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

                                   FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
    1934 for the fiscal year ended August 31, 2000.

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

    For the transition period from __________ to __________.

                         Commission File Number: 0-15482

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

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

                      5210 East Williams Circle, Suite 200
                              Tucson, Arizona 85711
                    (Address of principal executive offices)

                                 (520) 750-9093
              (Registrant's telephone number, including area code)

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

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

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

                          Common Stock $.001 Par Value
                                (Title of Class)

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

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

     Issuer's revenues for the fiscal year ended August 31, 2000: $28,670.

     The aggregate  market value of the Common Stock of the  registrant  held by
non-affiliates as of November 28, 2000 was approximately $4,045,221 based on the
average  bid and asked  prices  for such  Common  Stock as  reported  on the OTC
Bulletin Board.

     The number of shares of Common  Stock  outstanding  as of November 28, 2000
was 8,223,589.

     Documents Incorporated by Reference - None.

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

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ITEM 1. DESCRIPTION OF BUSINESS.

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

BUSINESS DEVELOPMENT

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

     On April 23, 1999,  we entered  into a licensing  agreement  with  Softalk,
Inc.,  a  technology  company  based in  Ontario,  Canada  ("Softalk").  Softalk
develops  Internet-based  telecommunication  technologies  that enable  users to
initiate long distance  calls from anywhere in the world by accessing a specific
Internet  website.  This technology  enables users to, among other things,  make
International  telephone calls at substantially reduced rates from those offered
by traditional long distance carriers.  This licensing agreement granted BestNet

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certain marketing and customer service rights. The licensing agreement was later
amended and restated on October 25, 1999, to grant us exclusive rights to:

     *    distribute

     *    market

     *    service

     *    sell, and

     *    sublicense

Softalk's  services  and  products  to  commercial   accounts  and  a  worldwide
non-exclusive  license for individual accounts. We also have the exclusive right
to provide billing and customer support services for all customer  accounts.  In
consideration  for such  licensing  rights,  the  Company  has paid  Softalk  an
aggregate of two hundred thousand dollars (US$200,000).

     After   entering  into  the   licensing   agreement,   we  began   building
telecommunication   facilities   in  Toronto,   Canada,   including   installing
high-capacity  switches and Internet servers.  We also completed the development
of specialized  software used for data management,  billing and customer service
requirements.

     The brand name for our  web-enabled  long distance  service is Bestnetcall,
which was first made available to the public on April 17, 2000. We are presently
focusing our  resources  on marketing  Bestnetcall  to selected  companies  with
international locations and/or clients.

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

     *    enroll

     *    place calls

     *    pay for service

     *    access customer service immediately on the Internet

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

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

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MARKETING AND SALES STRATEGY

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

     *    Governmental agencies

     *    Business and Industry

     *    Commercial Development Companies

     *    Telecommunication Carriers

     *    Internet Service Providers

     *    Browser Based Services such as Internet Explorer, Yahoo and Amazon.com

     *    Affinity Groups

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

     These  marketing  efforts will be targeted at  international  long distance
users in a number of key geographic areas in the world. Our marketing priorities
will be focused primarily on the following geographic regions:

     *    Caribbean

     *    North America

     *    Asia Pacific

     *    Central & South America

     *    Europe

     *    Middle East

DIRECT SALES

     We intend to  utilize  the  following  marketing  and sales  strategies  to
generate revenue and obtain and increase customer usage:

     *    Direct Mail and E-mail  Solicitations - We intend to send  testimonial
          advertisements to prequalified  potential users. These  advertisements
          will refer or link the potential user to www.bestnetcall.com and offer
          a subscription to our Bestnetcall service.  Recipients will be invited
          to use the service or request more  information.  These direct mail or
          e-mail  solicitations  will be carried out on a continuous basis by an
          in-house staff of direct marketing  specialists located in our Tucson,
          Arizona office.

     *    Telemarketing - Telemarketing  operations will be initiated out of our
          Tucson,  Arizona  office  targeted at  specific  market  segments.  We
          believe   Tucson  is  an  ideal  center  for   customer   service  and
          telemarketing  due to its relatively low wages and inexpensive  space.
          There also is an abundance of experienced telemarketing personnel. The
          40,000  student  University  of Arizona  located  in Tucson,  gives us
          access to individuals  who speak many different  languages and who can
          place calls to areas outside the United States.

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     *    Media Advertising and Promotion - We intend to place advertisements in
          key print and electronic  media targeted at specific market  segments.
          These  advertisements  will be  designed  to elicit  direct  responses
          and/or activations. Incentives will be included in the advertisements.
          Testimonials by key customers  representing  different market segments
          will be used to advocate the use of our service and  encourage a visit
          to our Bestnetcall web site.

     *    Public  Relations  Activities  - We  intend  to  hire  an  experienced
          corporate  communications and public relations specialist to work with
          an  international  public relations firm and the media. The specialist
          will  be   responsible   for   developing   a   comprehensive   global
          communications   program.  This  communications  program  will  likely
          feature print  articles in industry and trade  specific  publications,
          local print media and feature editorial support.

INDIRECT SALES

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

     *    Carriers - Our  Bestnetcall  services will be made  available to other
          telecommunication carriers for resale to their clients. These types of
          indirect sales  organizations  will be solicited  through direct mail,
          e-mail,  telemarketing  initiatives,  fax and  direct  sales  calls by
          BestNet personnel.

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

     *    Retailers  - We  intend  to  approach  large  retailers  to offer  our
          services to their credit card holders as a value-added service.  These
          relationships   are  revenue  sharing   initiatives  with  the  retail
          organization  receiving  a  negotiated  percentage  of  gross  revenue
          generated by our services.

     *    Agent/Distributors  - Organizations  with large client or member bases
          who may be a user of our services will also be encouraged to offer the
          services  to  their  clients  or  members,   including  the  following
          companies:

          --   Computer companies

          --   Commercial property development companies

          --   Banks

          --   Associations

          --   Affinity groups

     Such  companies  will be offered  the ability to  participate  in a revenue
sharing  program with us by offering  Bestnetcall to their customers or members.
Revenue  sharing is  expected  to be between 5% and 10% of our net revenue for a
particular program.

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PROJECT MANAGERS

     We intend to hire four project managers to sell, maintain and service major
accounts. The managers will primarily focus their efforts on encouraging use and
sales  by  carrier  groups,   professional   organization  retailers  and  agent
distributors.

                      INDUSTRY BACKGROUND AND MARKET DEMAND

     According to industry sources, global revenue for telecommunication service
providers  is  expected  to reach $975  billion  in the year  2000.  A number of
industry studies have mapped international  telephone traffic patterns.  Current
forecasts  project a total of 106  billion  minutes of  international  telephone
traffic  in the year  2000.  Valued at a price of $0.25 per  minute,  this would
represent a global market of  approximately  $26.5 billion,  although we believe
the real market value may be significantly higher.

     We believe the primary  reasons for the continued use of telephone  company
lines versus the  alternatives  found in  satellite,  Internet and cable systems
include:

     *    Speed of communication

     *    Quality of communication

     *    Reliability of communication

     *    Ease of operation

     The global telecommunications industry has been highly regulated.  However,
over the past several years, North America has enjoyed significant deregulation,
which has resulted in a highly  competitive long distance service industry.  The
U.S. and Canada have among the lowest  telephone rates in the world and the U.S.
has emerged as one of the lowest  cost  supplier of long  distance  rates.  U.S.
deregulation  has resulted in sizeable  reductions in the wholesale cost of long
distance services available to long distance resellers.

     Although  declining  rates have been symbolic in the U.S. and Canadian long
distance  markets,  we believe  international  rates from and to other countries
have been slow to decline for two major reasons:

     *    Management  of foreign  telephone  companies  have been  reluctant  to
          reduce their rates given their monopoly-like status.

     *    Foreign  governments  appear  to be  reluctant  to take on the  strong
          foreign telephone company unions.

     In the long term,  we believe it is unlikely  that these high rates will be
maintained as new technologies  render the foreign telephone company  monopolies
ineffective.

     Many new technologies  have evolved around the emergence of the Internet as
a mass communications and commerce medium. As a result, the Internet has emerged
as an attractive medium for advertising and e-commerce.  Jupiter Communications,
a provider of research on Internet commerce, estimates that Internet advertising
will grow from $1.9 billion in 1998 to $7.7 billion in 2002. Forrester Research,
Inc.,  an  independent  Internet  research  firm that analyzes the impact of the
Internet  and  emerging   technologies  on  business  strategy,   projects  that
business-to-business  Internet advertising will expand from $290 million in 1998
to $2.6 billion in 2002.

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     Business-to-business e-commerce is also growing rapidly. This growth is the
result  of  businesses  utilizing  the  Internet's  ability  to  reach  targeted
audiences  globally,  deliver  personalized  content  and open new  distribution
channels. Forrester forecasts that business-to-business  e-commerce will grow to
$17 billion in 2002.

     Traditionally,  companies have employed a variety of well-recognized  media
in business-to-business advertising,  information delivery and communications to
identify,  qualify and facilitate commerce opportunities.  A number of companies
have started  Internet  telephony  operations in the last few years to serve the
business-to-business   market   segment.   The   intense   competition   in  the
telecommunications  market and the growth of e-commerce  has  contributed to the
movement to lower costs. Accordingly, we believe competition and e-commerce have
contributed to the creation of Internet telephony.

