144 review of its intangible assets by a certified valuation firm.

     In May 2002, the FASB issued SFAS No. 145,  "Rescission Of FASB  Statements
No. 4, 44, And 64, Amendment Of FASB Statement No. 13, And Technical Corrections
As Of April 2002",  that,  among other things,  rescinded SFAS No. 4, "Reporting
Gains And Losses From  Extinguishment  Of Debt." With the rescission of SFAS No.
4, companies generally will no longer classify early  extinguishments of debt as
an extraordinary  item. The provision related to the rescission is effective for
fiscal years beginning after May 15, 2002, and early  application is encouraged.
The  Company  will adopt the  standard at such time and does not expect that the
adoption will have a significant  impact on the Company's  financial position or
results of operations.

     In July  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  For  Costs
Associated With Exit Or Disposal Activities, which replaces Emerging Issues Task
Force Issue No. 94-3,  "Liability  Recognition For Certain Employee  Termination
Benefits And Other Costs To Exit An Activity  (Including  Certain Costs Incurred
In A  Restructuring)."  The new standard  requires  companies to recognize costs
associated  with exit or disposal  activities when they are incurred rather than
at the date of a commitment to an exit or disposal  plan. The provisions of SFAS
146 are effective for disposals  after December 31, 2002. The Company will adopt
the  standard  at such time and does not expect  that the  adoption  will have a
significant impact on the Company's financial position or results of operations.

3. PROPERTY AND EQUIPMENT

     Property and equipment is composed of the following at August 31, 2002:

     Furniture and fixtures                                    $    16,811
     Computer equipment                                            654,355
     Software                                                    1,800,296
     Equipment                                                   1,489,618
                                                               -----------
     Total property and equipment, at cost                       3,961,080
     Less: accumulated depreciation and amortization            (2,335,732)
                                                               -----------
                                                               $ 1,625,348
                                                               ===========

     For the fiscal years ended August 31, 2002 and 2001,  depreciation  expense
related to property and equipment equaled $334,806 and $597,868, respectively.

                                      F-10
<PAGE>
4. COMMITMENTS

LEASES:

     The Company has entered into  non-cancelable  operating lease  arrangements
for office space and two colocation facilities.

Future minimum lease commitments as of August 31, 2002 are as follows:

                FISCAL YEAR ENDING               OPERATING
                AUGUST 31,                        LEASES
                ----------                        ------
                 2003                            $108,343
                 2004                              90,702
                 2005                              88,521
                                                 --------
                                                 $287,566
                                                 ========

Total rent  expense  under  operating  leases in 2002 and 2001 was  $159,563 and
$189,805, respectively.

5. NOTES PAYABLE

Subordinated Notes Payable

     On March 8, 2002,  the  Company  completed  the  private  placement  of two
$50,000  8%  Subordinated  Convertible  Promissory  Notes  due June 8, 2002 (the
"Subordinated  Notes").  The Subordinated  Notes bear interest at the rate of 8%
per annum and may be prepaid at any time, in whole or in part,  without penalty.
On the maturity date, the Company has the option to repay the Subordinated Notes
in cash,  or,  with the  approval of the  holder,  by issuing  shares of BestNet
common  stock.  The  holder  of each  note  may  elect  to  convert  the  amount
outstanding  thereunder  into shares of common stock at any time during the term
of the  note  and  ending  upon  the  repayment  in full of the  principal.  The
conversion  rate is equal to seventy  percent  (70%) of the closing bid price of
common  stock on March 8, 2002,  or the closing bid price of the common stock on
the date a conversion  request is received  from the note  holder,  whichever is
less. The beneficial  conversion  features of these notes resulted in a discount
to the notes of $42,857, which was recorded to additional paid-in capital at the
time the notes were  issued and is being  charged to interest  expense  over the
life of the notes.

     Prior to year-end,  the Company received conversion requests from both note
holders but has not issued  common  shares to the note  holders as of August 31,
2002 due to a pending registration statement.  Accordingly,  the shares that are
to be issued upon  registration have been included in common stock subscribed on
the accompanying  balance sheet.  Total shares that are to be issued to the note
holders upon registration are 224,784.

Senior Notes Payable

     On April 23, 2002, the Company completed a private placement of $800,000 in
aggregate principal amount of 8% Senior Secured Convertible Promissory Notes due
November  1, 2002  (the  "Senior  Notes")  and five year  warrants  to  purchase
1,000,000  shares of common stock at an exercise  price of $0.50 per share.  The
fair value of the  warrants  resulted  in a discount  to the notes of  $476,640,
which has been recorded to additional paid-in capital at the time the notes were
issued and is being charged to interest expense over the life of the notes.

     The Senior Notes may be prepaid at any time,  in whole or in part,  without
penalty.  On the maturity  date,  the Company has the option to repay the Senior
Notes in cash,  or,  with the  approval  of the  holders,  by issuing  shares of
BestNet  common stock.  Each holder of the notes may elect to convert the amount
outstanding  thereunder  into shares of common stock at any time during the term
of the note and ending upon the  repayment  in full of the  principal,  together
with any accrued but unpaid interest,  of the notes, at a conversion price equal
to $0.40 per share. The beneficial  conversion feature associated with the notes
resulted  in an  additional  discount to the notes of  $323,360,  which has been
recorded to additional  paid-in-capital at the time the notes were issued and is
being charged to interest  expense over the life of the notes.  The notes may be
prepaid at any time, in whole or in part, without penalty.

     Prior to  year-end,  the  Company  has  received  conversion  requests  for
$500,000 of the $800,000 original  aggregate  principal note balances.  However,
the Company has not issued the shares to the note holders at August 31, 2002 due
to a pending  registration  statement.  Accordingly,  the shares  that are to be
issued upon  registration  have been included in common stock  subscribed on the

                                      F-11
<PAGE>
accompanying  balance sheet. Total shares that are to be issued for these Senior
Notes as of August 31, 2002 are 1,250,000.

     As of August 31, 2002,  the  principal  balance and  un-amortized  discount
related to the above notes was $300,000 and $96,875, respectively. Subsequent to
August 31, 2002, the remaining outstanding Senior Notes were converted to shares
of the Company's common stock.

6. STOCKHOLDERS' EQUITY

PREFERRED STOCK:

     The  Company is  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.

     Series B Preferred Convertible Stock: On May 1, 2000, the Company completed
a $5,000,000  private  placement of 1,000 shares of 6% Series B Preferred Stock.
The  Preferred  Stock was  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.  The Series B Preferred  Stock was 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,  had been  declared
effective, provided the Company had given at least five days written notice.

     The  Series B  Preferred  stockholders  were  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  was settled by the  issuance  of 227,265  shares of
common stock.

     On September 28, 2001 the Company entered into an agreement with the holder
of the Series B Preferred Stock,  whereby the holder exchanged all 532 shares of
Series B Preferred Stock then  outstanding for 2,938,927 shares of the Company's
common stock. The shares issued reflect the conversion of the outstanding Series
B Preferred  Stock, the conversion of the dividend that had accrued through that
date,  and the conversion of a $665,487  redemption  premium that was due to the
Series B Preferred  Stockholders.  In addition to the 2,938,927 shares of common
stock, the former holder of the Series B Preferred Stock was issued a warrant to
purchase  225,000 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.  The  issuance  of the
warrants  and  redemption  premium  resulted in a deemed  dividend to the former
Series B Preferred Stockholders of $141,750 and $665,487, respectively, which is
reflected in the accompanying financial statements.

     Series C Preferred  Convertible  Stock:  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 $90,750 resulting in net proceeds to the Company of $409,250.

