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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, 2003

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


     For the transition period from __________ to __________.

                         Commission File Number: 0-15482

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

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

                          5075 Cascade Road SE, Suite A
                          Grand Rapids, Michigan 49546
                     --------------------------------------
                    (Address of principal executive offices)

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

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

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

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

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

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

     Issuer's revenues for the fiscal year ended August 31, 2003: $1,471,358.

     The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of November 5, 2003 was approximately $10,926,994 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 5, 2003 was
29,532,415.

                       Documents Incorporated By Reference

                                      None


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                                        i
                                TABLE OF CONTENTS

                                     PART I

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

                                     PART II

Item 5        Market for Common Equity and Related Stockholder Matters........11
Item 6        Management's Discussion and Analysis or Plan of Operation.......13
Item 7        Financial Statements and Supplementary Data.....................24
Item 8        Changes In and Disagreements With Accountant on Accounting
                   and Financial Disclosure...................................25
Item 8A       Controls and Procedures.........................................25

                                    PART III

Item 9        Directors and Executive Officers of the Company; Compliance
                   with Section 16(a) of the Exchange Act.....................25
Item 10       Executive Compensation..........................................27
Item 11       Security Ownership of Certain Beneficial Owners and
                   Management.................................................28
Item 12       Certain Relationships and Related Transactions..................30

                                     PART IV

Item 13       Exhibits, Lists and Reports on Form 8-K.........................32
Item 14       Principal Accountant Fees and Services..........................34

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                                     PART I


ITEM 1.  DESCRIPTION OF BUSINESS

     Unless otherwise indicated the industry data contained herein are derived
from publicly available industry trade journals and reports and other publicly
available sources which we have not independently verified but which we believe
to be reliable.

     This annual report on Form 10-KSB contains certain statements which we
believe are forward-looking statements within the meaning of the safe harbor
provisions of section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements appear throughout this report. These statements relate to future
events and the future financial performance of BestNet Communications Corp.
(formerly, Wavetech International, Inc.). In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential," or "continue" or the negative of such terms and other comparable
terminology. These statements are based upon management's beliefs, as well as on
assumptions made by and information currently available to management, and
involve various risks and uncertainties, which are beyond our control. Our
actual results could differ materially from those expressed in any
forward-looking statements made by, or on behalf of us. Factors that could cause
actual results to differ include those factors identified in "Item 6.
Management's Discussion and Analysis or Plan of Operation - Factors That May
Affect Our Future Results. BestNet is not undertaking any obligation to update
any forward-looking statements contained in this report.

     All references to "we," "our," "us," "BestNet" or the "Company" refer to
BestNet Communications Corporation, and its predecessors and subsidiaries.

     For a discussion of certain risks associated with our business, see
"Management's Discussion and Analysis or Plan of Operation" in Item 6 of this
Report, and specifically, "--Additional Factors That May Affect Our Results"
included in Item 6.

     Bestnetcall and ClicktoPhone are registered trademarks of BestNet
Communications Corp. All other trademarks, service marks and trade names
referred to in this report are the property of their respective owners.


COMPANY OVERVIEW

     BestNet is a facilities-based, global communication solutions provider. The
Company's patented, proprietary technology uses widely available Internet and
text messaging network access to control, enable and manage voice communications
over the Public Switched Telecommunication Network (PSTN). BestNet views its
role as a product development, marketing, sales, sub-licensing, customer service
and billing organization for patented, packet-based communication software
applications that control, manage and enable global communication services. We
are presently focusing substantially all of our financial and other resources on
marketing and developing communication applications to individual clients and
selected companies with international locations and/or clients worldwide. As of
the date of this Report, we have approximately 19,500 clients, making calls from
171 countries and geographic regions and calling to 224 countries and geographic
regions.

     We develop, market and sell patented and proprietary communication
applications, technologies and services to corporate and residential clients
worldwide. Bestnetcall, the Company's flagship product, is the industry's first
patented (phone-to-phone) Internet-enabled long distance service, which combines
global Internet access and the PSTN via our website located at
www.Bestnetcall.com. This service was first made available to the public on
April 17, 2000 and is marketed under the brand name "Bestnetcall." In fiscal
year 2003, the Company introduced two additional and distinctive product
offerings in ClicktoPhoneTM and SMS Call (Short Message System).

     Although founded as a Nevada corporation on July 10, 1986, we did not
commence operations until 1995. From 1995 until 1999, we operated under the name
"Wavetech International, Inc." and developed software for customized calling
card services and created an infrastructure to market and distribute our
products and services. During this period, our efforts were primarily focused on
hiring management and other key personnel, raising capital, procuring

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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 and commercializing
our Bestnetcall web-enabled and other communication applications for long
distance and conference calling services. On September 27, 2000, we changed our
name to BestNet Communications Corp.

BESTNET SOLUTIONS

     Users of our services are able to perform the following activities by
accessing our websites at WWW.BESTNETCALL.COM and WWW.CLICKTOPHONE.COM:

          o    Register to use our services

          o    Access and launch communication applications

          o    Access current rate tables

          o    Access a full suite of call management features

          o    Access customer service immediately via the Internet

          o    Maintain call account security

          o    Obtain real time billing detail

     BestNet calling applications do not require the purchase of special
hardware or software by the customer and use existing telephone equipment. Users
only need access to the Internet or text messaging network and an available
phone line (land line or mobile). BestNet applications also offer immediate real
time billing detail to all users and accept various payment methods, including
post-paid credit card payments, invoicing options and prepaid accounts. The
architecture of our services allows for total security regarding both the FROM
and TO legs of each call. The FROM and TO numbers are never displayed, thus it
is impossible to determine from where a call is being placed.

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

     The methodology upon which our Bestnetcall service is based is subject to a
license agreement with Softalk, Inc., an Ontario, Canada-based technology
company. We entered into this licensing arrangement in April 1999 and later
amended and restated that arrangement in October 1999. Under the terms of our
license agreement with Softalk, we were granted exclusive global rights to
distribute, market, service, sell, and sublicense Softalk's services and
products to commercial accounts and on a worldwide non-exclusive basis to
individual consumer accounts. In fiscal 2003, BestNet announced a new chapter in
its history with the completion of development, successful testing and
implementation of its own next generation technology called GlobalPlex.
GlobalPlex technology has been specifically developed and designed by BestNet to
easily interface with current and future commercially standard communication
applications and evolving technology such as Voice over Internet Protocol (VoIP)
and mobile solutions. GlobalPlex was also designed to easily interface with
other networks as well. This allows BestNet greater scalability, customization
and flexibility to serve our current and future customers.

     We own and operate telecommunication equipment and network infrastructure
in Toronto, Ontario and New York, New York including high-capacity switches, web
servers, data base servers, calling servers and security systems. In addition,
we make use of specialized software for data management, billing and customer
service requirements.

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PRODUCT SUITE

     BestNet Communication services include the following suite of communication
applications:

     BestNet webCall - Long Distance Calling

     Clients utilizing our webCall can decrease the cost of their long distance
service while still retaining the toll quality for global communication needs.
BestNet provides the core benefits of lower prices, quality service and on-line
real-time billing. Other significant benefits include point and click FROM and
TO directories, point and click dialing using directories from Microsoft
Outlook, speed dialing, e-mail calling, billing codes, country and city code
look-up, time zone information and dialing examples.

     BestNet conferenceCALL - Conference Calling

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

     BestNet desktopCALL - Desktop Application

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

     BestNet emailCALL - E-mail Application

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

     BestNet satCALL - Satellite Calls

     BestNet has a direct circuit to an international satellite uplink carrier
for launching the Inmarsat satellite leg of calls. This circuit provides our
BestNet service with the capability to complete calls to remote platforms such
as ships, airplanes and oilrigs via our web site at WWW.BESTNETSAT.COM.

     BestNet pdaCALL - Mobile Calling

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

     BestNet SMS CALL - Mobile Calling

     BestNet's SMS Call application allows registered users to launch calls via
text messaging networks worldwide. This application enables users to access
BestNet's feature-rich services anywhere, anyplace, anytime. This application
expands BestNet's potential user base to customers that do not have access to a
computer and Internet connection, but that do have an SMS-capable mobile phone.

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     ClicktoPhone - A New Online Communication Tool

     BestNet created the ClicktoPhone voice application to bridge the virtual
world of the web and electronic documents to the physical world of businesses,
call centers and web marketing campaigns to add a voice telephone call to any
electronic e-mail, logo, ad, picture or banner. ClicktoPhone is unique to
Internet related technologies in that it does not rely on any special software,
hardware, retraining of staff, nor does it force users to talk over a PC.
ClicktoPhone users talk using ordinary telephones. Simply click, call, and
connect.

     This voice enabling technology has adaptable security options authorizing
only welcome calls and permits blocking of unwelcome calls. No caller-ID is
passed and no origination phone numbers are disclosed. The calling network is
fully secure and safe. BestNet is offering ClicktoPhone service at
WWW.CLICKTOPHONE.COM on a pay-for-usage basis, allowing individuals and
companies to add voice applications to web sites, e-mail, interactive marketing,
and banner ads without capital investment.

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


MARKETING STRATEGIES

     We offer our BestNet services through both direct sales and indirect sales
channels. Our target markets include:

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

          o    Marketing and Channel Partners

          o    Reseller, Value Added Reseller's (VAR) and Integrators

          o    Technology and Telecommunication Consultants

          o    Large Corporations

          o    Consumers

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


          o    Central and South America

          o    Caribbean

          o    North America

          o    Asia Pacific

          o    Europe

          o    Middle East

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DIRECT SALES

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

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

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

   o  Direct Mail and E-mail Solicitations - We send solicitation materials to
      pre-qualified potential users of our BestNet services. These materials
      refer or link the potential user to WWW.BESTNETCALL.COM or
      WWW.CLICKTOPHONE.COM to facilitate activation of our BestNet services.
      Recipients are invited to use the service or request more information.
      These direct mail or e-mail solicitations are launched on a continuous
      basis currently by in-house staff. Future direct mail initiatives will be
      launched using a combination of in-house resources and external resources.

   o  Media Advertising and Promotion - We have initiated limited advertising in
      print and electronic media targeted at specific market segments in the
      form of national or international publications. We will consider
      additional initiatives such as advertising in specific trade publications
      and Internet advertising during fiscal 2004 based on an analysis of the
      cost-effectiveness and anticipated results of these activities.

   o  Public Relations Activities - We have a corporate communications and
      public relations strategy in place for developing a comprehensive
      communications program. This communications program includes initiating
      appropriate news releases, feature print articles in industry and trade
      specific publications, local print media and editorial support. Our
      WWW.BESTNETCALL.COM website was redeveloped and includes a frequently
      asked questions section to facilitate direct communication with
      shareholders, customers and the public-at-large. Our WWW.BESTNETCALL.COM
      website is part of our overall public relations strategy.



INDIRECT SALES

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

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

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

   o  Professional Service Firms - Marketing firms, consultants, integrators and
      legal firms are being solicited to use our BestNet services and to provide
      these services to their clients as a means of saving money.

   o  Licensed Services Channel - We seek to offer a sub-license program to
      generate additional revenue and to offer others in our industry the
      features and benefits of our intellectual property.



INDUSTRY BACKGROUND AND MARKET DEMAND

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

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

   o  Telecommunications Industry Association (TIA) forecast that the global
      telecommunications industry would see a 9% increase in compound annual
      growth between 2003 and 2006.

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

   o  According to CIBC World Markets Equity Research, the conferencing industry
      is projected to grow from $3.5 billion in 2001 to nearly $7 billion in
      2006 (five-year Compound Average Growth Rate (CAGR) of 15%). The most
      pronounced growth will likely occur in the unattended audio conferencing,
      more than 20% CAGR and Web Conferencing more than a 40% CAGR. The
      international market is growing faster than the North American market,
      given the immaturity of these conferencing markets.

   o  According to Strategic Analytics, a global research and consulting firm,
      worldwide cellular subscribers are projected to grow at a 13.6% rate, from
      1.1 billion in 2002 to 2 billion subscribers in 2006.

     We believe the above market trends and projections reflect a large and
growing market for potential users of alternative communication services. We
believe these market trends and projections will translate into increased demand
for providers of innovative communication solution services and that we are well
positioned to capture a portion of this market.

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



THE OPPORTUNITY

     We believe our most strategic business opportunity is in servicing the
communication needs of the small to medium size business and mobile markets,
which still rely on traditional carriers for supplying their international long
distance and conferencing services. There exists a notable price disparity
between the cost of long distance originating from the U.S., versus origination
from most international locations. The advantage of BestNet's service is
three-fold. The first advantage is our proprietary applications, which provide
universal access to our network without the requirement for special software or
hardware, and now with SMS Call, there is no need for Internet connectivity. The
second advantage is our patented methodology, which uses a two-leg call
(origination and destination leg), which works with any telephone or legacy
phone system. The third advantage is our international long-distance transport.
Our intelligent network is connected to multiple Tier-1 carriers where routes
are chosen on the basis of price and quality. With our current network
architecture, we can easily route calls over Voice over Internet Protocol (VoIP)
networks, if there is an advantage to do so.

     This hybrid approach to routing calls allows the universal access and cost
advantages associated with VoIP transport, without any of the disadvantages. For
this reason, business and mobile users in over 171 countries and geographic
regions rely on BestNet to provide a simple, viable alternative to their
existing long distance provider. BestNet provides its service without contracts
or hidden charges. Our service easily integrates within any existing legacy or
PBX system.

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     BestNet's approach to the marketplace is based on:

     o    Speed of communication - easy deployment within any environment

     o    Quality of communication - interconnection with Tier-1 carriers
          ensures highest standards

     o    Reliability of communication - carrier-class network with full
          redundancy

     o    Ease of operation - user adoption is simple and straight forward

     o    Interoperability - operation with legacy systems, fixed or mobile
          phones

     o    Capital requirement - investment by users is not required

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



INTERNET AND TELEPHONY

     We believe Voice over Internet Protocol (VoIP) has changed the face of
global telephony, as such technology has provided millions of users worldwide a
viable alternative to expensive long-distance services provided in highly
regulated or closed markets. Use of the Internet to transport voice has many
advantages, including global access and low cost per minute rates. Providers of
VoIP services, more specifically PC-to-phone services (which terminate calls
over the public switched telephone network), have experienced the greatest
adoption by personal home users, versus business users. However, the
disadvantages of PC-to-phone services are notable. VoIP is not available for
cellular users and is difficult to use with legacy PBX systems. Other
disadvantages include the requirement to buy software, configuration of hardware
and reduction in voice quality - notably echoes and voice delay. The new VoIP
technology has greatly improved the quality - however interoperability within
legacy phone systems remains the biggest challenge. For this reason, the
business market has been slower to adopt VoIP on any large scale.