     According to Frost & Sullivan,  an  international  marketing and consulting
company  that  monitors  information  and  telecommunications  markets,  the new
international  standards  are  expected to result in  significant  growth in the
Internet telephony market in the near future. Frost & Sullivan projects that the
Pacific Rim, Europe and so-called rest-of-the-world markets will account for 73%
of the total  Internet  telephony  market by 2002. We believe these  projections
support  BestNet's  market  strategy of  targeting  businesses  outside of North
America or North American businesses with offices worldwide.

                               BESTNET'S SOLUTION

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

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

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

     BestNet  provides  customers  access to its network  through  its  switches
located in Toronto,  Canada and New York, NY.  Additional  switch  locations are
planned for  deployment in major cities in North America,  Asia and Europe.  Our
next switch will be deployed in Los Angeles,  California in the first quarter of
2001. Other switches will follow as demand dictates and capital resources become
available.

BESTNETCALL

     Our Bestnetcall  service allows users to initiate  telephone calls over the
Internet. This service, which provides users with toll quality long distance and
call  management  service,  is targeted  primarily  to  businesses.  Using a Web
browser, subscribers may place calls by entering their location telephone number
and  the  destination  telephone  number  on a Web  page.  This  information  is
transmitted over the Internet to our Web server, which in turn communicates with
a switching  matrix.  The  switching  matrix  launches a call through the public
switch telephone network back to the subscriber's  telephone and then launches a
call to the  destination  number.  Both calls are then bridged and the two calls
are connected.

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     By using our Bestnetcall  service,  North American  subscribers can save an
average  of  50 -  75%  over  traditional  international  long  distance  costs.
Subscribers  outside  North  America  can  save  an  average  of 75 -  90%  over
traditional long distance costs charged by their local carriers. Set forth below
is a diagram which illustates how Bestnetcall works.

BESTNETCALL.COM

                                   Toronto POP

                 Web Server                       Switch Matrix
                  (UUNet)   --------------------- (Leased Line)
                     |                                  |
                     |                                  |
                 Internet                              PSTN
                  (Data)                              (Voice)
                     |                             /           \
                     |                            /             \
            www.bestnetcall.com        Origination Call    Destination Call
                                             (US)                (UK)

BESTNETCALL - CALL INFRASTRUCTURE

Bestnetcall - Version 1.5

     The current version of Bestnetcall was specifically  designed for corporate
users to make and manage  international  and  long-distance  calls.  Bestnetcall
provides a  comprehensive  array of call  management  features.  These  features
reside on a user's personal computer. Current active features include:

     *    Custom directories - Users are given two directories,  one for storing
          origination  numbers and the second for storing  destination  numbers.
          There is no limit  to the  number  of  telephone  numbers  that can be
          created  and  stored  in the two  directories.  BestNet  is  currently
          developing a customized directory that can be automatically created by
          linking  to  company/department-wide  directories,  such as from Lotus
          Notes, Microsoft Outlook and other contact management applications.

     *    Personal speed dial - To simplify dialing  frequently  called numbers,
          the  subscriber  may  create a speed  dial  which  provides  one click
          dialing.

     *    Billing codes - Each telephone call may be charged to specific  client
          or  accounting  codes  defined by the  subscriber.  This  allows  easy
          segregation of calls by business,  department, client or personal use.
          All  billing  codes are  tagged to call  detail  that is  viewable  in
          real-time statements from the Bestnetcall web site.

     *    Real-time  statements - The subscriber  may, at any time, view online,
          and  up-to-the-second  call detail record for the current day, current
          month and previous month. Each call detail record includes time, date,
          duration,  rate, total cost, destination number and origination number
          of the calls. Call records may be viewed by billing codes.  Statements

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          may be printed or exported to standard office  applications  including
          Word and Excel. Account administrators can view, print and export call
          detail records for all users tied to their account.

     *    World time - The  subscriber  may view,  on demand,  the current local
          time for cities worldwide.

     *    Worldwide  city  and  country  codes  - To aid  dialing  international
          telephone  numbers,  the  subscriber  may check for a list of city and
          country codes worldwide.

     *    Rates - The subscriber may, at anytime,  look-up Bestnetcall's current
          rates on a worldwide basis.

     *    Account editing - Subscribers may edit their account online, including
          changing credit card number or adding additional users.

BESTNETCALL - ENHANCEMENTS

     *    We are currently  developing  enhancements to our Bestnetcall  service
          which will be offered  to  subscribers  on a  scheduled  basis.  These
          include enhancements to both our website and product features. Product
          enhancements under development include the following:

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

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

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

BESTNETCALL - FUTURE PRODUCT STRATEGY

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

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

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

     *    Internet   Devices  -  Bestnetcall   services  will  be  designed  for
          non-personal computer Internet devices, such as the following:

          - Set-top boxes, such as WebTV
          - Smart phones, such as iPhone
          - Appliances, such as I-Opener

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

NETWORK STRUCTURE

PHASE I - INITIAL DEPLOYMENT

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

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

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

PHASE II - EXPANDING POINTS OF PRESENCE

     We are planning on expanding our network worldwide. Additional locations of
network equipment will be deployed in key strategic locations to facilitate web,
voice  and  data  traffic.  These  additional  locations  will  provide  network
redundancy and least cost routing for voice traffic.

     Our second  location is deployed  in New York at 60 Hudson  Street,  as the
East Coast's principal gateway for international  telecommunication traffic. Our
New York  location  contains a switching  matrix  similar to the one deployed in
Toronto that can be expanded up to 10,000 ports.  The New York switching  matrix
will be inter-connected to several international public switch telephone network
carriers,  where  BestNet  will offer  least cost  routing  for all voice  calls
originating  in  North  America.  The cost of  deploying  additional  points  of
presence is approximately $80,000.

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     Following  New York,  we intend to  expand  to Los  Angeles  at 1  Wilshire
Boulevard,  as the West  Coast's  gateway  for  international  telecommunication
traffic.  The equipment and facility will also be similar to that of our Toronto
and New York offices.

     We are currently  working deploy another web host server in Asia to provide
website access redundancy.

PHASE III - VIRTUAL PRIVATE NETWORK

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

TRANSACTIONS WITH SOFTALK

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

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

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

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

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

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

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

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

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

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

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

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

     CROSS  CORPORATE  CONTROL.  Softalk  has the right to  designate  up to two
directors to the Board of  Directors of BestNet.  As of the date of this 10-KSB,
Softalk has  designated  Alexander  Christopher  Lang to serve on BestNet's four
person  Board of  Directors.  BestNet also has been granted the right to appoint
one director to the three  person  Board of  Directors  of Softalk.  BestNet has
appointed  Gerald I. Quinn,  BestNet's  Chief  Executive  Officer,  to Softalk's
board.

     LOAN FACILITY. On August 6, 1999, BestNet entered into a loan facility with
Softalk  pursuant  to which  Softalk  may borrow up to $2 million at an interest
rate of prime plus 1%. As of November 28, 2000, the  outstanding  balance of the
loan was $1,384,000. Under the terms of this loan, Softalk may pay back the loan
principal  plus  interest  on or before  August 6, 2000,  or convert any amounts
outstanding,  plus interest,  on the loan into shares of Softalk common stock in
full satisfaction of money owed to BestNet under the loan. On September 8, 2000,
the Board of Directors approved amending the loan to extend the term of the loan
for an additional year.

                                       11
<PAGE>
                                   COMPETITION

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

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

                                   REGULATION

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

OVERVIEW

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

                                       12
<PAGE>
FEDERAL REGULATION

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

                                    EMPLOYEES

     As of November 28, 2000, we had approximately  seven employees.  We believe
that our future  success will depend on our ability to attract and retain highly
skilled and qualified employees. None of our employees are currently represented
by collective bargaining agreements. We believe that we enjoy good relationships
with our employees.

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 of approximately  $8,400 over the term
of the lease  monthly.  From May 13, 1998 to May 15,  2000,  the Company  sublet
approximately  2,000  square feet of its office  space for $3,000 per month on a
month-to-month basis.

ITEM 3. LEGAL PROCEEDINGS

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

                                       13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On September 27, 2000, the Company held its annual meeting of  shareholders
at which 3,090,508  shares,  or 91.3% of the 3,385,127  shares  outstanding were
represented  by proxy or in person.  The  following  proposals  were approved as
follows:


                Proposals                      Votes For   Against   Abstentions
                ---------                      ---------   -------   -----------
1.   Election of Directors:
     Gerald I. Quinn                           3,075,563    14,945           0
     Alexander Christopher Lang
     Kelvin C. Wilbore
     Kevin England

2.   Amendment to the Company's Articles
     of Incorporation to change its name
     to BestNet Communications Corp.           3,068,528     2,497      19,483

3.   Approval of 2000 Incentive Stock Plan     2,846,308   214,917      29,283

4.   Ratification of Ernst & Young, LLP
     as the Company's independent auditors.    3,059,709     3,341      27,458

                                       14
<PAGE>
                                     PART II

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

The Company's common stock was quoted on the Nasdaq SmallCap Market until May 4,
1999, and then on the OTC Bulletin Board from June 28, 1999 to the present.  The
high and low bid prices of the Company's common stock as reported from September
1,  1998  through  August  31,  2000 by fiscal  quarters  (i.e.,  1st  Quarter =
September 1 through November 30) were as follows,  as adjusted for a one-for-six
reverse split effective December 18, 1998.