                                      F-12
<PAGE>
     The Warrants issued to the Series C Preferred  stockholders  have a term of
five years, are exercisable at $2.90 per share and contain a provision to adjust
the purchase price in the event of certain  dilutive  circumstances.  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.

     On January 30, 2002, the Company  completed a $115,000 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 $97,750.
The financing  consisted of 1,150 shares of Series C Preferred  Stock and a five
(5) year  warrant to purchase  5,750  shares of common stock at $1.19 per share.
The number of shares of common stock  issuable upon  conversion of each share of
Series C  Preferred  Stock is  determined  in the  same  manner  as that for the
October 17, 2001 Series C Preferred Stock issuance, which is described above.

     During Fiscal 2002, the Company received conversion requests for all Series
C Preferred Shares. As of August 31, 2002, the Company had not issued the 99,752
common shares  associated with these  conversions due to a pending  registration
statement at year-end. Accordingly, the common shares that are to be issued upon
registration  have been included in common stock  subscribed on the accompanying
financial statements.

     The Company incurred penalties as a result of the delay in the registration
and issuance of the common shares.  These  penalties were satisfied  through the
issuance of common shares  subsequent to year-end.  As of August 31, 2002, there
were 25,756 common shares issuable to the former Series C Preferred Stockholders
as a result of these penalties. The fair value of these shares has been expensed
during  Fiscal  2002  and  is  included  in  common  stock   subscribed  on  the
accompanying financial statements.

COMMON STOCK:

     On March 14, 2002,  the Company  completed a one time private  placement of
519,750 shares of common stock at a purchase price of $.467 per share.  The sale
yielded net proceeds to the Company of $225,905.

     On August 30, 2002 the Company  completed a one time  private  placement of
264,550  shares of  restricted  stock at a per share  price of $.945.  This sale
yielded the Company proceeds of $250,000. As of August 31, 2002, the Company had
not issued the common  shares.  Accordingly,  the common  shares  that are to be
issued upon  registration  have been included in common stock  subscribed on the
accompanying financial statements.

     During  Fiscal 2002,  the Company  issued  58,614 shares of common stock in
satisfaction  of services  valued at  $99,700.  The value of the  services  were
charged to expenses during the period incurred.

WARRANTS:

     The following summarizes Warrant activity in 2002 and 2001:

                                             NUMBER       EXERCISE PRICE
                                             ------       --------------
     Outstanding, August 31, 2000          5,543,463      $ .01 - $10.00
     Expired                                  (3,333)             $ 3.18
     Issued                                  250,000      $1.00 - $ 5.00
                                           ---------      --------------
     Outstanding, August 31, 2001          5,790,130      $ .01 - $10.00
                                           =========      ==============
     Exercised                              (160,000)
     Issued                                2,280,750      $ .50 - $ 4.00
                                           ---------      --------------
     Outstanding, August 31, 2002          7,910,880      $ .01 - $10.00
                                           =========      ==============

STOCK INCENTIVE PLAN:

     The Company is authorized  to issue up to 4,600,000  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.

                                      F-13
<PAGE>
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>
                                                                     2002           2001
                                                                 -----------    -----------
<S>                                                              <C>            <C>
     Net loss available to common stockholders, as reported      $(6,468,448)   $(4,014,810)
     Pro forma compensation expense for stock options             (1,074,342)      (524,247)
                                                                 -----------    -----------
     Pro forma net loss available to common stockholders         $(7,542,790)   $(4,539,057)
                                                                 ===========    ===========
     Pro forma loss per share available to common stockholders   $      (.47)   $      (.50)
                                                                 ===========    ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                              WEIGHTED AVERAGE
                                            NUMBER OF        OPTION PRICE         EXERCISE
                                         OPTIONS GRANTED      PER SHARE       PRICE PER SHARE
                                         ---------------      ---------       ---------------
<S>                                        <C>              <C>                    <C>
     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
     Granted                                1,115,000        $ .73 - 1.65           1.06
     Exercised                                (62,001)       $ .73 - 1.25           1.13
     Canceled                                (355,332)       $ .73 - 4.56           1.66
                                            ---------                               ----
     Outstanding August 31, 2002            4,238,001        $ .65 - 8.00           1.57
                                            =========        ============           ====
</TABLE>

     The remaining contractual life of options outstanding as of August 31, 2002
was 7.95 years.  Options for the purchase of 2,534,666 and 1,830,333 shares were
immediately  exercisable  on August  31,  2002 and 2001 with a  weighted-average
price of $1.58 and $1.84 per share.

     The weighted  average fair values of stock options  granted during 2002 and
2001 for which the  exercise  price  was equal to the fair  market  value of the
stock were $1.06 and $1.55 per share, respectively.

                                      F-14
<PAGE>
7. INCOME TAXES

     As of  August  31,  2002,  the  Company  has  federal  net  operating  loss
carryforwards  totaling  approximately  $20,104,000 and state net operating loss
carryforwards totaling approximately $11,447,000. The federal net operating loss
carryforwards  expire in various  amounts  beginning in 2003 and ending in 2022.
The state net operating loss  carryforwards  expire in various amounts beginning
in 2003  and  ending  in 2008.  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  that 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,  2002 and 2001 is
comprised of the following amounts:

                                          2002           2001
                                       -----------    -----------
           Current:                    $        --    $        --

           Deferred:
              Federal                   (1,555,000)      (976,600)
              State                       (150,000)      (108,400)
                                       -----------    -----------
                                        (1,705,000)    (1,085,000)
           Valuation Allowance           1,705,000      1,085,000
                                       -----------    -----------
                                       $        --    $        --
                                       ===========    ===========

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

                                           2002           2001
                                          -----          -----
          Statutory tax rate               34.0%          34.0%
          State income taxes                5.3%           5.3%
          Valuation allowance             (39.3)%        (39.3)%
                                          -----          -----
          Effective tax rate                0.0%           0.0%
                                          =====          =====

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

                                                  2002            2001
                                               -----------     -----------
     Deferred tax assets (liabilities):
     Amortization of intangibles               $   655,000     $   390,000
     Property and equipment                       (102,000)        (81,000)
     Net capital loss                               85,000          85,000
     Other                                          11,000           7,000
     Net operating loss carryforward             7,440,000       5,983,000
                                               -----------     -----------
                                                 8,089,000       6,384,000
     Valuation allowance                        (8,089,000)     (6,384,000)
                                               -----------     -----------
                                               $        --     $        --
                                               ===========     ===========

     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
$8,089,000  valuation allowance as of August 31, 2002 is necessary to reduce the
net  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
$1,705,000.

                                      F-15
<PAGE>
8. RELATED PARTY TRANSACTIONS, SIGNIFICANT CONCENTRATIONS AND CONTINGENCIES:

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,
Inc.  ("Softalk"),   a  privately-owned   Ontario,  Canada  corporation,   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.  The  Company's  various
transactions  and  agreements  with Softalk are  discussed in more detail in the
following  paragraphs of this Note 8. During Fiscal 2002,  the Company sought to
take over the infrastructure and applications it owns from Softalk's management.
Although  initially met with resistance,  the Company proceeded under the advice
and direction of legal counsel and  ultimately was successful in taking over its
infrastructure and applications.

