U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
   
                                  FORM 10-KSB/A
                                 Amendment No. 2
    
(MARK ONE)

[X]  Annual report under section 13 or 15(d) of the  Securities  Exchange Act of
     1934 (Fee Required) for the fiscal year ended August 31, 1997.

[ ]  Transition  report under section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 (No Fee Required) for the transition  period from  ____________
     to ___________.

                         Commission file number: 0-15482

                                 WAVETECH, INC.
                 (Name of small business issuer in its Charter)

             New Jersey                                    22-2726569
     (State or other jurisdiction                        (IRS Employer
           of incorporation)                         Identification Number)


                       5210 E. Williams Circle, Suite 200
                           Tucson, Arizona 85711-4410
                    (Address of Principal Executive Offices)

                  Registrant's Telephone Number: (520) 750-9093
                                                 --------------

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

                                                     Name of each exchange
     Title of Each Class                              on which registered
     -------------------                             ---------------------

            None                                              None

Securities to be registered under Section 12(b) of the Act:

                          Common Stock $.001 par value
                                (Title of Class)
   
The undersigned  Registrant hereby amends, in its entirety, its Annual Report on
Form 10-KSB for the Fiscal Year Ended August 31, 1997, as follows:
    
     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the Securities 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 [ ]

<PAGE>

     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. [ ]

     State issuer's revenues for its most recent fiscal year: $719,142.

     The aggregate  market value of the Common Stock of the  registrant  held by
non-affiliates as of November 28, 1997 was approximately $5,187,772 based on the
average  high and low bid prices for such Common Stock as reported on the Nasdaq
SmallCap System.

     The number of shares of Common  Stock  outstanding  as of November 28, 1997
was  15,141,364.  The  aggregate  number of  Redeemable  Common  Stock  Purchase
Warrants outstanding as of November 28, 1997 were 3,119,630.

     Documents  Incorporated by Reference - Various like numbered  exhibits from
the Company's  1987  Registration  Statement  File No.  33-8353;  Post-Effective
Amendment No. 1 to Form S-18 Registration Statement,  SEC File No. 33-8353 filed
September 2, 1988; Form 10-K for the fiscal year ending August 31, 1991.

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

                                       2
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

     THIS  ANNUAL  REPORT  ON  FORM  10-KSB  CONTAINS  CERTAIN  "FORWARD-LOOKING
STATEMENTS,"  INCLUDING STATEMENTS  REGARDING,  AMONG OTHER ITEMS, THE COMPANY'S
GROWTH  STRATEGY AND  ANTICIPATED  TRENDS IN ITS BUSINESS.  ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE FORWARD-LOOKING  STATEMENTS AS A RESULT OF A NUMBER
OF FACTORS,  INCLUDING,  BUT NOT LIMITED TO, THE COMPANY'S  NEED FOR  ADDITIONAL
FINANCING,  INTENSE  COMPETITION IN VARIOUS  ASPECTS OF ITS BUSINESS AND VARIOUS
OTHER FACTORS  DESCRIBED UNDER "RISK FACTORS" AND ELSEWHERE  HEREIN,  AS WELL AS
THE  COMPANY'S  PUBLICLY  AVAILABLE  DOCUMENTS  FILED  WITH THE  SECURITIES  AND
EXCHANGE COMMISSION.

(A)  BUSINESS DEVELOPMENT

COMPANY PROFILE

     Wavetech, Inc. (hereinafter referred to as the "Company" or "Wavetech") was
incorporated  in the State of New Jersey on July 10,  1986.  The Company  became
subject to the reporting  requirements  of the  Securities  Exchange Act of 1934
(the "Exchange Act") by filing and registering  with the Securities and Exchange
Commission a Form S-18 under the  Securities Act of 1933;  400,000  units,  each
unit  consisting of three shares of Common Stock and one Class A and one Class B
redeemable  Common Stock purchase  warrant.  Its  Registration  Statement became
effective  on  February  11,  1987.  A total of  400,000  units were sold at the
offering  price of $6.75 per unit for gross total  proceeds of  $2,700,000.  The
Company's  Common Stock is listed on the Nasdaq SmallCap Market under the symbol
"ITEL."

WAVETECH SUBSIDIARIES

     INTERNATIONAL ENVIRONMENTAL SERVICES CORPORATION. On June 6, 1991, Wavetech
acquired all of the outstanding  stock of International  Environmental  Services
Corporation  (hereinafter  referred  to as "IES"),  a  privately  held  Delaware
corporation,  in exchange for 8,000,000  shares  (400,000  shares after the 1-20
split) of the company and a $5 per cubic yard  royalty  payment on IES's  future
operations, if any. IES has not derived any revenue from its operations.

     IES was incorporated in 1988 and at the time of its acquisition reported as
its sole asset  approximately  1,000 acres of real  property  located in Carroll
County,  Ohio.  The property  was acquired by IES for the purpose of  converting
all, or a portion thereof,  to a non-hazardous  sanitary landfill  facility.  In
November  1995,  Wavetech  was advised  that all of the land was sold to satisfy
real  estate  taxes  in  arrears  by  Carroll  County,  Ohio.  This tax sale was
consummated  in April 1994.  The  Company  intends to pursue  legal  recourse to
recover the value of the land from responsible parties.

                                       3
<PAGE>

     Following the acquisition of IES,  Wavetech was comprised of two divisions:
An  Environmental   Laboratory  Testing  and  Engineering   Division  through  a
wholly-owned subsidiary,  Applied Environmental Technology, Inc. ("Applied") and
a Landfill  Development  & Management  Division  ("IES").  During the year ended
August 31, 1995, Wavetech, with the then President abstaining, voted to sell the
stock of Applied to the father of the then President.  This divestiture occurred
before  March 8, 1995,  during the year ended  August  31,  1995,  resulting  in
Wavetech  having  no  further  liabilities  nor  assets  on  its  balance  sheet
associated with Applied.

     INTERPRETEL,  INC. On March 8, 1995,  Wavetech,  Inc.  ("Wavetech") entered
into an  agreement  with  Interpretel,  Inc.  ("Interpretel")  pursuant to which
Wavetech  agreed to issue  6,000,000  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  Wavetech.  The  Acquisition
agreement also provides that during the three year period following the March 8,
1995 closing,  former  shareholders  of  Interpretel  are entitled to receive an
additional  7,500,000 Common Shares of Wavetech through an "earn-out" based upon
before tax net profit.  During the two year  period  following  closing,  former
shareholders of Interpretel could earn up to 3,750,000 Common Shares of Wavetech
for every $0.50 net profit before  taxes,  and an  additional  3,750,000  Common
Shares of the Wavetech  for every $1.00 of  cumulative  total net profit  before
taxes. During the third year following closing, any shares not previously issued
pursuant to this  agreement  can be earned at $1.50 net profit  before taxes per
share.  To date,  no  additional  shares have been issued  pursuant to the "earn
out."

     Interpretel  is a  facilities  based  telecommunication  company  using  an
advanced computer  telephony platform to deliver enhanced calling card services.
Incorporated  in the state of Arizona in  September  of 1993,  the  Company  was
formed  to create a simple  calling  card  product  featuring  direct  access to
over-the-phone  language  interpreters  with services  provided by AT&T Language
Line. Employing a digital  computer/telephony  integrated platform (switch) as a
back-bone,  the company's  products and services have evolved  significantly  to
capitalize on features and  capabilities of the system.  The Company now focuses
on highly  customized and branded,  enhanced  calling cards,  virtual office and
interactive marketing applications. Since its inception, Interpretel has focused
on creating an  infrastructure to support product  development,  administration,
sales, marketing, and customer support.

     Following the acquisition of Interpretel by Wavetech, the former principals
of Interpretel were elected to serve as the management for the  newly-structured
corporation.

     INTERPRETEL (CANADA) INC. On March 10, 1995,  Interpretel (Canada) Inc. was
incorporated  under  the laws of the  Province  of  Ontario  as a  wholly  owned
subsidiary  of  Interpretel,  Inc.  It was  formed  to  secure  a long  distance
reseller's  registration  and license in that country through the Canadian Radio

                                       4
<PAGE>

and Television  Commission (CRTC), which is the equivalent of the FCC in Canada.
This  reseller's  license  qualifies  Interpretel  (Canada) Inc. to operate as a
reseller  of  long  distance   services  and  secure   contracts  with  Canadian
corporations and organizations as a Canadian entity.  Interpretel  (Canada) Inc.
is essentially a sales and customer service operation.

     TELPLEX INTERNATIONAL COMMUNICATIONS,  INC. On January 1, 1997, the Company
acquired certain intangible assets of Telplex, Inc., an Arizona corporation,  in
exchange  for  $25,000 in cash.  These  assets,  which  consisted  primarily  of
goodwill,  an international long distance  wholesaler's  license, a few customer
contracts for the resale of switchless  international long distance numbers,  as
well as a non-compete  agreement from the owner of Telplex,  Inc., were acquired
by the Company through its new  wholly-owned  subsidiary  Telplex  International
Communications,  Inc.  ("Telplex").  The  Company  did  not  assume  any  of the
liabilities of Telplex, Inc.


(B)  BUSINESS OF ISSUER AND SUBSIDIARIES

     The  Company  conducts  most of its  operations  through  its  wholly-owned
subsidiary,  Interpretel.  Interpretel is a facilities  based  telecommunication
company  using an  advanced  computer  telephony  platform  to deliver  enhanced
calling card services.  The Company's products are highly customized and branded
for specific distributor  applications and feature a single point of access, via
any touch-tone telephone, to a suite of information and communication services.

     Sample services  include:  world-wide  direct calling;  instant  conference
calling;  over-the-phone language interpretation  supporting over 100 languages;
fax-based language translation;  news, weather and sports headlines;  integrated
voice and fax mail; integration with customer call centers; and in Canada, Dun &
Bradstreet Express business services, and legal consultations and referrals. All
services are billed on a post-pay basis directly to the subscriber,  usually via
a credit card.

     Positioned as an added-value  service,  principal  benefits to distributors
include:  cost-effective  information distribution and interactive marketing and
promotion capability.  The product also becomes a customer retention vehicle and
new profit center.

     Since its inception,  Interpretel has focused  primarily on the development
of  product   specifications,   proprietary   application   software  (including
call-processing,  billing,  membership and customer service database  software),
execution  of  vendor   contracts,   development  of  corporate   infrastructure
(including  customer  service,  sales and marketing  divisions,  regional  sales
staff),  design and printing of product and marketing  brochures,  and strategic
planning for international business development. The Company's software packages
are tightly integrated into a state-of-the-art  communications system creating a
platform  network  that can be  duplicated  throughout  the world as the Company
proceeds with its international expansion plans.

                                       5
<PAGE>

     The  Company  has issued a tariff,  bearing  F.C.C.  Tariff No. 2, filed in
compliance with the requirements of the  Communications Act of 1934, as amended,
with the Federal Communications Commission.

     Interpretel has a staff of five employees, of which four were employed on a
full-time  basis.  The Company  currently has operations  underway in the United
States and Canada,  and in Australia  through a licensing  agreement with Switch
Telecommunications Pty Ltd.

FEATURES AND CAPABILITIES OF THE COMPANY'S INTERACTIVE SYSTEM

     The Company's  call-processing  architecture is a UNIX-based  multi-tasking
digital  call-processing  system integrated with a Tandem database server, which
provides the ability to manage a wide range of diverse  applications on a single
platform.  The Company believes that its systems computer telephony  integration
technology  is "leading  edge," is highly  robust,  modularly  designed  and can
support  virtually  limitless  expansion and capacity.  The system offers direct
T-1/DS-3  connectivity  with  the  public  telephone  network  and is  networked
remotely for customer service/database management.

     The  Company's   database   management  system  is  currently  managed  and
administered  from its  corporate  offices  in  Tucson,  Arizona,  with the call
processing platforms located in Lincoln,  Nebraska. Plans are currently underway
to locate call processing  platforms in Toronto to support Canadian  operations.
In Sydney,  Australia, a fully operational system is supporting customer traffic
for   the   Company's   first    international    licensing   partner,    Switch
Telecommunications Pty Ltd.

     From 1994 through 1997, the Company  remained focused on the development of
the infrastructure for its call-processing and data management systems. Although
the Company has signed major  distributor  agreements over the last three years,
results are not expected to be commercially realized until at least early 1998.

     The Company currently offers the following programs:

     1. THE  INTERPRETEL  TRAVELER  CARD.  Designed for  worldwide  business and
travel use, this application offers voice and fax mail with pager  notification;
over-the-phone language interpretation;  fax-based document translation;  12-way
conference  calling;  news and  sports  headlines;  and access to  domestic  and
international calling card long distance service. Line charges are billed to the
subscriber's  credit card of choice. The Company is considering  distribution of
this program through a direct mail initiative or promotional program.

     2. THE  AFFINITY  CARD  PROGRAM.  Building on the  Interpretel  Card,  this
program  allows a  company  to brand  and  fully  customize  services  including

                                       6
<PAGE>

integration of Interpretel's communication features with their own services. The
Company currently has Affinity Card programs with Diners Club  International and
Delta Hotels and Resorts,  among others.  The Affinity Card Program  constitutes
the cornerstone of the Company's current marketing and sales initiatives.

     3. THE VIRTUAL OFFICE PROGRAM. Built as a customized "affinity" product and
featuring  many of the same  services as the  Interpretel  Traveler  Card,  this
product is positioned for the Small Office/Home  Office (SOHO) market and uses a
private  '888'  number  for  access.  Unique to this  program  is a  "follow-me"
function  which  dials  and  searches   multiple  phone  numbers   locating  the
subscriber.  As a new  initiative,  during fiscal 1998,  the Company  intends to
commence marketing this product to multi-level sales organizations.

     4.   THE   INTERACTIVE    MARKETING   PROGRAM.   The   Company's   advanced
call-processing  system can be used for non-card based  applications,  including
interactive voice response, fax-backs,  surveys/polling and meet-me conferencing
systems.  The  modular  call-processing  architecture  allows  easy  creation of
applications  with  virtually  no limit.  As the  Company  builds  its sales and
marketing  infrastructure,  this program will receive  greater  attention in the
future.

STRATEGIES FOR THE FUTURE

     The Company believes it is positioned to significantly  expand its customer
base  and  penetrate  new  markets.   The  Company's   proprietary   interactive
call-processing  software and related  systems are designed to address the needs
of  the   international   customer  and  be  easily   integrated   into  foreign
telecommunication  networks. The Company intends to develop additional licensing
agreements  similar to the agreement signed with Switch  Telecommunications  Pty
Ltd for Southeast Asia.

     As companies are shifting from  mass-marketing  initiatives  to "one-on-one
interactive"  marketing,  the Company believes it is uniquely and  strategically
positioned for growth by enabling  businesses to customize and personalize their
marketing initiatives using the Company's interactive telecommunication systems.
The Company intends to aggressively pursue the following growth strategies:

     SEEK OUT ATTRACTIVE  ACQUISITION,  MERGER AND JOINT VENTURE  OPPORTUNITIES.
     The Company believes there exist several  unaffiliated  third parties whose
     operations or assets would complement the Company's  products and services.
     The Company  intends to seek out  potential  acquisitions,  mergers,  joint
     ventures or other partnerships as they arise. However, to date, the Company
     has  no  binding   agreements  for  any  such   opportunities.   See  "Risk
     Factors--Uncertainty  of  Strategic  Relations," "--Potential Acquisitions"
     and "--Need for Additional Financing."

                                       7
<PAGE>

     FOCUS ON  EXPANSION  INTO  INTERNATIONAL  MARKETS.  The Company  intends to
     aggressively  seek  expansion  into  international  markets.  To date,  the
     Company has executed a licensing  agreement with Switch  Telecommunications
     Pty  Ltd for use of the  Company's  platforms  in  Southeast  Asia.  Switch
     Telecommunications   is   operational   and  is  currently   marketing  and
     distributing products and services from the Interpretel System. The Company
     expects to receive  royalty  payments  on the sales of these  products  and
     services  over the next  year,  however,  that  amount  is not yet  readily
     determinable.  The  Company  believes  that its  technology  can be readily
     adaptable  to  a  variety  of  foreign  communications  networks  and  that
     significant  demand  exists  in  international  markets  for the  Company's
     services.   See  "Risk   Factors--Risks   Associated   with   International
     Expansion."