                                                    High         Low
                                                    ----         ---
          FISCAL YEAR ENDED:
          August 31, 1998
            First Quarter                           3.625         2.25
            Second Quarter                         2.8125       2.4375
            Third Quarter                           4.125        3.375
            Fourth Quarter                         4.3125       1.3125

          FISCAL YEAR ENDED:
          August 31, 1999
            First Quarter                          3.5625          1.5
            Second Quarter                         3.5625          2.0
            Third Quarter                          2.9375        0.125
            Fourth Quarter                          2.625          0.5

          FISCAL YEAR ENDED:
          August 31, 2000
            First Quarter                            4.25      1.46875
            Second Quarter                          10.25        4.125
            Third Quarter                            9.50         5.00
            Fourth Quarter                           7.25         3.81

     The bid and asked prices of the Company's common stock on November 28 2000,
were $1.0625 and $1.1875, respectively.

     As of November 13, 2000, the Company had 87  shareholders  of record of its
common stock.  As of November 20 2000, the Company had 1,732  shareholders  that
beneficially own the stock in the name of various brokers.

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

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

OPERATIONS OVERVIEW

COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 2000 AND AUGUST 31, 1999

     REVENUES.  Revenues  increased  to $28,670 in fiscal  2000 from  $13,580 in
1999. Current year revenues were derived from beta testing and customer usage of
the  Bestnetcall  services.  Prior year  revenues  were from the sale of various
calling card services, such as long distance and voice and fax mail services.

                                       15
<PAGE>
     COST OF SALES.  Costs of sales  increased  to $51,722  in fiscal  2000 from
$9,468 in fiscal  1999.  These  costs  consisted  of long  distance  fees  from
carriers for the Bestnetcall service. Cost of sales for the previous period were
costs  associated with the sale of various  calling card services,  such as long
distance and voice and fax mail services.

     GENERAL  AND  ADMINISTRATIVE  EXPENSES.  Operating  expenses  increased  to
$1,188,032  in  fiscal  2000  from  $691,479  in  fiscal  1999.   Marketing  and
advertising  fees increased to $258,355 in fiscal 2000 from $10,410 in the prior
year due to costs associated with creation of web pages and marketing efforts of
the Bestnetcall service. Insurance expense increased for Directors and Officer's
liability  coverage  by $38,125 in fiscal  2000 from zero in fiscal  1999 due to
adding such insurance. Travel expenses increased by $45,725 to $67,287 in fiscal
2000 from  $21,562 in the prior  fiscal year due to travel  associated  with the
negotiation of the Company's agreements with Softalk.  Payroll expense increased
by $73,239 to $313,551 in fiscal  2000,  from  $240,312 in the prior fiscal year
due to the hiring of additional  staff.  Consulting fees increased to $48,558 in
fiscal 2000 from $7,198 in fiscal 1999 due to the hiring of consultants  for the
Bestnetcall  product.  Accounting  fees increased to $81,964 in fiscal 2000 from
$21,030 in fiscal 1999 due to the Company engaging a "Big 5" accounting firm.

     DEPRECIATION  AND  AMORTIZATION  EXPENSES.  Depreciation  and  amortization
expenses  increased to $1,545,636  for fiscal year 2000 from $146,977 for fiscal
year 1999.  This increase was due to amortization on the higher level of license
fees and  depreciation for the additional  purchases of equipment,  software and
computer hardware.

     INTEREST  INCOME.  Interest income increased to $76,129 in fiscal 2000 from
$70,519  in  fiscal  1999  due to an  increase  in the  average  balance  in the
Company's money market fund during fiscal 2000 as compared to fiscal 1999.

     INTEREST  EXPENSE.  Interest  expense  increased to $60,512 for fiscal 2000
from $8,995 in fiscal 1999.  The  increase in interest  expense was related to a
short-term  $2,000,000  promissory  note  executed on  December  21,  1999.  The
principal and accrued interest on this note were repaid on May 4, 2000.

     MERGER EXPENSES.  The Company had zero costs related to merger expenses for
the current year as compared to $118,450 for fiscal 1999. The costs in 1999 were
the result of the proposed but  terminated  merger with DCI  Telecommunications,
Inc.

     RENTAL   INCOME.   From  May  1998  until  May  2000,  the  Company  sublet
approximately  2,000  square feet of its office space to another  company.  This
sublease was on a month-to-month basis and earned the Company $3,000 per month.

     PREFERRED STOCK CONVERSION PENALTY. The Company incurred monthly liquidated
damages to the holder of its Series A Convertible Preferred Stock (the "Series A
Preferred  Stock")  equal  to 3% (or  $18,000)  of  the  purchase  price  of the
Preferred  Stock  ($600,000)  for each month in the quarter.  The issuance  cost
increased to $221,226 in fiscal 2000 from  $144,000 in fiscal year 1999.  On May
9, 2000,  the remaining  shares of Series A Preferred  Stock were converted into
common  stock.  All shares due for  accrued  penalties  payable  were  issued on
November 15, 2000.

     SETTLEMENT  COSTS. On January 21, 1999, the Company paid Steven A. Ezell in
an  out-of-court  settlement  $15,000 in settlement of all pending legal claims.
These costs represented a one-time expense, and therefore,  there are no similar
expenses for the year ended August 31, 2000.

                                       16
<PAGE>
     PREFERRED DECLARED AND DEEMED DIVIDENDS.  Preferred  dividends increased to
$2,602,046  for fiscal  2000,  from  $36,500  for fiscal  1999.  An  increase of
$101,095 was due to dividends payable on the 1,000 outstanding  shares of Series
B Preferred Stock. Dividends accumulate,  with respect to the outstanding shares
of the Series B Preferred  Stock,  at a rate of six percent (6%) per annum,  and
may be  paid in cash  or in  shares  of  common  stock  of the  Company,  at the
Company's  option.  Dividends for the Series A Preferred  Stock were $21,234 for
fiscal 2000. Dividends accumulate, with respect to the Series A Preferred Stock,
at a rate of six percent (6%) per annum, and are payable quarterly.  The Company
has elected to pay the dividends by issuing  shares of common stock equal to the
aggregate  amount of dividends  owed for such period.  All  remaining  shares of
Series A Preferred  Stock were  converted  into common stock on May 9, 2000. All
shares of common stock issuable in payment of dividends  accrued under the terms
of the Series A Preferred Stock were issued on May 15, 2000. On May 1, 2000, the
Company completed a $5,000,000 private placement of Series B Preferred Stock and
common  stock  purchase  warrants  with an  accredited  investor.  Assuming  the
conversion  of the Series B Preferred  Stock on May 1, 2000,  such shares  would
have been convertible into an aggregate of 1,000,000 shares of common stock, and
result in a beneficial  conversion deemed dividend of approximately $2.5 million
in May of 2000.

     INCOME  TAXES.  At August 31, 2000,  the Company had federal net  operating
loss carryforwards  totaling  approximately  $13,300,000 and state net operating
loss  carryforwards  of  approximately  $8,200,000.  The  federal  and state net
operating loss  carryforwards  expire in various  amounts  beginning in 2011 for
federal  purposes  and 2000 for state  purposes.  Additionally,  the Company has
capital loss  carryforwards of approximately  $216,000 which will expire in 2004
unless  offset  by  capital  gains.  No tax  benefit  has been  recorded  in the
financial  statements  since  realization of these loss  carryforwards  does not
appear likely.

LIQUIDITY AND CAPITAL RESOURCES

     At August 31, 2000, the Company had working capital of $2,394,852, compared
to working capital of $618,440 at August 31, 1999.

     We expect to incur operating  losses for the  foreseeable  future until the
completion of our global network build-out.  We believe we have sufficient funds
to meet our operating expenses for the next fiscal year.

     As of November  28,  2000,  the  Company  had,  on a fully  diluted  basis,
17,765,566 shares  outstanding in stock,  options and warrants and is authorized
to issue  50,000,000  common  shares.  The Company has 1,000  Series B preferred
shares  outstanding and is authorized to issue 10,000,000  preferred shares. The
Company  believes  it can  finance  its global  build-out  and growth by issuing
additional  shares,  either  through  private  placements,  a  secondary  public
offering or a combination of both.  However,  no assurance can be given that any
such  financing  options will be available,  or if  available,  will be on terms
acceptable to the company.

INFLATION

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

ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE RESULTS

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

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

                                       17
<PAGE>
Our  Bestnetcall  service may never  achieve  commercial  acceptance by Internet
users.  The failure to achieve market  acceptance  would have a material adverse
effect on BestNet's  business,  financial  condition and results of  operations.
BestNet's risks include the following:

     *    evolving and unpredictable business models

     *    management and funding of growth

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

     *    acceptance by Internet users

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

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

     *    the maintenance of BestNet's relationship with Softalk

To address these risks BestNet must, among other things:

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

     *    maintain its business customer base

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

     *    expand  its  sales of  voice,  fax and  value-added  telecom  services
          through Bestnetcall

     *    respond to competitive developments

     *    continue  to form and  maintain  relationships  with  telecom  carrier
          partners

     *    continue to attract and retain and motivate qualified personnel

     *    provide superior customer service

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

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

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

                                       18
<PAGE>
purchasing  such services from these third  parties on acceptable  terms,  if at
all. If BestNet is unable to purchase  the  necessary  services to maintain  and
expand its  network  as  currently  configured,  BestNet's  business,  financial
condition and results of operations would be materially adversely affected.