     In September 2002, we began legal  proceedings in Canada against Softalk to
address numerous breaches of its obligations  under our various  agreements with
Softalk.  In  September  2002,  we obtained a court  order/injunction  requiring
Softalk to monitor and maintain our communication  network during a commercially
reasonable  transition  period.   Softalk  failed  to  comply  with  this  court
order/injunction  and,  instead,  responded  by  making  allegations  of its own
against Bestnet in taking over its  infrastructure  and application.  We believe
Softalk's allegations are without merit. We are properly responding to Softalk's
allegations and asserting our rights under our present  agreements with Softalk.
We have moved under our contractual agreements to resolve matters in arbitration
proceedings  with Softalk.  During  October 2002, we sought to have Softalk stop
support    and   shut   down    various    competitive    websites,    including
InternetOperator.com,  using BestNet proprietary intellectual property developed
for BestNet by Softalk. We sought in arbitration immediate injunctive relief via
the  shutdown of these  websites.  This  relief was not granted on an  immediate
basis due to the complexity of the issues involved and remains to be resolved as
part of the overall arbitration  proceedings,  which are ongoing. We continue to
pursue all of our rights  under the  agreements  in place  between  BestNet  and
Softalk, and at law.

     The Company incurred  expenses of  approximately  $600,000 and $175,000 for
Fiscal 2002 and 2001,  respectively,  for development,  network  maintenance and
monitoring  work performed by Softalk.  These expenses relate to development and
maintenance  services provided by Softalk,  as well as royalty payments pursuant
to the amended license  agreement and facility rent payments.  The  maintenance,
monitoring,  and royalty expenses are included in cost of revenues, and the rent
payments are included in general and administrative expenses on the accompanying
income  statements.  The Company also capitalized a total of $163,079 related to
software  development  performed by Softalk  during  Fiscal 2002.  At August 31,
2002, the Company has booked $450,889 in conjunction with outstanding  invoices,
currently  in dispute  with  Softalk.  The Company also has a loan it granted to
Softalk with a current outstanding balance of $1,508,043 as of August 31, 2002.

TRANSACTIONS WITH SOFTALK

     During 1999 and 2000, the Company entered into various license and purchase
agreements  with  Softalk,  Inc.  Softalk is a  developer  of  various  Internet
telephony software and technology. A termination of the Softalk agreements could
cause a  delay  in the  Company's  operations,  which  could  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.

                                      F-16
<PAGE>
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 was
capitalized to the license  agreement  equaling  $154,000.  In October 2002, the
Company  filed an S-2  registration  statement for the shares  underlying  these
warrants.

     For Fiscal 2002 and 2001, amortization expense to the license agreement was
$50,567 and $50,582, 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, 2002,  Softalk had no representatives on BestNet's Board as Mr. C. Alexander
Lang resigned from the Board on September 12, 2001.

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  equipment,  basic  software  applications,  existing  Softalk  beta
accounts,   certain   contracts,   rights  under  or  pursuant  to   warranties,
representations  and  guarantees  made by suppliers in connection  with the beta
accounts.  The  equipment,   software,  and  beta  accounts  are  all  based  on
proprietary  Internet telephony  technology  patented by Softalk and licensed to
the Company. Under the terms 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.

     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 $1,331,538 at August 31, 2002 and
August 31, 2001 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. On December 1, 2000, Softalk assigned the common shares it held as
collateral against the outstanding loan balance owed to BestNet. This assignment
was for a period of one (1) year from  November  10,  2000 or until such time as
the asset  value of  Softalk  was  determined  to be at least $20  Million  USD,
whichever occurred first.

PRODUCT DEVELOPMENT AGREEMENT

     Effective  June 14,  2000,  the Company and Softalk  entered into a product
development agreement. The agreement engages Softalk to develop the software for
the Company,  enhance the performance  and features of the Bestnetcall  services
and to provide  installation  and maintenance of certain  hardware and software.
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.

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

                                      F-17
<PAGE>
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, 2002, the  outstanding  balance of the loan was
$1,508,043.  The loan is due and callable at any time by the Company.  A portion
of the loan balance,  $5,280,  was used in Fiscal 2002 to compensate Softalk for
development work it performed for the Company, as agreed to by Softalk.

     As of August 31, 2002,  total  amounts due to Softalk  included in accounts
payable totaled $450,889, the majority of which was for development work.

NOTE RECEIVABLE RELATED PARTY

     On September 1, 2000, the Company loaned  $10,160 to Kelvin  Wilbore,  Vice
President  and  Director  of the  Company.  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.  During  Fiscal  2002  this loan was
forgiven in lieu of a salary increase then due.

9. DISCONTINUED OPERATIONS

On June 10, 2002,  the Company made a decision to exit the travel  business.  On
this date, the Company sold the remaining  assets of  Bestnetravel  for $300 and
ceased  operations  in  the  travel  business  segment.   The  disposal  of  the
Bestnetravel  operations  represents  the disposal of a business  segment  under
Accounting Principles Board ("APB") Opinion No. 30. Accordingly, results of this
operation have been  reclassified  as  discontinued  and prior periods have been
restated to reflect these changes.

Net sales and income from the discontinued operation are as follows:

                                                            August 31,
                                                         2002        2001
                                                       --------    --------
     Net sales                                         $ 36,715    $132,645
                                                       --------    --------

     Income (loss) from discontinued operations          (5,468)     17,280
     Gain on disposal of business segment                  (332)         --
                                                       --------    --------
     Loss from discontinued operation                  $ (5,800)   $ 17,280
                                                       ========    ========

10. RETIREMENT PLAN

     Effective  June 1, 2000,  the  Company  adopted a 401(k)  retirement  plan.
Employees  are  eligible  to  participate  in the plan after 60 days of service.
Salary  deferral may range from 1% to 18%. The Company matches 5% of the amounts
deferred by the employees, up to 5% of an employee's annual compensation. 50% of
the matched  amount is vested after the  employees'  first year of service.  The
remaining 50% of the matched amount is vested after the  employees'  second year
of service. The Company matched contributions  totaling $12,275.14 and $5,687.33
for the years ended August 31, 2002 and 2001, respectively.

11. STATEMENTS OF CASH FLOWS

     During Fiscal 2002 and 2001, the Company recognized  operating,  investing,
and financing  activities that affected assets and stockholders'  equity and the
statement of operations, but did not result in cash receipts or payments.

                                      F-18
<PAGE>
For  Fiscal  2002,  these  non-cash  investing  and  financing   activities  are
summarized as follows:

                                                                       AMOUNT
                                                                       ------
The Company issued 10,783 shares of common stock in satisfaction
  of its Series B Preferred Stock dividends.                         $    12,253

The Company recorded a dividend for a redemption premium granted
  to holders of Series B Preferred Stock. This premium was
  granted as an incentive for the former Series B Preferred
  Stockholders to convert all outstanding Series B Preferred
  Stock to shares of the Company's Common Stock. The Premium was
  satisfied through the issuance of additional Common Shares upon
  the conversion.                                                        665,487

In conjunction with the conversion of Series B Preferred Stock
  (as discussed above), the Company also granted the former
  Series B Preferred Stockholders three-year warrants to purchase
  up to 450,000 shares of the Company's common stock; 225,000 of
  which have an exercise price of $3.00, 225,000 of which have an
  exercise price of $4.00. The fair value of the warrants has been
  reflected as a dividend to the former Series B Preferred
  Stockholders.                                                          141,750

The Company issued 25,713 shares of common stock in payment of
  its Series C Preferred Stock dividends.                                 14,233

During Fiscal 2002, the Company deferred interest earned on the
  note receivable from Softalk, an affiliate due to the past due
  status of the note and the current arbitration with Softalk.
  See Note 8 for additional information related to the Company's
  relationship and transactions with Softalk.                            124,043

During 2002, the Company issued 160,000 shares of common stock
  for the exercise of a warrant.                                             160

The Company recorded a dividend to the holders of Series C
  Preferred Stock at the time of issuance, related to the
  beneficial conversion feature inherent to the Series C
  Preferred Stock.                                                       125,000
                                                                       ---------
    TOTAL NON-CASH TRANSACTIONS - INVESTING AND FINANCING ACTIVITIES   1,082,926
                                                                       =========