     Despite the challenges, however, the Internet telephony market is expected
to grow substantially over the next five years. Since 2002, there has been a
dramatic uptake in enterprise VoIP, particularly IP-PBX's, IP phones, and IP
Centrex. The trend toward voice/data convergence is slowly building momentum, as
enterprises recognize the long-term benefits of IP and converged communication
platforms.

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



INMARSAT TELEPHONY MARKET

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

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

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FUTURE PRODUCT STRATEGY

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

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

     BestNet intends to further develop its core network to be a universal
interface, where intelligence and functionality can easily be added to the
front-end, without having to modify its core database and call control
functionality. The development of GlobalPlex technology enables BestNet to
expand and embrace new technologies as they become commercially viable.

     In fiscal 2004, we plan to introduce a variety of new services and product
enhancements - all based on the core technology platform of GlobalPlex. These
new services and products include the following:

     o    Conferencing - The conferencing sector represents one of the strongest
          growth segments within the communications arena. Conferencing is in
          the middle of a growth cycle, due to declining costs, the emergence of
          innovative technologies and fundamental shifts in the economy that are
          causing permanent changes in the way business is conducted. According
          to CIBC World Markets Equity Research, it is projected the
          conferencing industry will grow from $3.5 billion in 2001 to nearly $7
          billion in 2006 (five-year CAGR of 15%). The most pronounced growth
          will likely occur in the unattended audio conferencing, more than 20%
          CAGR and web conferencing more than a 40% CAGR. The international
          market is growing faster than the North American market, given the
          immaturity of these conferencing markets. With infrastructure costs
          already in place, growth in conference calling offers BestNet
          substantial opportunity to improve gross margins on added revenue. As
          a result of customer feedback, BestNet intends to enhance the
          functionality of its service. This new functionality will include the
          addition of dial-in capability (800 or toll), call recording, operator
          services and other collaborative applications.

     o    Mobile Access - BestNet's future product development strategy includes
          a website specializing in value-added mobile applications. These
          applications will include PDA Call, Email Call and newly developed SMS
          Call. The SMS market is one the largest, fastest growing and most
          dynamic in the world. This is a break thru from previous business
          models for BestNet, as all other applications require Internet
          connectivity. SMS calling only requires a cell phone with text
          messaging or SMS ability. According to Cellular Online,
          www.cellular.co.za:

               o    23% of worldwide mobile users use SMS once a day

               o    SMS sent in 2002 = 366 Billion + growing!

               o    Total Global Mobile Users = 1.3 Billion

          According to Cellular Online, Wireless devices are the most powerful
          communication devices with respect to immediacy, interactivity and
          mobility and therefore can act as a very powerful marketing and
          application devices. The mobile revolution is changing the way we live
          and work. Mobile phones are already pervasive in all major developed
          economies and in an increasing number of developing ones as well. The
          mobile Internet is a powerful enabling technology that will make
          possible new services and applications.

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     o    IP Telephony - According to The Insight Research Corporation, over the
          next five years, VoIP technologies will garner an increasing share of
          the world's telecommunications services revenue. From a $13 billion in
          2002, VoIP-based services will grow to just under $197 billion by
          2007. This is a large and fast growing market opportunity and will
          require a number of products and applications that are designed for
          specific market segments. We are uniquely positioned to develop IP
          voice applications to take advantage of converged networks. We will
          continue to monitor deregulation and opening of markets worldwide to
          evaluate our positioning in this growth segment. GlobalPlex was
          specifically built to add VoIP applications and services. We believe
          that we will provide proprietary applications and services to launch
          international calling and conference calling over VoIP networks
          without the need for additional hardware, adapters, configuring
          software, and need to broadband access.

NETWORK STRUCTURE

     Our network equipment is currently housed in central office facilities
located in New York and Toronto. Our system capacity can be easily increased as
demand for our services increases. Currently we have substantial excess
capacity. During fiscal 2003, we created and implemented our proprietary
GlobalPlex technology. GlobalPlex, which is the engine of our network and
applications, was developed to be an open platform easily integrating new ways
to access our network. It was also designed to interface with other networks. We
have just begun to realize the benefits of our new GlobalPlex technology.

     In fiscal 2003, we entered into a new contractual agreement with Trivalent,
Inc. to host our web servers. This new agreement allowed us to upgrade our
servers for increased speed and improved reliability. In addition, their cost
effective program allows us to save $110,000 during the life of the contract,
versus our previous supplier. Our configuration has redundant servers that are
monitored on a 24 x 7 basis.

     Our switching matrix is located in our central office facilities and
includes direct connectivity to Tier-1 carriers. We have multiple carrier
connections at each switch location, which provides excellent back-up coverage
and the ability to reroute calls to obtain the highest quality connections
available. Our carrier configuration also allows us to take advantage of the
highest value (highest quality/lowest price) service offered by our carriers to
every country we service. The blackout in the Northeast during fiscal 2003
resulted in us acquiring generator backup power, in addition to previous battery
backup power, in both Toronto and New York.

     Currently all of our voice traffic is carried by Tier-1 carriers via their
preferred traffic routes. We continue to monitor developments of VoIP.
GlobalPlex is fully capable of incorporating this technology into our network.
Our strategy remains to move forward with VoIP once market demand dictates.



SOFTALK LICENSE AGREEMENT

     On October 9, 2003 a settlement between BestNet Communications Corp. and
Softalk, Inc. was reached. This settlement ends both our arbitration proceeding
in Canada and Softalk's counter claim. Although the settlement occurred after
August 31, 2003, and the final execution of all releases were not completed
until December 3, 2003, for reporting purposes, the financial effects have been
reflected in the Company's fiscal 2003 financial statements (See Item 7).
BestNet's license agreement with Softalk remains in effect with BestNet
retaining commercial exclusivity in accordance with the terms of the License
Agreement and subject to the following terms and conditions:

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

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

                                       9

<PAGE>


     o    In the event the other party becomes bankrupt or insolvent, suffers a
          receiver to be appointed, or makes an assignment for the benefit of
          its creditors.

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

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



COMPETITION

     Incumbent telecommunication companies continue to have strategic advantage
by owning the local loop monopoly. Long distance carriers have faltered, as
voice services became a lower margin commodity. As cellular margins shrink and
providers look towards more lucrative Internet based wireless services, the
industry will continue to go through consolidations to larger players. The
breakup of the Bell System had a profound worldwide impact, spurring competition
in long distance and data communications, equipment and wireless services, and
driving lower prices with increased quality and availability. Competition in the
markets we currently compete, and will compete in the future, is intense.
Competitors range from large well established telephone companies to upstart
service providers. We currently do not have a significant market share in any of
our markets. The established telephone companies have long-standing
relationships with their clients, financial, technical and marketing resources
substantially greater than ours and the potential to fund competitive services
with cash flows from a variety of businesses. These established companies also
currently benefit from existing regulations that favor the established telephone
companies.

     Telecommunication services are increasingly mobile, that is, delivered by
the medium of radio waves rather than fixed-line network. Until about 50 years
ago, the majority of the international telephone calls were delivered over
short-wave radio, and people tuned into the radio for the latest news. Looking
ahead to the future, the majority of international calls may be made from, and
delivered to, hand held devices. Those same devices will receive updates from
the Internet, websites and real-time video streams from multiple sources around
the globe. Radio is now being increasingly used to provide access to networks,
while wired networks provide the long distance component.

     Insight Research reveals that VoIP services will grow at a compounded rate
of over 72 percent from 2002 to 2007, making packet voice services one of the
fastest-growing segments in the battered telecommunications segment. VoIP
includes all forms of packet voice including VoIP, voice over frame relay and
voice over ATM.

     Cost savings for both customers and carriers are driving the near-term
growth of the VoIP market. As packet-switched voice displaces the older
circuit-switched voice technology, VoIP carrier revenues will explode, fueled by
lower operational costs to carry a voice call along with new service offerings
such as follow-me, unified messaging and multimedia communications. Phone
companies are accelerating their use of the Internet and other packet networks
to carry voice calls, says a new research study from Insight Research. From a
mere $13 billion in 2002, Voice over Internet Protocol (VoIP)-based services
will grow to nearly $197 billion by 2007, according the study. Last year, 10% of
international calls used VoIP, says research firm Telegeography.com.

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

APPLICABLE REGULATIONS

     Telecommunications services are generally subject to federal, state,
provincial and local regulation. In the United States, the Federal
Communications Commission (FCC) exercises jurisdiction over all facilities and
services of telecommunications common carriers to the extent those facilities
are used to provide, originate, or terminate interstate or international
communications. Internationally and within the United States, we operate under a
Section 214 License issued to us by the FCC. In Canada, based on our point of
presence and service provision, we hold a Class "A" Operating License issued to
us by the Canadian Radio-television and Telecommunications Commission (CRTC).

                                       10

<PAGE>


Currently we believe these licenses are sufficient for the services we provide.
We continue to monitor changes in regulations and plan to fully comply in areas
we operate around the world.


EMPLOYEES

     On November 5, 2003, we employed 7 full-time employees. We believe our
future success will depend on our ability to attract and retain highly skilled
and qualified employees. None of our employees are currently represented by
collective bargaining agreements. We believe we have an excellent team and our
relations with employees are good.

ITEM 2. DESCRIPTION OF PROPERTY

     Our corporate headquarters is located at 5075 Cascade Road SE, Suite A,
Grand Rapids, Michigan 49546, along with our Customer Service Department and
various other administrative functions. The current lease term for our Grand
Rapids space is for thirty-four months beginning December 1, 2002. Monthly lease
costs are $4,500. We also relocated our Toronto operations office to 151 Front
Street West, Toronto, Ontario, Canada, M5J 2N1. Our office is now located in the
same facility as our telecommunications equipment. This change has resulted in
substantial savings in T-1 and other operating costs, while improving efficiency
and response to network issues. This lease expires on January 13, 2004 and
carries a monthly payment of $2,018. Flexibility for further expansion and
extension exists. On February 23, 2003, the Company entered into a 36 month
co-location contract with Trivalent Inc. to provide web server hosting. The
monthly payments on this operating lease are $1,105. The Company also has
co-location contracts to host our communication equipment. These are twelve
month contracts which automatically renew each year. The monthly payment is
$5,838.

ITEM 3.  LEGAL PROCEEDINGS

     Legal proceedings against Softalk, Inc. have ended as a result of a
settlement agreement signed on October 9, 2003 and final execution of all
releases occurred on December 3, 2003. All claims by BestNet, and subsequent
counter claims by Softalk, have been released and ended on a without cost basis.
The financial effects of this settlement are reflected in the Financial
Statements and Supplementary Data (Item 7) included within this Report.

     On September 21, 2001, BestNet filed a complaint against Mr. Joe Vazquez
and Infinity Financial Group related to certain alleged breaches of an
agreement. We filed a motion with the US District Court, for the Southern
District of Florida, to enforce a settlement agreement between Mr. Vazquez and
BestNet. On August 4, 2003, we filed a notice of dismissal ending legal
proceedings to contain our legal costs.


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

     Three items were submitted to a vote of shareholders of BestNet common
stock who were holders of record as of August 11, 2003. These items included:
(1) a vote for up to six directors of the Board of Directors of the Company to
serve for a term of one year; (2) a vote to increase the amount of common stock
authorized from 50,000,000 shares to 100,000,000 shares; (3) ratification of the
Company's independent auditors, Semple & Cooper, LLP. On October 22, 2003, a
reconvened meeting of shareholders, where voting was completed, had the
following results: (1) a change in control of the board was effected by
shareholder vote with four new directors being elected along with two
incumbents; (2) approval of an increase in the authorized shares of the Company
to 100,000,000 common stock shares; (3) ratification of Semple & Cooper, LLP as
the Company's independent auditors.


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's common stock was quoted on the NASDAQ Small Cap Market until
May 4, 1999, and then on the OTC Bulletin Board from June 28, 1999 to the
present. The high and low bid prices of the Company's common stock as reported
from September 1, 2000 through August 31, 2003 by fiscal quarters (i.e., 1st
Quarter = September 1 through November 30) were as follows.

                                       11

<PAGE>


                                                       High       Low
                                                       ----       ---
              FISCAL YEAR ENDED:
              August 31, 2000
              First Quarter                            4.25      1.47
              Second Quarter                          10.25      4.13
              Third Quarter                            9.50      5.00
              Fourth Quarter                           7.25      3.81

              FISCAL YEAR ENDED:
              August 31, 2001
              First Quarter                            6.13       .88
              Second Quarter                           3.38       .56
              Third Quarter                            3.60       .55
              Fourth Quarter                           4.40      2.05


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

              FISCAL YEAR ENDED:
              August 31, 2003
              First Quarter                            1.59       .71
              Second Quarter                            .72       .34
              Third Quarter                             .41       .24
              Fourth Quarter                            .61       .26

     The bid and asked prices of our common stock on November 5, 2003, were $.37
and $.39, respectively.

     As of November 5, 2003, the Company had 161 shareholders of record of its
common stock. As of November 5, 2003, the Company had 1,836 shareholders that
beneficially own the stock in the name of various brokers.

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

     NASDAQ Delisting. Our common stock was delisted from the NASDAQ Small Cap
Market on May 4, 1999, due to our lack of compliance with NASDAQ's $1.00 minimum
bid price requirement. Since June 28, 1999, our common stock has been traded on
the OTC Bulletin Board under the symbol BESC.OB.

     On August 26, 2003, the Company's Units began trading under the symbol
BESCU.PK. Each Unit consists of the following underlying securities: (a) three
shares of the Company's common stock; (b) one share of Series A Convertible
Preferred Stock, par value $.001 per share; and (c) one three-year warrant to
purchase one share of common stock at a per share price of $0.30. Each share of
Series A Convertible Preferred Stock is convertible into two shares of the
Company's common stock in exchange for $0.10 per common share ($.20 for each
Series A Convertible Preferred share converted). The high and low bid prices of
the Company's Units as reported from August 26, 2003 by fiscal quarters (i.e.,
1st Quarter = September 1 through November 30) were as follows.