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

     BestNet depends in large part on its joint product  development efforts and
contractual  relationships  with  Softalk.  See  "Item  1 --  Transactions  with
Softalk".  Softalk may choose not to renew existing arrangements on commercially
acceptable terms, if at all. BestNet's loss of this key strategic  relationship,
or the failure to develop new relationships in the future, would have a material
adverse effect on its business,  prospects,  financial  condition and results of
operations.

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

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

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

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

     BestNet  intends on marketing  its service to  international  long distance
callers.  Because it will be  conducting  business  internationally,  BestNet is
subject  to  certain  direct  or  indirect  risks.  These  risks  would  include
unexpected  changes in regulatory  requirements for the Internet and/or Internet
telephony;  foreign  currency  fluctuations,  which  could  increase or decrease
operating expenses and increase or decrease revenue;  foreign taxation;  and the
burdens of complying with a variety of foreign laws,  trade  standards,  tariffs
and trade barriers.

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

     At August 31,  2000,  BestNet had an  accumulated  deficit of  $13,005,722.
Prior years'  financial  information has no particular  bearing on future years'
results  because the focus of the  Company's  business  has changed from calling
card services to Internet telephony.

                                       19
<PAGE>
     BestNet believes that its future  profitability  and success will depend in
large part on its ability to generate  sufficient  revenue  from the sale of its
Bestnetcall  service and websites to businesses.  Revenues are also  anticipated
from the sub-licensing of its internet telephony technology and business systems
to  partners  setting up Internet  telephony  services  in  partner-led  foreign
markets. The profitability and success of BestNet will depend on:

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

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

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

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

     *    its ability to generate sufficient online traffic and sales volume

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

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

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

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

     *    potential acquisitions or financing transactions

     *    sales or other dispositions by BestNet principals.

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

                                       20
<PAGE>
OUR  INABILITY  TO  BE  COMPETITIVE  INTERNATIONALLY  OR TO  SATISFY  REGULATORY
REQUIREMENTS  WHEN WE EXPAND  GLOBALLY  COULD  MATERIALLY  ADVERSELY  AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

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

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

     The market  price of our common stock may decrease as more shares of common
stock  become  available  for  trading  due to the  conversion  of the  Series B
convertible  preferred  stock into and the  exercise of the warrants to purchase
common  stock.  The  participation  of the  shareholders  in BestNet also may be
reduced through the issuance of new common stock.

THE  FORWARD-LOOKING  STATEMENTS IN THIS PROSPECTUS MAY NOT COME TRUE AND ACTUAL
RESULTS COULD MATERIALLY DIFFER FROM THE ANTICIPATED RESULTS.

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

     *    to grow its Internet-based communications businesses

     *    to expand the range of services it offers

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

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

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

                                       21
<PAGE>
     These forward looking statements reflect the belief or current  expectation
of  BestNet's  management  and are  necessarily  based on  management's  current
understanding  of the markets and  industries  in which BestNet  operates.  That
understanding  could  change  or could  prove  to be  inconsistent  with  actual
developments.  BestNet's actual results could differ materially from the results
discussed in this Form 10-KSB,  including those anticipated in or implied by any
forward-looking  statements.  Factors  that could  cause or  contribute  to such
differences  include those discussed above, as well as those discussed elsewhere
in this report.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                          BestNet Communications Corp.
                          Audited Financial Statements
                           Year ended August 31, 2000

                                    Contents

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

Report of Ernst & Young, LLP, Independent Auditors                           F-2

Audited Financial Statements

     Consolidated Balance Sheet                                              F-3

     Consolidated Statements of Operations                                   F-4

     Consolidated Statements of Changes in Stockholders' Equity              F-5

     Consolidated Statements of Cash Flows                                   F-6

     Notes to Consolidated Financial Statements                              F-8

                                       22
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS


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

     We have  audited the  accompanying  consolidated  balance  sheet of BestNet
Communications  Corp.  as of  August  31,  2000,  and the  related  consolidated
statements of operations,  stockholders' equity and cash flows for the year then
ended.  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  audit.   The   financial   statements   of  BestNet
Communications  Corp.  for the year ended  August 31, 1999 were audited by other
auditors whose report dated October 18, 1999,  expressed an unqualified  opinion
on those statements.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit 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 audit  provides a  reasonable  basis for our
opinion.

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


/s/ Semple & Cooper, LLP
October 16, 2000

                                       F-1
<PAGE>
                REPORT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS


Board of Directors
Wavetech International, Inc.

     We have audited the  accompanying  consolidated  statements of  operations,
stockholders' equity and cash flows of Wavetech International, Inc. for the year
ended August 31, 1999. 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 audit.  The financial  statements of Wavetech
International,  Inc.  for the year ended  August 31, 1998 were  audited by other
auditors whose report dated November 6, 1998,  expressed an unqualified  opinion
on those statements.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit 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 audit  provides a  reasonable  basis for our
opinion.

     In our opinion,  the 1999  financial  statements  referred to above present
fairly,  in  all  material  respects,   the  consolidated  results  of  Wavetech
International,  Inc.'s operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Tucson, Arizona
October 18, 1999, except for Note 11,
as to which the date is November 13, 1999

                                       F-2
<PAGE>
                          BestNet Communications Corp.
                           Consolidated Balance Sheet
                                 August 31, 2000


                                     ASSETS
Current assets:
  Cash and cash equivalents                                        $  2,581,492
  Prepaid expenses and other assets                                      23,902
                                                                   ------------
     Total current assets                                             2,605,394

  Property and equipment, net accumulated
    depreciation $ 1,032,886                                          1,208,025
  License fee, net of amortization of $1,166,046                      8,508,722
  Note receivable from affiliate                                      1,384,000
  Note receivable from related party                                     32,000
  Deposits and other assets                                             124,726
                                                                   ------------
     Total assets                                                  $ 13,862,867
                                                                   ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses                            $    208,949
  Capital lease obligations, current portion                              1,593
                                                                   ------------
     Total current liabilities                                          210,542

Stockholders' equity:
  Series B preferred stock, 6% cumulative, par value
    $.001 per share; 10,000,000 shares authorized,
    1,000 shares issued and outstanding (liquidation
    value $5,000,000)                                                         5
  Common stock, par value $.001 per share; 50,000,000
    shares authorized, 3,403,713 shares issued and
    outstanding                                                           3,404
  Additional paid-in capital                                         26,654,638
  Accumulated deficit                                               (13,005,722)
                                                                   ------------

     Total stockholders' equity                                      13,652,325
                                                                   ------------

     Total liabilities and stockholders' equity                    $ 13,862,867
                                                                   ============

                 See notes to consolidated financial statements.

                                       F-3
<PAGE>
                          BestNet Communications Corp.
                      Consolidated Statements of Operations
                  For the years ended August 31, 2000 and 1999

<TABLE>
<CAPTION>
                                                                  2000              1999
                                                              -----------        -----------
<S>                                                           <C>                <C>
Revenues                                                      $    28,670        $    13,580

Expenses:
  Cost of sales (exclusive of depreciation and
    amortization shown separately below)                           51,722              9,468
  General and administrative                                    1,188,032            691,479
  Depreciation and amortization expense                         1,545,636            146,977
                                                              -----------        -----------
     Total expenses                                             2,785,390            847,924
                                                              -----------        -----------
     Net loss from operations                                  (2,756,720)          (834,344)

Other income (expense):
  Interest income                                                  76,129             70,519
  Rental income                                                    22,500             36,000
  Miscellaneous income                                              4,014                 --
  Interest expense                                                (60,512)            (8,995)
  Costs incurred in connection with unconsummated merger               --           (118,450)
  Write-off of intangible and other assets                             --            (36,125)
  Preferred stock conversion penalty                             (221,226)          (144,000)
  Other expenses                                                       --            (15,000)
                                                              -----------        -----------
     Total other income (expense)                                (179,095)          (216,051)
     Net loss before preferred dividends                       (2,935,815)        (1,050,395)

Cumulative preferred dividends declared and
  preferred stock conversion benefit                            2,602,046             36,500
                                                              -----------        -----------
     Net loss available to common shareholders                $(5,537,861)       $(1,086,895)
                                                              ===========        ===========

     Net loss per common share, basic and diluted             $     (1.72)       $     (0.37)

Weighted average number of shares
  outstanding, basic and diluted                                3,221,225          2,904,693
</TABLE>

                 See notes to consolidated financial statements.