     EXPAND SALES AND MARKETING EFFORTS.  The Company's  operations to date have
     consisted  principally of developing its technology and product  offerings.
     The Company  intends to increase  revenues by  expanding  its base of users
     through direct sales and marketing efforts, as well as through affiliations
     with other third parties. See "Risk Factors--Competition."


ITEM 2.  DESCRIPTION OF PROPERTY

     The Company leases its office and administrative  space at 5210 E. Williams
Circle,  Suite 200, Tucson,  Arizona 85711. The lease expires November 30, 2001,
and requires the Company to make  payments  thereunder  in an average  amount of
approximately $8,400 per month over the term of the lease.


ITEM 3.  LEGAL PROCEEDINGS

     Applied Environmental Technology,  Inc. (Applied') was named as a defendant
in a lawsuit filed by Long Beach Memorial  Hospital (the "Hospital") on July 30,
1992 and, in December 1994, Wavetech, Inc. was added as a party defendant in the
filing of an Amended  Complaint.  The Hospital alleges to have sustained damages
as a result of  certain  errors and  emissions  by  Applied  in  performing  the
engineering of asbestos removal for the Hospital. Litigation counsel for Applied
believes that there are adequate defenses to the action and now believe that the
action will be dismissed.  Litigation  counsel has also advised  Wavetech,  Inc.
that the Statute of Limitations has expired on this action.

     On March 14,  1996,  Steven A.  Ezell  ("Ezell"),  a former  officer of the
Company,  sued the Company and two of its current  officers and directors in the
Superior  Court of the State of Arizona in an action titled EZELL VS.  WAVETECH,

                                       8
<PAGE>

INC.,  GERALD I. QUINN AND TERENCE E. BELSHAM.  The  Complaint  alleges that the
Company breached its employment  contract with Ezell and that Messrs.  Quinn and
Belsham tortiously interfered with Ezell's employment contract with the Company.
The  complaint  seeks  unspecified  compensatory  damages,  including  costs and
attorney's  fees. The Company  believes Ezell's claims have no merit and intends
to vigorously defend this action.


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

     None.



                                     PART II

ITEM 5.  MARKET PRICE FOR THE COMPANY'S SECURITIES

     The Company's  Common Stock is quoted on the Nasdaq  SmallCap  Market.  The
high and low bid prices of the Company's Common Stock as reported by Nasdaq from
September 1, 1995 through August 31, 1997 by fiscal quarters (i.e. 1st Quarter =
September 1 through November 30) were as follows:


                   1st Qtr          2nd Qtr          3rd Qtr          4th Qtr
               --------------   --------------   --------------   --------------
                High     Low     High     Low     High     Low     High     Low
               ------   -----   ------   -----   ------   -----   ------   -----
1996
Common Stock   2-1/16    3/4    1-3/8     3/4     2-1/8    3/4       2      3/4

1997
Common Stock   1-1/16   17/32   1-1/32    1/4     15/16   11/32     3/4     5/16


     The bid and the asked price of the  Company's  Common Stock on November 28,
1997 were 15/32 and 7/16, respectively.

     As of November 28, 1997, the Company had 173  shareholders of record of its
Common  Stock.  As of February  1997,  the Company had 1,496  shareholders  that
beneficially own the stock in the name of various brokers.

     The  Company has never  declared a dividend  and does not plan to declare a
dividend of cash on Wavetech, Inc. Common Stock in the future.

                                       9
<PAGE>

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

OPERATIONS OVERVIEW

     The Company's  business  consists of developing,  operating,  marketing and
selling   interactive   communication   systems   through  the   application  of
"intelligent" call processing  technology and proprietary software to reflect or
target the needs of an  identified  audience.  These  systems  are often used as
privatized  networks for organizations  and special purpose groups.  During 1995
and 1994, the Company remained focused on the development of the  infrastructure
for its call processing and data management  systems.  Operations in the USA and
Canada commenced on a limited basis in 1996. The Company signed an Equipment and
Software Turnkey Agreement with Switch Telecommunications Pty Ltd of Australia.
   
     On June 30, 1998, an agreement  was reached  between the Company and Switch
which terminated the license  agreement and any future  obligations  thereunder.
Consideration  of $150,000 was received on July 10, 1998 in connection with this
agreement.  The Company will recognize income in connection with the termination
of $86,906 unamortized deferred revenue and $150,000 of termination fee revenue.

     On June 30, 1998, an agreement  was reached  between the Company and Switch
which  sets  forth the terms and  conditions  of a put  option for the shares of
common  stock of  Switch,  which are  owned by the  Company.  The sale  price is
$2,100,000  and the term of the  option is one year.  On August  25,  1998,  the
Company  exercised the put option thereby selling its entire interest in Switch.
On August 31, 1998,  the Company  received  $2,100,000  in  satisfaction  of the
option agreement. The Company will recognize a loss of $216,165 upon disposition
of the investment.
    
     Wavetech has 300  cardholders  on its system.  The Company  acquired 65 new
customers during this period.  Wavetech is not currently attempting to implement
new solicitation and marketing  initiatives in an attempt to conserve capital to
complete the Merger.  Therefore,  the number of active subscribers on the system
has  remained  fairly  constant  over the  periods  presented  in the  financial
statements.  The Company gains a small  percentage of new subscribers each month
from previous promotions.  However, the Company also loses a small percentage of
subscribers each month due to normal attrition.

RESULTS OF OPERATIONS

TWELVE MONTHS ENDED AUGUST 31, 1997 COMPARED TO
TWELVE MONTHS ENDED AUGUST 31, 1996

     REVENUES.  The Company,  after  completing the  development of its back end
systems during the last quarter of 1996 and the first quarter of 1997, commenced
operations.  Revenues  increased  to  $719,142  in 1997  from  $19,895  in 1996.
Revenues from the resale of international long distance minutes were $149,155 in
1997 due to the  asset  purchase  of  Telplex,  Inc.  Revenues  from the sale of
enhanced  calling card services,  such as long distance,  voice and fax mail and
news services, increased by $21,511. An increase of $474,106 was due to the sale
of the Interpretel  System,  which consisted of a computer  platform and related

                                       10
<PAGE>

software,  to Switch  Telecommunications  Pty Ltd in Australia.  During 1997 the
Company received $200,000 per the terms of the licensing  agreement with Switch.
A total of  $500,000  for a  seven-year  license  is to be paid over a period of
three years. An increase of $53,571 in revenue  represents the amount recognized
pursuant to this licensing agreement with Switch for the period ended August 31,
1997.

     During the year ended August 31, 1997,  Switch did not pay any royalty fees
to the Company.  The Company was unable to  determine  the amount due because of
disagreements  related to the  modifications  required  for  compatibility  with
Australian  signaling  and the  final  installation  date of the  system.  These
differences precluded Switch from providing the necessary information to compute
the royalty fees. In lieu of  negotiating a working  resolution to these issues,
the Company agreed to terminate the licensing  agreement with Switch.  Effective
June 30,  1998,  an  agreement  was  reached  between  the  Company  and  Switch
terminating the license agreement.  Switch agreed to pay the Company $150,000 in
consideration  of the termination of the agreement.  The payment was received on
July 10, 1998.
   
     COST OF SALES. Cost of sales increased to $679,930 in 1997 from $179,068 in
1996.  $378,009  of the  increase  was related to the  hardware  and third party
software costs for the sale of the Interpretel  System to Switch in 1997.  Costs
related to the resale of  international  minutes  were  $125,766.  A direct mail
marketing  campaign was initiated  during 1997  resulted in increased  costs for
marketing and fulfillment collateral of $69,218.  Hardware and software upgrades
to the  Interpretel  System  to  accommodate  the  anticipated  usage  from  new
contracts increased costs by $15,673.  During the twelve months ended August 31,
1997,  the  positions  of National  Sales  Director and several  salaried  sales
representatives were eliminated thereby reducing costs by $62,062. The positions
were eliminated as the Company decided to market its service through direct mail
rather than a national sales force.  Another existing officer assumed  direction
of marketing  efforts.  During 1997,  a change was made in the  outsourced  call
center used by the Company to handle  customer  service  calls,  resulting  in a
decrease to costs of $17,336.

     DEVELOPMENT  COSTS.  Development  costs  decreased due to completion of the
development of the back end systems during the last quarter of 1996. Fiscal 1996
development costs were $297,935.  During fiscal 1997 there were no additional or
ongoing development costs as development had been completed.  Continued costs of
maintaining the system were charged to operations.

     GENERAL AND  ADMINISTRATIVE  EXPENSES.  Expenses increased to $1,584,747 in
1997 from  $1,287,386 in 1996.  The total  $1,585,747  expenses in 1997 included
$634,159  in  payroll  and  related  expenses;  $232,279  for  legal  and  other
professional  fees;  $141,873  for  platform  services  and fees;  $128,725  for
investor  relation  expenses;  $88,598  for rent;  $57,497 to develop  and print
general Company marketing collateral; $50,048 for overhead costs associated with
the asset purchase of Telplex, Inc.; and $41,935 in travel related expenses.
    
     The major increases in expenses for the twelve months ended August 31, 1997
as  compared  to the twelve  months  ended  August 31,  1996 came in the area of
investor  relations,  which  added  $128,725  during  1997.  Investor  relations
expenses  included fees for consulting  services of an investor  relations firm,

                                       11
<PAGE>

and annual  meeting  expenses,  such as  preparation  of the proxies and mailing
costs.  Certain officers of the Company also attended a major investor relations
conference during 1997. Other  significant  expense increases came from overhead
costs of $50,048  associated  with the asset purchase of Telplex,  Inc. Fees for
the  Company's  platforms,  space rental and  maintenance  increased by $48,000.
Legal and  professional  fees rose in 1997 by  $37,175.  Development  of general
Company marketing collateral increased general marketing expense by $24,544.
   
     DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization costs
increased to $211,786 for the twelve  months ended August 31, 1997 from $136,902
for the twelve months ended August 31, 1996, due to additional asset purchases.

     INTEREST  EXPENSE.  Interest  expense  increased  to  $26,893  in 1997 from
$11,585 in 1996.  The increase was primarily  due to notes  payable  obtained to
meet working capital.

     INCOME  TAXES.  Wavetech has neither  provided  for, nor paid any,  federal
income taxes since its inception  because the Company has not generated  taxable
income in any fiscal  year.  At August 31, 1997,  the Company had net  operating
loss  carryforwards  totaling  approximately  $7,764,000  that may offset future
income from 1997 to 2011 with varying  expiration dates. No tax benefit has been
recorded in the financial  statements  since  realization  of net operating loss
carryforwards does not appear likely. The potential benefit of the net operating
loss  carryforwards  and the deferred tax benefit of future  timing  differences
under SFAS No. 109 is  approximately  $2,298.000.  The March 8, 1995 acquisition
agreement between the Company and Interpretel  resulted in a "change of control"
as  defined  by the  Internal  Revenue  Service  Regulations.  Accordingly,  the
utilization  of the Company's net operating loss  carryforwards  are deemed more
likely than not to expire  unutilized.  Future  financings may cause  additional
changes in ownership and further limitations on the use of federal net operating
loss carryforwards.
    
LIQUIDITY AND CAPITAL RESOURCES

     At August 31, 1997 the Company had a working capital deficit of $650,761 as
compared to working capital of $665,483 at August 31, 1996. The Company borrowed
$122,000  from  certain  Board  Members in order to address the working  capital
needs.  As a result of  inadequate  funds  during the last  quarter  the Company
entered into  agreements  with its employees to compensate  such persons' salary
with a number of shares of the  Company's  Common Stock with a fair market value
on the last day of a regular  pay  period  equal to each  respective  employee's
salary plus a 10% premium as  consideration  for entering into such  agreements.
All of the shares were issued as Deferred  Shares pursuant to the Company's 1997
Stock Incentive Plan.

     As part of this strategy to preserve capital,  the Company was aggressively
pursuing  a number of  financing,  merger  and  acquisition  opportunities.  The
Company signed an investment  banking  agreement  with Stern,  Agee and Leach to
assist  in  evaluating  the  opportunities  available  for  re-capitalizing  the
Company.  Short-term  debt  financing,  to be repaid within twelve  months,  was
secured during this period while  longer-term  solutions,  with repayment  terms
greater than twelve months, were pursued with the investment bankers.

                                       12
<PAGE>

     If the Company succeeds in acquiring additional financing, such efforts may
result in additional dilution to the Company's stockholders; impose restrictions
upon the Company's ability to incur additional debt, pay future dividends, enter
into future business  combinations or other restrictions upon the Company to act
in a manner  which its Board of  Directors  may deem  advisable;  or result in a
change in control of the Company.

     The ability of the Company to continue as a going concern is dependent upon
increasing sales and obtaining additional capital and financing. There can be no
assurance  that the  Company  will be  successful  in  improving  its  financial
condition, and to the extent it is unsuccessful it may become insolvent, forcing
it to suspend or even cease its operations.

INFLATION

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

(B)  RISK FACTORS

     THIS ANNUAL REPORT ON FORM 10-KSB  CONTAINS  "FORWARD-LOOKING  STATEMENTS,"
INCLUDING  STATEMENTS  REGARDING,   AMONG  OTHER  ITEMS,  THE  COMPANY'S  GROWTH
STRATEGY,  FUTURE PRODUCTS, SALES, ABILITY TO LICENSE FUTURE PRODUCTS AND MARKET
PRODUCTS AND ANTICIPATED TRENDS IN THE COMPANY'S BUSINESS.  ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THESE FORWARD-LOOKING  STATEMENTS AS A RESULT OF A NUMBER
OF FACTORS,  INCLUDING,  BUT NOT LIMITED TO, THE NEED FOR ADDITIONAL  FINANCING,
INTENSE COMPETITION IN VARIOUS ASPECTS OF ITS BUSINESS,  ITS DEPENDENCE ON THIRD
PARTY  CONSULTANTS AND KEY PERSONNEL,  AND OTHER FACTORS  DESCRIBED IN THE "RISK
FACTORS" SECTION SET FORTH BELOW AND ELSEWHERE HEREIN.

     LIMITED OPERATING HISTORY; PREVIOUS LOSSES. The Company was incorporated in
1995, however,  it did not have any significant  business operations until 1997.
Accordingly,  the Company  has only a limited  operating  history  upon which an
evaluation  of the  Company  and  its  prospects  can be  based.  The  Company's
prospects  must be considered in light of the risks,  expenses and  difficulties
frequently  encountered  by companies in their early stages of  development  ---
particularly  companies  in  new  and  rapidly  evolving  markets  such  as  the
Company's. To address these risks, the Company must, among other things, respond
to competitive  developments,  attract,  retain and motivate qualified personnel
and  upgrade  its  technologies  and  commercialize   services   utilizing  such
technologies.  There can be no assurance  that the Company will be successful in
addressing  such risks.  The Company has  incurred  net losses of  approximately
$(1,775,714), $(1,860,204) and $(1,055,099) during each of the three most recent
fiscal years. The Company  recorded  revenues for the quarter ended February 28,
1997, but there can be no assurance that the Company will record a profit or, if
so, will be able to sustain growth and profitability.

     FACTORS AFFECTING  OPERATING RESULTS;  POTENTIAL  FLUCTUATIONS IN QUARTERLY
RESULTS.  The Company's operating results have varied  significantly in the past
and may vary  significantly  in the future.  Special  factors that may cause the
Company's  future  operating  results  to vary  include  the  unique  nature  of

                                       13
<PAGE>

strategic  relationships into which the Company may enter in the future, changes
in operating  expenses  resulting  from such strategic  relationships  and other
factors,  the  continued  acceptance  of the Company's  licensing  program,  the
financial  performance  of the Company's  licenses,  the timing of new services,
announcements,  market  acceptance of new and enhanced versions of the Company's
services,  potential acquisitions and changes in legislation and regulation that
may affect the competitive environment for the Company's communications services
and general economic and seasonal factors, among others. In the future, revenues
from  the  Company's   strategic   relationships   may  become  an  increasingly
significant portion of the Company's total revenues. Due to the unique nature of
each strategic relationship, these relationships may change the Company's mix of
expenses relative to revenues. In addition,  the Company's royalties from Switch
Telecommunications  Pty Ltd  ("Switch")  may be  adversely  affected  if  Switch
experiences equipment failure, cannot secure reasonable long distance rates from
an Australian  telecommunications  company in a highly regulated monopoly market
or its equipment becomes redundant or obsolete.