                                                       High       Low
                                                       ----       ---
              FISCAL YEAR ENDED:
              August 31, 2003
              First Quarter                             N/A       N/A
              Second Quarter                            N/A       N/A
              Third Quarter                             N/A       N/A
              Fourth Quarter                           1.50       .51

                                       12

<PAGE>


     The bid and ask prices of our units on November 5, 2003 were $1.55 and
$1.55, respectively.

     As of November 5, 2003, the Company had 5 shareholders of record of its
Units. As of November 5, 2003, the Company had 96 shareholders that beneficially
own the Units in the name of various brokers.


ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

INTRODUCTION

     We derive our revenue primarily from fees charged for customer usage of our
communication services. Both business and personal accounts grew by 47% over the
previous fiscal year. At 2003 fiscal year end, the Company had a total of
approximately 19,500 accounts, of which 6,200 new active accounts were enrolled
this year, in comparison to 4,500 new active accounts in the previous fiscal
year. Bestnetcall users presently make calls from 171 countries and geographic
regions to 224 countries and geographic regions. Fees for our services include
long distance calling, conference calling, ClicktoPhone, E-mail Call and SMS
Call services, all completed through our network.

CRITICAL ACCOUNTING POLICIES

     "Management's Discussion and Analysis or Plan of Operation" ("MD&A")
discusses our consolidated financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to revenue recognition, valuation allowances for inventory and accounts
receivable, warranty and impairment of long-lived assets. We base our estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances. The result of these estimates
and judgments form the basis for making conclusions about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions; changes in these estimates as a result of future events may have a
material effect on the Company's financial condition. The SEC suggests that all
registrants list their most "critical accounting policies" in Management's
Discussion and Analysis. A critical accounting policy is one which is both
important to the portrayal of the Company's financial condition and results and
requires management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. Management believes the following critical accounting
policies affect its more significant judgments and estimates in the preparation
of its consolidated financial statements.

     These policies include, but are not limited to, revenue recognition and the
carrying value of the Softalk License Agreement, which is dependent upon future
profitable operations.


COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 2003 AND AUGUST 31, 2002

     Revenues
     --------

     Revenues increased by 39% to $1,471,358 in the fiscal year ended August 31,
2003 ("fiscal 2003") from $1,060,582 for the fiscal year ended August 31, 2002
("fiscal 2002"). This increase in revenue occurred despite BestNet losing our
largest customer at the beginning of fiscal 2003. Revenue growth was seen in
both long distance and conference calling services. In addition, we have derived
revenue from the sale of private labeled websites used by channel partners who
are marketing our suite of services globally.

                                       13

<PAGE>


     Cost of Revenues
     ----------------

     Costs of revenues decreased to $1,287,328 in fiscal 2003 from $1,432,196 in
fiscal 2002. These costs consisted of long distance fees from carriers for our
Bestnetcall service along with other variable and fixed costs associated with
maintaining our service network. The decrease in these costs was due principally
to the routing of calls on our network through the highest quality, most cost
effective carriers. In addition, we have implemented measures to reduce merchant
fees by switching our credit card processing company. In September 2002, we took
over network monitoring and maintenance from Softalk, Inc, which resulted in the
biggest single reduction in our cost of revenues. For fiscal 2002, expenses
related to Softalk's network monitoring and maintenance totaled approximately
$600,000.

     General and Administrative Expenses
     -----------------------------------

     General and administrative expenses increased to $1,868,925 in fiscal 2003
from $1,849,483 in fiscal 2002. Payroll and related expenses decreased by
$55,686 to $794,337 in fiscal 2003, compared to $850,023 in fiscal 2002 due
principally to selected reductions in staffing. In addition, Executive Contracts
were recently restructured by the new Board of Directors to further reduce
payroll expense. Rent expense decreased by $36,691 to $122,872 in fiscal 2003,
from $159,563 in fiscal 2002 due to facility consolidation. Internet and website
operating expenses decreased $26,465 to $85,596 in fiscal 2003 from $112,061 in
fiscal 2002 due principally to the signing of a new web hosting contract. Over
the three year life of this contract, we expect to save over $110,000. Investor
relations expenses decreased by $51,716 to $40,322 in fiscal 2003, from $92,038
in fiscal 2002 due principally to a reduction in the contracting of these
services. Legal fees increased to $326,027 in fiscal 2003 from $191,713 in
fiscal 2002 due principally to the arbitration and mediation with Softalk, Inc.
Consulting fees decreased $46,489 to $75,288 in fiscal 2003, from $121,777 in
fiscal 2002 due principally to a reduction in the contracting of these services.
Of the $75,288 in consulting fees, approximately $69,000, were paid to Anthony
Silverman, a principal stockholder (See Note 14 to the Consolidated Financial
Statements included in Item 7 of this filing).

     Depreciation and Amortization Expenses
     --------------------------------------

     Depreciation and amortization expenses decreased to $2,231,383 for fiscal
2003 from $2,277,525 for fiscal 2002. This decrease was due to assets becoming
fully depreciated during fiscal 2003. Included in the depreciation and
amortization expense above is amortization in the amounts of approximately
$1,383,000 for both fiscal 2003 and fiscal 2002 which relates to the
amortization of the license agreement with Softalk. As a result of the
settlement agreement with Softalk, the rights in the license agreement are in
full force and effect.

     Interest Income
     ---------------

     Interest income increased to $4,815 in fiscal 2003 from $3,023 in fiscal
2002. This increase was due principally to higher average cash balances in the
Company's money market account.

     Interest and Finance Charges
     ----------------------------

     Interest and finance charges decreased to $870,684 in fiscal 2003, from
$943,937 in fiscal 2002. Total interest expense paid to note holders in fiscal
2003 amounted to $32,145 as compared to $15,571 paid in fiscal 2002. The
additional interest expense recorded was due to amortization of discounts on
various notes payable from beneficial conversion features inherent to the notes
payable.

     Discontinued Operations
     -----------------------

     In fiscal 2002, BestNet exited the highly competitive travel service
business by shutting down its subsidiary Bestnetravel. Revenues for Bestnetravel
during fiscal 2002 were $36,715. The related cost of revenues was $36,252. The
Company also incurred $5,931 of selling, general and administrative expenses
related to the travel service business and realized a loss of $332 on the final
disposal of the business in fiscal 2002. Management considered this business to
be non-strategic to overall operations of the corporation. There were no
revenues or expenses associated with Bestnetravel during fiscal 2003.

                                       14

<PAGE>


     Preferred Stock Conversion Penalty
     ----------------------------------

     We incurred liquidated damages to the holder of our Series C Convertible
Preferred Stock (the "Series C Preferred Stock") equal to $17,847 during fiscal
2003 and $35,944 during fiscal 2002. On November 8, 2002, we issued common stock
in payment of these penalties.

     Preferred Declared and Deemed Dividends
     ---------------------------------------

     Preferred dividends decreased to $265,006 for fiscal 2003, from $958,723
for fiscal 2002. In fiscal 2003, we recorded a deemed dividend of $265,006
resulting from a beneficial conversion feature inherent to the Series A
Preferred Stock that was included in our Unit offering.

     The decrease of $693,717 was due primarily to the recording of deemed
dividends from beneficial conversions of Series B and Series C Preferred Stock
during fiscal 2002. Dividends accumulated, with respect to the outstanding
shares of the Series B Preferred Stock, at a rate of six percent (6%) per annum,
and were payable in cash or shares of common stock of the Company, at the
Company's option. Dividends for the Series B Preferred Stock were $12,253 for
fiscal 2002. Dividends accumulated, with respect to the outstanding shares of
the Series C Preferred Stock, at a rate of eight percent (8%) per annum, and
were payable in cash or in shares of common stock of the Company, at the
Company's option. Dividends for the Series C Preferred Stock were $14,233 for
fiscal 2002. The Company also recorded a deemed dividend of $665,487 resulting
from a conversion premium on its Series B Preferred Stock and $141,750 related
to warrants issued upon redemption of such Series B Preferred Stock on September
28, 2001. The remaining $125,000 resulted from a beneficial conversion feature
of deemed dividends for the Series C Preferred Stock.

     Treasury Stock
     --------------

     The Company acquired 1,900,000 shares of treasury stock as a result of the
settlement with Softalk (See Note 8 to the Financial Statements included in Item
7). There are no current plans to acquire additional treasury stock. As a result
of our current plans, operating results of the company should not be affected by
additional treasury stock acquisitions.

     Income Taxes
     ------------

     At August 31, 2003, the Company had federal net operating loss
carryforwards totaling approximately $23,200,000 and state net operating loss
carryforwards of approximately $12,800,000. The federal and state net operating
loss carryforwards expire in various amounts beginning in 2003. Additionally,
the Company has capital loss carryforwards of approximately $216,000 that will
expire in 2004 unless offset by capital gains. No tax benefit has been recorded
in the financial statements since realization of these loss carryforwards has
not occurred.

     Pending Accounting Pronouncements
     ---------------------------------

     Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting
for Asset Retirement Obligations, requires recognition of the fair value of
liabilities associated with the retirement of long-lived assets when a legal
obligation to incur such costs arises as a result of the acquisition,
construction, development and/or the normal operation of a long-lived asset.
Upon recognition of the liability, a corresponding asset is recorded at present
value and accreted over the life of the asset and depreciated over the remaining
life of the long-lived asset. SFAS 143 defines a legal obligation as one that a
party is required to settle as a result of an existing or enacted law, statute,
ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppels. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. We adopted this statement effective
September 1, 2002 and it did not have a material effect on the Company's
financial position, results of operation or cash flows.

     In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. We have
adopted this statement effective September 1, 2002, and it did not materially
affect our consolidated financial position or results of operations.

                                       15

<PAGE>


     In April 2002, the FASB issued SFAS No. 145, Rescission of No. 4,
(Reporting Gains and Losses from Extinguishment of Debt), SFAS No. 44
(Accounting for Intangible Assets of Motor Carriers), SFAS No. 64,
(Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements), Amendment
of FASB Statement No. 13 (Accounting for Leases) and Technical Corrections. This
statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modification of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other non-substantive corrections to authoritative
accounting literature. The changes related to debt extinguishment became
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting became effective for transactions occurring after May 15,
2002. We have adopted this statement effective September 1, 2002, and it did not
materially affect our consolidated financial position or cash flow.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS 146 supersedes previous accounting guidance,
principally, Emerging Issues Task Force (EITF) Issue No. 94-3. SFAS 146 requires
that the liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of a company's commitment to an exit
plan. SFAS 146 also establishes that the liability should initially be measured
and recorded at fair value. Accordingly, SFAS 146 may affect the timing of
recognizing future restructuring costs as well as the amount recognized. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. We have adopted this statement effective
January 1, 2003, and it did not materially affect our consolidated financial
position or results of operations.

     In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and no longer requires the
separate recognition and subsequent amortization of goodwill that was originally
required by SFAS No. 72. SFAS No. 147 also amends SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term consumer-relationship intangible assets (such as core deposit
intangibles). Effective October 1, 2002, the Company adopted FAS 147, and the
adoption did not have material effect on our financial statements.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure, which amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirement of SFAS 123 to require more prominent and
more frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. The
Company has adopted SFAS 148 and has accordingly modified its disclosures
related to stock-based compensation.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. In particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in SFAS No. 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an underlying
derivative to conform it to the language used in FASB Interpretation No. 45,
Guarantor Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and (4) amends certain other
existing pronouncements. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003. We have adopted SFAS No. 149
effective July 1, 2003, and it did not materially effect our consolidated
financial position or results of operations.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective at the
beginning of the first interim period beginning after June 15, 2003; including
all financial instruments created or modified after May 31, 2003. SFAS No. 150
currently has no impact on the Company.

                                       16

<PAGE>


     In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting for Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. It also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation also incorporates
without reconsideration the guidance in FASB Interpretation No. 34, which is
being superseded. We have adopted this standard, and it did not materially
affect our consolidated financial position or results of operations.

     In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46"). FIN 46
applies immediately to variable interest entities created after January 31,
2003, and in the first interim period beginning after June 15, 2003 for variable
interest entities created prior to January 31, 2003. The interpretation explains
how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless a
single party holds an interest or combination of interests that effectively
recombines risks that were previously dispersed. We have adopted this standard,
and it did not materially affect our consolidated financial position or results
of operations.



LIQUIDITY AND CAPITAL RESOURCES

     During fiscal 2003, we incurred a net loss of $4,831,031 from continuing
operations compared with a net loss of $5,503,925 from continuing operations in
fiscal 2002. Cash used in operating activities from continuing operations
totaled $1,665,935 in fiscal 2003 and $1,734,190 in fiscal 2002.

     At August 31, 2003, we had cash of $226,559, total liabilities of $908,966
and stockholders' equity of $4,810,184. Our total liabilities at August 31, 2003
included $665,000 owed on outstanding 6% Convertible Promissory Notes, face
value of $665,000. As of November 5, 2003, $220,000 face value plus $2,647 in
accrued interest of the 6% Convertible Promissory Notes, had been converted into
common stock under revised conversion terms at a conversion rate of $.15 per
common share. The remaining balance of these notes, $445,000 face value, have
been extended for a period of one year from their original maturity rate. As
part of this extension, interest will be paid at a rate of 8%. The extended
convertible promissory notes, $445,000 face value, are convertible into common
stock at a revised conversion rate of $.10 per common share.

     Currently we do not generate sufficient cash from operations to fund our
capital requirements. We will need to raise additional funds to repay the
convertible promissory notes should we fail to reach agreement on acceptable
conversion or other terms between the note holders and the Company. We will also
need additional funds to achieve our short-term business objective of break
even. There can be no assurance that such funds will be available or, if
available, will be on terms acceptable to us. We can give no assurances that
either the convertible promissory notes outstanding will be converted or new
terms agreed to, or that additional funding for operations will be obtained.
Based on recent operating results as of August 31, 2003, the Company has cash
available to fund operations through December 2003. On December 10, 2003, the
Company was able to enter into a letter of intent, to be followed by a
definitive Note Purchase Agreement, with terms and conditions being negotiated.
The Note Purchase Agreement will provide up to $250,000 of bridge financing to
the Company. To the extent that actual results or events differ from our
financial projections or business plans, our operations will be adversely
impacted.