For Fiscal 2002, these non-cash operating and financing activities are as
follows:

During Fiscal 2002, the Company issued a total of 58,614 shares
  of common stock in lieu of payment for services performed
  for the Company.                                                     $  99,700

The Company issued 11,912 shares of its common stock and has
  25,756 shares of common stock subscribed related to conversion
  penalties incurred on its Series C Preferred Stock.                     35,944

In conjunction with the issuance $100,000 of aggregate principal of
  Subordinated Notes Payable, the Company recognized a discount of
  $42,858 related to a beneficial conversion feature inherent to
  the notes. As of August 31, 2002, all $42,858 has been recognized
  as interest expense. See Note 5, Notes Payable for further
  information.                                                            42,858

In conjunction with the issuance of $800,000 of aggregate principal
  of Senior Notes Payable, the Company recognized a discount of
  $323,360 related to a beneficial conversion feature inherent to
  the notes. As of August 31, 2002, $284,203 of this total discount
  has been recognized as interest expense. See Note 5, Notes Payable
  for further information.                                               284,203

In conjunction with the issuance of $800,000 of aggregate principal
  of Senior Notes Payable, the Company recognized a discount of
  $476,640 related to warrants that were issued with the notes.
  As of August 31, 2002, $418,922 of this total discount has been
  recognized as interest expense. See Note 5, Notes Payable for
  further information.                                                   418,922

                                      F-19
<PAGE>
Throughout Fiscal 2002, the Company issued warrants to various
  consultants and advisors; the aggregate fair value of these
  warrants is $231,624                                                  231,624

During Fiscal 2002, the Company earned interest income on its
  certificate of deposit that was not received in cash as of
  August 31, 2002.                                                       (1,491)
                                                                    -----------
    TOTAL NON-CASH TRANSACTIONS FROM OPERATING ACTIVITIES           $ 1,111,760
                                                                    ===========

For Fiscal 2001, these non-cash investing and financing activities are as
follows:

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

For Fiscal 2001, these non-cash operating and financing activities are as
follows:

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 was $185,000, of which, $176,627 was capitalized
  as software development.                                          $     8,373

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 was expensed in general and administrative expenses.          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.                                              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.                                                     149,700

The Company earned interest income on its certificate of deposit,
  which is not included in our ending cash balance.                      (1,283)

During Fiscal 2001, the Company issued 74,431 shares of its common
  stock in satisfaction of penalties related to Preferred Stock.        121,742

During Fiscal 2001, the Company issued a total of 162,000 shares
  of its common stock for payment of services provided for the
  Company throughout the year. The total expense incurred as a
  result of these issuances is $285,700 and is included in general
  and administrative expenses in the accompanying financial
  statements.                                                           285,700
                                                                      ---------
    TOTAL NON-CASH TRANSACTIONS FROM OPERATING ACTIVITIES             $ 804,232
                                                                      =========

                                      F-20
<PAGE>
12. SUBSEQUENT EVENTS

     On October 16, 2002, the Company sought to register, in an S-2 registration
statement,  the resale of shares underlying  outstanding  convertible promissory
notes and convertible  Series C Preferred Stock.  The most  significant  amounts
included  2,000,000 shares for 8% Senior Secured  Convertible  Promissory Notes.
The filing has been accepted by the SEC.

     On October 29, 2002, the Company sought to register, in an S-2 registration
statement,   the  resale  of  shares  underlying   outstanding   warrants.   The
registration  included  6,141,753  shares  underlying  the  warrants.  The  most
significant  amounts  included  5,246,753 due Softalk based on rights granted to
BestNet under Amendment No. 1 to the Amended and Restated License Agreement. The
filing is still pending with the SEC.

     On September 26, 2002, the Company entered into a Note and Warrant purchase
agreement with several  accredited  investors.  This convertible debt financing,
which was completed on October 30, 2002,  yielded  $665,000 in gross proceeds to
the  Company.  The  1-year  term  debt  carries  an  interest  rate of 6% and is
convertible  to equity at the share price of $1.00.  In  addition,  a warrant to
purchase  an  additional  share of the  Company's  stock at $1.50 was issued per
$2.00 invested.

     Subsequent to the year end, all shares in common stock subscribed have been
issued.  Additionally,  the other  holders of Senior  Secured  Promissory  notes
elected to convert, resulting in the issuance of 750,000 common shares.

     On November  1, 2002,  Gerald I. Quinn  resigned  as Chairman of  BestNet's
Board of  Directors  and he also  resigned as a  Director.  On November 1, 2002,
Gerald I. Quinn was  granted  60,000  stock  options  for past  services.  These
options  have an exercise  price of $1.29.  Robert A.  Blanchard  was  appointed
Acting Chairman and Paul H. Jachim was appointed  Director.  Additional outside,
independent  directors are currently  pending approval by the Board. The Company
is seeking a total of 3 independent directors and two employee directors.

13. GOING CONCERN

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming the Company will continue as a going concern.  The Company has incurred
losses  from  operations  over the years and  anticipates  additional  losses in
Fiscal 2003 and prior to achieving break even. Management has been successful in
obtaining  bridge  financing  and  has  implemented  a  number  of  cost-cutting
initiatives to reduce working capital needs.  The Company requires and continues
to pursue additional capital for growth and strategic plan implementation.

                                      F-21
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
        DISCLOSURES.

     None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; COMPLIANCE WITH
         SECTION 16(a) OF THE EXCHANGE ACT

     Information  concerning our directors and executive officers as of November
7, 2002, is set forth below:

             NAME              AGE         POSITION HELD WITH COMPANY
             ----              ---         --------------------------
     Robert A. Blanchard        47      Acting Chairman, President, Chief
                                        Executive Officer and Director
     Paul H. Jachim             44      Chief Financial Officer, Chief
                                        Operating Officer and Director
     Herman Haenert             63      Director

     ROBERT A. BLANCHARD was named President and Chief Executive  Officer of the
Company,  on August 20,  2001,  and was elected to the board of directors of the
Company on July 25, 2002.  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.

     PAUL H.  JACHIM  was named  Chief  Financial  Officer  and Chief  Operating
Officer on December 1, 2001.  Mr.  Jachim's  background  includes  extensive and
diverse operations  experience in technology,  service,  industrial and consumer
product  companies.  From November 1, 2000 through  November 1, 2001, Mr. Jachim
was  President  and COO of  Pacific  TelCom,  a unified  communication  solution
provider and co-owner of a communication network across North America. Beginning
in 1997,  prior to joining  Pacific  TelCom,  as  President  and CEO, he led the
successful  creation and launch of Spectra  Service Inc., a supply chain service
subsidiary  of  Union  Camp  Corporation  now  International   Paper,   Memphis,
Tennessee.  From 1995 until 1997, as Director of Service Operations,  Mr. Jachim
started up a North American  network of supply chain  management  facilities for
Menasha Corporation,  Neenah, Wisconsin. Prior to joining Menasha Corporation he
held various  positions with Procter & Gamble,  Cincinnati,  Ohio. His education
consists of a Bachelors  Degree in Engineering and an MBA from Kellogg  Graduate
School of Management, Northwestern University.