     Quarterly  revenues are  difficult  to forecast  because the market for the
Company's information and  telecommunications  services is rapidly evolving. The
Company's  expense levels are based,  in part, on its  expectations as to future
revenues.  If actual revenue levels are below  expectations,  the Company may be
unable or unwilling to reduce  expenses  proportionately  and operating  results
would likely be  adversely  affected.  As a result,  the Company  believes  that
period-to-period  comparisons of its results of operations  are not  necessarily
meaningful and should not be relied upon as  indications of future  performance.
Due to all of the foregoing  factors,  among  others,  it is likely that in some
future quarter the Company's operating results will be below the expectations of
public market analysts and investors.  In such event, the price of the Company's
Common Stock will likely be adversely affected.

     INTENSE  COMPETITION.   The  information  and  telecommunications  services
industries  are  intensely  competitive,  rapidly  evolving and subject to rapid
technological change. The Company expects competition to increase in the future.
Many of the Company's  current and potential  competitors  have longer operating
histories,  greater name  recognition,  larger customer bases and  substantially
greater  financial,  personnel,  marketing,  engineering,  technical  and  other
resources  than the Company.  There can be no assurance that the Company will be
able to successfully  compete with such entities.  As a result, such competition
could materially adversely affect the Company's business,  operating results and
financial condition.

     The  Company  attempts to  differentiate  itself  from its  competitors  by
offering an integrated  suite of  information  and  communications  services.  A
number of other providers  currently  offer each of the individual  services and
certain  combinations  of the  services  offered by the Company.  The  Company's
worldwide  long  distance  services and features,  such as  conference  calling,
compete  with  services  provided  by  companies  such as AT&T,  MCI and  Sprint
Corporation   ("Sprint"),   as  well  as  smaller  interexchange  long  distance
providers.  The Company's  voice mail services  compete with voice mail services
provided by certain  regional bell operating  companies  ("RBOCs") as well as by
independent  voice mail vendors such as Octel  Communications  Corporation.  The
Company's proposed enhanced travel services,  concierge  services,  new services
and electronic  mail services are expected to compete with the services of other

                                       14
<PAGE>

computer telephony companies such as Premier Technologies (WorldLink), VoiceNet,
among  others.  The Company  also  expects  that other  parties will develop and
implement information and  telecommunications  service platforms similar to that
of the Company, thereby increasing competition for the Company's services.

     In  addition,  the  Telecommunications  Act of 1996 allows  local  exchange
carriers,  including the RBOCs to provide  inter-LATA  long  distance  telephone
service,  which will likely significantly increase competition for long distance
services. The new legislation also grants the Federal Communications  Commission
("FCC") the  authority to  deregulate  other  aspects of the  telecommunications
industry,  which in the future may, if  authorized  by the FCC,  facilitate  the
offering of an integrated suite of information and  telecommunications  services
by regulated  entities,  including the RBOCs,  in competition  with the Company.
Such increased competition could have a material adverse effect on the Company's
business, operating results and financial position. See "--Regulation."

     Telecommunication  companies  often compete for  consumers  based on price,
with major long distance carriers conducting extensive  advertising campaigns to
capture market share. Many of the Company's competitors can offer lower rates to
consumers as a result of higher gross revenues.  As a result, the Company may be
required  to reduce  the prices at which it offers  services  in order to remain
competitive.  A decrease in the rates charged for communications services by the
major long distance  carriers or other  competitors,  whether  caused by general
competitive  pressures  or the  entry of the  RBOCs  and  other  local  exchange
carriers into the long distance market,  could have a material adverse effect on
the Company's business, operating results and financial condition.

     The Company expects that the information  and  telecommunications  services
markets will continue to attract new competitors and new technologies,  possibly
including  alternative   technologies  that  are  more  sophisticated  and  cost
effective  than  the  Company's  technology.  The  Company  does  not  have  the
contractual  right to prevent  its  subscribers  from  changing  to a  competing
network,  and the Company's  subscribers may generally  terminate their services
with the  Company at will.  If the  Company is unable to compete  with  emerging
technologies or services,  it may lose customers and, as a result,  its business
and operating results may be materially adversely affected.

     The personal  telecommunications products industry is intensely competitive
and subject to rapid change. The Company believes that the principal competitive
factors  affecting  the  markets  for its  products  include  customer  service,
content,  quality,  price,  marketing,  distribution,  uninterrupted service and
proprietary   technology.   In   addition,   consumer   demand  for   particular
telecommunications  products may be adversely  affected by the increasing number
of competitive products from which to choose, making it difficult to predict the
Company's future success in producing personal  telecommunications  products for
the retail market.

     TECHNOLOGICAL  CHANGE;  DEPENDENCE ON NEW  SERVICES.  The  information  and
telecommunications  services markets are  characterized  by rapid  technological
change, frequent new product introductions and evolving industry standards.  The
Company's  future  success  will  depend in  significant  part on its ability to
anticipate  industry  standards,  continue to apply  advances  in  technologies,

                                       15
<PAGE>

enhance its current  services,  develop and  introduce  new services on a timely
basis,  enhance its  software  and call  processing  platform  and  successfully
compete  with  products and services  based on evolving or new  technology.  The
Company expects new products and services, and enhancements to existing products
and  services,  to be  developed  and  introduced  which will  compete  with the
services currently offered or planned by the Company.  The Company is also aware
that  products  currently  exist  which  allow  text-to-voice   electronic  mail
conversion  and provide  "meet me"  services,  and that  several  communications
companies are developing or have developed services, that would compete with the
Company's  proposed  devices.  The Company  currently  intends to introduce  and
market new and enhanced  services in 1998,  such as a Virtual Office product and
an integrated messaging service.

     The Virtual Office will allow  subscribers  to enter up to three  different
telephone  numbers into the system  including a pager  number.  A caller will be
able to instruct  the system to leave a voice or fax message for the  subscriber
or direct  the  system to search  for the  subscriber  at one of the  designated
numbers.  If the caller  leaves a message  for the  subscriber,  he will then be
paged  and be  notified  of a voice or fax  message.  This  type of  service  is
sometimes referred to as a "follow me" service. The Integrated Messaging Service
will allow a subscriber  to access  e-mail and fax messages off the Internet via
telephone using  text-to-voice  conversion.  The same  application  will allow a
subscriber  to access  all the  different  Wavetech/Interpretel  services  via a
laptop computer.  Development of these services will require the  implementation
of new technologies and the integration of these technologies into the Company's
call processing  platform.  Rapid changes in technology and product obsolescence
require  the  Company  to develop or acquire  new  products  and to enhance  its
existing products on a timely basis. There is no assurance that the Company will
be able to predict such changes or have the  resources  required or otherwise be
able to respond to market or technological changes or to compete successfully in
the future.

     There can be no assurance that the Company will be successful in developing
and  marketing  service  enhancements  or new services  that respond to these or
other  technological  changes or evolving industry  standards,  that the Company
will not  experience  difficulties  that could delay or prevent  the  successful
development,  introduction  and  marketing  of its  services,  or  that  its new
services, and the enhancements thereto, will adequately meet the requirements of
the marketplace and achieve market acceptance. Delays in the introduction of new
services,  the  inability  of the  Company to develop  such new  services or the
failure of such  services  to achieve  market  acceptance  could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.

     UNCERTAINTY  OF  STRATEGIC  RELATIONSHIPS.   A  principal  element  of  the
Company's   growth  strategy  is  the  creation  and  maintenance  of  strategic
relationships  that will  enable the  Company to offer its  services to a larger
customer  base  than the  Company  could  otherwise  reach  through  its  direct
marketing  efforts.   The  Company  has  entered  into  or  initiated  strategic
relationships with several  companies,  including Switch,  DonTon Travel,  Inc.,
TeamMark and GroupMark.  These relationships were formed recently,  and have not
produced  significant  revenues to date.  The Company is unable to predict their

                                       16
<PAGE>

success or failure  due to limited  operating  experience  with these  strategic
partners.  Although  the  Company  intends  to  continue  to expand  its  direct
marketing  channels,  the Company believes that strategic partner  relationships
may  offer  a  potentially  more  effective  and  efficient  marketing  channel.
Consequently,  the Company's  success depends in part on the ultimate success of
these   relationships  and  on  the  ability  of  these  strategic  partners  to
effectively  market  the  Company's  services.  Failure  of one or  more  of the
Company's  strategic  partners to successfully  develop and sustain a market for
the  Company's  services,  or the  termination  of one or more of the  Company's
relationships with a strategic partner,  could have a material adverse effect on
the Company's  overall  performance due to the possibility of more costly direct
marketing expenditures by the Company and other factors.

     Although the Company views its strategic  relationships  as a key factor in
its overall business  strategy and in the development and  commercialization  of
its services,  there can be no assurance that its strategic  partners view their
relationships  with the Company as significant  for their own businesses or that
they will not  reassess  their  commitment  to the  Company in the  future.  The
Company's  arrangements  with its strategic  partners do not  establish  minimum
performance  requirements for the Company's strategic partners, but instead rely
on the voluntary  efforts of these partners in pursuing joint goals.  Certain of
these   arrangements   prevent  the  Company  from   entering   into   strategic
relationships  with  other  companies  in the  same  industry  as the  Company's
strategic  partners,   either  for  specified  periods  of  time  or  while  the
arrangements  remain in force.  In  addition,  even when the  Company is without
contractual  restriction,  it may be restrained by business  considerations from
pursuing  alternative  arrangements.  The  ability  of the  Company's  strategic
partners to  incorporate  the  Company's  services  into  successful  commercial
ventures  will  require  the  Company,   among  other  things,  to  continue  to
successfully  enhance  its  existing  services  and develop  new  services.  The
Company's  inability to meet the  requirements  of its strategic  partners or to
comply with the terms of its strategic partner  arrangements could result in its
strategic partners failing to market the Company's services, seeking alternative
providers of communication and information services or canceling their contracts
with the  Company,  any of which  could  have a material  adverse  impact on the
Company.

     DEPENDENCE ON LICENSING RELATIONSHIPS.  The Company has an active licensing
relationship with one company,  Switch  Telecommunications Pty Ltd in Australia.
The  Company  intends to increase  its number of licenses  and the volume of its
licensee  transactions  volume.  However,  the  telecommunications  industry  is
intensely  competitive and rapidly consolidating while the majority of companies
that chose to outsource communications card services to the Company are small or
medium-sized  telecommunications  companies  that may be unable to withstand the
intense  competition in the  telecommunications  industry.  The inability of the
Company to attract larger or more licensee  transactions,  the failure of one or
more of the  Company's  licensees  to  develop  and  sustain  a  market  for the
Company's  services,  or termination  of one or more of the Company's  licensing
relationships,  could have a material adverse effect on the Company's  business,
operating results and financial condition.

     ABILITY TO MANAGE  GROWTH.  The Company  expects to experience  substantial
growth  in 1998 and  thereafter  as it  begins to  operate  its call  processing

                                       17
<PAGE>

networks.  This growth, if any, can be expected to place significant  demands on
all aspects of the Company's business,  including its administrative,  technical
and financial personnel and systems.  In addition,  expansion by the Company may
strain the Company's management,  financial and other resources. There can be no
assurance  that  the  Company's  systems,  procedures,   controls  and  existing
resources will be adequate to support expansion of the Company's operations. The
Company's future operating results will  substantially  depend on the ability of
its officers and key employees to manage  changing  business  conditions  and to
implement  and  improve its  technical,  administrative,  financial  control and
reporting  systems.  If the Company is unable to respond to and manage  changing
business conditions,  then the quality in the Company's services, its ability to
retain key personnel and its results of operations could be materially adversely
affected.  At certain stages of growth in network usage, the Company is required
to add capacity to the call  processing  platform,  thus  requiring  the Company
continuously  to attempt to predict growth in its network usage and add capacity
to its system accordingly.  Difficulties in managing continued growth, including
difficulties  in predicting the growth in network  usage,  could have a material
adverse effect on the Company, its business and results of operations.

     DEPENDENCE  ON KEY  MANAGEMENT  AND  PERSONNEL.  The  Company's  success is
largely dependent upon its executive  officers,  the loss of one or more of whom
could have a material  adverse effect on the Company.  The Company believes that
its continued  success will depend to a significant  extent upon the efforts and
abilities of Gerald I. Quinn,  President and CEO, and Richard P.  Freeman,  Vice
President.  The  loss of  services  of any of  these  individuals  could  have a
material  adverse  effect  upon the  Company.  Mr.  Quinn  has  entered  into an
employment  agreement  with the Company which expires in May,  1998. Mr. Freeman
has entered into an employment agreement with the Company which is automatically
renewed on an annual basis. The Company does not currently maintain key man life
insurance on the lives of any of these persons.

     The Company also believes that its success depends upon its ability to hire
and retain  highly  qualified  engineering  and product  development  personnel.
Competition in the recruitment of highly qualified  personnel in the information
and telecommunications services industry is highly intense. The inability of the
Company to  identify,  attract  and retain  such  personnel  may have a material
adverse  effect on the Company.  No assurance can be given that the Company will
be able to retain its key employees or that it will be able to attract qualified
personnel in the future.

     DEPENDENCE ON CALL PROCESSING PLATFORM,  DAMAGE,  FAILURE AND DOWNTIME. The
Company currently  maintains a single UNIX-based  multi-tasking  call processing
system  integrated with a Tandem  database server located in Lincoln,  Nebraska.
The Company's  network  service  operations  are  dependent  upon its ability to
protect the equipment and data at its switching facility against damage that may
be caused by fire,  power  loss,  technical  failures,  unauthorized  intrusion,
natural  disasters,  sabotage and other  similar  events.  The Company has taken
certain precautions to protect itself and its subscribers from events that could

                                       18
<PAGE>

interrupt delivery of the Company's services. These precautions include physical
security systems, an uninterruptible power supply and an on-site power generator
designed to be sufficient to continue  operation of the Company's network in the
event of a power outage. The Company's network is further designed such that the
data  on each  network  server  is  duplicated  on a  separate  network  server.
Notwithstanding such precautions,  there can be no assurance that a fire, act of
sabotage, technical failure, natural disaster or a similar event would not cause
the failure of a network  server and its backup  server,  other  portions of the
Company's network,  or the Lincoln facility as a whole,  thereby resulting in an
outage of the Company's  services.  Such an outage could have a material adverse
effect on the Company. While the Company has not experienced any downtime of its
network due to natural  disasters or similar events, on occasion the Company has
experienced downtime due to various technical failures.  When such failures have
occurred,  the Company has worked to remedy the failure as soon as possible. The
Company believes that these technical failures have been infrequent and have not
resulted in any  material  downtime of the call  processing  platform  since the
Company's  inception.  Although  the  Company  maintains  business  interruption
insurance  providing  for  aggregate  coverage  of  approximately   $25,000  per
occurrence,  there can be no assurance that the Company will be able to maintain
its business  interruption  insurance,  that such insurance would continue to be
available at reasonable prices,  that such insurance would cover all such losses
or that such insurance  would be sufficient to compensate the Company for losses
it  experiences  due to the  Company's  inability  to  provide  services  to its
subscribers.

     LIMITED PROTECTION OF PROPRIETARY  TECHNOLOGY:  RISKS OF INFRINGEMENT.  The
Company relies primarily on a combination of copyright and trade secret laws and
contractual  confidentiality provisions to protect its proprietary rights. These
laws and contractual provisions provide only limited protection of the Company's
proprietary  rights. The Company has no patents or patent  applications  pending
and has no registered trademarks or copyrights. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's  software or services or to obtain and use information that the
Company regards as proprietary. Although the Company is not aware of any current
or previous  infringement upon its proprietary rights, there can be no assurance
that the Company's means of protecting its  proprietary  rights will be adequate
or that  the  Company's  competitors  will  not  independently  develop  similar
technology.  In addition,  the laws of some foreign countries do not protect the
Company's  proprietary  rights to as great an  extent as the laws of the  United
States.  An  inability  of the Company to  adequately  protect  its  proprietary
technology or other assets could have a material  adverse effect on its business
and results of operations.

     To date,  no actions  have been filed  against the Company  with respect to
either alleged patent or trademark  infringement  claims.  However, no assurance
can be given that  actions or claims  alleging  trademark,  patent or  copyright
infringement  will not be brought against the Company with respect to current of
future products or services,  or that, if such actions are brought,  the Company
will  ultimately  prevail.  Any such  claiming  parties  may have  significantly

                                       19
<PAGE>

greater resources than the Company to pursue litigation of such claims. Any such
claims, whether with or without merit, could be time consuming, result in costly
litigation,  cause delays in introducing new or improved  services,  require the
Company to enter into  royalty or licensing  agreements  or cause the Company to
discontinue  use of the  challenged  tradename,  service mark or  technology  at
potential  significant expense to the Company associated with the marketing of a
new name or the development or purchase of replacement technology,  any of which
results could have a material adverse effect on the Company.