     Historically, we have financed our cash requirements principally through
the sale of debt and equity securities, and the exercise of stock options. In
fiscal 2003, the Company raised $1,712,170 from the sale of debt and equity
securities and the exercise of stock options compared with $1,953,114 in fiscal
2002 by completing the following financing transactions.

          o    October 30, 2002 - The Company entered into a Note (the "Notes")
               and Warrant Purchase Agreement with several accredited investors.
               This convertible debt financing, which was completed on October
               30, 2002, yielded $665,000 in gross proceeds to the Company. The
               Notes have a term of 1-year and bear interest at a rate of 6% per

                                       17

<PAGE>


               annum. The principal amount outstanding under each Note, together
               with accrued interest is convertible into common stock of the
               Company at the election of the holder at a conversion price equal
               to one share of common stock for each $1.00 of principal and
               interest converted. Interest is payable quarterly. As of August
               31, 2003, approximately $7,000 of interest was accrued as payable
               to the investors and is included in accounts payable and accrued
               expenses in the Financial Statements in Item 7. In addition, a
               one-year warrant to purchase one additional share of the
               Company's common stock at $1.50 was issued per each $2.00
               invested.

          o    February 25, 2003 - On February 25, 2003, the Company completed a
               financing transaction consisting of the issuance of $150,000 in
               aggregate principal amount of its 10% Senior Secured Convertible
               Promissory Notes Payable due March 27, 2003 (the "Senior Secured
               Notes").

          o    March 30, 2003 - On March 30, 2003, the Company completed the
               private placement of Units pursuant to the terms of a Unit
               Purchase Agreement (the "Units") with accredited investors,
               resulting in gross proceeds to the Company of approximately
               $917,000. In conjunction with this offering, the Company incurred
               approximately $104,000 in costs directly associated with the
               private placement. The Company issued an aggregate of 3,055,399
               Units at a per Unit purchase price of $0.30. Each Unit consists
               of the following underlying securities: (a) three shares of the
               Company's common stock; (b) one share of Series A Convertible
               Preferred Stock, par value $.001 per share; and (c) one
               three-year warrant to purchase one share of common stock at a per
               share price of $0.30. Each share of Series A Convertible
               Preferred Stock is convertible into two shares of the Company's
               common stock in exchange for $0.10 per common share ($.20 for
               each Series A Convertible Preferred share converted). The
               securities underlying the Units are not to be separately tradable
               or transferable apart from the Units until such time as
               determined by the Company's Board of Directors.

     During the fiscal year ended August 31, 2003, cash flow used by continuing
operations was $1,665,935 resulting primarily from maintenance and carrier costs
related to the delivery of BestNet communication solutions, salaries of the
Company's employees and professional service fees.

     Cash provided by financing activities was approximately $1,653,161 for the
fiscal year ended August 31, 2003, primarily due to the following: The Company
raised $871,250 through two private placements of convertible promissory notes.
We raised an additional $812,669 through the sale of the Company's Units. The
remaining amounts were raised through the exercise of stock options, net of
approximately $59,000 of payments on notes payable.

     Cash used in investing activities was, approximately $112,451 for the
fiscal year ended August 31, 2003, primarily due to the purchase of equipment,
assets and the development of applications necessary to improve the BestNet
communication solutions. The Company also cashed in its certificate of deposit
and received $22,773.

     There can be no assurance that we will meet our targeted levels of
operating cash flow or that we will not incur significant unanticipated
liabilities. Similarly, there can be no assurance that we will be able to obtain
additional debt or equity financing on terms satisfactory to us. In addition,
there can be no assurance given that we will reach an acceptable resolution with
our convertible promissory note holders. We do not have access to borrowings
under any credit facilities other than our sale of debt securities from time to
time. We also will require additional financing and any such arrangement may
involve material and substantial dilution to existing stockholders resulting
from, amongst other things, breaking our recently issued Units to allow
conversion of the Series A Preferred Stock into common shares, exercise of the
warrants, the issuance of equity securities and/or the conversion of debt to
equity. In such event, the percentage ownership of our current stockholders will
be materially reduced, and such equity securities may have rights, preferences
or privileges senior to our current common stockholders. We require additional
financing. If we are unable to, or are unsuccessful in obtaining additional
financing, our operations in the short term will be materially affected and may
require that we seek bankruptcy protection. We continue to work towards
obtaining additional financing. The circumstance described above raises
substantial doubt as to the ability of the Company to continue as a going
concern. The Financial Statements included in Item 7 of this filing do not
include any adjustments that may be necessary as a result of this uncertainty.

                                       18

<PAGE>


Code of Ethics
--------------

     The company has adopted and attached in Section 10.14 of this Report its
Code of Ethics consistent with disclosure required by section 406 of the
Sarbanes-Oxley Act of 2002.

Additional Factors That May Affect Our Future Results
-----------------------------------------------------

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

     As of August 31, 2003, BestNet had an accumulated deficit of $28,585,017.
Prior year's financial information has no particular bearing on future years'
results.

     We believe that our future profitability and success will depend in a large
part on our ability to generate both revenue and profit from the sale of
communication solutions to both businesses and individual users. Revenues are
also anticipated from sub-licensing our proprietary technology and continued
development of private labeled websites for channel partners around the world.
Based on recent operating results as of August 31, 2003, the Company has
sufficient working capital to fund operations only through December 2003. The
profitability and success of BestNet will depend on:

          o    our ability to reach acceptable terms with convertible note
               holders;

          o    our ability to obtain further funding to reach breakeven;

          o    our ability to sustain existing accounts and current contribution
               margin;

          o    our ability to grow revenue at current or enhanced contribution
               margin;

          o    our ability to maintain selling, general and administrative costs
               at current levels.

     Accordingly, we expect to continue to expend significant financial and
management resources on the items listed above in the short term. As a result,
we expect to incur additional losses and continued negative cash flow from
operations prior to the achievement of breakeven. Should BestNet fail to achieve
the key result items listed above, it will have a material detrimental effect on
our Company.

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

     We are dependent on components of our license agreement with Softalk, which
gives us a worldwide exclusive license to distribute, market, service, sell and
sublicense communication solutions and software based on the methodology
protected by Softalk, Inc. patents (US 6,188,683 and Canadian 2,198,024) to
commercial accounts. This agreement also grants us a worldwide nonexclusive
license to distribute, market, service, sell and sublicense communication
solutions and software protected by Softalk, Inc. patents to individual
accounts. While our October 9, 2003 agreement solidifies our rights to the
license agreement, any further developments that could result in the termination
thereof, could materially adversely impact our business and future operations.

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

     BestNet has operated at a loss for the last eleven years. The Bestnetcall
service is a unique value-generating product. Based on our marketing efforts to
date it is still too early to determine if the Bestnetcall service will achieve
broad commercial acceptance. The failure to achieve broad market acceptance will
have a material adverse effect on BestNet's business, financial condition and
results of operations. BestNet's risks include the following:

     o    future funding;

     o    continued user acceptance, based on BestNet's marketing and sales
          efforts;

     o    the ability of BestNet to continue to establish relationships with
          strategic partners; and

                                       19

<PAGE>


     o    the maintenance of BestNet's network at a high level of quality to
          support commercial acceptance of our communication solutions.

To address these risks BestNet must, among other things:

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

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

     o    grow usage by our existing customer base;

     o    continue to increase contribution margin;

     o    expand value-added communication services;

     o    successfully respond to competitive developments;

     o    continue to form and maintain relationships with strategic partners;

     o    continue to attract, retain and motivate qualified personnel; and

     o    provide superior customer service.


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


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

     Despite our operating under a section 214 International License issued by
the FCC, and a Class "A" License issued by the CRTC in Canada, the international
regulatory environment remains dynamic. Further taxes and the imposition of such
surcharges or regulations could increase our cost of doing business. We may not
be able to recover these costs from our clients. These surcharges or regulations
could also adversely impact where we do business and thus reduce current and
future revenue. This could materially adversely affect BestNet's business,
financial condition and results of operations.

                                       20

<PAGE>


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

     BestNet is marketing its services to international long distance callers in
over 171 countries and geographic regions around the world. Because it will be
conducting business internationally, BestNet is subject to certain direct or
indirect risks. These risks could include:

     o    unexpected changes in regulatory requirements for communication
          solutions;

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

     o    foreign taxation;

     o    the burdens of complying with a variety of foreign laws, trade
          standards, tariffs and trade barriers; and

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

     All of these could potentially adversely impact BestNet's financial
condition and results of operations.

DIFFICULTIES COULD ARISE IN FINDING QUALIFIED PEOPLE TO MONITOR AND MAINTAIN
BESTNET'S COMMUNICATION NETWORK.

     We employ highly talented and skilled people who operate, maintain and
enhance our network. Our team is very familiar with our technology as well as
other available technology used in the delivery of communication solutions. We
could experience difficulty retaining the resources we have and further
difficulty replacing the skills and talents on our operational team. This could
result in higher operating costs and may have a material adverse effect on the
results of our operations and our financial condition.


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

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

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

     o    potential acquisitions or financing transactions; and

     o    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 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.

                                       21

<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 direct and indirect channels. Such expansion will place
additional burdens upon our management, personnel and financial resources and
may cause us to incur additional losses. We will also face different and
additional competition in international markets. These risks could impair our
ability to expand internationally as well as have a material adverse effect upon
our overall business operations, growth and financial condition. In addition,
international regulations continue to change and could adversely affect business
that we currently have along with business that we will develop in the future.


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

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


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

     Our Company is now authorized to issue up to 100,000,000 million shares of
common stock. The Board of Directors may issue shares of stock for such
consideration, as it deems adequate. Additional shares of common stock may be
issued to raise capital, to purchase property or rights, and upon exercise of
warrants, options, or other derivative instruments. Preferred stock may be
issued that is convertible into shares of common stock at conversion prices that
might not be related to the then current market price. The market price of our
common stock may decrease as more shares of common stock become available for
trading. The equity interest of the shareholders in BestNet also may be reduced
through the issuance of new common stock required to further fund our company.


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

     The Company is authorized to issue up to 100,000,000 shares of common stock
and up to 10,000,000 shares of preferred stock, in one or more series, and to
determine the price, rights, preferences and privileges of the shares of each
such series without any further vote or action by the stockholders. The issuance
of preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring, or preventing a change of control of the Company.


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

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

     o    to grow its communication solutions businesses;

                                       22

<PAGE>


     o    to expand the range of services it offers;

     o    to increase the number of customers and overall revenues;

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

     o    to retain key personnel or otherwise to implement its strategy as well
          as its beliefs regarding consumer acceptance of our services.

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

                                       23

<PAGE>



ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                          BestNet Communications Corp.
                          Audited Financial Statements
                           Year Ended August 31, 2003

                                    Contents

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

     Consolidated Balance Sheet                                         F-2
     Consolidated Statements of Operations                              F-3
     Consolidated Statements of Changes in Stockholders' Equity         F-4
     Consolidated Statements of Cash Flows                              F-6
     Notes to Consolidated Financial Statements                         F-8

                                       24

<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. (the "Company") as of August 31, 2003, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years ended August 31, 2003 and 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
BestNet Communications Corp. as of August 31, 2003, and the consolidated results
of its operations, changes in stockholders' equity, and its cash flows for the
years ended August 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
13 to the consolidated financial statements, the Company has incurred
significant losses from operations, anticipates additional losses in the next
year and has insufficient working capital as of August 31, 2003 to fund the
anticipated losses. These conditions raise substantial doubt as to the ability
of the Company to continue as a going concern. These consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/s/  Semple & Cooper, LLP
-----------------------------
     Semple & Cooper, LLP


November 14, 2003 except for Note 8 and Note 12, which are as of December 10,
2003

Phoenix, AZ

                                      F-1

<PAGE>
<TABLE>
<CAPTION>


                      BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                               CONSOLIDATED BALANCE SHEET
                                     AUGUST 31, 2003



                                         ASSETS

<S>                                                                       <C>
Current assets:
  Cash and cash equivalents                                               $    226,559
  Accounts receivable, net of allowance of $1,386                               74,360
  Prepaid expenses and other current assets                                     49,080
                                                                          ------------

      Total current assets                                                     349,999

Property and equipment, net of accumulated depreciation
  of $3,142,251                                                                909,713
License fee, net of amortization of $5,312,368                               4,362,400
Deposits and other assets                                                       97,038
                                                                          ------------

      Total assets                                                        $  5,719,150
                                                                          ============

                          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Capital lease obligations, current portion                              $      5,614
  Accounts payable and accrued expenses                                        290,535
  Convertible notes payable - net of discounts of $75,248                      589,752
  Deferred revenue                                                              15,734
                                                                          ------------

    Total current liabilities                                                  901,635
                                                                          ------------

Long-term liabilities
   Capital lease obligation, long-term portion                                   7,331
                                                                          ------------

     Total long-term liabilities                                                 7,331
                                                                          ------------

     Total liabilities                                                         908,966
                                                                          ------------

Stockholders' equity:
  Preferred stock, par value $.001 per share;  10,000,000 shares
    authorized, 3,563,593 shares issued and outstanding                          3,563
  Common stock, par value $.001 per share; 50,000,000 shares
    authorized, 29,948,104 shares issued, 28,048,104 shares outstanding         29,948
  Additional paid-in capital                                                34,273,690
  Accumulated deficit                                                      (28,585,017)
                                                                          ------------

                                                                             5,722,184
  Less treasury stock, 1,900,000 common shares, at cost (See Note 8)          (912,000)
                                                                          ------------

      Total stockholders' equity                                             4,810,184
                                                                          ------------

      Total liabilities and stockholders' equity                          $  5,719,150
                                                                          ============


              See accompanying notes to consolidated financial statements.