     HERMAN  HAENERT has served as director of the Company since March 2001. Mr.
Haenert was the founder and past president of Rockford, Illinois-based Wholesale
Veterinary  Supply Inc., a company  acquired by ConAgra.  During his 22 years at
Rockford, the Company grew to $100,000,000 in annual revenues. Mr. Haenert was a
founding member of St. Joseph,  Missouri based Agri  Laboratories  and currently
serves  as  Vice  President,   Business  Development.  He  has  been  with  Agri
Laboratories  for the past 5 years.  He is past  president  and  Chairman of the
American Veterinary Distributing Association.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section  16(a)  of  the  Exchange  Act  requires  BestNet's  directors  and
officers,  and persons who own more than 10% of a registered  class of BestNet's
equity securities to file reports of ownership and changes in ownership with the
Securities  and Exchange  Commission.  Officers,  directors and greater than 10%
stockholders  are required by Securities and Exchange  Commission  regulation to
furnish BestNet with copies of all Section 16(a) forms they file.

                                       22
<PAGE>
     Based  solely on a review of the copies of such forms  received  by BestNet
during the fiscal year ended August 31, 2002, except as set forth below, BestNet
believes  that each person who,  at any time  during  such  fiscal  year,  was a
director,  officer or  beneficial  owner of more than 10% of the common stock of
BestNet complied with all Section 16(a) filing  requirements  during such fiscal
year. Alexander Chris Lang, a former director of BestNet,  failed to timely file
a Form 4 reporting the  disposition of shares of common stock in 15 transactions
in February  2002, a Form 4 reporting the  disposition of shares of common stock
in one  transaction in March 2002, a Form 4 reporting the  disposition of shares
of  common  stock  in 24  transactions  in May  2002,  a Form  4  reporting  the
disposition of shares of common stock in 43 transactions in June 2002 and a Form
4 reporting the  disposition of shares of common stock in five  transactions  in
July  2002.  The late  reporting  was made on Form 4 as filed with the SEC on or
about October 4, 2002. In making these disclosures, BestNet has relied solely on
written  representations of its directors and executive officers,  and copies of
the reports that were filed with the SEC.

ITEM 11.  EXECUTIVE COMPENSATION

     The following table summarizes all compensation  paid for services rendered
to us for the fiscal  years ended  August 31,  2002,  2001 and 2000 by our Chief
Executive  Officer and our other  employee  whose  aggregate  cash  compensation
exceeded $100,000 (the "Named Executive Officers").  None of the Company's other
employees received  compensation in excess of $100,000 during the last completed
fiscal year.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                       ANNUAL COMPENSATION                          LONG TERM COMPENSATION
                              -------------------------------------    -------------------------------------------------
                                                                               AWARDS                    PAYOUTS
                                                                       -----------------------    ----------------------
                                                       OTHER ANNUAL                 SECURITIES
                                                           BONUS       RESTRICTED   UNDERLYING     LTIP       ALL OTHER
      NAME AND                                         COMPENSATION       STOCK      OPTIONS/     PAYOUTS   COMPENSATION
 PRINCIPAL POSITION    YEAR   SALARY ($)   BONUS ($)        ($)        AWARDS ($)    SARS ($)       ($)        ($)(1)
 ------------------    ----   ----------   ---------        ---        ----------    --------       ---        ------
<S>                    <C>     <C>            <C>           <C>        <C>           <C>            <C>        <C>
Robert A. Blanchard    2002    $190,000       $ 0           $ 0            -0-        200,000
President and CEO      2001    $  7,308       $ 0           $ 0            -0-        475,000       -0-         -0-
(2)(3)(6)

Paul H. Jachim         2002     123,750       $ 0           $ 0            -0-        560,000       -0-         -0-
CFO and COO            2001      --            --            --             --             --       -0-         -0-
(4)(5)(6)
</TABLE>

----------
(1)  Other  annual  compensation  did not exceed the lesser of $50,000 or 10% of
     the total salary and bonus for any of the officers listed.
(2)  Mr. Blanchard was appointed  President and CEO of the Company on August 20,
     2001. Mr. Blanchard's annual salary is $190,000.
(3)  On June 19, 2001,  Mr.  Blanchard was granted  options to purchase  500,000
     shares,  at a per  share  exercise  price of $2.90,  25,000  of which  were
     subsequently  cancelled.  These  shares  vest,  if ever,  over a three year
     period. On February 22, 2002, Mr. Blanchard was granted options to purchase
     200,000 shares,  at a per share price of $.73.  These shares vest, if ever,
     based on performance, over a three-year period.
(4)  Mr. Jachim was appointed Chief Operating and Chief Financial Officer of the
     Company on December 1, 2001. His annual salary is $165,000.
(5)  On  December  1, 2001,  Mr.  Jachim was  granted  options  to  purchase  an
     aggregate  of 400,000  shares of our common  stock at a per share  exercise
     price of $1.55 per share. These shares vest, if ever, based on performance,
     over a three-year  period.  On February 22,  2002,  Mr.  Jachim was granted
     160,000 options to purchase shares of stock at $.73.  These shares vest, if
     ever, based on performance, over a three-year period.
(6)  Messrs.  Blanchard  and  Jachim are  entitled  to  receive  non-cash  based
     incentive   compensation   for  the  achievement  of  certain   performance
     objectives  in  Fiscal  2002.  The  amount  of  such  compensation  is  not
     calculable at this time.

     The following  table  represents the options granted to the Named Executive
Officers in the last fiscal year and the value of those options.

                                       23
<PAGE>
                        OPTION GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)

<TABLE>
<CAPTION>
                          NUMBER OF
                         SECURITIES      PERCENT OF TOTAL
                         UNDERLYING      OPTIONS GRANTED
                           OPTIONS       TO EMPLOYEES IN     EXERCISE OR BASE
         NAME          GRANTED (#)(1)      FISCAL YEAR         PRICE ($/SH)       EXPIRATION DATE
         ----          --------------      -----------         ------------       ---------------
<S>                        <C>                <C>               <C>               <C>
Robert A. Blanchard        200,000            17.94%               $.73            June 19, 2004
Paul H. Jachim             560,000            50.22%            $1.55/$.73        December 1, 2004
</TABLE>

----------
(1)  Except  as  otherwise  indicated,  all  of  the  options  vest  and  become
     exercisable  as follows:  based on  achievement  of business  objectives as
     approved by the Board of Directors.  As a result of the current  transition
     in BestNet's  Board of  Directors,  a decision on Mr.  Blanchard's  and Mr.
     Jachim's 2002 options is being deferred until the transition is complete.
(2)  The  hypothetical  present  value of the  options  at the date of grant was
     determined using the Black-Scholes  option pricing model. The Black-Scholes
     model  estimates the present value of an option by  considering a number of
     factors,  including  the  exercise  price  of the  option,  the  time it is
     expected to be outstanding,  and interest rates. The  Black-Scholes  values
     were calculated  using the following  assumptions:  (a) risk-free  interest
     rate of 5.60%; (b) a dividend  yield of 0.00%; (c) an expected  life of the
     option after vesting of 2-3 years; and (d) an expected volatility factor of
     the expected  market price of the  Company's  stock range  between $.776 to
     $2.682.

     The following table represents certain  information  respecting the options
held by the Named Executive Officers as of August 31, 2002.

                 AGGREGATED OPTION 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 AT
                           SHARES                                OPTIONS AT FY-END         FY-END ($)
                        ACQUIRED ON                              (#) EXERCISABLE/         EXERCISABLE/
       NAME             EXERCISE (#)     REALIZED VALUE ($)        UNEXERCISABLE        UNEXERCISABLE(1)
       ----             ------------     ------------------        -------------        ----------------
<S>                          <C>                <C>               <C>                   <C>
Robert A. Blanchard         -0-                 $-0-              75,000/275,000        $16,500/$16,500
Paul H. Jachim              -0-                 $-0-              80,000/240,000        $13,200/$13,200
</TABLE>

----------
(1)  Calculated based on $1.06,  which was the closing sales price of our common
     stock as quoted on the OTC Bulletin  Board on November 7, 2002,  multiplied
     by the number of applicable  shares  in-the-money  less the total  exercise
     price.