     DEPENDENCE  UPON  SOFTWARE.  The  software  developed  and  utilized by the
Company in providing its services may contain  undetected  errors.  Although the
Company  engages in extensive  testing of its software prior to introducing  the
software  onto its network,  there can be no  assurance  that errors will not be
found in software after commencement of use of such software. Any such error may
result in partial or total  failure of the  Company's  network,  additional  and
unexpected  expenses to fund further  product  development or to add programming
personnel to complete a development  project, and loss of revenue because of the
inability  of  subscribers  to use  Wavetech's  network or the  cancellation  by
subscribers of their service with  Wavetech,  any of which could have a material
adverse effect on the Company.

     DEPENDENCE UPON  TELECOMMUNICATION  PROVIDERS;  NO GUARANTEED  SUPPLY.  The
Company does not own a transmission network and, accordingly, depends on MCI for
transmission of its subscribers'  long distance calls. For the year ended August
31, 1997, MCI was responsible for carrying  traffic  representing  approximately
100% of the  minutes  of long  distance  transmissions  billed  to the  Company.
Further,  the  Company  is  dependent  upon  local  exchange  carriers  for call
origination  and  termination.  If there is an outage  affecting  the  Company's
terminating carriers,  the Company's call processing platform may not complete a
call. The Company has not experienced  significant losses in the past because of
interruptions of service at terminating  carriers,  but no assurance can be made
in this  regard  with  respect to the future  integrity  of such  carriers.  The
Company's ability to maintain and expand its business  depends,  in part, on its
ability to continue to obtain telecommunication services on favorable terms from
a long distance  carrier and the  cooperation  of both  interexchange  and local
exchange carriers in originating and terminating  service for its subscribers in
a timely manner. A partial or total failure of the Company's  ability to receive
or  terminate  calls would result in a loss of revenues by the Company and could
lead to a loss of  subscribers,  either of which  could have a material  adverse
effect on the Company.

     The Company obtains long distance  telecommunications  services pursuant to
supply  agreements  with  Interact,  Inc.  of  Lincoln,  Nebraska,  and MCI.  No
assurance  can be given that the Company  will be able to obtain  long  distance
services in the future at favorable prices or at all, and the  unavailability of
long distance  services to the Company,  or a material  increase in the price at
which the Company is able to obtain long distance service, would have a material
adverse  affect on the  Company's  business  financial  condition and results of
operations.   The  Company  is  not   currently  a  party  to  a  long  distance

                                       20
<PAGE>

telecommunications  services agreement,  that requires the Company to purchase a
minimum  amount of service  each month.  The Company  may  determine  that it is
desirable to enter into agreements containing minimum purchase requirements.  No
assurance  can be given that  demand for  services  in the areas  covered by the
Company's transmission suppliers will exceed any minimum purchase requirement in
the future.

     REGULATION.  Various regulatory factors may have an impact on the Company's
ability to compete and on its financial  performance.  The Company is subject to
regulation by the Federal Communications Commission ("FCC") and by various state
public service and public utility commissions. Federal and state regulations and
regulatory  trends  have had,  and may have in the  future,  both  positive  and
negative  effects on the Company and on the information  and  telecommunications
service  industries  as a whole.  FCC policy  currently  requires  interexchange
carriers to provide resale of the use of their transmission facilities.  The FCC
also requires local exchange carriers to provide all interexchange carriers with
equal access to the  origination  and termination of calls. If either or both of
these requirements were removed, the Company would be adversely affected.  These
carriers  may  experience  disruptions  in service  due to factors  outside  the
Company's  control,  which may cause the Company to lose the ability to complete
its subscribers'  long distance calls. The Company has made all filings with the
FCC necessary to allow the Company to provide  interstate and international long
distance  service.  In order to provide  intrastate long distance  service,  the
Company  is  required  to obtain  certification  to  provide  telecommunications
services from the public service or public utility commissions of each state, or
to  register or be found  exempt  from  registration  by such  commissions.  The
Company has not yet made any filings or taken any actions to become certified or
tariffed to provide intrastate card services to customers  throughout the United
States. To date, the Company has not been denied any licenses or tariffs.

     On   February   8,   1996,   President   Clinton   signed   into   law  the
Telecommunications  Act of  1996  which  will  allow  local  exchange  carriers,
including the RBOCs, to provide  inter-LATA long distance  telephone service and
which  also  grants  the  FCC  authority  to  deregulate  other  aspects  of the
telecommunications  industry.  The  new  legislation  may  result  in  increased
competition  for  the  Company  from  others,   including  RBOCs  and  increased
transmission costs in the future. See "--Competition" above.

     In conducting  various  aspects of its business,  the Company is subject to
various laws and regulations relating to commercial transactions generally, such
as the Uniform  Commercial  Code,  and is also subject to the  electronic  funds
transfer  regulations  embodied  in  Regulation  E  promulgated  by the Board of
Governors of the Federal Reserve System ("Federal Reserve"). Given the expansion
of the electronic commerce market, the Federal Reserve might revise Regulation E
or adopt new rules for  electronic  funds  transfer  affecting  users other than
consumers.  Congress  has held  hearings  on whether to  regulate  providers  of
services and transactions in the electronic  commerce market, and it is possible

                                       21
<PAGE>

that Congress or individual  states could enact laws  regulating  the electronic
commerce market.  If enacted,  such laws,  rules and regulations  could directly
regulate the Company's  business and industry and could have a material  adverse
affect on the Company's business, operating results and financial condition.

     RISKS  ASSOCIATED  WITH  INTERNATIONAL  EXPANSION.  A key  component of the
Company's  strategy is its planned  expansion into  international  markets.  The
Company  intends  to  establish  call  processing   platforms  in  Canada,   and
potentially  other countries in 1998 and beyond.  If international  revenues are
not  adjusted  to offset  the  expense of  establishing  and  maintaining  these
international operations, the Company's business, operating results or financial
condition could be materially adversely affected.  To date, the Company has only
limited  experience in marketing and distributing its services  internationally.
There  can be no  assurance  that  the  Company  will be  able  to  successfully
establish the proposed  international call processing  platforms,  or to market,
sell and deliver its services in these markets.  In addition to the  uncertainty
as to the  Company's  ability to expand its  international  presence,  there are
certain  difficulties  and risks inherent in doing business on an  international
level,  such as burdensome  regulatory  requirements  and unexpected  changes in
these requirements, export restrictions, export controls relating to technology,
tariffs  and  other  trade  barriers,  difficulties  in  staffing  and  managing
international operations, longer payment cycles, problems in collecting accounts
receivable,  political  instability,  fluctuations  in currency  exchange rates,
seasonal  reduction  in business  activity  during the summer  months in certain
parts of the worlds and potentially adverse tax consequences, which could have a
material  adverse  effect  on the  performance  of the  Company's  international
operations.  There can be no assurance that one or more of such factors will not
have a material adverse affect on the Company's future international  operations
and,  consequently,  on the Company's business,  operating results and financial
condition.

     RISK  OF LOSS  FROM  RETURNED  TRANSACTIONS,  FRAUD,  BAD  DEBT,  THEFT  OF
SERVICES.  The Company utilizes Intrust Bank, N.A.,  principal financial payment
clearance  systems for  electronic  fund  transfers  and  ICVerify  software for
electronic  credit  card  settlement.  In its use of these  established  payment
clearance  systems,  the Company  generally bears the same credit risks normally
assumed by other  users of these  systems  arising  from  returned  transactions
caused by insufficient  funds,  stop payment  orders,  closed  accounts,  frozen
accounts,  unauthorized use disputes,  theft or fraud. From time to time persons
may be able to gain  unauthorized  access to the  Company's  network  and obtain
services without  rendering  payment to the Company by unlawfully  utilizing the
access numbers and personal identification numbers ("PINs") of authorized users.
Although  to date the Company has not  experienced  material  losses due to such
unauthorized  use of access  numbers and PINs,  no  assurance  can be given that
future  losses  due to  unauthorized  use  will  not be  material.  The  Company
currently  seeks to  manage  these  risks  through  its  internal  controls  and
proprietary  billing system. The Company's call processing  platform prohibits a
single access number and PIN from establishing multiple simultaneous connections

                                       22
<PAGE>

to the network system,  and the Company  establishes  preset spending limits for
each  subscriber.  The Company  also  maintains  a reserve for such risks.  Past
experience in estimating and establishing  reserves and the Company's historical
losses are not necessarily  accurate  indications of the Company's future losses
or the  adequacy  of the  reserves  established  by the  Company in the  future.
Although  the Company  believes  that its risk  management  and bad debt reserve
practices  are  adequate,  there can be no  assurance  that the  Company's  risk
management  practices or reserves will be sufficient to protect the Company from
unauthorized  or returned  transactions or thefts of services which could have a
material  adverse  effect  on the  Company's  business,  operating  results  and
financial condition.

     POTENTIAL  ACQUISITIONS.  The Company may in the future pursue acquisitions
of  complementary  services,  products,   technologies  or  businesses.   Future
acquisitions may result in potentially  dilutive issuances of equity securities,
the incurrence of additional debt, the write-off of software  development costs,
and the  amortization  of  expenses  related to  goodwill  and other  intangible
assets,  all of which  could have a  material  adverse  effect on the  Company's
business,  operating results and financial condition.  Future acquisitions would
involve numerous  additional risks,  including those related to the assimilation
of the operations, services, products and personnel of the acquired company, the
diversion of  management's  attention  from other  business  concerns,  entering
markets in which the Company has little or no direct  prior  experience  and the
potential loss of key employees of the acquired  company.  The Company currently
has no agreements or understandings with regard to any potential acquisitions.

     NEED  FOR  ADDITIONAL   FINANCING.   The  Company  has   significant   cash
requirements  in  connection  with its business.  To date,  the Company has been
unable to generate  sufficient  revenues to recover  its costs.  See  "--Limited
Operating  History;  Previous  Losses" above. In addition to its working capital
requirements, the Company must fund the production and marketing of its products
prior  to the time  the  products  are  made  available  for  sale and  generate
revenues.  The  Company's  potential  receipt of revenues from product sales are
subject to substantial contingencies,  and there can be no assurances concerning
the timing and amount of future revenues from product sales.  Additionally,  the
Company may not receive payment from its customers until a period after products
are sold to end-users.

     The Company may be required to seek  additional  financing  in the event of
delays, cost overruns or unanticipated  expenses associated with a company in an
early  stage of  development,  or in the  event  the  Company  does not  realize
anticipated revenues. In addition,  the Company may require additional financing
in the  future to further  expand its  product  offerings  or to make  strategic
acquisitions.  There can be no assurance that such additional  financing will be
available,  or that, if available,  such  financing  will be obtainable on terms
favorable  to the  Company or its  stockholders.  The Company  currently  has no
commitment for any such  financing and in the event such necessary  financing is
not obtained, the Company's operations will be materially adversely affected and
the  Company  will  have  to  cease  or  substantially  reduce  operations.  Any

                                       23
<PAGE>

additional  equity  financings  may  be  dilutive  to  stockholders,   and  debt
financings, if available, may involve restrictive covenants,  including limiting
the Company's ability to incur additional debt.

     NASDAQ  LISTING  AND  MAINTENANCE  REQUIREMENTS;  RISK  OF  DELISTING.  The
Company's Common Stock is currently listed on the Nasdaq SmallCap Market.  Under
the rules for continued  listing in the Nasdaq system,  the Company must satisfy
prior to February 23, 1998 and thereafter  will be required to maintain at least
$2,000,000 in net tangible assets or $35,000,000 in market  capitalization,  two
market-makers,  a public  float of at least  $500,000  shares and a minimum  bid
price of $1.00  per  share,  as well as  satisfy  certain  corporate  governance
criteria.  Upon  notice  of a  deficiency  in one  or  more  of the  maintenance
requirements,  the  Company  would  be given 90 days (30 days in the case of the
number of  market-makers) to comply with the maintenance  standards.  Failure of
the Company to meet the maintenance requirements of Nasdaq prior to February 23,
1998 could result in the Company's  securities being delisted from Nasdaq,  with
the result that the Company's  securities  would trade on the OTC Bulletin Board
or  in  the  "pink  sheets"   maintained  by  the  National   Quotation   Bureau
Incorporated. As a consequence of such delisting, an investor could find it more
difficult to dispose of or to obtain accurate  quotations as to the market value
of the Company's securities. Among other consequences, delisting from Nasdaq may
cause a decline in the stock price,  the loss of news coverage about the Company
and difficulty in obtaining future financing.

     RISK  OF  LOW-PRICED  STOCK;  PENNY  STOCK  REGULATIONS.  If the  Company's
securities  were  delisted  from Nasdaq (See "Risk  Factors--Nasdaq  Listing and
Maintenance Requirements; Risk of Delisting"), they could become subject to Rule
15g-9  under  the  Exchange  Act,  which  imposes   additional   sales  practice
requirements on broker-dealers  which sell such securities to persons other than
established customers and "accredited  investors"  (generally,  individuals with
net worth in excess of  $1,000,000  or annual  incomes  exceeding  $200,000,  or
$300,000 together with their spouses).  For transactions covered by this rule, a
broker-dealer  must make a special  suitability  determination for the purchaser
and have received the purchaser's  written  consent to the transaction  prior to
sale. Consequently, such rule may adversely affect the ability of broker-dealers
to sell the  Company's  securities  and may  adversely  affect  the  ability  of
purchasers in this Offering to sell any of the securities acquired hereby in the
secondary market.

     The Commission  adopted  regulations which generally define a "penny stock"
to be any  non-Nasdaq  equity  security  that has a  market  price  (as  therein
defined)  of less than  $5.00 per share or with an  exercise  price of less than
$5.00 per share, subject to certain exceptions.  For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in a penny stock of a disclosure schedule prepared by the Commission relating to
the penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and the registered  representative and current

                                       24
<PAGE>

quotations for the securities.  Finally,  monthly  statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.

     The  foregoing  required  penny  stock  restrictions  will not apply to the
Company's  securities if such  securities  are listed on Nasdaq and have certain
price and volume information  provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance  that the Company's  securities  will qualify for exemption from these
restrictions.  In any event,  even if the Company's  securities were exempt from
such  restrictions,  it would remain subject to Section 15(b)(6) of the Exchange
Act,  which gives the  Commission  the  authority to prohibit any person that is
engaged in unlawful  conduct while  participating  in a distribution  of a penny
stock from  associating  with a broker-dealer or participating in a distribution
of a penny stock,  if the commission  finds that such a restriction  would be in
the public interest. 

     If the Company's  securities were subject to the existing or proposed rules
on penny stocks,  the market  liquidity for the  Company's  securities  could be
severely adversely affected.
   
RISKS ASSOCIATED WITH YEAR 2000

Many computer  programs were designed to recognize  calendar years by their last
two  digits.  As a result,  such  programs  are  expected to  misidentify  dates
commencing in calendar year 2000.  This problem is referred to as the "Year 2000
Issue."  These  errors are likely to lead to computer  errors,  miscalculations,
delays and business  interruptions if not properly corrected in a timely manner.
The Company's main billing  program was originally  written to accept dates from
the year 2000 and beyond.  However,  the Company plans on having an  independent
consultant  review the billing system for the purpose of thoroughly  testing its
operation for readiness associated with the Year 2000 Issue. Estimated costs for
the  consultant  and  associated   testing   activities  is  $700.  The  Company
anticipates that such assessment activities will be completed by March 31, 1999.
The Company has completed an assessment  of all other  internal  systems and has
determined  that no  modifications  to such systems are  necessary.  Total costs
incurred  to date by the  Company  in  connection  with  its  assessment  of its
internal vulnerability to the Year 2000 Issue equal approximately $5,000.

The  Company  has also  contacted  its major  supplier,  which  handles the call
processing   software  and  supports  platform  services.   The  Company's  call
processing  hardware and operating systems are not currently able to address the
Year 2000 Issue.  Modifications  to this system have begun and the host server's
operating  system is expected to be compliant no later than the end of the first
quarter of calendar year 1999. The Company currently estimates that its costs to
be incurred with such  modification will be approximately  $50,000.  The Company

                                       25

<PAGE>

does not have material  relationships  with any other third  partners upon which
its business and operations are substantially dependent.  However, it intends to
seek  assurances  from any third parties with which it enters into agreements in
the future that the systems are compliant with the Year 2000 Issue.