                                          F-2
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                           BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENTS OF OPERATIONS
                           FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002



                                                                        2003            2002
                                                                    ------------    ------------
<S>                                                                 <C>             <C>
Revenues                                                            $  1,471,358    $  1,060,582

Expenses:
  Cost of revenues (exclusive of depreciation and
    amortization shown separately below)                               1,287,328       1,432,196
                                                                    ------------    ------------

        Gross income (loss)                                              184,030        (371,614)
                                                                    ------------    ------------
  General and administrative expenses                                  1,868,925       1,849,483
  Depreciation and amortization                                        2,231,383       2,277,525
                                                                    ------------    ------------

        Total operating expenses                                       4,100,308       4,127,008
                                                                    ------------    ------------
        Net loss from operations                                      (3,916,278)     (4,498,622)
                                                                    ------------    ------------
Other income (expense):
  Interest income                                                          4,815           3,023
  Interest and finance charges                                          (870,684)       (943,937)
  Foreign asset tax expense                                                 --           (30,050)
  Preferred stock conversion penalty                                     (17,847)        (35,944)
  Gain (loss) on disposal of property and equipment                      (17,290)          2,405
  Loss on arbitration (See Note 12)                                      (12,965)           --
  Other                                                                     (782)           (800)
                                                                    ------------    ------------

        Total other income (expense)                                    (914,753)     (1,005,303)
                                                                    ------------    ------------
        Loss from continuing operations                               (4,831,031)     (5,503,925)
                                                                    ------------    ------------

Discontinued operations:
  Operating loss from discontinued operations                               --            (5,468)
  Loss on disposal of discontinued operations                               --              (332)
                                                                    ------------    ------------
        Loss from discontinued operations                                   --            (5,800)
                                                                    ------------    ------------

        Loss from operations                                          (4,831,031)     (5,509,725)

Preferred stock dividends (See Note 12)                                  265,006         958,723
                                                                    ------------    ------------

Loss available to common shareholders                               $ (5,096,037)   $ (6,468,448)
                                                                    ============    ============

Loss per common share, basic and diluted
       Continuing operations                                        $      (0.22)   $      (0.41)
       Discontinued operations                                      $       --      $      (0.00)
                                                                    ------------    ------------
Net loss attributable to common shareholders                        $      (0.22)   $      (0.41)
                                                                    ============    ============

  Weighted average number of common shares outstanding, basic and
       diluted                                                        23,445,307      15,933,908
                                                                    ============    ============


                   See accompanying notes to consolidated financial statements.
</TABLE>

<PAGE>
<TABLE>
<CAPTION>



                                                BESTNET COMMUNICATIONS CORP.
                                 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                        FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002



                                                        Preferred Stock
                                           Series C                       Series B                      Common Stock
                                    Shares          Amount          Shares          Amount          Shares         Amount
                                 ------------    ------------    ------------    ------------   ------------    ------------
<S>                                 <C>             <C>             <C>             <C>            <C>
Balances, August 31, 2001                --              --               532    $          5      11,772,313   $     11,772
Net loss                                 --              --              --              --              --             --
Conversion of Series B
   Preferred Stock                       --              --              (532)             (5)      2,342,516          2,342
Conversion of notes payable
   into Common Stock                     --              --              --              --              --             --
Issuance of Series C
   Preferred Stock                      6,150               6            --              --              --             --
Conversion of Series C
   Preferred Stock                     (6,150)             (6)           --              --           985,689            986
Preferred stock dividends                --              --              --              --            33,582             33
Conversion penalties - Series
   C Preferred Stock                     --              --              --              --            11,912             12
Common stock issued for
   services                              --              --              --              --            58,614             59
Common Stock purchase
   agreements                            --              --              --              --           519,750            520
Warrants issued                          --              --              --              --              --             --
Warrants exercised                       --              --              --              --           160,000            160
Conversion premium-Series B
   Preferred Stock                       --              --              --              --           585,628            586
Beneficial conversion
feature-
   Series C Preferred Stock              --              --              --              --              --             --
Beneficial conversion
feature-
   Subordinated Convertible
   Promissory Notes                      --              --              --              --              --             --
Beneficial conversion feature-
   Senior Secured Convertible
   Promissory Notes                      --              --              --              --              --             --
Stock options exercised                  --              --              --              --            60,001             60
                                 ------------    ------------    ------------    ------------    ------------   ------------
Balances, August 31, 2002                --      $       --              --      $       --        16,530,005   $     16,530
                                 ============    ============    ============    ============    ============   ============

                                                            F-4
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                 BESTNET COMMUNICATIONS CORP.
                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                         FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002
                                         (CONTINUED)



                                  Additional
                                   Paid-in        Accumulated    Common Stock
                                   Capital          Deficit       Subscribed        Total
                                 ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>
Balances, August 31, 2001        $ 28,109,515    $(17,020,532)   $       --      $ 11,100,760
Net loss                                 --        (5,509,725)           --        (5,509,725)
Conversion of Series B
   Preferred Stock                     (2,337)           --              --              --
Conversion of notes payable
   into Common Stock                     --              --           600,000         600,000
Issuance of Series C
   Preferred Stock                    506,994            --              --           507,000
Conversion of Series C
   Preferred Stock                       (980)           --              --              --
Preferred stock dividends              25,344         (26,486)          1,109            --
Conversion penalties - Series
   C Preferred Stock                    3,737            --            32,195          35,944
Common stock issued for
   services                            99,641            --              --            99,700
Common Stock purchase
   agreements                         225,385            --           250,000         475,905
Warrants issued                       850,014        (141,750)           --           708,264
Warrants exercised                       (160)           --              --              --
Conversion premium-Series B
   Preferred Stock                    664,901        (665,487)           --              --
Beneficial conversion
feature-
   Series C Preferred Stock           125,000        (125,000)           --              --
Beneficial conversion
feature-
   Subordinated Convertible
   Promissory Notes                    42,858            --              --            42,858
Beneficial conversion feature-
   Senior Secured Convertible
   Promissory Notes                   323,360            --              --           323,360
Stock options exercised                68,689            --             1,460          70,209
                                 ------------    ------------    ------------    ------------
Balances, August 31, 2002        $ 31,041,961    $(23,488,980)   $    884,764    $  8,454,275
                                 ============    ============    ============    ============


                 See accompanying notes to consolidated financial statements.

                                          F-4(Con't)
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                             BESTNET COMMUNICATIONS CORP.
                              CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                               FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002 (CONTINUED)



                                                    Preferred Stock
                                        Series C                      Series A                    Common Stock
                                  Shares         Amount         Shares         Amount         Shares         Amount
                               ------------   ------------   ------------   ------------   ------------   ------------
<S>                            <C>            <C>            <C>            <C>            <C>            <C>
Balances, August 31, 2002              --             --             --             --       16,530,005   $     16,530
Net loss                               --             --             --             --             --             --
Conversion of notes payable
   into common stock                   --             --             --             --          750,000            750
Issuance of common stock
   subscribed                          --             --             --             --        1,866,842          1,867
Conversion penalties -
Series
   C Preferred Stock                   --             --             --             --           14,278             14
Warrants issued                        --             --             --             --             --             --
Beneficial conversion feature
   of convertible notes                --             --             --             --             --             --
Common stock issued for
   services                            --             --             --             --           57,500             57
Conversion of bridge notes
   payable into Units                  --             --          500,000            500      1,500,000          1,500
Conversion of accrued
   interest into Units                 --             --            8,194              8         24,582             25
Private placement of Unit
   offering                            --             --        3,055,399          3,055      9,166,197          9,166
Offering costs associated
with
   Unit private placement              --             --             --             --             --             --
Beneficial conversion feature-
   Unit private placement              --             --             --             --             --             --
Treasury stock acquisition -
   (Note 12)                           --             --             --             --             --             --
Stock options exercised                --             --             --             --           38,700             39
                               ------------   ------------   ------------   ------------   ------------   ------------
Balances, August 31, 2003              --     $       --        3,563,593   $      3,563     29,948,104   $     29,948
                               ============   ============   ============   ============   ============   ============


                                                         F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                BESTNET COMMUNICATIONS CORP.
                                 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                  FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002 (CONTINUED)



                                Additional
                                 Paid-in       Accumulated     Common Stock          Treasury Stock
                                 Capital         Deficit        Subscribed        Shares         Amount          Total
                               ------------    ------------    ------------    ------------   ------------    ------------
<S>                           <C>             <C>             <C>              <C>            <C>             <C>
Balances, August 31, 2002      $ 31,041,961    $(23,488,980)   $    884,764            --             --      $  8,454,275
Net loss                               --        (4,831,031)           --              --             --        (4,831,031)
Conversion of notes payable
   into common stock                300,318            --              --              --             --           301,068
Issuance of common stock
   subscribed                       882,897            --          (884,764)           --             --              --
Conversion penalties -
Series
   C Preferred Stock                 17,833            --              --              --             --            17,847
Warrants issued                     219,593            --              --              --             --           219,593
Beneficial conversion feature
   of convertible notes             543,179            --              --              --             --           543,179
Common stock issued for
   services                          23,818            --              --              --             --            23,875
Conversion of bridge notes
   payable into Units               148,000            --              --              --             --           150,000
Conversion of accrued
   interest into Units                2,425            --              --              --             --             2,458
Private placement of Unit
   offering                         904,399            --              --              --             --           916,620
Offering costs associated
with
   Unit private placement          (103,951)           --              --              --             --          (103,951)
Beneficial conversion feature-
   Unit private placement           265,006        (265,006)           --              --             --              --
Treasury stock acquisition -
   (Note 12)                           --              --              --         1,900,000       (912,000)       (912,000)
Stock options exercised              28,212            --              --              --             --            28,251
                               ------------    ------------    ------------    ------------   ------------    ------------
Balances, August 31, 2003      $ 34,273,690    $(28,585,017)   $       --         1,900,000   $   (912,000)   $  4,810,184
                               ============    ============    ============    ============   ============    ============


                                See accompanying notes to consolidated financial statements.

                                                         F-5(Con't)
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                  BESTNET COMMUNICATIONS CORP. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002



                                                                                   2003                 2002
                                                                               -----------          -----------
<S>                                                                           <C>                   <C>
Operating activities:
  Loss from operations                                                         $(4,831,031)         $(5,509,725)
     Add:  loss from discontinued operations                                          --                  5,800
                                                                               -----------          -----------
     Loss from continuing operations                                            (4,831,031)          (5,503,925)

  Adjustments to reconcile net loss to net cash
     used in operating activities:
  Depreciation and amortization                                                  2,231,383            2,277,525
  Loss (gain) on disposal of property and equipment                                 17,290               (2,405)
  Non-cash transactions (See Note 11)                                              842,611            1,111,760
  Changes in assets and liabilities:
     Accounts receivable                                                            (1,516)             (54,471)
     Prepaid expenses and other current assets                                      22,721              (35,138)
     Deposits and other assets                                                     (21,450)             (77,017)
     Accounts payable and accrued expenses                                          71,730              546,534
     Deferred revenue                                                                2,327                2,947
                                                                               -----------          -----------

         Net cash used in operating activities from continuing
            operations                                                          (1,665,935)          (1,734,190)
         Net cash used in operating activities from
            discontinued operations                                                   --                 (5,644)
                                                                               -----------          -----------
         Net cash used in operating activities                                  (1,665,935)          (1,739,834)
                                                                               -----------          -----------

Investing activities:
  Purchase of property and equipment                                              (135,224)            (175,404)
  Proceeds from disposal of property and equipment                                    --                 12,650
  Proceeds from maturity of a certificate of deposit                                22,773                 --
  Repayment of notes receivable from related parties                                  --                 15,440
                                                                               -----------          -----------

         Net cash used in investing activities from continuing operations         (112,451)            (147,314)
         Net cash provided by  investing activities from discontinued
            operations                                                                --                    300
                                                                               -----------          -----------
         Net cash used in investing activities                                    (112,451)            (147,014)
                                                                               -----------          -----------

Financing activities:
  Proceeds from issuance of convertible notes payable                              871,250              900,000
  Repayment of notes payable                                                       (56,250)                --
  Principal payments on capital lease obligations                                   (2,759)                --
  Proceeds from the sale of Units                                                  812,669                 --
  Proceeds from the sale of common stock                                              --                475,905
  Proceeds from the issuance of Series C Preferred Stock                              --                507,000
  Proceeds from the exercise of stock options                                       28,251               70,209
                                                                               -----------          -----------

         Net cash provided by financing activities                               1,653,161            1,953,114
                                                                               -----------          -----------

         Net increase (decrease) in cash and cash equivalents                     (125,225)              66,266

Cash and cash equivalents, beginning of year                                   $   351,784          $   285,518
                                                                               -----------          -----------

Cash and cash equivalents, end of year                                         $   226,559          $   351,784
                                                                               ===========          ===========


                          See accompanying notes to consolidated financial statements.

                                                      F-6
</TABLE>

<PAGE>


Supplemental disclosure of cash flow information:

                                                 2003       2002
                                                 ----       ----
Cash paid during the year for:

Interest                                      $  32,145  $  15,571
Taxes                                         $     524  $     453



          See accompanying notes to consolidated financial statements.

                                      F-7

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

     BestNet Communications Corp., a Nevada corporation, formerly Wavetech
International, Inc., is currently actively pursuing the implementation of its
business strategy to provide value creating communication solutions around the
world. The Company has recorded net operating losses in each of the previous
eleven years.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

     The consolidated financial statements include the accounts of the BestNet
Communications Corp. and it's wholly owned subsidiaries, Interpretel, Inc.,
Interpretel Canada Inc., Telplex International Communications, Inc. and
Bestnetravel, Inc, (collectively the "Company"). All significant intercompany
accounts and transactions have been eliminated. During fiscal 2002 the
operations of Bestnetravel were shut down, as it was un-profitable and a
non-strategic business. Accordingly, the operating results of Bestnetravel are
classified as discontinued operations in the accompanying financial statements.

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid instruments with a maturity of
three (3) months or less when purchased to be cash equivalents.

ACCOUNTS RECEIVABLE

     The Company provides for potentially uncollectible accounts receivable by
use of the allowance method. An allowance is provided based upon a review of the
individual accounts outstanding and the Company's prior history of uncollectible
accounts. Provision for uncollectible accounts receivable amounted to
approximately $1,000 at August 31, 2003. Accounts receivable are unsecured and
do not include any finance charges.

PROPERTY AND EQUIPMENT

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

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

     The costs of maintenance and repairs are charged to expense in the year
incurred. Expenditures that increase the useful lives of assets are capitalized
and depreciated over the remaining useful lives of the assets. 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.