                                       F-4
<PAGE>
                          BestNet Communications Corp.
           Consolidated Statements of Changes in Stockholders' Equity
                  For the years ended August 31, 2000 and 1999

<TABLE>
<CAPTION>
                                       PREFERRED STOCK               COMMON STOCK
                               -------------------------------   --------------------
                                  SERIES A        SERIES B                               ADDITIONAL
                               --------------  ---------------                            PAID-IN     ACCUMULATED
                               SHARES  AMOUNT  SHARES   AMOUNT     SHARES      AMOUNT     CAPITAL       DEFICIT        TOTAL
                               ------  ------  ------   ------     ------      ------     -------       -------        -----
<S>                           <C>     <C>     <C>      <C>      <C>          <C>        <C>         <C>            <C>
Balances, September 1, 1998      600   $   1       --   $  --    16,994,887   $ 16,995  $ 8,516,922  $ (6,380,966)   2,152,952
Net loss                          --      --       --      --            --         --           --    (1,050,395)  (1,050,395)
Conversion of debt into
 common stock                     --      --       --      --       156,250        156       49,844            --       50,000
Reverse 1-for-6 stock split       --      --       --      --   (14,292,473)   (14,292)      14,292            --           --
Preferred stock dividends         --      --       --      --        27,798         28       24,272       (36,500)     (12,200)
Preferred stock conversion
 penalty                          --      --       --      --       128,993        129      143,871            --      144,000
Stock options exercised           --      --       --      --         5,833          5        8,745            --        8,750
                               -----   -----   ------   -----   -----------   --------  -----------  ------------  -----------
Balances, August 31, 1999        600       1       --      --     3,021,288      3,021    8,757,946    (7,467,861)   1,293,107

Net loss                                                                                               (2,935,815)  (2,935,815)
Conversion of Series A
 preferred stock                (600)     (1)      --      --       150,993        151         (150)           --           --
Issuance of Series B
 preferred stock                  --      --    1,000       5            --         --    4,446,147            --    4,446,152
Preferred stock dividends         --      --       --      --        27,897         28      122,301      (122,329)          --
Preferred stock conversion
 penalty                          --      --       --      --        19,869         20       99,464            --       99,484
Preferred stock conversion
 benefit                          --      --       --      --            --         --    2,479,717    (2,479,717)          --
Common stock issued for
 services                         --      --       --      --         4,000          4        7,496            --        7,500
Warrants issued                   --      --       --      --            --         --      154,000            --      154,000
Softalk purchase agreement        --      --       --      --            --         --   10,000,000            --   10,000,000
Stock options excercised          --      --       --      --       179,666        180      587,717            --      587,897
                               -----   -----   ------   -----   -----------   --------  -----------  ------------  -----------
Balance, August 31, 2000          --   $  --    1,000   $   5     3,403,713   $  3,404  $26,654,638  $(13,005,722) $13,652,325
                               =====   =====   ======   =====   ===========   ========  ===========  ============  ===========
</TABLE>

                 See notes to consolidated financial statements.

                                       F-5
<PAGE>
                          BestNet Communications Corp.
                      Consolidated Statements of Cash Flows
                  For the years ended August 31, 2000 and 1999


<TABLE>
<CAPTION>
                                                                             2000             1999
                                                                         -----------      -----------
<S>                                                                      <C>              <C>
Operating activities:
  Net loss                                                               $(2,935,815)     $(1,050,395)
    Adjustments to reconcile net loss to net
      cash used in operating activities:
    Depreciation and amortization                                          1,545,636          146,977
    Common stock issued for services                                           7,500               --
    Bad debt provision                                                            --           18,276
    Write-off of intangible and other assets                                      --           36,125
    Preferred stock conversion penalty                                        99,484          144,000
  Changes in assets and liabilities:
    (Increase) decrease in prepaid expenses and other current assets         (15,372)          (1,983)
    (Increase) decrease in deposits and other assets                        (102,515)           7,872
    (Decrease) increase in accounts payable and accrued expenses             (34,080)         (12,216)
                                                                         -----------      -----------
         Net cash used in operating activities                            (1,435,162)        (711,344)

Investing activities:
  Purchase of property and equipment                                        (554,348)        (252,445)
  Issuance of notes receivable from affiliate                             (1,284,000)        (100,000)
  Issuance of notes receivable from related party                            (32,000)              --
  Purchase of licensing agreements                                                --         (200,000)
                                                                         -----------      -----------
         Net cash used in investing activities                            (1,870,348)        (552,445)

Financing activities:
  Payments on notes payable                                                  (13,000)              --
  Payments on capital lease obligations                                      (23,667)         (45,714)
  Proceeds from common stock issued                                          587,897            8,750
  Proceeds from preferred stock issued                                     4,446,152               --
  Dividends paid in cash on preferred stock                                       --          (12,200)
                                                                         -----------      -----------
         Net cash provided by (used in) financing activities               4,997,381          (49,164)

Net increase(decrease) in cash and cash equivalents                        1,691,872       (1,312,953)
Cash and cash equivalents, beginning of year                                 889,620        2,202,573
                                                                         -----------      -----------

Cash and cash equivalents, end of year                                   $ 2,581,492      $   889,620
                                                                         ===========      ===========
</TABLE>

                 See notes to consolidated financial statements.

                                       F-6
<PAGE>
                          BestNet Communications Corp.
                Consolidated Statements of Cash Flows (Continued)
                  For the years ended August 31, 2000 and 1999


                                                            2000         1999
                                                           -------      -------
Supplemental disclosure of cash flow information:

Cash paid during the year for:
     Interest                                              $65,142      $13,035
     Taxes                                                 $    50      $    50

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


1. ORGANIZATION

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

     Effective September 27, 2000, the Company's  shareholders approved changing
its name to BestNet Communications Corp.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

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

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

CASH AND CASH EQUIVALENTS

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

PROPERTY AND EQUIPMENT

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

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

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


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

LICENSE FEES

     Fees to license  certain  communications  software are recorded at cost and
amortized over the seven year life of the underlying agreement.

INCOME TAXES

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

CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company  maintained  the majority of its cash balances in bank accounts
at  various  financial  institutions.  Deposits  not to exceed  $100,000  at the
financial institutions are insured by the Federal Deposit Insurance Corporation.
As of August  31,2000,  the Company had  approximately  $2,500,000  of uninsured
cash.

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

REVENUE RECOGNITION

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

ADVERTISING COSTS

     Advertising costs are charged to operations when incurred.  During 2000 and
1999, total advertising cost equaled $110,855 and $10,410, respectively.

                                       F-9
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (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.
Stock Options are granted to employees and directors under its Stock Option Plan
with an exercise price equal to fair value at the date of grant and  accordingly
recognizes no compensation expense in connection with such grants.

NET LOSS PER COMMON SHARE

     Diluted  loss per share is equal to basic  loss per  share for all  periods
presented as the effect of all applicable  securities  (preferred  stock,  stock
options and warrants; see Note 5) is anti-dilutive  (decrease the loss per share
amount). References to share and per share amounts have been restated to reflect
a one-for-six stock split effective December 18, 1998 unless otherwise noted.

USE OF ESTIMATES

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

3. PROPERTY AND EQUIPMENT

     Property and equipment is composed of the following at August 31, 2000:

     Furniture and fixtures                                    $   120,177
     Computer equipment                                            719,634
     Software                                                      303,334
     Equipment                                                   1,097,766
                                                               -----------
     Total property and equipment, at cost                       2,240,911
     Less: accumulated depreciation and amortization            (1,032,886)
                                                               -----------
                                                               $ 1,208,025
                                                               ===========

     For the years ended August 31, 2000 and 1999,  depreciation expense related
to  property  and  equipment   equaled  $388,938  and  $113,606,   respectively.
Amortization  expense  related to assets held under capital  leases was $176 and
$23,847 in 2000 and 1999 respectively.

4. COMMITMENTS

LEASES:

     The Company has entered into capital lease  arrangements  for equipment and
operating lease arrangements for office space and a corporate apartment.

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


     Future lease commitments at August 31, 2000 are as follows:

                                                     Capital      Operating
                                                      Leases        Leases
                                                     --------      --------
     2000                                            $  1,629      $146,859
     2001                                                  --        29,494
                                                     --------      --------
                                                        1,629      $176,353
     Less amounts representing interest                    36      ========
                                                     --------
     Present value of net minimum lease payments        1,593
     Less current portion                              (1,593)
                                                     --------
                                                     $     --
                                                     ========

     Total rent expense under operating leases in 2000 and 1999 was $148,125 and
$128,270, respectively.

5. STOCKHOLDERS' EQUITY

PREFERRED STOCK:

     SERIES A  PREFERRED  STOCK:  The  Company  issued  600  shares  of Series A
Convertible  Preferred  Stock in 1998 at  $1,000  per  share.  The 6%  Preferred
stockholders  are  entitled to receive  annual  cumulative  dividends of $60 per
share per annum,  accrued  daily and payable  quarterly  in arrears on March 31,
June 30,  September 30, and December 31 of each year, in preference and priority
to any payment to any other class or series of stock of the Company. In 1999 and
2000, a portion of these dividends were settled by the issuance of common stock.
Series A Preferred stockholders do not have any voting rights.

     The Series A Preferred Stock is convertible at the option of the Company at
any time on at least ten days  advance  notice  once the  shares  issuable  upon
conversion are registered for resale by an effective registration statement. The
conversion price is the lesser of five dollars and twenty-five  cents ($5.25) or
eighty-three percent (83%) of the average closing bid prices of the common stock
as reported by NASDAQ during the five (5) consecutive trading days preceding the
conversion date (but not including such date).

     The Holder of Series A  Preferred  Stock may elect to convert  such  shares
into common stock at the conversion price described above upon written notice to
the Company. Should the Company fail to file an effective registration statement
covering such common shares to allow for conversion as noted above,  the Company
is required to pay monthly liquidated damages to the Preferred  Stockholder.  In
2000 and 1999, the Company expensed  $221,226 and $144,000 and issued 19,869 and
128,933 shares of common stock for liquidating damages, respectively.