Presently,  the  Company  does not have a  contingency  plan in the  event it is
unable to correct any  vulnerability  to the Year 2000 Issue,  but is  reviewing
alternatives,  such as using a service bureau to  temporarily  process calls and
run applications, should any problems arise in system operations.

The  Company  believes  there exist  multiple  alternative  suppliers  for these
services.  However,  if it is  unable  to  obtain  such  services  and at  terms
acceptable to it, it may be forced to interrupt or suspend its services. In
addition, even if available,  the Company may be required to incur substantially
higher  costs in order to  provide  such  services.  The  Company  has  adequate
resources to complete its Year 2000 assessment and any necessary modifications.
    

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   WAVETECH, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                     Page Number
                                                                     -----------

REPORT OF INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . . . .      28

CONSOLIDATED BALANCE SHEET - August 31, 1997. . . . . . . . . . . .      29

CONSOLIDATED STATEMENT OF OPERATIONS - Periods ended
August 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . .      30

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S 
EQUITY - Periods ended August 31, 1997 and 1996 . . . . . . . . . .      31

CONSOLIDATED STATEMENTS OF CASH FLOWS - Periods ended
August 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . .      32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . .      33



                                       26



<PAGE>
                         WAVETECH, INC. AND SUBSIDIARIES

                          Audited Financial Statements

                  For the years ended August 31, 1997 and 1996
                                   -----------

                                       27
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT



To the Stockholders and Board of Directors
  Wavetech, Inc.


We have audited the accompanying  consolidated  balance sheet of Wavetech,  Inc.
and subsidiaries as of August 31, 1997 and the related  consolidated  statements
of  operations,  changes  in  stockholders'  equity and cash flows for the years
ended  August  31,  1997  and  1996.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Wavetech,  Inc.  and  subsidiaries  as of August 31, 1997 and the results of its
operations  and its cash flows for the years ended August 31, 1997 and 1996,  in
conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will  continue as a going  concern.  As discussed in Note 16 to
the consolidated  financial  statements,  the Company has incurred a significant
loss from operations and has a deficit that raises  substantial  doubt about its
ability to continue as a going  concern.  Management's  plans in regard to these
matters are also  described in Note 16. The financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 17 to the financial statements, certain errors resulting in
overstatement  of  previously  reported  revenue  recognized  from the sale of a
licensing  agreement  as of August 31, 1997,  were  subsequently  discovered  by
management.  Accordingly,  the August 31, 1997  financial  statements  have been
restated  to  correct  the  error.  Additionally,   Note  11  contains  expanded
disclosure regarding the fair value of stock options.

   
/s/ Addison, Roberts & Ludwig
Tucson, Arizona
August 31, 1998
    


                                       28
<PAGE>
                         WAVETECH, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                                 August 31, 1997
                                   -----------

                                     ASSETS
                                                                       1997
Current assets:                                                   -------------
  Cash and cash equivalents                                       $      13,329
  Accounts receivable, net of allowance of $527                          26,273
  Prepaid expenses and other assets                                       9,725
                                                                  -------------
    Total current assets                                                 49,327
Property and equipment, net                                             410,182
Noncurrent assets:
  Investment in Switch Telecommunications Pty Ltd                     2,316,165
  Intangibles, net of amortization of $7,511                             29,489
  Deposits and other assets                                              35,633
                                                                  -------------
    Total noncurrent assets                                           2,381,287
                                                                  -------------
    Total assets                                                  $   2,840,796
                                                                  =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                           $     395,222
  Accrued interest payable, noncurrent portion                            5,248
  Notes payable, current portion                                        172,071
  Capital leases payable, current portion                                56,119
  Deferred revenue, current portion                                      71,428
                                                                  -------------
    Total current liabilities                                           700,088
Noncurrent liabilities:
  Capital leases payable                                                 53,892
  Deferred revenue                                                       75,001
                                                                  -------------
    Total liabilities                                                   828,981
Commitments (Note 10)
Stockholders' equity:
  Common stock, par value $ .001 per share;
    50,000,000 shares authorized, 15,076,807
      shares issued and outstanding                                      15,077
  Additional paid-in capital                                          7,024,823
  Accumulated deficit                                                (5,028,085)
                                                                  -------------
    Total stockholders' equity                                        2,011,815
                                                                  -------------
    Total liabilities and stockholders' equity                    $   2,840,796
                                                                  =============

                        See independent auditor's report.
        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       29
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  For the years ended August 31, 1997 and 1996
                                   -----------


                                                    1997               1996
                                                ------------       ------------


Revenues                                        $    719,142       $     19,895
                                                ------------       ------------
   
Expenses:
  Cost of sales (exclusive of depreciation
     and amortization shown separately below)        679,930            179,068
  Development                                            -0-            297,935
  General and administrative                       1,584,747          1,287,386
  Depreciation and amortization expense              211,786            136,902
                                                ------------       ------------
    Total expenses                                 2,476,463          1,901,291
                                                ------------       ------------
    

Net loss from operations                          (1,757,321)        (1,881,396)

Other income and expense:
  Interest income                                      8,500             32,777
  Interest expense                                   (26,893)           (11,585)
                                                ------------       ------------
    Total other income and expense                   (18,393)            21,192
                                                ------------       ------------
Net loss                                        $ (1,775,714)      $ (1,860,204)
                                                ============       ============
Net loss per common share                       $       (.12)      $       (.17)
                                                ============       ============
Weighted average number of
  shares outstanding                              14,455,167         11,200,401
                                                ============       ============




                        See independent auditor's report.
        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       30
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                  For the years ended August 31, 1997 and 1996
                                   -----------

<TABLE>
<CAPTION>
                                                           Additional
                                              Common        Paid-in     Accumulated
                               Shares         Stock         Capital       Deficit         Total
                             ----------    -----------    -----------   -----------    -----------
                            <S>            <C>            <C>           <C>            <C>
Balances, August 31, 1995     9,455,078    $     9,455    $ 1,540,223   $(1,392,167)   $   157,511
Common stock issued           3,115,253          3,115      2,893,123                    2,896,238
Common stock issued in
  exchange for Switch
  common stock                1,544,110          1,544      2,314,621                    2,316,165
Net loss                                                                 (1,860,204)    (1,860,204)
                             ----------    -----------    -----------   -----------    -----------
Balances, August 31, 1996    14,114,441         14,114      6,747,967    (3,252,371)     3,509,710
Common stock issued             962,366            963        256,856                      257,819
Warrants issued                                                20,000                       20,000
Net loss                                                                 (1,775,714)    (1,775,714)
                             ----------    -----------    -----------   -----------    -----------
Balances, August 31, 1997    15,076,807    $    15,077    $ 7,024,823   $(5,028,085)   $ 2,011,815
                             ==========    ===========    ===========   ===========    ===========
</TABLE>



                        See independent auditor's report.
        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       31
<PAGE>
                         WAVETECH, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  For the years ended August 31, 1997 and 1996
                                  ------------

                                                         1997           1996
                                                     -----------    -----------
Cash flows from operating activities:
  Net loss                                           $(1,775,714)   $(1,860,204)
  Adjustments to reconcile net loss to
    net cash used in operating activities:
  Depreciation and amortization                          211,876        136,902
  Common stock issued for services                       204,180        203,125
  Changes in assets and liabilities:
    (Increase) decrease in accounts receivable
      and other current assets                             1,108        (32,758)
    (Increase) decrease in inventory deposit             241,037       (241,037)
    Increase (decrease) in accounts payable
      and accrued expenses                               264,507       (104,339)
    Increase (decrease) in accrued interest
      payable                                              5,248        (39,327)
    Increase (decrease) in unearned revenue             (153,556)       299,985
                                                     -----------    -----------
      Total adjustments                                  774,400        222,551
                                                     -----------    -----------
      Net cash used in operating activities           (1,001,314)    (1,637,653)

  Cash flows from investing activities:
    Purchase of property and equipment                   (25,237)       (89,352)
    Increase in deposits and other assets                    -0-         (2,508)
    Advance on notes receivable                              -0-        (45,282)
    Payment of notes receivable                           45,282            -0-
    Purchase of intangibles                              (25,000)           -0-
                                                     -----------    -----------
      Net cash used in investing activities               (4,955)      (137,142)

  Cash flows from financing activities:
    Proceeds from (payments on) notes payable            172,071       (324,600)
    Payments on capital lease payable                    (29,961)       (22,023)
    Proceeds from common stock issued                        -0-      2,693,113
    Proceeds from sale of warrants                        20,000            -0-
                                                     -----------    -----------
      Net cash provided by financing activities          162,110      2,346,490
                                                     -----------    -----------
Net increase (decrease) in cash                         (844,159)       571,695

Cash and cash equivalents, beginning of year             857,488        285,793
                                                     -----------    -----------
Cash and cash equivalents, end of year               $    13,329    $   857,488
                                                     ===========    ===========

                        See independent auditor's report.
        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       32
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


1.   ORGANIZATION

     The  consolidated  financial  statements  include the accounts of Wavetech,
     Inc. (the  Company) and its wholly owned  subsidiaries,  Interpretel,  Inc.
     (Interpretel),  Interpretel (Canada) Inc., Telplex International,  Inc. and
     International Environmental Services Corporation (an inactive corporation).
     All material  intercompany  balances and transactions have been eliminated.
     As of August 31, 1997, and for the previous three years, the Company had no
     operations other than its investment in Interpretel which was made on March
     8, 1995. On March 10, 1995,  Interpretel  (Canada) Inc. was incorporated in
     Ontario,  Canada as a wholly owned  subsidiary of Interpretel.  Interpretel
     (Canada) Inc. had not yet had any activities as of August 31, 1997.

     Interpretel was incorporated April 15, 1993, under the laws of the state of
     Arizona  to  develop,  market  and  provide  interactive  telecommunication
     systems and  services to business  and  individual  customers.  The systems
     incorporate  interactive call processing,  computer-telephony  integration,
     card production/fulfillment,  bill services,  marketing, sales support, and
     customer  service to  provide  features  and  services,  including  but not
     limited  to,  long  distance  dialing,   voice/fax   messaging,   voice/fax
     broadcast,  language  interpretation/translation,   information  retrieval,
     interface  to existing  databases,  and product  promotion  services.  Each
     Interpretel  system is  developed  to  reflect  or  target  the needs of an
     identified (target) market, with services provided to individual  customers
     via a calling card product  incorporating the use of certain trade secrets,
     trademarks,  service marks, and materials related thereto.  In prior years,
     Interpretel was deemed to be a development stage  enterprise.  For the year
     ended  August  31,  1997,  Interpretel  is  considered  to be an  operating
     company.

     On January 1, 1997,  the  Company  acquired  certain  intangible  assets of
     Telplex,  Inc.,  an Arizona  corporation,  in exchange for $25,000 in cash.
     These assets were placed in a new wholly-owned subsidiary of Wavetech, Inc.
     called Telplex International Communications,  Inc. ("Telplex"). The Company
     did not assume any of the  liabilities of Telplex.  Telplex is a switchless
     international long distance  reseller.  The acquisition of Telplex's assets
     was made pursuant to an Asset Purchase Agreement dated January 22, 1997, by
     the Company, although it is deemed effective as of January 1, 1997.

     This  acquisition  has been  accounted  for  under the  purchase  method of
     accounting and the results of Telplex's  operations  since the  acquisition
     date have been included with those of the Company.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CASH AND CASH EQUIVALENTS

     For  purposes of the  consolidated  statements  of cash flows,  the Company
     considers  all highly  liquid  debt  instruments  with a maturity  of three

                                       33
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     months or less (money market  accounts and  certificates  of deposit) to be
     cash equivalents.

     PROPERTY AND EQUIPMENT

     All property and  equipment  is recorded at cost and  depreciated  over the
     estimated useful lives of the assets, as follows:

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

     The costs of maintenance, repairs and minor renewals are charged to expense
     in the year incurred.  Expenditures  which 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.

     INTANGIBLE ASSETS

     Intangible  assets  consist of start-up  costs.  These costs are  primarily
     consulting fees and other costs incurred in connection with the development
     of the Company. Management believes that these costs will be recovered with
     future  operations.  Start-up costs are amortized over five years using the
     straight-line method.

     INCOME TAXES

     The Company  uses  Statement  of Financial  Accounting  Standards  No. 109,
     "Accounting  for Income  Taxes"  (SFAS 109).  SFAS 109 requires a liability
     approach to  accounting  for  deferred  income  taxes in that the  deferred
     income tax liability or benefit at the end of an  accounting  period should
     reflect  the  estimated  deferred  tax  liability  or  tax  benefit  on the
     temporary book-tax  differences at anticipated federal and state income tax
     rates.

     CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

     At August 31, 1997, the Company maintained a cash balance in a bank account
     insured by the FDIC.  The cash  balance  did not exceed the FDIC  insurable
     amount.

     The  Company  extends  credit to  customers  on an  unsecured  basis in the
     ordinary  course of business.  The Company  bills its services  directly to
     authorized customer credit cards as usage is incurred.



                                       34
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     SFAS 107  requires  disclosing  fair  value to the extent  practicable  for
     financial  instruments  which are recognized or unrecognized in the balance
     sheet. The fair value of the financial  instruments disclosed herein is not
     necessarily representative of the amount that could be realized or settled,
     nor does the fair value amount consider the tax consequences of realization
     or settlement.

     The carrying amounts for cash and cash  equivalents,  accounts  receivable,
     license fee receivable, accounts payable and notes payable approximate fair
     value because of the short maturity of these instruments. The fair value of
     the common stock of Switch  Telecommunications  Pty Limited is estimated at
     carrying  value as such stock is not  traded on the open  market and market
     price  is not  readily  available.  The  Company  does  not  hold or  issue
     financial instruments for trading purposes.

     ADVERTISING COSTS

     The cost of  advertising  is  expensed  when  incurred  or when  the  first
     advertising  takes place.  Wavetech and  Interpretel do not  participate in
     direct-response   advertising   which  requires  the   capitalization   and
     amortization of related costs.  The Company incurred $57,637 in advertising
     costs during the year ended August 31, 1997.

     INVESTMENTS

     Investments  in companies in which the Company has less than a 20% interest
     are carried at cost.  Dividends  received from those companies are included
     in  other   income.   Dividends   received  in  excess  of  the   Company's
     proportionate  share of accumulated  earnings are applied as a reduction of
     the cost of the investment.

     REVENUE RECOGNITION
   
     Revenue from the sale of the  licensing  agreement is  recognized  over the
     term of the  agreement.  Revenue  from the  installation  of  equipment  is
     recognized when  delivered.  Revenue from the resale of minutes is recorded
     when incurred.  Cost of sales  includes  expenses  directly  related to the
     operation and  maintenance  of the  telephony  platform.  Depreciation  and
     amortization expense is separately stated.
    
     CONCENTRATION OF REVENUE

     During the year ended August 31, 1997, the Company  recognized revenue from
     the  installment of equipment of $474,160 and $53,571 from the  recognition
     of income  from the sale of a licensing  agreement  all from  Switch.  This
     represents 73% of total revenue for the year ended August 31, 1997.

                                       35
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

     STOCK-BASED COMPENSATION

     The Company accounts for its employee stock-based compensation arrangements
     under  the  provisions  of APB No.  25,  Accounting  for  Stock  Issued  to
     Employees.

     LOSS PER COMMON SHARE

     Loss per common  share is computed  using the  weighted  average  number of
     shares of common stock  outstanding.  Common  equivalent  shares from stock
     options and warrants are excluded from the  computation  when the effect is
     antidilutive.

3.   USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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

     Management  utilized certain  estimates in connection with establishing and
     maintaining  the value of the  common  stock of  Switch  (Note 5). It is at
     least reasonably  possible that these estimates may change in the near term
     due to one or more future  events.  Such a change would change the value of
     the common  stock of Switch.  The effect of the change could be material to
     the financial statements.

4.   BUSINESS COMBINATION - COMMITMENT

     On March 8, 1995, the Company  entered into an agreement  with  Interpretel
     pursuant  to which  the  Company  agreed to issue  6,000,000  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 has been 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.