     The Company accounts for its capitalized internal use software in
accordance with Statement of Position ("SOP") 98-1, Accounting for Costs of
Computer Software Developed or Obtained for Internal Use. Accordingly,
capitalized internal use software represents software costs incurred in the
application development stage.

LICENSE FEES

     Fees to license certain communications software are recorded at cost and
amortized over the life of the underlying agreement. The Company evaluates the
continuing carrying value of its licenses at each balance sheet date and records
a write down if the carrying value has become impaired. An impairment is
determined if the anticipated net cash flow attributed to the asset is less than
the carrying value. The asset is then reduced to the net present value of the
anticipated future cash flows related to the underlying license agreement.
Specifically, in fiscal 2003, BestNet contracted with Stout Risius Ross, Inc., a

                                      F-8

<PAGE>
<TABLE>
<CAPTION>


consulting firm in the business of completing SFAS No. 144 impairment testing,
among other services. Stout Risius Ross, Inc. tested the fair value of BestNet's
license agreement with Softalk, Inc. No impairment was found. The lack of
impairment contemplates that BestNet will continue its entitlement to operate
under the terms and conditions set forth in the license agreement (See Note 8).

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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair values for financial instruments are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. The carrying
amounts of accounts receivable, accounts payable, accrued expenses and notes
payable approximate fair value.

CREDIT RISK AND CONCENTRATIONS

     The Company maintains the majority of its cash balances in bank accounts at
a financial institution. Deposits not to exceed $100,000 at the financial
institutions are insured by the Federal Deposit Insurance Corporation. As of
August 31, 2003, the Company has approximately $195,000 of uninsured cash.

     Included in cost of revenues are costs incurred from Tier 1 long distance
carriers. The Company contracts with certain carriers based on price and quality
for the services that they provide. The Company believes these services are
readily available; however, the Company has had concentrations with several
service providers in the past. For the years ended August 31, 2003 and 2002, the
Company used several service providers that accounted for 80.8% and 58.8% of
cost of revenues, respectively.

REVENUE RECOGNITION

     The Company's revenue is derived from customers' use of our communication
solutions on a per minute basis. Revenues related to the minutes used are
recognized as used by customers. The Company also derives revenue from the sale
of private labeled websites to channel partners who sell BestNet's suite of
services. Cost of sales includes expenses directly related to the operation and
maintenance of the Company's service network. Depreciation and amortization
expense are separately stated.

STOCK-BASED COMPENSATION

     At August 31, 2003, the Company had stock-based compensation plans
accounted for under the recognition and measurement principles of Accounting
Principles Board Opinion ("APBO") No. 25 "Accounting for Stock Issued to
Employees," and related interpretations, as more fully described in Note 6. Pro
forma information regarding the impact of stock-based compensation on net income
and earnings per share is required by SFAS No. 123 "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." Such pro forma information, determined
as if the Company had accounted for its employee stock options under the fair
value recognition provisions of SFAS No. 123, is illustrated in the following
table:

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

                                                                                 Year Ended August 31
                                                                                  2003           2002
                                                                               -----------    -----------
              <S>                                                              <C>            <C>
              Net loss available to common stockholders, as reported           $(5,096,037)   $(6,468,448)
              Pro forma compensation expense for stock options                    (491,702)    (1,074,342)
                                                                               -----------    -----------
              Pro forma net loss available to common stockholders              $(5,587,739)   $(7,542,790)
                                                                               ===========    ===========
              Pro forma loss per share available to common stockholders        $      (.24)   $      (.47)
                                                                               ===========    ===========

                                                   F-9
</TABLE>

<PAGE>


     The fair value for these options was estimated as of the date of grant
using a Black-Scholes option-pricing model with the following weighted average
assumptions for all options granted.

                                          Year Ended August 31
                                          --------------------
                                         2003              2002
                                         ----              ----
          Volatility                  89% to 104%       96% to 194%
          Risk free rate                    5.60%             5.60%
          Expected dividends                None              None
          Expected term (in years)    1 to 3 years      1 to 3 years

NET LOSS PER COMMON SHARE

     Diluted loss per common share is equal to basic loss per common share for
all periods presented as the effect of all applicable securities (convertible
preferred stock, convertible notes payable, common stock options and warrants)
is anti-dilutive (decreases the loss per common share amount).

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

                                                           August       August
                                                           ------       ------
                                                          31, 2003     31, 2002
          Loss from continuing operations                $   (0.21)   $   (0.35)
          Preferred stock dividends                          (0.01)       (0.06)
                                                         ---------    ---------
          Loss per common share - continuing operations      (0.22)       (0.41)
          Loss per common share - discontinued operations      --         (0.00)
                                                         ---------    ---------
          Net loss attributable to common shareholders   $   (0.22)   $   (0.41)
                                                         =========    =========

     The following is a summary of dilutive securities and the number of shares
of common stock that the securities are convertible/exercisable into:

                                                               Underlying
                    Description                               Common Shares
                    -----------                               -------------
                   Convertible preferred stock                    7,127,186
                   Options                                        3,808,301
                   Warrants                                       6,426,844
                                                              -------------

                   Total dilutive securities                     17,362,331
                                                              =============

USE OF ESTIMATES

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

     The Company makes significant assumptions concerning its license fees,
amount of the accounts receivable reserve and reserves related to deferred tax
assets. Due to the uncertainties inherent in the estimation process and the
significance of these items, it is at least reasonably possible that the
estimates in connection with these items could be further materially revised
within the next year.

SEGMENT INFORMATION

     SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," defines operating segments as components of a company about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company has identified one continuing operating
segment (communications); accordingly, these financial statements contain the
results of only this segment. As discussed elsewhere in this footnote, the
Company discontinued and disposed of its travel segment in fiscal 2002.

                                      F-10

<PAGE>


RECLASSIFICATIONS

     Certain reclassifications have been made to conform fiscal 2002 information
to the presentation of fiscal 2003 information. The reclassifications had no
effect on net income.

ADVERTISING COSTS

     Advertising costs are expensed as incurred and are included in selling,
general and administrative expenses. Advertising expense totaled approximately
$10,000 and $22,000 for the years ended August 31, 2003 and 2002, respectively.

RECENT AND PENDING ACCOUNTING PRONOUNCEMENTS

     Statement of Financial Accounting Standards ("SFAS") No. 143, Accounting
for Asset Retirement Obligations, requires recognition of the fair value of
liabilities associated with the retirement of long-lived assets when a legal
obligation to incur such costs arises as a result of the acquisition,
construction, development and/or the normal operation of a long-lived asset.
Upon recognition of the liability, a corresponding asset is recorded at present
value and accreted over the life of the asset and depreciated over the remaining
life of the long-lived asset. SFAS 143 defines a legal obligation as one that a
party is required to settle as a result of an existing or enacted law, statute,
ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppels. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. We have adopted this statement effective
September 1, 2002 and it did not have a material effect on the Company's
financial position, results of operation or cash flows.

     In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 requires that long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. We have
adopted this statement effective September 1, 2002, and it did not materially
affect our consolidated financial position or results of operations.

     In April 2002, the FASB issued SFAS No. 145, Rescission of No. 4,
(Reporting Gains and Losses from Extinguishment of Debt), SFAS No. 44
(Accounting for Intangible Assets of Motor Carriers), SFAS No. 64,
(Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements), Amendment
of FASB Statement No. 13 (Accounting for Leases) and Technical Corrections. This
statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modification of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other non-substantive corrections to authoritative
accounting literature. The changes related to debt extinguishment became
effective for fiscal years beginning after May 15, 2002, and the changes related
to lease accounting became effective for transactions occurring after May 15,
2002. We have adopted this statement effective September 1, 2002, and it did not
materially affect our consolidated financial position or cash flow.

      In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses accounting for
restructuring and similar costs. SFAS 146 supersedes previous accounting
guidance, principally, Emerging Issues Task Force (EITF) Issue No. 94-3. SFAS
146 requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a company's commitment
to an exit plan. SFAS 146 also establishes that the liability should initially
be measured and recorded at fair value. Accordingly, SFAS 146 may affect the
timing of recognizing future restructuring costs as well as the amount
recognized. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. We have adopted this
statement effective January 1, 2003, and it did not materially affect our
consolidated financial position or results of operations.

                                      F-11

<PAGE>


     In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which amends SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and no longer requires the
separate recognition and subsequent amortization of goodwill that was originally
required by SFAS No. 72. SFAS No. 147 also amends SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, to include in its scope
long-term consumer-relationship intangible assets (such as core deposit
intangibles). Effective October 1, 2002, the Company adopted FAS 147, and the
adoption did not have material effect on our financial statements.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure, which amends SFAS No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"). SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirement of SFAS 123 to require more prominent and
more frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002. The
Company has adopted SFAS 148 and has accordingly modified its disclosures
related to stock-based compensation.

     In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. In particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in SFAS No. 133, (2) clarifies when a derivative
contains a financing component, (3) amends the definition of an underlying
derivative to conform it to the language used in FASB Interpretation No. 45,
Guarantor Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and (4) amends certain other
existing pronouncements. SFAS No. 149 is generally effective for contracts
entered into or modified after June 30, 2003. We have adopted SFAS No. 149
effective July 1, 2003, and it did not materially effect our consolidated
financial position or results of operations.

     In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS No. 150 is effective at the
beginning of the first interim period beginning after June 15, 2003; including
all financial instruments created or modified after May 31, 2003. SFAS No. 150
currently has no impact on the Company.

     In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting for Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB Statements No.
5, 57, and 107 and rescission of FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. It also requires a guarantor to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation also incorporates
without reconsideration the guidance in FASB Interpretation No. 34, which is
being superseded. We have adopted this standard, and it did not materially
affect our consolidated financial position or results of operations.

      In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research
Bulletins ("ARB") No. 51, Consolidated Financial Statements ("FIN 46"). FIN 46
applies immediately to variable interest entities created after January 31,
2003, and in the first interim period beginning after June 15, 2003 for variable
interest entities created prior to January 31, 2003. The interpretation explains
how to identify variable interest entities and how an enterprise assesses its
interests in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved. Variable interest
entities that effectively disperse risks will not be consolidated unless a
single party holds an interest or combination of interests that effectively
recombines risks that were previously dispersed. We have adopted this standard,
and it did not materially affect our consolidated financial position or results
of operations.

                                      F-12

<PAGE>


3. PROPERTY AND EQUIPMENT

     Property and equipment is composed of the following at August 31, 2003:

              Furniture and fixtures                           $    15,147
              Computer equipment                                   681,125
              Software                                           1,832,122
              Equipment                                          1,523,570
                                                               -----------
              Total property and equipment, at cost              4,051,964
              Less: accumulated depreciation and amortization   (3,142,251)
                                                               -----------
                                                               $   909,713

     For the fiscal years ended August 31, 2003 and 2002, depreciation expense
related to property and equipment are approximately $339,000 and $335,000,
respectively. Included in the above accumulated depreciation and amortization
balance of $3,142,251 is accumulated amortization of approximately $1,460,000
that relates to capitalized software. Amortization expense for capitalized
software is approximately $518,000 and $565,000 for the years ended August 31,
2003 and 2002, respectively.

     The Company is the lessee of equipment under a capital lease agreement
expiring in fiscal 2006 (See Note 4). The assets and liabilities under this
capital lease agreement are recorded at the lower of the present value of the
minimum lease payments or the fair value of the assets. The assets are being
depreciated over their estimated productive lives. As of August 31, 2003, the
cost of equipment under capital lease is approximately $15,700 with accumulated
depreciation of approximately $1,600. These balances are included in the table
above.


4. COMMITMENTS

OPERATING LEASES:

     The Company has entered into non-cancelable operating lease arrangements
for two office locations, web hosting and two co-location facilities.

Future minimum lease commitments as of August 31, 2003 are as follows:

                     Fiscal Year Ending
                     August 31,
                     ----------
                     2004                   $ 141,624
                     2005                      70,131
                     2006                      13,968
                                            ---------
                                            $ 225,723

     Rent expense under operating leases in 2003 and 2002 is approximately
$123,000 and $160,000, respectively.

     The Company leases equipment under a capital lease agreement. The following
is a summary of future minimum lease payments on this capital lease as of August
31, 2003.

         Fiscal Year Ending
         August 31,
         ----------
         2004                                        $   6,854
         2005                                            5,622
         2006                                            2,343
                                                     ---------
                                                        14,819
         Less: Amount representing interest             (1,874)
                                                     ---------
         Amount representing principal                  12,945
         Less: Current portion                           5,614
                                                     ---------
         Long term portion                           $   7,331
                                                     =========

                                      F-13

<PAGE>


5. NOTES PAYABLE

Senior Secured Convertible Notes Payable

     On February 25, 2003, the Company completed a financing transaction
consisting of the issuance of $150,000 in aggregate principal amount of its 10%
Senior Secured Convertible Promissory Notes Payable due March 27, 2003 (the
"Senior Secured Notes"). As required under the terms of the Senior Secured
Notes, the Company issued 50,000 shares of common stock as compensation for the
issuance of the Senior Secured Notes. The Company extended the due date of the
Senior Secured Notes for an additional 30 days to April 26, 2003. In accordance
with the terms of the Senior Secured Note, the Company issued 7,500 shares of
common stock for this extension. The Company recorded financing expense which
represents the fair market value of the common stock issued for the issuance and
extension of the Senior Secured Notes.

     No payment, including any prepayment, may be made on these Senior Secured
Notes unless payments are made pair passe on each of the outstanding Senior
Secured Notes. Each holder of the Senior Secured Notes may elect to convert the
amount outstanding there under, including accrued interest into Units of the
Company's at a conversion price equal to $0.30 per Unit (Refer to Note 6,
Stockholders' Equity, for information related to the Units). The beneficial
conversion feature associated with the Senior Secured Notes resulted in a
discount to the Senior Secured Notes of $150,000, which has been recorded to
additional paid-in-capital at the time these notes were issued and is being
charged to interest expense over the life of the Senior Secured Notes. The
$150,000 principal plus accrued interest of approximately $2,000 was converted
to 508,194 fully paid Units on April 24, 2003.