     On May 9, 2000, all outstanding  Series A Preferred Stock were converted to
shares of common stock of the Company.

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


     SERIES  B  PREFERRED  STOCK:  On May  1,  2000,  the  Company  completed  a
$5,000,000  private  placement  of Series B  Preferred  Stock and  common  stock
purchase  warrants (the  "Warrant") with an accredited  investor.  The financing
consisted of 1,000 shares of Series B Preferred  Stock and a Warrant to purchase
160,000 shares of common stock.  The Series B Preferred Stock carries a dividend
of 6%. The Preferred Stock is convertible by the holder at anytime following the
issuance  date based on a conversion  price equal to the lesser of eight dollars
and  seven  cents  ($8.07)  or 80% of the  average  closing  bid  prices  of the
Company's  common stock as reported by Bloomberg LP for the three lowest trading
days of the 10  consecutive  trading days  immediately  preceding the conversion
date. However,  all outstanding shares of Preferred Stock shall be automatically
converted into common stock in May 2002 at the  conversion  price set forward in
the subscriptions  agreement.  A beneficial  conversion feature of approximately
$2,500,000 resulted in a charge to retained earnings in 2000.

     The  Series  B  Preferred  stockholders  are  entitled  to  receive  annual
cumulative  dividends of $300 per share per annum,  accrued daily and payable in
preference  and priority to any payment to any other class or series of stock of
the  Corporation,  excluding  the Series A Preferred  Stock.  In fiscal  2000, a
portion of these dividends were settled by the issuance of common shares. Series
B Preferred stockholders do not have any voting rights.

     The Series B  Preferred  Stock is  redeemable  at the option of the Company
prior  to the  conversion  date  and  after  the  date on  which a  registration
statement  under the  Securities  Act of 1933,  as  amended,  has been  declared
effective;  provided the Company has given at least 5 days written notice. Based
on the conversion  formats in the purchase  agreements in the private placement,
if all the  Preferred  Stock and Warrants  were  converted on the day before the
registration  statement  was filed,  the  Company  would be required to issue an
aggregate  of  1,790,673  shares of common  stock.  The  Company is  required to
prepare  and file  within 45 days after the  issuance  date of the  registration
statement  to  be  effective  within  120  days  from  the  issuance  date.  The
Registration  Statement was declared  effective by the  Securities  and Exchange
Commission on August 31, 2000.

     The Company  incurred  issuance costs associated with the completion of the
Series B Preferred Stock private placement for commission, escrow fees and legal
fees totaling $500,000, $30,000, and $23,848, respectively.

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

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

     COMMON STOCK: On October 12, 1998, a note payable for $50,000, plus accrued
interest, to an unrelated entity was converted into 156,250 (pre-split) share of
common stock.  The conversion price was based on the average of the high and low
price on the date of the letter agreement for repayment for this note payable.

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


     During  2000,   the  Company   issued  4,000  shares  of  common  stock  in
satisfaction of services valued at $7,500.  The value of the service was charged
to expense during the period incurred.

     The following summarizes warrant activity in 2000 and 1999:

                                               Number       Exercise Price
                                             ----------     ---------------
     Outstanding, September 1, 1998             382,500     $ 2.64 - $10.50
     Expired                                    (34,167)    $ 2.64 - $10.50
                                             ----------     ---------------
     Outstanding, September 1, 1999             348,333     $ 2.76 - $ 9.00
     Expired                                   (344,999)    $ 2.76 - $ 9.00
     Issued                                   5,540,124     $  .01 - $10.00
                                             ----------     ---------------
     Outstanding, August 31, 2000             5,543,458     $  .01 - $10.00
                                             ==========     ===============

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

     Effective  May 9, 2000,  Company's  Board of  Directors  approved  the 2000
Incentive  Stock Plan subject to shareholder  approval.  The plan authorized the
Company to issue up to 5,000,000 shares of common stock.  Awards of shares under
the plan may be issued as incentive stock option, non-statutory stock options or
restricted  stock.  Options  under the plan may not be  granted at less than the
fair market of the common stock on the date of grant. The Company's shareholders
approved the 2000 Incentive plan on September 27, 2000, effective date as of May
9, 2000.

     The fair value of 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 5.60%, dividend yield of 0%, volatility
factor of the expected market price of the Company's  common stock of 2.682, 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 that have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.   Because  the   Company's   stock   options  have   characteristics
significantly  different from those traded  options,  and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

     SFAS No. 123  requires  the  Company to present  pro forma  disclosure  for
options  granted  subsequent to 1995.  These  disclosures  are not indicative of
future  amounts,  as options  granted  prior to 1995 have not been  included  as
provided by SFAS No. 123. For purposes of pro forma  disclosure,  the  estimated
fair value of stock options was amortized to expense over the vesting period.

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

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

<TABLE>
<CAPTION>
                                                                       2000               1999
                                                                    -----------        -----------
<S>                                                                 <C>                <C>
     Net loss available to common stockholders, as reported         $(5,537,861)       $(1,086,895)
     Pro forma compensation expense for stock options                (1,065,708)          (249,557)
                                                                    -----------        -----------
     Pro forma net loss available to common stockholders             (6,603,569)        (1,336,452)
                                                                    -----------        -----------
     Pro forma loss per share available to common stockholders      $     (2.05)       $      (.46)
                                                                    ===========        ===========
</TABLE>

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

                                     Number of                       Weighted
                                      Options      Option Price   Exercise Price
                                      Granted        Per Share      Per Share
                                    -----------    -------------     -------
     Outstanding, September 1, 1998     286,667    $ 2.25 - 6.00     $  4.17
       Granted                        1,896,667      1.00 - 3.00        1.06
       Exercised                         (5,833)            1.50        1.50
       Canceled                        (133,333)     1.00 - 3.96        2.14
                                    -----------    -------------     -------
     Outstanding, August 31, 1999     2,044,168    $ 1.00 - 6.00        1.43
       Granted                          313,664      2.94 - 8.00        5.14
       Exercised                       (179,665)     1.00 - 6.00        2.45
       Canceled                        (237,833)     1.00 - 4.56        2.39
                                    -----------    -------------     -------
     Outstanding, August 31, 2000     1,940,334    $ 1.00 - 8.00     $  1.38
                                    ===========    =============     =======

     The remaining  contractual  life of options  outstanding at August 31, 2000
was 8.6 years.  Options for the  purchase of 1,801,667  and 266,667  shares were
immediately  exercisable  at August  31,  2000 and 1999 with a  weighted-average
price of $1.38 and $3.33 per share.

     The weighted  average fair values of stock options  granted during 2000 and
1999 for which the  exercise  price  was equal to the fair  market  value of the
stock were $4.59 and $.96 per share, respectively.

6. INCOME TAXES

     At  August  31,  2000,   the  Company  has  federal  net   operating   loss
carryforwards  totaling  approximately  $13,300,000 and state net operating loss
carryforwards of approximately  $8,200,000.  The federal and state net operating
loss  carryforwards  expire in various  amounts  beginning  in 2011 for  federal
purposes and 2000 for state  purposes.  Certain of the  Company's  net operating
loss  carryforwards  may  be  subject  to  annual  restrictions  limiting  their
utilization in accordance with Internal  Revenue Code Section 382, which include
limitations based on changes in control. In addition,  approximately  $3,200,000
of net operating loss carryforwards are further limited to activities in a trade
or business in which the Company is not presently  involved.  Additionally,  the
Company has capital loss  carryforwards  of  approximately  $216,000  which will
expire in 2004 unless offset by capital gains.  No tax benefit has been recorded
in the financial  statements since realization of these loss  carryforwards does
not appear likely.

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


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

                                               2000            1999
                                            -----------     -----------
     Current                                $        --     $        --

     Deferred:
       Federal                               (1,285,000)       (359,000)
       State                                   (140,000)        (55,000)
                                            -----------     -----------
                                             (1,425,000)       (414,000)
     Valuation allowance                      1,425,000         414,000
                                            -----------     -----------
                                            $        --     $        --
                                            ===========     ===========

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

                                               2000            1999
                                            -----------     -----------
     Statutory tax rate                            34.0%           34.0%
     State income taxes                             5.3%            5.3%
     Change in valuation allowance                (39.3)%         (39.3)%
                                            -----------     -----------
     Effective tax rate                             0.0%            0.0%
                                            ===========     ===========

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

                                               2000            1999
                                            -----------     -----------
     Deferred tax asset:
     Amortization of Intangibles            $   267,000     $    33,000
     Net Capital Loss                            85,000          85,000
     Other                                        2,000              --
     Net operating loss carryforward          4,945,000       3,756,000
                                            -----------     -----------
                                              5,299,000       3,874,000
     Valuation allowance                     (5,299,000)     (3,874,000)
                                            -----------     -----------
                                            $        --     $        --
                                            ===========     ===========

     Income taxes of $50 were paid in both 2000 and 1999, respectively.