     The  acquisition  agreement also provides that during the three year period
     following the March 8, 1995 closing, former shareholders of Interpretel can


                                       36
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


4.   BUSINESS COMBINATION - COMMITMENT, CONTINUED

     receive an additional  7,500,000  common  shares of the Company  through an
     "earn-out"  based upon  before tax net  profit.  During the two year period
     following  closing,  former  shareholders  of Interpretel  shall earn up to
     3,750,000  common  shares of the Company for every $0.50 net profit  before
     taxes,  and an additional  3,750,000 common shares of the Company for every
     $1.00 of cumulative  total net profit  before taxes.  During the third year
     following  closing,  any  shares not  previously  issued  pursuant  to this
     agreement can be earned at $1.50 net profit  before taxes per share.  These
     additional  shares will not be  considered  in  recording  the  Acquisition
     transaction until such time as the earnings targets have been met.

5.   INVESTMENT IN SWITCH TELECOMMUNICATIONS PTY LIMITED

     During  August,  1996 the Company  entered  into an  agreement  with Switch
     Telecommunications  Pty Limited  (Switch) to exchange an equity interest in
     the Company for an equity interest in Switch.  The equity interests consist
     of  outstanding  common  stock of the  respective  companies.  The  Company
     received five shares of Switch common stock  representing  5% of the issued
     and  outstanding  common  stock,  in exchange for  1,544,110  shares of the
     Company's stock.  These shares were pledged as collateral to a note payable
     to an  officer/shareholder  and  subsequently  released as of November  30,
     1997. (Note 8)

     Switch is a wholly owned  subsidiary of Tech Pacific Holdings Limited (Tech
     Pacific).  Tech  Pacific is an  Australian  corporation  whose stock is not
     publicly  traded.  Tech  Pacific  is a  wholly  owned  subsidiary  of First
     Pacific, a publicly traded company on the Hong Kong stock exchange.  Switch
     conducts  business as a  telecommunications  Fixed Network Service Provider
     and also validates mobile telephone  connections for Telestra  Mobilenet in
     Australia. The Company has entered into a contract appointing Switch as the
     exclusive   provider  of  Interpretel's   telecommunications   services  in
     Australia, New Zealand, the subcontinent of India and Asia (excluding Korea
     and Japan) (Note 6).

     The  value  assigned  to the  Switch  shares  received  was  determined  by
     management  valuing the whole of the issued  capital of Switch on the basis
     of discounting the anticipated future cash flow. This method determines the
     net present value of the underlying cash flow of a business.  It recognizes
     that  money  has a time  value  by  discounting  future  cash  flows  at an
     appropriate   discount  rate.  A  valuation  using   discounted  cash  flow
     procedures  requires  the  determination  of the nature of timing of future
     cash inflows and outflows and the discount factor to be applied to the cash
     flows.  Future cash flows may not be achieved and  consequently  any future
     variation  between  the actual cash flow and those  utilized by  management
     will affect the valuation.  Since Switch is a privately  held company,  the
     market value of the shares is not readily  ascertainable  and is subject to

                                       37
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


5.   INVESTMENT IN SWITCH TELECOMMUNICATIONS PTY LIMITED, CONTINUED

     uncertainty.  There have been no events  known to the  Company  which would
     signify an impairment of the value of the investment.

     The agreement  provides that when Tech Pacific  completes an initial public
     offering of its equity  securities,  the  Company  will have the right upon
     written  notice to Tech  Pacific to convert its Switch  common stock at its
     current fair market value as determined by an independent  third party into
     equity  securities  of an equivalent  value  proposed to be offered by Tech
     Pacific.  If Tech  Pacific has not  completed  an initial  public  offering
     within two years from the date of the  agreement,  then Tech Pacific shall,
     upon thirty days  written  notice from the Company,  repurchase  the Switch
     common stock held by the Company at its then market value as  determined by
     an independent third party.

     Switch purchased a three-year warrant to purchase up to 2,000,000 shares of
     the  Company's  common  stock at a price of $1.50 per share.  The  warrants
     expire  January 17,  2000.  Consideration  of $20,000 was  received for the
     warrants.

6.   LICENSING AGREEMENT

     The Company entered into an Equipment and Software  Turnkey  Agreement with
     Switch during August, 1996. This agreement sets forth the terms of fees and
     services  between  Interpretel and Switch.  The agreement  provides for the
     purchase of the Interpretel  system and licensing for its use in Australia,
     New  Zealand,  the  subcontinent  of India  and Asia  (excluding  Korea and
     Japan). The initial term of the license is seven years.

     In the  agreement,  Switch  contracted  to purchase an  Interpretel  System
     consisting of a computer platform and related software.

     The  agreement  also provides for a licensing fee in the amount of $500,000
     to be paid to Interpretel over a three-year  period.  Switch shall not have
     an  obligation to pay any fees  pursuant to  termination  provisions in the
     agreement.  The Company  received  $200,000 of the licensing fee during the
     year ended August 31, 1997. The agreement provides for payments of $150,000
     each in year two and three.  A payment of $150,000 was due on May 22, 1998.
     Effective  June 30, 1998, an agreement was reached  between the Company and
     Switch terminating the license agreement.  Switch agreed to pay the Company
     $150,000 in consideration of the termination of the agreement.  The payment
     was received on July 10, 1998.

     Switch agreed to pay an additional  fee to  Interpretel  of 2% of the gross
     revenues on all sales of products by Switch using the  Interpretel  System,
     including  without  limitation  on  gross  revenues  derived  from  prepaid


                                       38
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


6.   LICENSING AGREEMENT, CONTINUED

     applications,   post-paid   applications  and  Interactive  Voice  Response
     Systems.  The fee of 2% of  gross  revenues  shall be paid  monthly  on the
     fifteenth of each month based on prior month  payments  received by Switch.
     The fee of 2% of  gross  revenues  shall be  reviewed  by the  parties  and
     increased  or  decreased  by  mutual  agreement  of the  parties  at  least
     annually,  reviewed  after the first  15,000  cards are on the  Interpretel
     system in Australia, and reviewed if net revenues for Switch are altered by
     a change in carrier  discounts  and/or  rates.  Net revenues are defined as
     gross revenues  minus carrier costs only.  During the year ended August 31,
     1997,  Switch did not pay any royalty fees to the Company.  The Company was
     unable to determine the amount due because of disagreements  related to the
     installation   dates  of  the  system  and   modifications   required   for
     compatibility with Australian signaling. These differences precluded Switch
     from  providing the necessary  information  to compute the royalty fees. In
     lieu of  negotiating  a working  resolution  to these  issues,  the Company
     agreed to terminate the  licensing  agreement  with Switch.  The payment of
     $150,000  received  in  settlement  of the  termination  of  the  licensing
     agreement  includes an  undetermined  amount on  satisfaction  of potential
     gross  revenue.  In  consideration  of the  termination  of  the  licensing
     agreement,  the Company agreed to release Switch from any other obligations
     including the gross revenue fee.

7.   PROPERTY AND EQUIPMENT

     Property and equipment is composed of the following at August 31, 1997:

                                                                         1997
                                                                      ---------

          Furniture and fixtures                                      $ 170,415
          Computer equipment                                            505,377
          Software                                                      112,318
                                                                      ---------
             Total property and equipment, at cost                      788,110

          Less:  accumulated depreciation                              (377,928)
                                                                      ---------
             Net property and equipment                               $ 410,182
                                                                      =========








                                       39
<PAGE>
                          NOTES TO FINANCIAL STATEMENTS

                         WAVETECH, INC. AND SUBSIDIARIES
                                 --------------


8.   NOTES PAYABLE

     Notes payable is composed of the following at August 31, 1997:

     Note payable to a shareholder and officer of the 
     Company due on demand with  interest  payable at
     15% annually.  Collateralized  by five shares of
     Switch  Telecommunications Pty common  stock and
     one  share of Interpretel (Canada) common stock.
     (Note 13)                                                        $ 109,071

     Note payable to a shareholder and officer of the 
     Company due on  demand  with   interest  payable
     at 15% annually.  Uncollateralized.  (Note 13)                      13,000

     Note payable to a shareholder of the Company due
     and payable on demand no later than  January 21,
     1998. At the option of the holder, principal and
     interest can  be paid in  shares of common stock
     of  Wavetech,  Inc.  with  an  aggregate  payoff
     value equal to the aggregate amount of principal
     plus   interest.   Collateralized  by   security  
     interest  in  accounts  receivable,   inventory,
     general  intangibles,   equipment,   investments
     and  personal  guarantee of corporate  officers.
     (Note 13)                                                           50,000
                                                                      ---------
        Total short-term notes payable                                $ 172,071
                                                                      =========

9.   CAPITAL LEASES PAYABLE

     The  Company  has  entered  into  capital  lease  arrangements  for  office
     furniture and equipment.  The leases require monthly  payments of principal
     and interest.

     Future lease commitments are as follows:

          1998                                                        $  56,119
          1999                                                           35,746
          2000                                                           15,662
          2001                                                            2,484
                                                                      ---------
                                                                      $ 110,011
                                                                      =========
10.  COMMITMENTS

     The  Company  has  entered  into  cancelable  operating  agreements  with a
     telecommunications  service  provider.  The Company has agreed to a $12,555

                                       40
<PAGE>
                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


10.  COMMITMENTS, CONTINUED

     monthly  minimum  charge.  Although  there are a limited  number of service
     providers for the call processing  systems used by the Company,  management
     believes that other suppliers could provide similar  services on comparable
     terms.

     Total rent expense  under all  operating  leases for the years ended August
     31, 1997 and 1996 approximated $107,000 and $95,500, respectively.

     The Company has entered into a lease agreement for office space.

     Future lease commitments are as follows:

          1998                                                        $  99,453
          1999                                                          105,056
          2000                                                          110,659
          2001                                                          116,262
          2002                                                           29,416
                                                                       --------
          Total                                                        $460,846
                                                                       ========
11.  COMMON STOCK

     During the year ended August 31, 1997,  the Company issued 62,342 shares of
     common stock for consulting  services pursuant to various agreements valued
     at $37,303.  The value  assigned to the common  stock was based on the fair
     market  value  of the  common  stock on the date  that  the  liability  was
     incurred.  The value of the  consulting  services  was  charged  to expense
     during the period incurred.

     During the year ended August 31, 1997, the Company issued 361,269  deferred
     shares of common stock under the 1997 Stock  Incentive Plan to meet payroll
     expenses in the amount of $137,877.  The value assigned to the common stock
     was based on the fair market value on the date of issue.

     During the year ended August 31, 1997, the Company issued 100,000 shares in
     satisfaction of a note payable of $53,639. The value assigned to the common
     stock was based on the fair market value of the common stock on the date of
     the agreement was negotiated.

     During the year ended August 31, 1997, the Company issued 438,755 shares of
     stock in  satisfaction  for  services  valued at $203,125  performed in the
     previous year. The previous values assigned to the common stock and charged
     to expense in the period the services were performed were based on the fair
     market values of the common stock.

     Pursuant to various  consulting  agreements,  the Company has  committed to
     issue  64,578  shares of common  stock as payment  for  services  valued at


                                       41
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


11.  COMMON STOCK, CONTINUED

     $29,000. The value of the common stock charged to expense in the period the
     services were  performed  were based on the fair market value of the common
     stock.

     During the year ended  August 31,  1996,  the Company  issued  common stock
     pursuant to various Securities and Exchange  Commission  Regulation S stock
     subscription  agreements.  The Company  issued  3,115,253  shares of common
     stock and received $2,658,734.

     On May 21, 1996 the  Company  entered  into an  agreement  with  Switch  to
     exchange an equity interest in the Company for an equity interest in Switch
     (Note 5). On August 30, 1996 the Company  issued  1,544,110  shares  common
     stock in exchange for five shares of Switch common stock.

     During 1995 and 1994,  Interpretel  issued warrants for the purchase of its
     common stock in  connection  with a note  offering.  On March 8, 1995,  the
     warrants  were  converted  to  warrants  to  purchase  common  stock of the
     Company.  The warrants are exercisable at a price of $1.00 per share at any
     time prior to May 31,  1998.  As of August  31,  1997,  there were  820,885
     warrants outstanding.

     During 1995 and 1994,  Interpretel  issued warrants for the purchase of its
     common stock in connection  with a private  placement  offering of units of
     common stock. At the date of the  acquisition,  the warrants were converted
     to warrants to purchase  common  stock of the  Company.  The  warrants  are
     exercisable  at a price of $3.50 per share.  The  warrants  expire June 30,
     1998. As of August 31, 1997, there were 23,745 warrants outstanding.

     Pursuant to an agreement with Switch (Note 5) the Company  issued  warrants
     to purchase up to 2,000,000  shares of common stock at a price of $1.50 per
     share.  Consideration  received  was  $20,000.  The value  assigned  to the
     warrants was based on an allocation pursuant to the comprehensive agreement
     (Note 5).

     In  consideration of various  consulting and loan  agreements,  the Company
     issued  warrants  to purchase  up to 235,000  shares of common  stock at an
     exercise  price of between  $.44 and $1.75 per share.  The  exercise  price
     reflects the fair market value of the shares of common stock on the date of
     the grant of the warrants.

     The total number of warrants outstanding at August 31, 1997, is 3,079,630.

     The Company has elected to follow  Accounting  Principles Board Opinion No.
     25,  Accounting  for Stock Issued to  Employees  ("APB No. 25") and related
     Interpretations  in accounting  for its stock options  because as discussed
     below, the alternative  fair value accounting  provided for under Statement
     of Financial  Accounting  Standards  No. 123,  Accounting  for  Stock-Based


                                       42
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


11.  COMMON STOCK, CONTINUED

     Compensation ("SFAS No. 123"),  requires the use of option valuation models
     that were not developed for use in valuing  employee stock  options.  Under
     APB No. 25,  because the  exercise  price of the  Company's  stock  options
     equals or exceeds  the fair  market  value of the  underlying  stock on the
     dates of grant, no compensation expense is recognized.

     During the year ended August 31, 1997,  the Company  adopted the  Wavetech,
     Inc. 1997 Stock Incentive Plan.  Under this plan, the Company is authorized
     to issue up to 4,600,000  shares of common stock such options have terms of
     up to ten years. Shares may be issued as incentive stock options,  deferred
     shares or  restricted  shares.  The options were granted at the fair market
     value of the common stock on the date of the grant.

     Pro forma information regarding net loss and net loss per share is required
     by SFAS No. 123, and such information has been determined as if the Company
     had accounted for its employee stock options under the fair value method of
     that statement.  The fair value for these options was estimated at the date
     of grant using a  Black-Scholes  option  pricing  model with the  following
     weighted average  assumptions:  risk-free interest rate of 5.64%,  dividend
     yield  of  0%,  volatility  factor  of the  expected  market  price  of the
     Company's common stock of .98, and a weighted-average  expected life of the
     options of 2 years.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
     estimating  the  fair  value  of  traded  options  which  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.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
     options is  amortized  to expense  over the  related  vesting  period.  The
     Company's pro forma information follows:





                                       43
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


11.  COMMON STOCK, CONTINUED

                                                                  Year ended
                                                                August 31, 1997
                                                                ---------------

          Net loss, as reported                                 $    (1,629,285)

          Pro forma compensation expense for stock options
            1997 grants                                                (414,000)
                                                                ---------------
          Pro forma net loss                                         (2,043,285)
                                                                ---------------
          Pro forma loss per share                              $          (.14)
                                                                ===============

     A summary of the Company's stock options activity is as follows:

                                                                    Weighted
                                                Number of        Exercise Price
                                             Options Granted        Per Share
                                             ---------------     --------------
          Outstanding, August 31, 1995               136,250     $         1.39

          Granted                                  1,550,000               1.73
          Canceled                                  (450,000)              1.94
                                             ---------------     --------------
          Outstanding, August 31, 1996             1,236,250               1.73

          Granted                                  2,328,935                .68
          Canceled                                (1,236,250)              1.73
                                             ---------------     --------------
          Outstanding, August 31, 1997             2,328,935     $          .68
                                             ===============     ==============

     Exercise  prices for options  outstanding as of August 31, 1997 ranged from
     $0.36 per share to $0.81 per share. The remaining  contractual life of such
     options ranged from two to ten years. Options for the purchase of 1,468,935
     shares were immediately exercisable at August 31, 1997.

     Pro forma  compensation  expense  presented  may not be  representative  of
     future pro forma expense, when amortization of multiple years of awards may
     be reflected.

     The weighted  average fair values of stock options  granted during 1997 for
     which the  exercise  price was equal to the fair market  value of the stock
     were $0.68 per share.