EMPLOYMENT AGREEMENTS

     On August 3, 2001, we entered into an employment  agreement  with Robert A.
Blanchard,  our President and Chief  Executive  Officer,  for a three-year  term
expiring on August 20, 2004. Under Mr. Blanchard's  employment agreement,  he is
to receive a base salary of  $190,000,  and is entitled  to  participate  in our
stock option plans and our other  generally  available  benefit  programs.  Upon
execution of the employment agreement, Mr. Blanchard also was granted options to
purchase  an  aggregate  of 500,000  shares of our common  stock  subject to the
following  vesting terms:  (a) 25,000 shares were subject to the  achievement of
certain  specified  performance goals set at the mutual agreement of BestNet and
Mr.  Blanchard,  which  were  achieved,  (b) 25,000  shares  were due to vest on
January  1,  2002,  provided  Mr.  Blanchard  successfully  completed  financing
transactions  initiated by Mr. Blanchard that yielded net proceeds to BestNet of
$3,000,000,  and  (c)  450,000  shares  vest  in  one-third  increments  over  a
three-year period commencing one year from the date of grant.

                                       24
<PAGE>
     Mr. Blanchard's  employment agreement provides that should we terminate his
employment  without  cause,  or should Mr.  Blanchard  terminate his  employment
agreement for good reason,  he will receive his then  effective  base salary and
other benefits provided by the employment  agreement  immediately  following the
effective date of  termination of employment for a period of twelve months.  Mr.
Blanchard  also will be entitled to exercise  any options that were vested as of
the  date  of  termination  for a  period  of  six  months  thereafter.  If  Mr.
Blanchard's employment is terminated without cause following a change in control
of BestNet (as defined in the employment  agreement),  he will receive an amount
equal to his then  effective  annual base  salary,  which will be payable over a
period  of  six  months  following  such  termination  date.  If  Mr.  Blanchard
terminates his employment agreement without good reason, he will not receive any
severance benefits.

     Under Mr. Blanchard's  employment  agreement,  he has agreed not to compete
against us after the  termination  of his  employment  agreement for a period of
twelve months after the effective date of such  termination.  This  twelve-month
noncompete  period is extended  by the number of days  included in any period of
time during which Mr.  Blanchard is or was engaged in activities  constituting a
breach of the noncompete provisions in his employment agreement.

     On December 1, 2001, we entered into an employment  agreement  with Paul H.
Jachim to become our Chief  Operating  Officer for a  three-year  term  expiring
December 1, 2004. Under Mr. Jachim's employment  agreement,  he is to receive an
annual base salary of  $165,000,  and is  entitled to  participate  in our stock
option plans and our other generally available benefit programs.  Upon execution
of the employment agreement,  Mr. Jachim also was granted options to purchase an
aggregate of 400,000 shares of our common stock subject to the following vesting
terms:  (a) 20,000 shares were subject to the  achievement of certain  specified
performance  goals set at the mutual agreement of BestNet and Mr. Jachim,  which
were achieved,  (b) 20,000 shares were due to vest on January 1, 2002,  provided
Mr.  Jachim  successfully  established  network  and  operations  processes  and
procedures  that were,  in the  opinion  of our  President  and Chief  Executive
Officer,  sufficient to successfully serve customers of BestNet ,and (c) 360,000
shares vest in one-third increments over a three-year period commencing one year
from the date of grant.

     Mr.  Jachim's  employment  agreement  provides that should we terminate his
employment  without  cause,  or  should  Mr.  Jachim  terminate  his  employment
agreement for good reason,  he will receive his then  effective  base salary and
other benefits provided by the employment  agreement  immediately  following the
effective date of  termination of employment for a period of twelve months.  Mr.
Jachim also will be entitled to exercise  any options that were vested as of the
date of  termination  for a period of six  months  thereafter.  If Mr.  Jachim's
employment is terminated  without cause following a change in control of BestNet
(as defined in the employment agreement), he will receive an amount equal to his
then  effective  annual base salary,  which will be payable over a period of six
months following such termination  date. If Mr. Jachim terminates his employment
agreement without good reason, he will not receive any severance benefits.

     Under Mr.  Jachim's  employment  agreement,  he has  agreed  not to compete
against us after the  termination  of his  employment  agreement for a period of
twelve months after the effective date of such  termination.  This  twelve-month
noncompete  period is extended  by the number of days  included in any period of
time during  which Mr.  Jachim is or was engaged in  activities  constituting  a
breach of the noncompete provisions in his employment agreement.

     Both  Messrs.  Blanchard  and Jachim  were  entitled  to receive  incentive
compensation for the achievement of certain performance objectives during Fiscal
2002, but have elected to defer the  determination  of the amount and receipt of
such  compensation  until such time as the composition of the Company's board of
directors includes additional outside independent directors.

     During Fiscal 2002,  Ms. Ros Atan on September  10, 2001 and Mr.  Alexander
Chris Lang on September 13, 2001 ended their  respective  consulting  agreements
with BestNet.

COMPENSATION OF DIRECTORS

     All directors are reimbursed for their  reasonable  out-of-pocket  expenses
incurred in connection  with  attendance  of board  meetings.  In addition,  per
approval of the Board of  Directors  on July 17, 2000,  each  director  receives
options to purchase 20,000 shares of common stock upon election to the board and
annual  grants of 10,000  options  for each year of  service  thereafter.  Board
members serving on our Audit Committee  receive an additional option to purchase
5,000  shares of common  stock per year of service on the Audit  Committee.  The
options vest one year from the date of the grant and terminate  upon the earlier

                                       25
<PAGE>
of 10 years from the date of grant or six months after the director ceases to be
a member of the Board.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of November 7, 2002, certain  information
with  regard  to the  beneficial  ownership  of our  common  stock  by (i)  each
shareholder known by us to beneficially own 5% or more of our outstanding common
stock, (ii) each director  individually,  (iii) the Named Executive Officers and
(iv) all of our officers and directors as a group:

          NAME AND ADDRESS              AMOUNT AND NATURE             PERCENT
      OF BENEFICIAL OWNER (1)       OF BENEFICIAL OWNER (2)(3)      OF CLASS (3)
      -----------------------       --------------------------      ------------

Robert A. Blanchard                           75,000                    .39%

Paul H. Jachim                                80,000                    .42%

Herman Haenert                               111,700                    .58%

Anthony Silverman                          2,164,550                  10.84%

Cedar Avenue LLC
c/o Citco Trustees
Cayman LTD
P.O. Box 31106 SMB
Grand Cayman Cayman, BVT                   4,032,634                  20.67%

Alexander Christopher Lang
c/o Softalk, Inc.
370 Queens Quay West
Toronto, Ontario Canada, M5V3J3            9,871,753(4)               39.60%

All directors and executive
officers as a group (3 persons)              266,700                   1.38%

----------
(1)  Unless  otherwise noted, the address of each holder is 5075 Cascade Rd. SE,
     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, 2002 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  19,059,839  shares
     of Common Stock outstanding as of November 7, 2002.
(4)  Includes  4,000,000 shares of common stock,  shares underlying  warrants to
     purchase  5,246,753  shares of common  stock  held by  Softalk,  and shares
     underlying  vested options to purchase  625,000 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.

                                       26
<PAGE>
EQUITY COMPENSATION PLAN

     The following  table  represents  securities  authorized for issuance under
equity compensation plans at August 31, 2002.