Convertible Notes Payable

     On September 26, 2002, the Company entered into a Note (the "Notes") and
Warrant Purchase Agreement with several accredited investors. This convertible
debt financing, which was completed on October 30, 2002, yielded $665,000 in
gross proceeds to the Company. The Notes have a term of 1-year and bear interest
at a rate of 6% per annum. The principal amount outstanding under each Note,
together with accrued interest is convertible into common stock of the Company
at the election of the holder at a conversion price equal to one share of common
stock for each $1.00 of principal and interest converted. Interest is payable
quarterly. As of August 31, 2003, approximately $7,000 of interest was accrued
as payable to the investors and is included in accounts payable and accrued
expenses on the accompanying balance sheet. In addition, a one-year warrant to
purchase one additional share of the Company's common stock at $1.50 was issued
per each $2.00 invested.

     The Notes may be prepaid at any time, in whole or in part, without penalty.
On the maturity date, the Company had the option to repay the Notes in cash, or,
with the approval of the holders, by issuing shares of common stock. Each holder
of the Notes may elect to convert the amount outstanding pursuant to the
conversion terms described above. The beneficial conversion feature associated
with the Notes and detachable warrants issued in conjunction with the Notes
resulted in a discount to the notes of $393,179 and $219,593, respectively,
which have been recorded to additional paid-in-capital at the time the Notes
were issued and is being charged to interest expense over the life of the Notes.

     As of August 31, 2003, the principal balance and unamortized discount
related to the above notes was $665,000 and $75,248, respectively. During fiscal
2003, the Company recorded interest expense of $537,524 resulting from the
amortization of the discounts on the Notes.


Senior Convertible Notes Payable

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

     The Senior Notes may be prepaid at any time, in whole or in part, without
penalty. On the maturity date, the Company has the option to repay the Senior
Notes in cash, or, with the approval of the holders, by issuing shares of
BestNet common stock. Each holder of the Senior Notes may elect to convert the
amount outstanding hereunder into shares of common stock at any time during the

                                      F-14

<PAGE>


term of the Senior Note and ending upon the repayment in full of the principal,
together with any accrued but unpaid interest, of the Senior Notes, at a
conversion price equal to $0.40 per share. The beneficial conversion feature
associated with the Senior Notes resulted in an additional discount to these
notes of $323,360, which has been recorded to additional paid-in-capital at the
time the Senior Notes were issued and is being charged to interest and financing
expense over the life of the Senior Notes.

     As of August 31, 2003, we have received conversion requests for the entire
$800,000 principal balance of these notes; accordingly, the Company issued
2,000,000 shares of common stock in full satisfaction of these conversion
requests.


6. STOCKHOLDERS' EQUITY

PREFERRED STOCK:

     The Company is authorized to issue up to 10,000,000 shares of preferred
stock, in one or more series, and to determine the price, rights, preferences
and privileges of the shares of each such series without any further vote or
action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
shares of preferred stock that may be issued in the future.

     During fiscal 2003, the Company continued to incur penalties as a result of
the delay in the registration and issuance of the common shares. The Company
issued an additional 14,278 common shares to the former holders of the Series C
Preferred Stock as a result of penalties incurred in fiscal 2003 and recorded an
expense of $17,847 for the fair value of these shares.

     On January 30, 2002, the Company completed a $115,000 private placement of
Series C Preferred Stock and common stock purchase warrants with an accredited
investor. The private placement yielded net proceeds to the Company of $97,750.
The financing consisted of 1,150 shares of Series C Preferred Stock and a five
(5) year warrant to purchase 5,750 shares of common stock at $1.19 per share.

     During fiscal 2002, the Company received conversion requests for all Series
C Preferred Shares. As of August 31, 2002, the Company had not issued the 99,752
common shares associated with these conversions due to a pending registration
statement at year-end. These common shares were issued during fiscal 2003.

     During fiscal 2003, the Company retired the previously issued Series A, B
and C Preferred Stock Series prior to the issuance of the Series A Preferred
Stock associated with the sale of Units.


UNITS

     On March 30, 2003, the Company completed the private placement of Units
pursuant to the terms of a Unit Purchase Agreement (the "Units") with accredited
investors, resulting in gross proceeds to the Company of approximately $917,000.
In conjunction with this offering, the Company incurred approximately $104,000
in costs directly associated with the private placement. The Company issued an
aggregate of 3,055,399 Units at a per Unit purchase price of $0.30 under this
private placement. Each Unit consists of the following underlying securities:
(a) three shares of the Company's common stock; (b) one share of Series A
Convertible Preferred Stock, par value $.001 per share; and (c) one three-year
warrant to purchase one share of common stock at a per share price of $0.30.
Each share of Series A Convertible Preferred Stock is convertible into two
shares of the Company's common stock in exchange for $0.10 per common share
($.20 for each Series A Convertible Preferred share converted). The securities
underlying the Units are not to be separately tradable or transferable apart
from the Units until such time as determined by the Company's Board of
Directors.

     The Company has accounted for this transaction as though the securities
underlying the Units have been issued. Accordingly, the accompanying financial
statements reflect 9,166,197 shares of common stock, 3,055,399 shares of Series
A Preferred Stock and an increase in additional paid-in capital to reflect the
warrants issued in conjunction with the Unit offering. The Company allocated
approximately $556,000 to the common stock, approximately $265,000 to the Series
A Preferred Stock and approximately $96,000 to the warrants. This allocation is

                                      F-15

<PAGE>


based on the relative fair values of the various securities underlying the
Units. As a result of the beneficial conversion feature associated with the
Series A Preferred Stock, the Company recorded a deemed dividend in the amount
of approximately $265,000, which is reflected in the Statement of Operations as
a preferred stock dividend.

     As is discussed in Note 5, the Company also issued $150,000 in aggregate
principal of Senior Secured Notes that, along with any unpaid accrued interest,
are convertible to Units at a conversion rate of $.30 per Unit. During fiscal
2003, the Senior Secured Notes and unpaid accrued interest of approximately
$2,000 were converted to 508,194 Units. As discussed in the preceding paragraph,
the underlying securities related to the Units are reflected in the financial
statements. Accordingly, the accompanying financial statements reflect 1,524,582
shares of common stock, 508,194 shares of Series A Preferred Stock and an
increase in additional paid-in capital to reflect the warrants issued in
conjunction with the conversion of the Senior Secured Notes into Units. The
Company allocated approximately $92,000 to the common stock, approximately
$44,000 to the Series A Preferred Stock and approximately $16,000 to the
warrants. This allocation is based on the relative fair values of the various
securities underlying the Units.


COMMON STOCK:

     During fiscal 2003, the Company issued 57,500 shares of common stock for
bridge financing. $23,875 was charged to expense during the period incurred.


WARRANTS:

     The following summarizes Warrant activity in fiscal 2003 and 2002:

                                               Number         Exercise Price
                                               ------         --------------
         Outstanding, August 31, 2001         5,790,130       $ .01 - $ 4.00
         Exercised                             (160,000)              $ 0.01
         Issued                               2,280,750       $1.00 - $ 5.00
                                          -------------       --------------
         Outstanding, August 31, 2002         7,910,880       $ .01 - $10.00
                                          =============       ==============
         Expired/Retired                     (5,380,129)      $3.25 - $10.00
         Issued                               3,896,093               $ 1.50
                                          -------------       --------------
         Outstanding, August 31, 2003         6,426,844       $ .01 - $ 3.00
                                          =============       ==============


     The remaining contractual life of warrants outstanding as of August 31,
2003 was 2.43 years. Warrants for the purchase of 6,426,844 and 7,910,880 shares
were immediately exercisable on August 31, 2003 and 2002 with a weighted-average
price of $.85 and $3.83 per share.

     The weighted average fair values of warrants granted during 2003 and 2002
for which the exercise price was equal to the fair market value of the stock
were $.40 and $1.48 per share, respectively.


STOCK INCENTIVE PLANS:

     The Company is authorized to issue up to 4,600,000 shares of common stock
under its 1997 Stock Incentive Plan. Shares may be issued as incentive stock
options, non-statutory stock options, deferred shares or restricted shares.
Options are granted at the fair market value of the common stock on the date of
the grant and have terms of up to ten years.

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

                                      F-16

<PAGE>
<TABLE>
<CAPTION>


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

                                                                              Weighted Average
                                            Number of        Option Price         Exercise
                                         Options Granted      Per Share       Price Per Share
                                         ---------------      ---------       ---------------
          <S>                                 <C>           <C>    <C>             <C>
          Outstanding August 31, 2001          3,540,334     $.65 - 8.00            1.73
          Granted                              1,115,000     $.73 - 1.65            1.06
          Exercised                              (62,001)    $.73 - 1.25            1.13
          Canceled                              (355,332)    $.73 - 4.56            1.66
                                         ---------------                           ----
          Outstanding August 31, 2002          4,238,001     $.65 - 8.00            1.57
          Granted                                184,000     $.53 - 1.33            1.00
          Exercised                              (38,700)        $.73               .73
          Canceled                              (575,000)    $.73 - 4.86            1.84
                                         ---------------                           ----
          Outstanding August 31, 2003          3,808,301     $.53 - 8.00            1.51
                                         ===============     ===========            ====

     We maintain a 2000 Stock Incentive Plan under which we have issued
2,599,615 shares of our common stock to our employees, and currently have
2,400,385 shares of common stock available for future issuance. Under the 2000
Stock Incentive Plan, the sale price of the shares of common stock is equal to
the fair market value of such shares on the date of the option grant. We also
maintain a 1997 Stock Incentive Plan under which we have issued 1,570,001 shares
of our common stock to our employees, and currently have 3,029,999 shares of
common stock available of future issuance. The sale price of the shares of
common stock available under our 1997 Stock Incentive Plan also is equal to the
fair market value of such shares on the date of grant. Both of these plans have
been approved by our shareholders.

     The remaining contractual life of options outstanding as of August 31, 2003
was 7.15 years. Options for the purchase of 2,489,965 and 2,534,666 shares were
immediately exercisable on August 31, 2003 and 2002 with a weighted-average
price of $1.36 and $1.58 per share, respectively.

     The weighted average fair values of stock options granted during 2003 and
2002 for which the exercise price was equal to the fair market value of the
stock were $1.00 and $1.06 per share, respectively.


7. INCOME TAXES

     As of August 31, 2003, the Company has federal net operating loss
carryforwards totaling approximately $23,200,000 and state net operating loss
carryforwards totaling approximately $12,800,000. The federal net operating loss
carryforwards expire in various amounts beginning in 2004 and ending in 2023.
The state net operating loss carryforwards expire in various amounts beginning
in 2004 and ending in 2008. Certain of the Company's net operating loss
carryforwards may be subject to annual restrictions limiting their utilization
in accordance with Internal Revenue Code Section 382, which include limitations
based on changes in control. In addition, approximately $3,200,000 of net
operating loss carryforwards are further limited to activities in a trade or
business in which the Company is not presently involved. Additionally, the
Company has capital loss carryforwards of approximately $216,000 that will
expire in 2004 unless offset by capital gains. No tax benefit has been recorded
in the financial statements since realization of these loss carryforwards has
not occurred.

     The income tax benefit for the years ended August 31, 2003 and 2002 is
comprised of the following amounts:

                                           2003          2002
                                       ------------  -----------
              Current:                 $      --     $      --

              Deferred:
              Federal                   (1,050,000)   (1,555,000)
              State                       (160,000)     (150,000)
                                       -----------   -----------
                                        (1,210,000)   (1,705,000)
              Valuation Allowance        1,210,000     1,705,000
                                       -----------   -----------
                                       $        --   $        --
                                       ===========   ===========

                                      F-17
</TABLE>

<PAGE>



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

                                                   2003       2002
                                                   ----       ----
Statutory tax rate                                 34.0%      34.0%
State income taxes                                  5.3%       5.3%
Change in valuation allowance                     (39.3)%    (39.3)%
                                                  -----      -----
Effective tax rate                                  0.0%       0.0%
                                                    ===        ===

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

                                                   2003          2002
                                               -----------   -----------
         Deferred tax assets (liabilities):
         License fee                           $   886,000   $   655,000
         Property and equipment                    (54,000)     (102,000)
         Net capital loss                           85,000        85,000
         Other                                       6,000        11,000
         Net operating loss carryforward         8,376,000     7,440,000
                                               -----------   -----------
                                                 9,299,000     8,089,000
         Valuation allowance                    (9,299,000)   (8,089,000)
                                               -----------   -----------
                                               $      --     $      --
                                               ===========   ===========

     SFAS 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 $9,299,000 valuation allowance as of August 31,
2003 is necessary to reduce the net deferred tax assets to the amount that will
more likely than not be realized. The change in the valuation allowance for the
current year is $1,210,000.


8. RELATED PARTY TRANSACTIONS, SIGNIFICANT CONCENTRATIONS AND CONTINGENCIES:

CURRENT RELATIONSHIP WITH SOFTALK

     The Company is in the business of providing communications solutions to its
customers using the network infrastructure, proprietary technology and
applications it owns. Softalk, Inc. ("Softalk"), is a privately-owned Ontario,
Canada corporation, who is a significant shareholder of the Company and owns the
patented methodology currently used in some of our solutions. We have an
exclusive license to Softalk's patented methodology for commercial accounts. The
Company's various transactions and agreements with Softalk are discussed in more
detail in the following paragraphs of this footnote. The Company entered into a
settlement agreement with Softalk, Inc. on October 9, 2003 which was
subsequently finalized on December 3, 2003. This settlement agreement dismisses
an on-going arbitration with Softalk, its claims and Softalk's counter claims
based on action taken by the Company dating back to August of 2002.

     The Company incurred expenses of approximately $0 and $600,000 for fiscal
2003 and 2002, respectively, for development, network maintenance and monitoring
work performed by Softalk. These expenses relate to development and maintenance
services provided by Softalk. The maintenance, monitoring, and royalty expenses
are included in cost of revenues, and the rent payments are included in general
and administrative expenses on the accompanying statements of operations. The
Company also capitalized a total of $0 and $163,079 related to software
development performed by Softalk during fiscal 2003 and 2002, respectively.
Under the terms of the Settlement Agreement, royalty payments have been
terminated. BestNet's license agreement with Softalk remains in effect with
BestNet retaining commercial exclusivity in accordance with the terms of the
License Agreement.