                                       44
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


12.  INCOME TAXES

     At August 31,  1997,  the  Company  has net  operating  loss  carryforwards
     totaling  approximately  $7,764,000 that may offset future income from 1997
     to 2011 with varying  expiration dates. No tax benefit has been recorded in
     the  financial   statements   since   realization  of  net  operating  loss
     carryforwards  does not appear  likely.  The  potential  benefit of the net
     operating loss  carryforwards and the deferred tax benefit of future timing
     differences  under SFAS No. 109 is approximately  $2,988,000.  The March 8,
     1995  acquisition  (Note 4) resulted in a "change in control" as defined by
     Internal Revenue Service Regulations.  Accordingly,  the utilization of the
     Company's net operating loss  carryforwards are deemed more likely than not
     to  expire  unutilized.   The  total  amount  of  the  net  operating  loss
     carryforwards,   $7,764,000,   consists   of   pre-acquisition   losses  of
     approximately  $3,186,000.  These losses cannot be applied  against  income
     generated in a trade or business  significantly  different  from that which
     gave rise to the carryforward.

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

                                                   1997               1996
                                              --------------     --------------
          Current                             $          -0-     $          -0-

          Deferred
            Federal                                 (429,000)          (628,000)
            State                                    (28,000)           (67,000)
                                              --------------     --------------
                                                    (457,000)          (695,000)
          Valuation allowance                        457,000            695,000
                                              --------------     --------------
          Total tax benefit                   $          -0-    $          -0-
                                              ==============    ===============

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

                                                   1997               1996
                                              --------------     --------------
          Statutory tax rate                          (35.0%)            (35.0%)
          State income taxes                           (9.0%)             (9.0%)
          Amortization of organization costs            7.0%               7.0%
          Release of valuation allowance               37.0%              37.0%
                                              --------------     --------------
          Effective tax rate                             .0%                .0%
                                              ==============     ==============




                                       45
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------

12.  INCOME TAXES, CONTINUED

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

                                                   1997
                                              --------------
       Deferred tax asset:
          Amortization of organization costs  $     (120,000)
          Net operating loss carryforward         (2,868,000)
                                              --------------
                                                  (2,988,000)
          Valuation allowance                      2,988,000
                                              --------------
                                              $          -0-
                                              ==============

13.  RELATED PARTY TRANSACTIONS

     The Company has cancelable  operating  agreements with a telecommunications
     service  provider who is a shareholder of common stock of the Company.  The
     Company  has agreed to a $12,555  monthly  minimum  charge with the service
     provider.  The current and future  contracts with the service provider have
     been and are anticipated to be at market rates.  The Company also purchased
     computer equipment and software from this provider valued at $378,009.

     During the year ended August 31, 1997, an officer and shareholder  advanced
     $109,071 to the Company  which is reflected in notes  payable.  The Company
     pledged as collateral  the five shares of Switch common stock and one share
     of Interpretel (Canada) common stock (Note 8). As of November 30, 1997, the
     collateral has been released and the note payable is converted to shares of
     common stock at .35 per share.

     An  officer  and  shareholder  advanced  $13,000  to the  Company  which is
     reflected in notes payable (Note 8).

     A  shareholder  of the Company  advanced  $50,000 to the  Company  which is
     reflected in notes  payable  (Note 8). The Company  pledged as collateral a
     security interest in accounts receivable,  inventory,  general intangibles,
     equipment, instruments and personal guarantees of corporate officers. As of
     November 30, 1997 the collateral has been released and the shares converted
     to shares of common stock of the Company.

14.  SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES

     During the year ended  August 31,  1997,  the Company  entered into capital
     leases in the amount of $53,783 to purchase office equipment.

     During the year ended August 31, 1997, the Company issued 100,000 shares of
     common stock in satisfaction of a note payable of $53,639.


                                       46
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


14.  SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES, CONTINUED

     During the year ended  August 31,  1996,  the Company  entered into capital
     leases in the amount of $108,213 to purchase office equipment.

     During  the year  ended  August  31,  1996,  the  Company  entered  into an
     agreement with Switch to exchange an equity  interest in the Company for an
     equity interest in Switch (Note 4). The Company issued  1,544,110 shares of
     its common stock in exchange for 5 shares of the common stock of Switch.

     Supplemental disclosure of cash flow information:

                                                   1997               1996
                                              --------------     --------------
          Cash paid during the period for:
            Income taxes                      $           50     $           50
                                              ==============     ==============
            Interest                          $       20,454     $       39,327
                                              ==============     ==============

15.  SUBSEQUENT EVENTS

     On January 6, 1998, the Company entered into a Reorganization Agreement and
     Plan  of  Merger  with  Imagitel,   Inc.  (Imagitel),   a  privately  owned
     telecommunication  company based in Houston,  Texas.  The merger would have
     resulted  in  Imagitel  shareholders  receiving  approximately  70%  of the
     Company's  outstanding  common stock an existing  shareholders  holding the
     remaining  30%.  On August  24,  1998,  the  Reorganization  Agreement  was
     terminated.  The Company is currently  seeking  other  potential  strategic
     merger or  acquisition  candidates.  The Company  does not have any binding
     agreements.

     On February 9, 1998,  the Company  executed a loan  agreement with Imagitel
     pursuant to which the Company may borrow up to $450,000 for working capital
     purposes. Outstanding balances under such loan accrue interest at a rate of
     12% per annum and all unpaid principal plus interest accrued thereon mature
     upon completion of the merger.  The loan is secured by all of the assets of
     the  Company.  On August 31, 1998,  the  outstanding  principal  balance of
     $180,000 and accrued  interest was paid in full and the loan  agreement was
     cancelled.

     In October of 1997,  the Company  received  proceeds  of $250,000  from the
     issuance of convertible notes payable.  The notes were issued with attached
     warrants to purchase an aggregate of 40,000 share of the  Company's  common
     stock. Each of the warrants is convertible at any time prior to October 24,
     1999 by the holder  thereof at an  exercise  price of $0.46 per share.  The
     warrants  were granted at fair market value of the common stock on the date


                                       47
<PAGE>

                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


15.  SUBSEQUENT EVENTS, CONTINUED

     of the  grant.  The notes  accrue  interest  at a rate of 12% per annum and
     principal  and accrued  interest  thereon is payable on or before April 24,
     1998.  On November 30, 1997,  $200,000 in notes  payable along with accrued
     interest of $2,067 was converted into 577,333  shares on common stock.  The
     beneficial  conversion  feature  of $92,894  was  charged to expense in the
     period of the conversion.

     During the quarter ended May 31, 1998,  the Company  offered to all warrant
     holders with warrants  expiring May 31, 1998 and an exercise price of $1.00
     per share,  the following  option:  for a specific  eleven day period,  the
     right to exercise  their  warrants  for $0.585 per common share (the market
     price on the date of the offer). A total of 380,280 out of 784,781 warrants
     were exercised under this offer and the balance of 404,501 warrants expired
     on May 31,  1998.  The Company  received  $222,503  for the  warrants.  The
     Company  recorded the exercise of the warrants as an increase to additional
     paid-in-capital.
   
     On June 30, 1998, an agreement  was reached  between the Company and Switch
     which  terminated the license  agreement and any future  obligations  there
     under.  Consideration  of $150,000  was  received in  connection  with this
     agreement.  The  Company  will  recognize  income  in  connection  with the
     termination  of  $86,906  unamortized  deferred  revenue  and  $150,000  of
     termination  fee revenue.

     On June 30, 1998, an agreement  was reached  between the Company and Switch
     which sets forth the terms and  conditions of a put option for the share of
     common stock of Switch  which are owned by the  Company.  The sale price is
     $2,100,000  and the term of the option is one year. On August 25, 1998, the
     Company  exercised the put option  thereby  selling its entire  interest in
     Switch. On August 31, 1998, the Company received $2,100,000 in satisfaction
     of the option agreement. The Company will recognize a loss of $216,165 upon
     disposition of the investment.
    
16.  GOING CONCERN

     For the year  ended  August  31,  1997,  the  Company  sustained  a loss of
     $1,775,714.  The  Company  currently  lacks  adequate  funds to finance its
     ongoing working capital needs.

     The Company is  currently  seeking to secure  adequate  sources of funds to
     finance its immediate and long-term working capital needs. Such sources may
     include a private placement of equity by the Company, commercial financing,
     or a strategic alliance or other business combination. The Company does not
     currently have any agreements,  binding or non-binding, with respect to any
     such above stated arrangements. Further, there can be no assurance that the
     Company will be able to secure adequate  sources of funds and its inability

                                       48
<PAGE>
                         WAVETECH, INC. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS
                                 --------------


16.  GOING CONCERN, CONTINUED

     to do so would  result in a  material  adverse  affect  upon the  Company's
     business and results or operations. In addition, if the Company succeeds in
     acquiring  additional  financing,  such  efforts  may result in  additional
     dilution  to the  Company's  stockholders;  impose  restrictions  upon  the
     Company's  ability to incur  additional debt, pay future  dividends,  enter
     into future business combinations or other restrictions upon the Company to
     act in a manner which its Board of Directors may deem advisable;  or result
     in a change in control of the Company.

     The ability of the Company to continue as a going concern is dependent upon
     increasing  sales and  obtaining  additional  capital  and  financing.  The
     financial statements do not include any adjustments that might be necessary
     if the Company is unable to continue as a going concern.

17.  RESTATEMENT OF FINANCIAL STATEMENTS
   
     Contained in the Company's  financial  statements for the year ended August
     31,  1997,  whose  report  thereon  was dated  December  4,  1997,  was the
     recognition of revenue related to the receipt of payment of a licensing fee
     (Note 6). The financial statements have been corrected to recognize revenue
     from the licensing fee over the seven-year term of the licensing agreement.
     Revenue  previously  recognized on the licensing fee was $200,000.  Revenue
     recognized  for the licensing fee in the restated  financial  statements is
     $53,758. The correction resulted in a decrease in revenue recognized in the
     amount of $146,242,  for the year ended August 31, 1997.  Total revenue was
     $865,384 in the previously  issued financial  statements and is $719,142 in
     the  restated  financial  statements.  Net  loss  was  $(1,629,472)  in the
     previously issued financial  statements and is $(1,775,714) in the restated
     financial  statements.  The correction resulted in a change in the net loss
     per common  share from $(0.11) per common  share in the  previously  issued
     financial  statements to $(0.12) per common share in the restated financial
     statements.
    


                                       49

<PAGE>

ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND 
        FINANCIAL DISCLOSURE.

     None.


                                    PART III

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

     All directors hold office until the next annual meeting of  stockholders of
the Company and thereafter until their successors are chosen and qualified.  All
officers  hold office at the  selection  and choice of the Board of Directors of
the Company.

DIRECTORS AND OFFICERS

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

Name                   Age   Position Held with Company
----                   ---   --------------------------

Terence E. Belsham     61    Chairman of the Company's Board of Directors
Gerald I. Quinn        53    President, Chief Executive Officer,
                               and a member of the Company's Board of Directors
Lydia M. Montoya       44    Chief Financial Officer
Richard P. Freeman     40    Vice President, Investor Relations and Product 
                               Development, and a member of the Company's 
                               Board of Directors
Terrence H. Pocock     65    Director

TERENCE E. BELSHAM was a co-founder of Interpretel. Since it was founded in 1992
until May 1996,  Mr.  Belsham  was the  President  and CEO of  Interpretel.  Mr.
Belsham has also served as the Company's Chairman of the Board since March 1995.
From 1989 until 1992,  Mr.  Belsham was President of Intran  Systems,  Inc. From
1983 to 1989, Mr. Belsham owned Sinclair Associates, a real estate marketing and
management  firm.  From 1965 to 1983,  Mr.  Belsham was  President  and owner of
Lackie Manufacturing  Company,  Ltd., a jewelry manufacturing company in Canada.
Mr.  Belsham  graduated  from the business  school of the  University of Western
Ontario.  Mr.  Belsham has been  active in Rotary  International,  the  Canadian
Jeweler's Association and the 24 Karat Club.

GERALD  I.  QUINN  has  been the  President  of  Interpretel  (Canada)  Inc.,  a
subsidiary  of the  Company,  since  1995.  In May 1996,  Mr.  Quinn  became the
President,  Chief Executive Officer and a Director of the Company.  From 1986 to
1994, Mr. Quinn was Vice President of University  Affairs and Development at the
University  of Guelph,  which is one of Canada's  leading  teaching and research
universities.  While at the University of Guelph,  Mr. Quinn's  responsibilities
included  marketing,   image  development,   constituent   relations  and  media
relations,  including systems development,  telemarketing and the development of
affinity   programs.   From  1975  until  1986,   Mr.  Quinn  held  many  senior
administrative  positions  with  Canada's  largest  college of applied  arts and


                                       50

<PAGE>

technology,    including    positions    relating   to   the   development   and
commercialization  of  technology  and  multimedia  based  interactive  learning
programs.  Since  1984,  Mr.  Quinn has  served as a  consultant  to  Cableshare
Interactive Technology, Inc., a Canadian TSE listed public company that operates
in the  interactive  television  industry.  Mr.  Quinn  has been a  director  of
Cableshare   since  1993  and  chairs  its  board   committee   on  mergers  and
acquisitions.   Mr.  Quinn  is  active  in  numerous   civic  and   professional
organizations  and has  been  recognized  for  his  work  in  marketing,  sales,
promotion and public relations by various trade organizations. Mr. Quinn has two
arts  degrees  with majors in English,  Economics  and  Political  Science.  Mr.
Quinn's sister is married to Terrence H. Pocock.

LYDIA M.  MONTOYA  joined the Company in September  1996 as its Chief  Financial
Officer.  From May 1994 until September 1996, Ms. Montoya was self-employed as a
Certified  Public  Accountant.  Ms.  Montoya  was  Controller  of Ugly  Duckling
Corporation,  a publicly traded company ("Ugly  Duckling") from November 1992 to
May 1994. Ugly Duckling is an operator of nine used car  dealerships  which also
finance and service retail installment contracts generated from the sale of used
cars by its  dealerships.  From July  1987 to  October  1992,  Ms.  Montoya  was
Director of Partnership  Accounting for Verde  Investments,  Inc., a real estate
development  company that  constructed,  operated and sold over 5,000  apartment
units.  Ms.  Montoya began her career with Coopers & Lybrand.  Ms. Montoya has a
B.S. in Accounting  from the  University of Arizona and a B.S. in Sociology from
Arizona State University.

RICHARD  P.  FREEMAN  was  a  co-founder  of  Interpretel   and  has  served  as
Interpretel's  Vice President  since 1993 and as a Director of the Company since
March 1995. Prior to joining Interpretel, Mr. Freeman was a principal in several
entrepreneurial  companies located in Arizona,  which were primarily involved in
the tourism and travel  industries.  Those companies  included Desert Divers,  a
scuba retail and boat charter  company,  and  Vacation,  Etc., a tour and travel
company which focused on corporate, leisure and adventure travel, wholesale tour
operations  and  escorted  senior  travel.  Mr.  Freeman  has also  served  as a
consultant to several travel-related organizations, including the Business Radio
Network,  a national  network.  Mr. Freeman holds a Bachelor of Arts degree from
the  University  of  Arizona  and is  active  in  various  civic  and  community
organizations.

TERRENCE H. POCOCK has been a Director the Company since March 1997.  Mr. Pocock
is the Vice  Chairman of  Cableshare  Interactive  Technology,  Inc., a Canadian
public  company he founded in 1973 that operates in the  interactive  television
industry.  Currently,  Mr.  Pocock is involved in  technology  oversight for the
board of directors at  Cableshare.  From its  inception in 1973 until 1992,  Mr.
Pocock was the CEO of Cableshare.  While at Cableshare,  Mr. Pocock was involved
in product  development  and was  responsible  for obtaining  several patents on
interactive  television  technology.  Mr.  Pocock  holds B.A.,  B Comm.  and MBA
degrees from  various  Canadian  universities  and is a graduate of the Canadian
Royal Military College. Mr. Pocock is married to the sister of Gerald I. Quinn.