     Statement of Financial  Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES,  requires a valuation  allowance  to reduce the  deferred  tax assets if,
based on the weight of the evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.  After consideration of all the
evidence,  both  positive  and  negative,   management  has  determined  that  a
$5,299,000  valuation  allowance  at August 31, 2000 is  necessary to reduce the
deferred  tax assets to the amount that will more  likely than not be  realized.
The change in the valuation allowance for the current year is $1,425,000.

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


7. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CONCENTRATIONS:

TRANSACTIONS WITH SOFTALK:

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

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

     AMENDMENT NO. 1 TO RESTATED  LICENSE  AGREEMENT:  On October 25, 1999,  the
Company  and Softalk  amended  their  restated  license  agreement  to grant the
Company  and its  subsidiaries  a  worldwide  exclusive  license to  distribute,
market,  service,  sell  and  sublicense  Softalk's  services  and  products  to
commercial  accounts.  This  agreement  also  grants  the  Company  a  worldwide
nonexclusive  license  to  distribute,  market,  service,  sell  and  sublicense
Softalk's services and products to individual customer accounts. In exchange for
the license  amendments,  the Company  issued to Softalk  five-year  warrants to
purchase up to 5,246,753  shares of the  Company's  common  stock;  3,246,753 of
which have an  exercise  price of $3.25 per share,  1,000,000  have an  exercise
price of $5.00 per share, and the remaining  1,000,000 have an exercise price of
$10.00  per  share.  In  2000,  the  fair  value  of the  warrants  issued  were
capitalized to the license agreement equaling $154,000.

     For the years ended August 31, 2000 and 1999,  amortization  expense to the
license agreement was $46,901 and $9,524, respectively.

     Under the license  agreement,  Softalk has the right to designate up to two
directors to the Board of Directors of the Company.  At August 31, 2000, Softalk
has  designated  two  individuals to serve on the Company's five person Board of
Directors.  Ms. Atan resigned as a Director of the Company  effective  September
27,  2000.  Softalk  also has been  granted the Company the right to appoint one
director  to the  three  person  Board of  Directors  of  Softalk.  BestNet  has
appointed  Gerald I. Quinn,  BestNet's  Chief  Executive  Officer,  to Softalk's
board.

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

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


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

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

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

     LOAN FACILITY.  On August 6, 1999, the Company entered into a loan facility
agreement  with Softalk,  Inc.  Under the facility,  the Company  agreed to loan
Softalk up to $2 million at an interest  rate equal to prime plus 1%.  Under the
terms of this loan,  Softalk may pay back the loan principal plus interest on or
before August 6, 2000, or convert any amounts outstanding, plus interest, on the
loan into  shares of Softalk  common  stock in full  satisfaction  of money owed
under the loan. The number of shares of Softalk common stock which may be issued
to the  Company  for  repayment  of the full $2 million  would equal ten percent
(10%) of the value of Softalk  at the time of  repayment.  In the event  Softalk
does not require the full $2 million loan from the Company, any amounts advanced
to Softalk may be converted to Softalk shares on a pro rata basis.  As of August
31, 2000, the outstanding  balance of the loan was  $1,384,000.  On September 8,
2000 the Company's Board of Directors  approved  amending the loan to extend the
term of the loan for an additional year.

     As of August 31, 2000,  total  amounts due to Softalk  included in accounts
payable totaled $32,929.

NOTE RECEIVABLE RELATED PARTY:

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

                                      F-17
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (Continued)


CONSULTING AGREEMENT WITH RELATED PARTY:

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

8. LOSS ON ASSET IMPAIRMENT

     The Company  determined  in the fourth  quarter of fiscal 1999 that certain
fixed and intangible assets no longer were of value to the Company. Accordingly,
such assets and related  accumulated  depreciation  and  amortization  (net book
value of $36,125) were written off.

9. STATEMENTS OF CASH FLOW

     During the year ended  August 31,  2000 and 1999,  the  Company  recognized
investing  and  financing  activities  that  affected  assets and  stockholders'
equity, but did not result in cash receipts or payments.

     For the year ended  August  31,  2000,  these  non-cash  activities  are as
follows:

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

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

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

     The Company,  through its subsidiary  Interpretel  (Canada) Inc., purchased
all existing  products and accounts of Softalk in exchange for 4,329,004  shares
of Class A non-voting preferred stock of Interpretel (Canada). The shares issued
under the agreement are  exchangeable  on a one-for-one  basis for shares of the
Company's  common stock at any time by the holder  thereof.  The issuance of the
shares of  Interpretel  (Canada)  was  valued at  $10,000,000,  the value of the
Company's  common  shares  into which the  Interpretel  (Canada),  shares can be
converted.  At August 31, 2000, the total consideration given under the purchase
agreement  was  capitalized  to the license  agreement  and equipment in amounts
equaling $9,320,768 and $679,232, respectively.

                                      F-18
<PAGE>
                          BestNet Communications Corp.
             Notes to Consolidated Financial Statements (continued)


     For the year ended  August  31,  1999,  these  non-cash  activities  are as
follows:

     During  1999, a note payable for  $50,000,  plus  accrued  interest,  to an
unrelated entity was converted into 156,250  (pre-split) shares of Common Stock.
The  conversion  price was based on the average of the high and low price on the
date of the letter of agreement for repayment for this note payable.

     The Company issued 27,798 and 128,993 shares of common stock for payment of
the Series A Preferred  Stock dividend for $36,500 and conversion  penalties for
$144,000, respectively.

10. SUBSEQUENT EVENTS

     On September 8, 2000, the Board of Directors  approved the Company's 401(k)
defined contribution plan for its employees.

     On September 27, 2000, the Company's  shareholders approved an amendment to
its  Article  of   Incorporation   to  change  the  Company's  name  to  BestNet
Communications Corp.

     Effective November 10, 2000, Softalk,  Inc. converted 4,329,004 Preferred A
shares in Interpretel  (Canada) for shares of the Company's  common stock.  This
transaction  resulted in Softalk  acquiring  approximately  53% of the Company's
outstanding capital stock.

     Subsequent to August 31, 2000,  the Company and Softalk,  Inc.  amended the
loan facility to secure the amounts due to the Company by the  Company's  common
stock held by Softalk, Inc.

                                      F-19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
        DISCLOSURES.

     On September  27, 2000,  the Company  filed a Form 8-K  reporting  that the
Company,  with the approval of the Company's  board of directors,  had dismissed
Ernst & Young LLP ("E&Y") as its independent accountants.

     On October 13, 2000 the Company filed a Form 8-K reporting that the Company
engaged  Semple & Cooper,  LLP as its  independent  auditors for the fiscal year
ending August 31, 2000.

                                    PART III

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

DIRECTORS AND OFFICERS

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

     NAME                    AGE             POSITION HELD WITH COMPANY
     ----                    ---             --------------------------
Gerald I. Quinn               57     President, Chief Executive Officer and a
                                     member of the Company's Board of Directors
Alexander C. Lang             47     Director
Kelvin C. Wilbore             46     Vice President and Director
Kevin England                 48     Director

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

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

                                       23
<PAGE>
     From 1988 to 1993,  Mr. Lang  provided  consulting  services to the telecom
industry.  He launched a long distance  reselling  company,  participated in the
development  of the Novell  certification  Program,  and strategic  partnerships
program for voice recognition.  From 1985 to 1988, he worked for Rolm/IBM in the
development  of  telecommunication  systems  which  included  a  posting  at the
strategic  presentation  center in Santa Clara,  CA. From 1981 to 1985, he was a
marketing manager with Rockwell International  Switching Division.  From 1978 to
1981,  Mr. Lang worked for Bell Canada in many different  technical  capacities.
Mr. Lang received his BA in Economics in 1977.

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

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

ITEM 10. EXECUTIVE COMPENSATION

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

                                       24
<PAGE>
                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                     Annual Compensation                Long-Term Compensation Awards
                             -----------------------------------    -------------------------------------
   Name and                                                        Restricted   Securities
  Principal         Fiscal                          Other Annual     Stock      Underlying    All Other
   Position          Year    Salary($)    Bonus     Compensation    Awards($)   Awards ($)   Awards($)(#)
   --------          ----    ---------    ------    ------------    ---------   ----------   ------------
<S>                  <C>      <C>         <C>          <C>           <C>          <C>           <C>
Gerald I. Quinn      2000     $85,000     $  -0-       $  -0-        $  -0-           -0-        -0-
President/CEO        1999     $85,000     $  -0-       $  -0-        $  -0-       500,000        -0-
                     1998     $85,000(1)  $  -0-       $  -0-        $  -0-           -0-        -0-
</TABLE>

(1)  Includes the fair market value of 3,316 shares of Common  Stock,  for which
     Mr. Quinn elected to receive deferred shares pursuant to the Company's 1997
     Stock  Incentive  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 respective deferral periods equaled $8,734.

     On July 19, 1999,  the Named  Executive  Officer was granted  500,000 stock
options at a per share  exercise  price of $1.00.  All of these shares vested on
July 19, 2000. This grant represented 26.4% of all grants made in 1999.

     The  following  table  sets  forth  certain   information   concerning  the
aggregated value of the unexercised options of the Named Executive Officer as of
August 31, 2000.