                           EQUITY COMPENSATION PLAN(1)

<TABLE>
<CAPTION>
                               NUMBER OF SECURITIES                             NUMBER OF SECURITIES
                                TO BE ISSUED UPON       WEIGHTED AVERAGE        REMAINING AVAILABLE
                                   EXERCISE OF         EXERCISE PRICE OF            FOR FUTURE
                               OUTSTANDING OPTIONS    OUTSTANDING OPTIONS       ISSUANCE UNDER PLAN
                               -------------------    -------------------       -------------------
<S>                                 <C>                     <C>                      <C>
Equity compensation plan
approved by stockholders:           4,238,001               $1.568                   5,152,283

Equity compensation plan not
approved by stockholders:                  -0-              $  -0-                         -0-
                                    ---------               ------                   ---------
TOTAL                               4,238,001               $1.568                   5,152,283
                                    =========               ======                   =========
</TABLE>

----------
(1)  We  maintain  a 2000  Stock  Incentive  Plan  under  which  we have  issued
     2,693,948  shares of our common stock to our employees,  and currently have
     2,306,052 shares of common stock available for future  issuance.  Under the
     2000 Stock  Incentive Plan, the sale price of the shares of common stock is
     equal to the fair  market  value of such  shares on the date of the  option
     grant.  We also maintain a 1997 Stock  Incentive  Plan under which was have
     issued 1,866,665 shares of our common stock to our employees, and currently
     have 2,733,335  shares of common stock  available of future  issuance.  The
     sale price of the  shares of common  stock  available  under our 1997 Stock
     Incentive Plan also is equal to the fair market value of such shares on the
     date of grant. Both of these plans have been approved by our shareholders.

     For a description of our 1997 and 2000 Stock  Incentive  Plans,  please see
the  description  set  forth  in  footnote  5  of  our  Consolidated   Financial
Statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1999 and 2000, the Company entered into various license and purchase
agreements  with Softalk.  Those  agreements are described  below.  Softalk is a
developer of certain  Internet  telephony  software and a major  shareholder  of
BestNet.

ORIGINAL AND RESTATED LICENSE AGREEMENT

     On April 23,  1999,  we  entered  into a  license  agreement  with  Softalk
granting us and our  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,  we 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, we amended our restated license  agreement to grant us
and our  subsidiaries  a  worldwide  exclusive  license to  distribute,  market,
service,  sell and  sublicense  Softalk's  services and  products to  commercial
accounts.  This  agreement  also grants us 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,  we
issued to Softalk  five-year  warrants to purchase up to 5,246,753 shares of our
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 was capitalized to the license agreement equaling $154,000.  Mr.
Christopher Lang, a former director of the Company, is a principal  shareholder,
officer and director of Softalk.

PURCHASE AGREEMENT

     On November 13, 1999, we, through our 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  to us a right of first  refusal  with
respect to  purchasing  Softalk,  its  intellectual  property,  software  and/or
patents.

                                       27
<PAGE>
     On November  10, 2000,  Softalk  exercised  its  exchange  rights under the
purchase agreement,  resulting in the issuance of 4,000,000 restricted shares of
BestNet  common  stock  in  exchange  for a like  number  of  shares  of Class A
non-voting preferred stock of Interpretel (Canada).

PRODUCT DEVELOPMENT AGREEMENT

     Effective  June 14, 2000, we entered into a product  development  agreement
with  Softalk.  The  agreement  engages  Softalk to develop  software for us and
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  was for a period  of one  year.  Total  consideration  given  for the
agreement was $500,000.  In addition,  if the work performed under the agreement
exceeded the retainer as calculated at the rate of $70 per person per hour, then
we 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  were to be compensated at the rate
of $100 per person per hour.

LOAN FACILITY

     On August 6, 1999, we entered into a loan facility  agreement with Softalk,
Inc.  Under the  facility,  we 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.  As of August 31, 2002,  the amount  outstanding  under this
facility was $1,508,043.

     All  future  transactions  between  us and  our  officers,  directors,  and
principal  stockholders are expected to be on terms no less favorable to us than
could be obtained from unaffiliated persons and will require the approval of our
independent directors.

OTHER

Effective  November  1, 2002,  Gerald I. Quinn  resigned  as both  Chairman  and
Director of BestNet.  During Fiscal 2002, Mr. Quinn received a salary of $85,000
along with other Company benefits  including health care and life insurance.  On
November 1, 2002,  Mr. Quinn was also granted 60,000 shares of common stock at a
per share  exercise  price of $1.29 for his past service on  BestNet's  Board of
Directors.
                                     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

<TABLE>
<CAPTION>
       NUMBER                             DESCRIPTION OF FILING                              METHOD
       ------                             ---------------------                              ------
<S>              <C>                                                                         <C>
         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 Equity Securities Investment, Inc.                  (4)

         4.4     Form of warrant issued to Thomson Kernaghan & Co. Limited as Placement
                 Agent                                                                         (5)

         4.5     Certificate of Designations, Rights, Preferences and Limitations of
                 the Series C 8% Cumulative Convertible Preferred Stock                        (6)

         4.6     Form of warrant issued to Berni Holdings, S.A.                                (7)

         4.7     Form of warrant issued to Anthony Silverman                                    *

         4.8     Form of warrant issued to Cedar Avenue LLC                                     *

         4.9     Form of warrant issued to ComHoldings Ventures, LLC                            *

        4.10     Financial Public Relations Agreement between BestNet and  Liolios
                 Group, Inc. dated June 1, 2002 (reflecting terms of warrant issued to
                 Liolios)                                                                       *

        4.11     Form of warrant issued to Robert C. Caylor                                     *

        10.1     Securities Purchase Agreement between Wavetech and Cedar Avenue LLC
                 dated May 1, 2000                                                             (8)

        10.2     Registration Rights Agreement between Wavetech, Cedar Avenue LLC and
                 Thomson Kernighan & Co. Limited dated May 1, 2002                             (9)

        10.3     Common Stock Purchase Agreement between BestNet and Anthony
                 Silverman dated August 30, 2002                                                *

        10.4     Form of Note and Warrant Purchase Agreement between BestNet and
                 various investors, dated April 23, 2002 (including exhibits)                  (10)

        10.5     Product Customization Agreement                                               (11)

        10.6     Purchase Agreement by and among Softalk, Inc., Interpretel (Canada)
                 Inc. and Wavetech International, Inc. dated October 25, 1999                  (12)

        10.7     Amendment No. 1 to Amended and Restated License Agreement                     (12)

        10.8     Amended and Restated License Agreement                                        (12)

        10.9     Share Exchange Agreement by and among Wavetech International, Inc.,
                 Interpretel (Canada) Inc. and Softalk, Inc. dated November 13, 1999           (12)

        10.10    Form of Note and Warrant Purchase Agreement between BestNet and Equity
                 Securities Investment, Inc.                                                   (13)

        10.11    Securities Purchase Agreement between BestNet and Laurus Master Fund,
                 Ltd.                                                                          (14)

        10.12    Employment Agreement dated August 3, 2001, between BestNet and Robert
                 A. Blanchard                                                                   *

        10.13    Employment Agreement dated November 21, 2001, between BestNet and Paul
                 H. Jachim                                                                      *

        10.14    Lease Agreement, dated December 1, 2001, by and between 5075 Cascade
                 Road, LLC and BestNet                                                          *

         21      Subsidiaries of the Registrant                                                 *

         23      Consent of Semple & Cooper                                                     *

        99.1     Section 906 Certification of Robert A. Blanchard and Paul H. Jachim            *
</TABLE>

*    Filed herewith

(1)  Incorporated by reference to the like numbered exhibit to Form 10-Q for the
     quarter ended February 28, 1998.

(2)  Incorporated by reference to the like numbered exhibit to Form S-8 as filed
     on May 29, 2001.