                                       51
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

(A)  CASH COMPENSATION

     The following table summarizes all compensation paid to the Company's Chief
Executive Officer (the "Named Executive Officer"),  for services rendered in all
capacities to the Company during each of the fiscal years ended August 31, 1997,
1996 and 1995.  None of the  Company's  other  employees  received  in excess of
$100,000 in compensation during the last completed fiscal year.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                                        LONG TERM
                                      ANNUAL COMPENSATION                          COMPENSATION AWARDS
-----------------------------------------------------------------------------------------------------------
                                                                            RESTRICTED STOCK    SECURITIES
NAME AND               FISCAL                  BONUS       OTHER ANNUAL     STOCK AWARDS        UNDERLYING
PRINCIPAL POSITION     YEAR      SALARY ($)    AWARDS($)   COMPENSATION     ($)                 OPTIONS (#)
-----------------------------------------------------------------------------------------------------------

<S>                    <C>       <C>           <C>         <C>              <C>                 <C>       
Gerald I. Quinn        1997      $85,000(1)    -0-         $-0-             -0-                 800,000(2)
President/CEO
                       1996      $85,000       -0-          -0-             $203,637            500,000

                       1995      $58,000       -0-          -0-             -0-                 300,000
</TABLE>

(1)  Includes the fair market value of 8,853 shares of Common  Stock,  for which
     Mr. Quinn elected to receive deferred shares pursuant to the Company's 1997
     Stock  Option  Plan in lieu of a portion  of his  annual  base  salary  for
     services  rendered.  The aggregate fair market value of these shares at the
     expiration of the applicable deferral periods equalled $34,163.

(2)  Effective January 31, 1997, the exercise price with respect to an aggregate
     of 800,000 options to purchase Common Stock previously granted to Mr. Quinn
     was  amended  in  connection  with  the  cancellation  of  such  previously
     outstanding  options  in  exchange  for a new  grant of an equal  number of
     options under the Company's 1997 Stock  Incentive  Plan. The exercise price
     of the new  options  is  equal to the fair  market  value of the  Company's
     common stock on the date of grant.

     The following table sets forth information  concerning individual grants of
stock  options made to the Named  Executive  Officer  during the last  completed
fiscal year.


                                       52
<PAGE>

                        OPTION GRANTS IN LAST FISCAL YEAR

--------------------------------------------------------------------------------
                     NUMBER OF
                   OF SECURITIES   PERCENT OF TOTAL
                    UNDERLYING     OPTIONS GRANTED
                     OPTIONS       TO EMPLOYEES IN       EXERCISE     EXPIRATION
     NAME           GRANTED (#)      FISCAL YEAR       PRICE ($/SH)      DATE
--------------------------------------------------------------------------------

Gerald I. Quinn       800,000            45%              $0.66        May 2006

---------------

(1)  In January of 1997, the Company's  stock price had decreased  significantly
     from the date these options were granted. In addition,  the Company's Board
     of  Directors  approved  the  Company's  1997  Stock  Incentive  Plan.  The
     Company's  Board of Directors  determined that these options were no longer
     providing appropriate  incentives to the officers of the Company due to the
     significant  decrease  in  market  price  of the  Company's  Common  Stock.
     Accordingly, in January of 1997, the Company agreed to cancel these options
     and issue an equal number of options under the 1997 Stock Incentive Plan to
     these  officers  at an  exercise  price per share  equal to the closing bid
     price of the Company's Common Stock on the date of grant.

     The following table sets forth certain information concerning each exercise
of stock  options  during the year ended August 31, 1997 by the named  Executive
Officer and the aggregated  fiscal year-end value of the unexercised  options of
such Named Executive Officer.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------
                                                              NUMBER OF SECURITIES
                                                                   UNDERLYING                   VALUE OF UNEXERCISED
                                                              UNEXERCISED OPTIONS               IN-THE-MONEY OPTIONS
                                                             AT FISCAL YEAR END (#)            AT FISCAL YEAR END ($)
------------------------------------------------------------------------------------------------------------------------
                    Shares Acquired        Value
        Name        on Exercise (#)     Realized ($)     Exercisable     Unexercisable     Exercisable     Unexercisable
------------------------------------------------------------------------------------------------------------------------

<S>                       <C>               <C>            <C>                <C>              <C>               <C>
Gerald I. Quinn           -0-               $0             800,000            -0-              $0                $0
</TABLE>

(B)  COMPENSATION PURSUANT TO PLANS

     None.



                                       53
<PAGE>

(C)  COMPENSATION OF DIRECTORS

     All Directors are reimbursed for their  reasonable  out-of-pocket  expenses
incurred in  connection  with  attendance at Board  meetings.  Directors who are
employees of the Company do not receive  compensation  for service on the Board,
other than their  compensation as employees.  In March 1997, the Company adopted
the 1997 Stock Incentive Plan. Under the Plan, members of the Board of Directors
of the Company,  who are not employees of the Company or its subsidiaries,  will
receive an option to purchase  10,000 shares of the Company's  Common Stock upon
their initial election to the Board and thereafter receive an annual grant of an
additional 10,000 options. The options vest one year from the respective date of
grant and  terminate  upon the  earlier of 10 years from the date of grant or 24
months after the Director ceases to be a member of the Board.

     The Company  lacked  sufficient  funds to  compensate  its  executives  and
employees  and,  therefore,  entered into  agreements  with such  executives and
employees to  compensate  them with a number of shares of the  Company's  Common
Stock with a fair market  value on the last day of a regular pay period equal to
each respective  employee's  salary plus a ten percent premium as  consideration
for entering  into such  agreements.  The shares were issued as Deferred  Shares
pursuant to the Company's 1997 Stock Incentive Plan.

(D)  EMPLOYMENT CONTRACTS

     In May  1996,  the  Board  of  Directors  approved  a  two-year  employment
agreement  with Gerald I. Quinn for  services as President  and Chief  Executive
Officer. The agreement requires Mr. Quinn to devote his full time to the Company
and provides  for a salary of $85,000  annually.  Mr. Quinn is also  entitled to
receive any fringe benefits  generally extended to the employees of the Company,
including medical,  disability and life insurance.  Mr. Quinn also has the right
to receive certain sales commissions from the Company under his agreement.

     In May  1996,  the  Board  of  Directors  approved  a  one-year  employment
agreement with Terence E. Belsham for services as Chairman.  In September  1996,
the agreement was amended to eliminate Mr. Belsham's  responsibilities  as Chief
Financial  Officer  because the Company  retained  Lydia Montoya to serve as its
Chief Financial  Officer.  The agreement requires Mr. Belsham to devote his full
time to the Company and provides for a salary of $85,000  annually.  Mr. Belsham
is also entitled to receive any fringe benefits extended to the employees of the
Company,  including medical,  disability and life insurance. In August 1997, Mr.
Belsham's  contract was terminated,  as per conditions of the agreement,  due to
illness.

     In June  1996,  the  Board of  Directors  approved  a  one-year  employment
agreement with Richard P. Freeman for services as Vice President.  The agreement
provides for a base salary of $72,000 per year. The agreement  requires  Richard
P. Freeman to devote his full time to the Company.  In June 1997, Mr.  Freeman's
contract was renewed under the same terms.

     After their initial terms, each of the above-described  agreements continue
at will,  terminable  with/on  ninety days written notice by either party to the
other.  The  agreements  terminate  upon the  occurrence of any of the following
events: (i) if the employee voluntarily  terminates;  (ii) if the employee dies;


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<PAGE>

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

     In the event of any  Corporate  Transaction  or Change  of  Control  of the
Company  (each as defined in the Plan),  the Common Stock at the time subject to
each outstanding  option, but not otherwise vested,  shall automatically vest in
full, so that each such option shall, immediately prior to the effective date of
such corporate  transaction or change of control,  become fully  exercisable for
all of the Common Shares at the time subject to the option, and may be exercised
for all or any portion of those shares as fully vested Common Stock.

(E)  SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

     In 1997, Messrs. Belsham,  Freeman and Quinn each failed to make timely one
report on Form 4 of a change in the  exercise  price of  certain  stock  options
granted in 1996 and Ms.  Montoya  failed to timely  make one report on Form 4 of
the grant of certain stock options. In addition Mr. Pocock failed to timely file
an initial statement of beneficial  ownership on Form 3 and one report on Form 4
of the grant of certain stock options.

(F)  COMPENSATION COMMITTEE REPORT ON REPRICING

     In January 31, 1997, the Board, on the  recommendation  of the Compensation
Committee,  canceled the options granted to Gerald I. Quinn,  President and CEO,
under his Services  Agreement of May 21, 1996.  Under the May 21, 1996  Services
Agreement,  Quinn was to  receive  options  on  500,000  Common  Shares  with an
exercise price of $1.75 a share and, from a former Agreement, options on 300,000
Common  Shares at an  exercise  price of $1.3875  per  share.  On the same date,
January 31, 1997,  Mr. Quinn was granted a new option plan within the  Company's
1997 Stock Incentive Plan of 800,000 Common Shares at an exercise price of $0.66
cents a share.  Mr.  Quinn's prior  options were not within the Stock  Incentive
Plan of the Company and were at an unrealistic  exercise price. It was felt that
Mr.  Quinn as President  and CEO needed to have a  reasonable  incentive to make
Wavetech a financially viable operation for the benefit of the shareholders. Mr.
Quinn was not a significant  shareholder  and was not being paid a large salary.
Consequently,  the  Board  felt the  change  in the  option  plan for  Quinn was
appropriate.


                                       55
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of November 28, 1997 certain  information
with regard to the record and beneficial ownership of the Company's Common Stock
by (i)  each  shareholder  beneficially  owning  5% or  more  of  the  Company's
outstanding  Common  Stock,  (ii) each  Director  individually,  (iii) the Named
Executive Officer and (iv) all Officers and Directors of the Company as a group:

       Name and Address of
        Beneficial Owner                Shares Owned            Percent of Class
       -------------------              ------------            ----------------

Terence E. Belsham                      1,187,876 (1)                 7.7%
5210 E. Williams Circle, Suite 200      
Tucson, Arizona 85711

Richard P. Freeman                      1,195,192 (2)                 7.8%
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711

Gerald I. Quinn                         1,346,083 (3)                 8.3%
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711

Terrence H. Pocock                      298,096 (4)                   1.9%
5210 E. Williams Circle, Suite 200
Tucson, Arizona 85711

Switch Telecommunications Pty Ltd       3,544,110 (5)                20.7%
55 Mentmove Ave.
Rosebery, New South Wales 2018
Australia

All Officers and Directors as a 
group (4 in number)                     4,027,247 (1)(2)(3)(4)       23.7%

--------------

(1)  Includes  200,000  Common  Shares  issuable in  connection  with options to
     purchase  Common Stock.  The options are exercisable at $0.81 per share and
     have  fully  vested.  At  August  31,  1997,  200,000  of the  options  are
     exercisable.

(2)  Includes  200,000  Common  Shares  issuable in  connection  with options to
     purchase  Common Stock.  The options are exercisable at $0.81 per share and
     have  fully  vested.  At  August  31,  1997,  200,000  of the  options  are
     exercisable.

(3)  Includes  800,000  Common  Shares  issuable in  connection  with options to
     purchase  Common Stock.  The options are exercisable at $0.66 per share and
     have  fully  vested.  At  August  31,  1997,   800,000  share  options  are
     exercisable.  Includes  333,593 Common Shares,  issuable upon conversion of
     convertible note as of November 28, 1997.

                                       56
<PAGE>

(4)  Includes 10,000 options granted to a non-employee Board member. The options
     are exercisable at $0.37 and have fully vested.  At August 31, 1997, 10,000
     of the options are  exercisable.  Includes  288,096 Common Shares,  held by
     spouse and son of which he expressly  disclaims  ownership,  issuable  upon
     conversion of convertible notes as of November 28, 1997.

(5)  Includes a warrant of 2,000,000 Common Shares at $1.50 per share.


(C)  CHANGE IN CONTROL

     On March 8, 1995, the Company  entered into an agreement with  Interpretel,
Inc.  pursuant  to which the  Company  agreed to issue  6,000,000  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,  Inc. owning  approximately  80% of the  outstanding  shares of the
Company.  In  accordance  with  Accounting  Principles  Board  Opinion  No.  16,
"Business  Combinations,"  the  Acquisition  has been accounted for as a reverse
acquisition with Interpretel, Inc. deemed to be acquiring entity of the Company.
The Common Shares in connection with the Acquisition  were valued at $2,000,000,
which is based on the fair  market  value of the  Company's  only  major  asset,
undeveloped land located in Ohio.

     The  Acquisition  agreement also provides that during the three year period
following the March 8, 1995 closing,  former  shareholders  of  Interpretel  can
receive  an  additional  7,500,000  Common  Shares  of the  Company  through  an
"earn-out"  based  upon  before  tax net  profit.  During  the two  year  period
following closing,  former  shareholders of Interpretel can earn up to 3,750,000
Common  Shares of the Company for every $0.50 net profit  before  taxes,  and an
additional  3,750,000 Common Shares of the Company for every $1.00 of cumulative
total net profit  before taxes.  During the third year  following  closing,  any
shares not previously  issued  pursuant to this agreement can be earned at $1.50
net  profit  before  taxes  per  share.  These  additional  shares  will  not be
considered  in  recording  the  Acquisition  transaction  until such time as the
earnings targets have been met.


ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     On  January   21,   1997,   the   Company   granted  a  warrant  to  Switch
Telecommunications  Pty Ltd to purchase up to 2,000,000  shares of the Company's
Common  Stock at a price of $1.50 per share,  in exchange for  consideration  of
$2,000,000.  The Company also licensed Switch to use certain Company  technology
in Australia and various other Asian countries.

     During the year ended 1997, the Company became indebted to two officers and
one  shareholder.  The Company became indebted to Mr. Gerald I. Quinn, the Chief
Executive  Officer,  for $109,071  plus accrued  interest of $3,809;  and to Mr.
Richard P. Freeman,  Vice President,  for $13,000 plus accrued interest of $585;
and to Mr.  Robert  Caylor,  shareholder,  for $50,000 plus accrued  interest of
$854.  The loans were made in the  ordinary  course of business and were made on
substantially  the  same  terms,  including  rates  and  collateral,   as  those
prevailing at the time for comparable transactions with other persons.

                                       57
<PAGE>

                                     PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.


(A)(1)   FINANCIAL STATEMENTS.  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
                                                                      Method of
Number    Description                                                  Filing
------    -----------                                                 ---------

3.1     Certificate of Incorporation of the Company                        *
3.2     By-Laws of the Company                                             *
10.30   Employment Contract dated May 21, 1996, between the Company       **
        and Terence E. Belsham, Chairman and Chief Financial Officer
10.31   Employment Contract dated June 17, 1996 between the Company       **
        and Richard P. Freeman, Vice President, Product Development & 
        Strategic Planning
10.32   Employment Contract dated May 21, 1996 between the Company        **
        and Gerald I. Quinn, President and Chief Executive Officer
22      Subsidiaries of the Registrant                                   ***
23      Consent of Addison, Roberts & Ludwig                             ****
27      Financial Data Schedule                                          ****

----------

*    Incorporated  by reference from the like numbered  exhibit to the Company's
     Form 10-QSB for the Quarter ended February 28, 1997.

**   Incorporated  by reference from the like numbered  exhibit to the Company's
     Form 10-KSB for the Fiscal year ended August 31, 1996.

***  Incorporated  by reference from the like numbered  exhibit to the Company's
     Form 10-KSB for the Fiscal Year Ended  August 31,  1997,  filed on December
     15, 1997.

**** Filed herewith.


(B)  REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD  COVERED BY
     THIS REPORT ARE AS FOLLOWS:

     None.


                                       58
<PAGE>
   
                                   SIGNATURES


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

WAVETECH, INC.



Dated:  December 4, 1998           By: /s/ Gerald I. Quinn
                                       -----------------------------------
                                       GERALD I. QUINN, PRESIDENT AND 
                                       CHIEF EXECUTIVE OFFICER, DIRECTOR
                                       (Principal Executive Officer)



Dated:  December 4, 1998           By: /s/ Lydia M. Montoya
                                       -----------------------------------
                                       LYDIA M. MONTOYA, CHIEF FINANCIAL OFFICER
                                       (Principal Financial Officer)



Dated:  December 4, 1998          By: /s/ Terrence E. Belsham
                                      -----------------------------------
                                      TERENCE E. BELSHAM, CHAIRMAN 
                                      OF THE BOARD



Dated:  December 4, 1998          By: /s/ Richard P. Freeman
                                      -----------------------------------
                                      RICHARD P. FREEMAN, DIRECTOR



Dated:  December 4, 1998          By: /s/ Terrence H. Pocock
                                      -----------------------------------
                                      TERRENCE H. POCOCK, DIRECTOR
    


                                       59