                 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
                     Shares                       at Fiscal Year End(#)          Fiscal Year End($)
                   Acquired On     Value       ---------------------------   ---------------------------
      Name         Exercise(#)   Realized($)   Exercisable   Unexercisable   Exercisable   Unexercisable
      ----         -----------   -----------   -----------   -------------   -----------   -------------
<S>                   <C>          <C>          <C>              <C>          <C>             <C>
Gerald I. Quinn        -0-         $  -0-       633,333(1)        -0-           $             $  -0-
</TABLE>

----------
(1)  This total include 133,333 options exercisable at any time prior to January
     2007 at a price of $3.96 per share, and 500,000 options  exercisable at any
     time prior to July 19, 2009 at a price of $1.00 per share.

                                       25
<PAGE>
COMPENSATION PURSUANT TO PLANS

     None.

EMPLOYMENT CONTRACTS

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

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

     In the event of any  Corporate  Transaction  or Change  of  Control  of the
Company  (each as defined in the 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.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section  16(a)  of  the  Exchange  Act  requires  the  Company's  executive
officers,  directors,  and  persons  who  own  more  than  10% of the  Company's
outstanding  Common  Stock to file initial  reports of ownership  and changes in
ownership  with  the  Commission.  Officers,  directors,  and  greater  than 10%
stockholders are required by Commission  regulations to furnish the Company with
copies of all  Section  16(a)  forms they file.  Based  solely  upon a review of
copies of such filings or written  representations  that no forms were  required
that  were  furnished  to the  Company,  the  Company  believes  that all of the
Company's  executive  officers,  directors,  and greater  than 10%  stockholders
complied  during  the  fiscal  year ended  August  31,  2000 with the  reporting
requirements of Section 16(a).

                                       26
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of November 28, 2000, certain information
with regard to the  beneficial  ownership of the  Company's  Common Stock by (i)
each  shareholder  known by the  Company to  beneficially  own 5% or more of the
Company's outstanding Common Stock, (ii) each Director  individually,  (iii) the
Named Executive  Officer and (iv) all Officers and Directors of the Company as a
group:

        NAME AND ADDRESS OF                 AMOUNT AND NATURE OF      PERCENT OF
        BENEFICIAL OWNER(1)                BENEFICIAL OWNER (2)(3)     CLASS (3)
        -------------------                -----------------------    ----------
Gerald I. Quinn                                     722,872              8.16%
Richard P.  Freeman                                 520,426              6.08%
Alexander Christopher Lang (4)                    9,825,757             71.61%
Kelvin C. Wilbore  (5)                               50,000               .60%
All Directors and executive officers
  as a group (3 persons)(6)                      10,598,629             70.60%

----------
*    Represents less than one percent of the outstanding Common Stock.

(1)  Unless  otherwise  noted,  the address of each holder is 5210 East Williams
     Circle, Suite 200, Tucson, Arizona 85711.
(2)  A person is deemed to be the  beneficial  owner of  securities  that can be
     acquired  within 60 days from November 28, 2000 through the exercise of any
     option,  warrant or other right. Shares of Common Stock subject to options,
     warrants or rights which are currently exercisable or exercisable within 60
     days are deemed  outstanding  solely for  computing  the  percentage of the
     person  holding  such  options,  warrants  or  rights,  but are not  deemed
     outstanding for computing the percentage of any other person.
(3)  The amounts and percentages in the table are based upon 8,223,589 shares of
     Common Stock outstanding as of November 28, 2000.
(4)  Includes 4,329,004 shares of common stock and shares underlying warrants to
     purchase  5,246,753  shares of common  stock held by Softalk.  Mr. Lang has
     sole voting and  dispositive  power over such  shares.  Under SEC rules and
     regulations, Mr. Lang is deemed to beneficially own such shares.
(5)  Includes 50,000 shares subject to options granted pursuant to the Company's
     Plan which are currently  exercisable or become  exercisable within 60 days
     after November 28, 2000.
(6)  Includes 50,000 shares subject to options granted pursuant to the Company's
     Plan which are currently  exercisable or become  exercisable within 60 days
     after November 28, 2000.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

                                       27
<PAGE>
     AMENDMENT NO. 1 TO RESTATED  LICENSE  AGREEMENT:  On October 25, 1999,  the
Company  and Softalk  amended  their  restated  license  agreement  to grant the
Company  and its  subsidiaries  a  worldwide  exclusive  license to  distribute,
market,  service,  sell  and  sublicense  Softalk's  services  and  products  to
commercial  accounts.  This  agreement  also  grants  the  Company  a  worldwide
nonexclusive  license  to  distribute,  market,  service,  sell  and  sublicense
Softalk's services and products to individual customer accounts. In exchange for
the license  amendments,  the Company  issued to Softalk  five-year  warrants to
purchase up to 5,246,753  shares of the  Company's  common  stock;  3,246,753 of
which have an  exercise  price of $3.25 per share,  1,000,000  have an  exercise
price of $5.00 per share, and the remaining  1,000,000 have an exercise price of
$10.00  per  share.  In  2000,  the  fair  value  of the  warrants  issued  were
capitalized to the license agreement equaling $154,000.  Mr. Lang, a director of
the Company, is a principal shareholder, officer and director of Softalk.

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

     PURCHASE  AGREEMENT.  On  November  13,  1999,  the  Company,  through  its
subsidiary  Interpretel  (Canada)  Inc.,  purchased  all  existing  products and
accounts  of Softalk in  exchange  for  4,329,004  shares of Class A  non-voting
preferred stock of Interpretel (Canada).  Under this agreement,  Softalk granted
the Company a right of first  refusal with respect to  purchasing  Softalk,  its
intellectual  property,  software and/or patents.  On November 10, 2000, Softalk
excercised its right under the purchase agreement,  resulting in the issuance of
4,329,004  restricted  shares of BestNet  common  stock in  exchange  for a like
number of shares of Class A non-voting preferred stock of Interpretel  (Canada).
As of the date of this  Form  10-KSB,  Softalk  holds  approximately  53% of the
issued and outstanding shares of BestNet common stock.

     PRODUCT  DEVELOPMENT  AGREEMENT.  Effective  June 14, 2000, the Company and
Softalk  entered into a product  development  agreement.  The agreement  engages
Softalk to  customize  the  software it develops  for the  Company,  enhance the
performance and features of the Bestnetcall services and to provide installation
and maintenance of certain  hardware and software.  The term of the agreement is
for a period  of one  year.  Total  consideration  given  for the  agreement  is
$500,000.  In addition,  if the work performed  under the agreement  exceeds the
retainer as calculated at the rate of $70 per person per hour,  the Company will
compensate Softalk at the rate of $85 per person per hour for the work performed
beyond the amount covered by the retainer.  Additional services provided outside
the scope of the agreement  will be  compensated  at the rate of $100 per person
per hour. The Company estimates project costs to approximately  equal $1,260,000
upon completion and delivery of the software.

     LOAN FACILITY. On August 6, 1999, the Company entered into a loan agreement
with Softalk, Inc. Under the facility,  the Company agreed to loan Softalk up to
$2 million at an interest  rate equal to prime plus 1%.  Under the terms of this
loan,  Softalk may pay back the loan principal plus interest on or before August
6, 2000, or convert any amounts  outstanding,  plus  interest,  on the loan into
shares of  Softalk  common  stock in full  satisfaction  of money owed under the
loan.  The number of shares of Softalk  common stock  issuable to the Company in
repayment of the full $2 million  would equal ten percent  (10%) of the value of
Softalk at the time of repayment. In the event Softalk does not require the full
$2 million  loan from the  Company,  any  amounts  advanced  to  Softalk  may be
converted to Softalk shares on a pro rata basis. As of August

                                       28
<PAGE>
31, 2000, the outstanding  balance of the loan was  $1,384,000.  On September 8,
2000 the Company's Board of Directors  approved  amending the loan to extend the
term of the loan for an additional year.

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

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

                                     PART IV

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

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

     (a)(2)  Exhibits

     Number                Description of Filing                       Method
     ------                ---------------------                       ------
       10.1                Product Customization Agreement               *
       21                  Subsidiaries of the Registrant                *
       27                  Financial Data Schedule                       *

     ----------
     * Filed herewith

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

     On September  27, 2000,  the Company  filed a Form 8-K  reporting  that the
Company,  with the approval of the Company's  board of directors,  had dismissed
Ernst & Young LLP ("E&Y") as its independent accountants.

     On October 13, 2000 the Company filed a Form 8-K reporting that the Company
engaged  Semple & Cooper,  LLP as its  independent  auditors for the fiscal year
ending August 31, 2000.

                                       29
<PAGE>
                                   SIGNATURES

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

                                         BESTNET COMMUNICATIONS CORP.


Date: December 14, 2000                  By: /s/ Gerald I. Quinn
     ------------------                     ------------------------------------
                                            Name:  Gerald I. Quinn
                                            Title: President & CEO

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


Dated: December 14, 2000                 By: /s/ Gerald I. Quinn
      ------------------                    ------------------------------------
                                            Gerald I. Quinn, President and Chief
                                            Executive Officer, Director
                                            (Principal Executive Officer)


Dated: December 14, 2000                 By: /s/ Alexander C. Lang
      ------------------                    ------------------------------------
                                            Alexander C. Lang, Director


Dated: December 14, 2000                 By: /s/ Kelvin C. Wilbore
      ------------------                    ------------------------------------
                                            Kelvin C. Wilbore, Director


Dated: December 14, 2000                 By: /s/ Kevin England
      ------------------                    ------------------------------------
                                            Kevin England, Director

                                       30