(3)  Incorporated  by  reference  to exhibit 4 to Form 8-K filed on May 16, 2000
     (the "May 2000 Form 8-K").

(4)  Incorporated by reference to exhibit 10.2 to the May 2000 Form 8-K.

                                       28
<PAGE>
(5)  Incorporated by reference to exhibit 10.1 to the May 2002 Form 8-K.

(6)  Incorporated by reference to exhibit 4.2 to Form S-2 Registration Statement
     (File No. 333-73870).

(7)  Incorporated by reference to exhibit 4.1 to Form S-2 Registration Statement
     (File No. 333-89848).

(8)  Incorporated by reference to exhibit 10.4 to the May 2000 Form 8-K.

(9)  Incorporated by reference to exhibit 10.3 to the May 2000 Form 8-K.

(10) Incorporated  by  reference  to  exhibit  10.1  to  Form  S-2  Registration
     Statement (File No. 333-89848.

(11) Incorporated  by  reference to exhibit 10.1 to the Form 10-K for the fiscal
     year ended August 31, 2000.

(12) Incorporated by reference to the Form 10-K for the fiscal 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.

(13) Incorporated  by  reference  to  exhibit  10.1  to  Form  S-2  Registration
     Statement (File No. 333-89848).

(14) Incorporated  by  reference  to  exhibit  10.1  to  Form  S-2  Registration
     Statement (File No. 333-73870).

                                       29
<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 27, 2002                  By: /s/ ROBERT A. BLANCHARD
                                             -----------------------------------
                                             Name:  Robert A. Blanchard
                                             Title: President & CEO

     The officers and directors of BestNet Communications Corp. whose signatures
appear below,  hereby  constitute  and appoint  Robert A.  Blanchard and Paul H.
Jachim as their true and lawful attorneys-in-fact and agents, with full power of
substitution,  with  power to act  alone,  to sign and  execute on behalf of the
undersigned  any amendment or  amendments  to this Form 10-KSB,  and each of the
undersigned does hereby ratify and confirm all that said  attorneys-in-fact  and
agents, or their substitutes, shall do or cause to be done by virtue hereof.

     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.

By: /s/ ROBERT A. BLANCHARD                              Date: November 27, 2002
    -------------------------------------------------
    Robert A. Blanchard, President,
    Chief Executive Officer, Acting Chairman
    and Director (Principal Executive Officer)


By: /s/ PAUL H. JACHIM                                   Date: November 27, 2002
    -------------------------------------------------
    Paul H. Jachim, Chief Financial Officer, Chief
    Operating Officer and Director
    (Principal Financial Officer)


By: /s/ HERMAN HAENERT                                   Date: November 27, 2002
    -------------------------------------------------
    Herman Haenert, Director

                                       30
<PAGE>
                                 ACKNOWLEDGEMENT

     I, Robert A. Blanchard,  President and Chief  Executive  Officer of BestNet
Communications Corp. (the "Company"), certify that:

     (1)  I have  reviewed the Annual  Report on Form 10-KSB for the fiscal year
          ended August 31, 2002 (the "Report");

     (2)  Based  on my  knowledge,  the  Report  does  not  contain  any  untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary  in  order  to make  the  statements  made,  in light of the
          circumstances under which such statements were made, not misleading;

     (3)  Based on my knowledge,  the financial statements,  and other financial
          information  included in the Report,  fairly  present in all  material
          respects the  financial  condition  and results of  operations  of the
          Company as of, and for, the periods represented in the Report;

     (4)  The Company's  other  certifying  officers and I are  responsible  for
          establishing and maintaining  "disclosure controls and procedures" (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the Company and
          have:

          (a)  designed such  disclosure  controls and procedures to ensure that
               material  information  relating  to the  Company,  including  its
               consolidated  subsidiaries,  is made  known to us by others  with
               these  entities,  particularly  during  the  period in which this
               Report is being prepared;

          (b)  have  evaluated the  effectiveness  of the  Company's  disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of the Report (the "Evaluation Date"); and

          (c)  presented in the Report our conclusions  about the  effectiveness
               of the disclosure  controls and procedures  based on the required
               evaluation as of the Evaluation Date.

     (5)  The Company's other certifying officers and I have disclosed, based on
          our most recent  evaluation,  of the Company's  auditors and the audit
          committee of the Company's  board of directors (or persons  performing
          the equivalent functions):

          (a)  All  significant  deficiencies  in the  design  or  operation  of
               internal  controls  which could  adversely  affect the  Company's
               ability to record,  process,  summarize and report financial data
               and have  identified  for the  Company's  auditors  any  material
               weaknesses in internal controls; and

          (b)  Any fraud,  whether or not material,  that involves management or
               other  employees  who have a  significant  role in the  Company's
               internal controls.

     (6)  The Company's other  certifying  officers and I have indicated in this
          Report  whether or not there  were  significant  changes  in  internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation;
          including   any   correction   actions  with  regard  to   significant
          deficiencies and material weaknesses.

Dated: November 27, 2002

By: /s/ ROBERT A. BLANCHARD
    -------------------------------------
    Robert A. Blanchard
    President and Chief Executive Officer

                                       31
<PAGE>
                                 ACKNOWLEDGEMENT



     I, Paul H. Jachim,  Chief Financial  Officer and Chief Operating Officer of
BestNet Communications Corp. (the "Company"), certify that:

     (1)  I have  reviewed the Annual  Report on Form 10-KSB for the fiscal year
          ended August 31, 2002 (the "Report");

     (2)  Based  on my  knowledge,  the  Report  does  not  contain  any  untrue
          statement  of a  material  fact  or  omit to  state  a  material  fact
          necessary  in  order  to make  the  statements  made,  in light of the
          circumstances under which such statements were made, not misleading;

     (3)  Based on my knowledge,  the financial statements,  and other financial
          information  included in the Report,  fairly  present in all  material
          respects the  financial  condition  and results of  operations  of the
          Company as of, and for, the periods represented in the Report;

     (4)  The Company's  other  certifying  officers and I are  responsible  for
          establishing and maintaining  "disclosure controls and procedures" (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the Company and
          have:

          (a)  designed such  disclosure  controls and procedures to ensure that
               material  information  relating  to the  Company,  including  its
               consolidated  subsidiaries,  is made  known to us by others  with
               these  entities,  particularly  during  the  period in which this
               Report is being prepared;

          (b)  have  evaluated the  effectiveness  of the  Company's  disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of the Report (the "Evaluation Date"); and

          (c)  presented in the Report our conclusions  about the  effectiveness
               of the disclosure  controls and procedures  based on the required
               evaluation as of the Evaluation Date.

     (5)  The Company's other certifying officers and I have disclosed, based on
          our most recent  evaluation,  of the Company's  auditors and the audit
          committee of the Company's  board of directors (or persons  performing
          the equivalent functions):

          (a)  All  significant  deficiencies  in the  design  or  operation  of
               internal  controls  which could  adversely  affect the  Company's
               ability to record,  process,  summarize and report financial data
               and have  identified  for the  Company's  auditors  any  material
               weaknesses in internal controls; and

          (b)  Any fraud,  whether or not material,  that involves management or
               other  employees  who have a  significant  role in the  Company's
               internal controls.

     (6)  The Company's other  certifying  officers and I have indicated in this
          Report  whether or not there  were  significant  changes  in  internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation;
          including   any   correction   actions  with  regard  to   significant
          deficiencies and material weaknesses.

Dated: November 27, 2002


By: /s/ PAUL H. JACHIM
    ----------------------------
    Paul H. Jachim
    Chief Financial Officer and Chief Operating Officer

                                       32