TRANSACTIONS WITH SOFTALK

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

                                      F-18

<PAGE>


ORIGINAL AND RESTATED LICENSE AGREEMENT

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

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

AMENDMENT NO. 1 TO RESTATED LICENSE AGREEMENT

     On October 25, 1999, the Company and Softalk further amended their restated
license agreement to grant the Company and its subsidiaries a worldwide
exclusive license to distribute, market, service, sell and sublicense Softalk's
services and products to commercial accounts. This agreement also grants the
Company a worldwide nonexclusive license to distribute, market, service, sell
and sublicense Softalk's services and products to individual customer accounts.
In exchange for the license amendments, the Company issued to Softalk five-year
warrants to purchase up to 5,246,753 shares of the Company's common stock;
3,246,753 of which have an exercise price of $3.25 per share, 1,000,000 have an
exercise price of $5.00 per share, and the remaining 1,000,000 have an exercise
price of $10.00 per share. In 2000, the fair value of the warrants issued was
capitalized to the license agreement equaling $154,000. In October 2002, the
Company filed an S-2 registration statement to register the resale of the shares
underlying these warrants. The terms of the Settlement Agreement with Softalk
include the return or termination of warrants associated with this amendment.

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

     For fiscal 2003 and 2002, amortization expense related to the Original and
Restated License Agreement and Amendment No. 1 to the Restated License Agreement
is approximately $51,000 and $51,000, respectively. It is anticipated that
amortization expense will continue at this rate for approximately the next four
fiscal years.

PURCHASE AGREEMENT

     On November 13, 1999, the Company, through its subsidiary Interpretel
(Canada) Inc., entered into an agreement to purchase certain assets of Softalk
in exchange for 4,329,004 shares of Class A non-voting preferred stock of
Interpretel (Canada). The purchase agreement provided for the acquisition from
Softalk of equipment, software applications, existing Softalk beta accounts,
certain contracts, rights under or pursuant to warranties, representations and
guarantees made by suppliers in connection with the beta accounts. The
equipment, software, and beta accounts are all based on proprietary technology
patented by Softalk and licensed to the Company. Under the terms of the purchase
agreement, Softalk also granted the Company a right of first refusal with
respect to purchasing Softalk, its intellectual property, software and/or
patents.

     Under this Purchase Agreement, the total consideration given under the
purchase agreement was capitalized to the license agreement and equipment in
amounts of approximately $9,321,000 and $679,000, respectively. Amortization
expense relating to the license agreement is approximately $1,332,000 for the
years ended August 31, 2003 and August 31, 2002. It is anticipated that
amortization expense will continue at this rate for approximately the next four
fiscal years.

     On May 1, 2000, as part of the private placement of Series B Convertible
Preferred Stock, Softalk agreed not to sell, offer, transfer or exchange the
Interpretel (Canada) shares until May 1, 2001, unless Softalk is given consent
to do so by the investor involved in the private placement. Such consent was
obtained in connection with Softalk's exchange of Interpretel shares for BestNet
common stock. On December 1, 2000, Softalk assigned the common shares it held as
collateral against an outstanding loan balance owed to BestNet. This assignment
was for a period of one (1) year from November 10, 2000 or until such time as
the asset value of Softalk was determined to be at least $20 Million USD,
whichever occurred first.

                                      F-19

<PAGE>


PRODUCT DEVELOPMENT AGREEMENT

     Effective June 14, 2000, the Company and Softalk entered into a product
development agreement. The agreement engages Softalk to develop the software for
the Company, enhance the performance and features of the Bestnetcall services
and to provide installation and maintenance of certain hardware and software.
Total consideration given for the agreement is $500,000, which was paid in
advance in the form of a retainer. In addition, if the work performed under the
agreement exceeds the retainer as calculated at the rate of $70 per person per
hour, then the Company has agreed to compensate Softalk at the rate of $85 per
person per hour for the work performed beyond the amount covered by the
retainer. Additional services provided outside the scope of the agreement would
be compensated at the rate of $100 per person per hour. We had been carrying
unpaid invoices due Softalk under the terms of this product development
agreement. Their costs have been offset by monies owed to BestNet by Softalk
under the Loan Facility described below per the terms of the Settlement
Agreement.

LOAN FACILITY

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

ARBITRATION SETTLEMENT

     On October 9, 2003, the Company settled all of its disputes with Softalk.
The Settlement Agreement was finalized on December 3, 2003. Terms of the
Settlement Agreement affect balances carried by BestNet in the following manner:

     o    BestNet will release its claim to the Loan Facility plus all unpaid
          accrued interest. As of August 31, 2003, the balance of the Loan
          Facility plus accrued interest was $1,589,768. As of August 31, 2003,
          a total of $211,048 of interest had been accounted for as deferred
          interest income.

     o    Softalk has agreed to release BestNet from claims related to certain
          outstanding invoices. As of August 31, 2003, total accounts payable
          that will be released as a result of the Settlement Agreement is
          $481,465.

     o    Prior to August 31, 2003, BestNet had placed on deposit $27,709 as
          partial payment for royalties then due under the Amended and Restated
          License Agreement. This amount had been classified as deposits and
          other assets; however, as part of the terms of the Settlement
          Agreement, these funds were paid to Softalk, for full and complete
          settlement of all royalties for both now and in the future. In
          addition, BestNet relinquishes its rights to future communication
          software developed by Softalk.

     o    Softalk is to return all previously issued warrants to purchase
          BestNet stock. These warrants are described more fully in other parts
          of this footnote.

     o    Softalk is also to return 1,900,000 shares of BestNet's common stock
          that Softalk had previously acquired through the terms of the Purchase
          Agreement described above in full and final satisfaction of the Loan
          Facility.

                                      F-20

<PAGE>


     As a result of the Settlement Agreement between BestNet and Softalk, the
Company removed certain balances from its consolidated balance sheet and
recognized the return of the 1,900,000 treasury shares. The results of the
Settlement Agreement are reflected in the accompanying Financial Statements as
if the agreement were effective August 31, 2003. The following table summarizes
the assets and liabilities that were removed from the consolidated balance sheet
and the addition of the treasury shares as of August 31, 2003:


                                                               Asset (Liability)
                                                               -----------------
          Note receivable from Softalk                             $  1,589,768
          Deposits related to the arbitration                            27,709
          Accounts payable to Softalk                                  (481,465)
          Deferred interest income                                     (211,048)
                                                                   ------------

          Subtotal of assets and liabilities eliminated as a
               result of the Settlement Agreement                      924,964

          Value of 1,900,00 shares of treasury stock re-acquired
            from Softalk as a result of the Settlement
            Agreement                                                 (912,000)
                                                                  ------------

          Non-cash loss recognized as a result of the Settlement
           Agreement                                              $     12,964
                                                                  ============


CONSULTING ARRANGEMENT WITH A PRINCIPAL SHAREHOLDER

     During fiscal 2003, the Company entered into a consulting agreement with
Anthony Silverman, a principal stockholder of the Company. Under the terms of
the agreement, Mr. Silverman provides financial consulting services to the
Company in the area of raising capital at the rate of $1,000 per day. During
fiscal 2003, the Company paid Mr. Silverman approximately $69,000 for his
services. This amount is included in selling, general and administrative
expenses on the accompanying Consolidated Statements of Operations. Services are
provided on an as needed basis.


9. DISCONTINUED OPERATIONS

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

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

                                                                August 31,
                                                            2003        2002
                                                          --------    --------
          Net sales                                       $   --      $ 36,715
                                                          --------    --------
          Loss from discontinued operations                   --        (5,468)

          Loss on disposal of discontinued operations         --          (332)

                                                          --------    --------
          Loss from discontinued operation                $   --      $ (5,800)
                                                          ========    ========

                                      F-21

<PAGE>
<TABLE>
<CAPTION>



10. RETIREMENT PLAN

     Effective June 1, 2000, the Company adopted a 401(k) retirement plan.
Employees are eligible to participate in the plan after 90 days of service.
Salary deferral may range from 1% to 18%. The Company matches the amounts
deferred by the employees, up to 5% of an employee's annual compensation with
50% of the matched amount vesting after the employees' first year of service and
the remaining 50% of the matched amount vesting after the employees' second year
of service. The Company matched contributions totaling approximately $15,000 and
$12,000 for the years ended August 31, 2003 and 2002, respectively.


11. STATEMENTS OF CASH FLOWS

     During fiscal 2003 and 2002, the Company recognized operating, investing,
and financing activities that affected the balance sheet and the statement of
operations, but did not result in cash receipts or payments.

For fiscal 2003, these non-cash investing and financing activities are
summarized as follows:

                                                                                          Amount
                                                                                          ------
          <S>                                                                          <C>
          During fiscal 2003, the holders of several notes payable issuances
     converted outstanding principal and interest to shares of common stock or
     Units                                                                             $   453,526

          The Company financed the purchase of property and equipment through a
     capital lease.                                                                         15,704

          Total non-cash transactions from investing and financing activities.             469,230
                                                                                       ===========


For fiscal 2003, these non-cash operating and financing activities are as
follows:

          In conjunction with the issuance of $150,000 of aggregate principal of
     Senior Notes, the Company recognized a discount of $150,000 related to a              150,000
     beneficial conversion feature $ inherent to these notes. As of August 31,
     2002, all $150,000 has been recognized as interest expense. See Note 5,
     Notes Payable for further information.

          In conjunction with the issuance of $665,000 of aggregate principal of
     Notes, the Company recognized a discount of $612,772 related to a
     beneficial conversion feature inherent to these notes. As of August 31,
     2002, $537,524 of this discount has been recognized as interest expense.
     See Note 5, Notes Payable for further information.                                    537,524

          The Company recognized $96,875 of non-cash interest expense related to
     the amortization of a beneficial conversion feature associated with Senior
     Notes issued in fiscal 2002.                                                           96,875

          The Company issued 57,500 shares of common stock for services
     performed during fiscal 2003.                                                          23,875

          The Company issued 14,278 common shares to satisfy Preferred Stock
     penalties                                                                              17,847

          The Company recognized a non-cash loss related to the settlement
     reached with Softalk.                                                                  12,964

          The Company recognized $2,458 in interest costs that were satisfied
     through the issuance of common stock.                                                   2,458

          Other non-cash operating activities.                                               1,068
                                                                                       -----------

          Total non-cash transactions from operating and financing activities          $   842,611
                                                                                       ===========

                                               F-22
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


For fiscal 2002, these non-cash investing and financing activities are
summarized as follows:

                                                                                          Amount
                                                                                          ------
          <S>                                                                          <C>
          The Company issued 10,783 shares of common stock in satisfaction of
     its Series B Preferred Stock dividends.                                           $    12,253

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

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

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

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

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


          The Company recorded a dividend to the holders of Series C Preferred
     Stock at the time of issuance, related to the beneficial conversion feature
     inherent to the Series C Preferred Stock.                                             125,000
                                                                                       -----------

          Total non-cash transactions - investing and financing activities               1,082,926
                                                                                       ===========

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

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


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


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


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

                                               F-23
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


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


          Throughout fiscal 2002, the Company issued warrants to various
     consultants and advisors; the aggregate fair value of these warrants is
     $231,624                                                                              231,624


          During fiscal 2002, the Company earned interest income on its
     certificate of deposit that was not received in cash as of August 31, 2002.            (1,491)
                                                                                       -----------

          Total non-cash transactions from operating and financing activities          $ 1,111,760
                                                                                       ===========


12. SUBSEQUENT EVENTS AND NOTE PAYABLE DEFAULT

     Subsequent to August 31, 2003, the 6% Convertible Promissory Notes went
into default. As an incentive to convert, accredited investors were offered a
new conversion proposal. Under the terms of this proposal, the Note would be
convertible into the Company's common stock at a conversion price of $.15 per
share. In addition, the warrants associated with this Note and Warrant Purchase
Agreement would be cancelled. On or before November 5, 2003, four investors had
elected to convert their principal and accrued interest into common stock. The
principal of $220,000 and accrued interest of $2,647 was converted into
1,484,311 shares of common stock. Certificates representing 220,000 free-trading
shares of common stock were issued to these investors. The Company will move to
affect a registration for the remaining 1,264,311 shares within 120 days of the
first conversion request received by the Company. During November 2003, the
remaining Convertible Promissory Notes, $445,000 face value, have been extended
for one year. These extended Convertible Promissory Notes now bear an interest
rate of 8% and are convertible into the Company's common stock at a conversion
rate of $.10 per common share.

     On September 17, 2003, the Company entered into a note payable agreement to
finance $68,000 of directors and officer's insurance premiums. The note bears
interest at a rate of 7.20% per annum and is due in eight monthly installments
of $8,731, including principal and interest, beginning on October 17, 2003.

     On October 9, 2003, the Company signed settlement minutes settling all of
 its pending disputes with Softalk. The releases were finalized on December 3,
 2003. See Note 8 for a complete description of the transaction.

     On October 21, 2003, three incumbent directors, Randal S. Moore, James B.
Woodcock and Christopher J. Grant resigned from the Board immediately prior to
the Company's reconvened annual shareholder meeting at which the Board was up
for reelection. Messrs. Moore, Woodcock and Grant agreed to resign to effect a
change in control of the Board of Directors giving a large contingent of
shareholders, active in a proxy contest, the ability to cause such a change in
control of membership on the Board.

     On October 22, 2003, the Company reconvened our annual meeting of the
shareholders and concluded voting on three proposals submitted to the
shareholders. Six directors were elected to a one year term. The authorized
common stock of the Company was increased to 100,000,000 shares and Semple &
Cooper, LLP was ratified as the Company's independent auditors.

     On October 30, 2003, the newly elected Board of Directors met for the first
time electing Richard Bourke Chairman and electing both the Audit and
Compensation Committees. On October 30, 2003, with four new independent Board of
Director (the "Board") members joining our Board, a new Audit Committee was
approved by the Board. The Audit Committee is comprised of Richard Bourke
(Chair), Marco Messina and Stanley L. Schloz.

                                      F-24
</TABLE>

<PAGE>


     Effective November 13, 2003, Scott Ritchie, a newly appointed director
resigned from the Board of Directors of BestNet Communications Corp.

     On November 21, 2003, the new Board of Directors effected a change in
Executive Compensation Plans and staffing. Paul H. Jachim, Chief Operating
Officer and Chief Financial Officer accepted a severance package and will leave
the Company effective December 1, 2003. Robert A. Blanchard, President and Chief
Executive Officer received a restructuring of his compensation package.

     On November 21, 2003, we entered into a new employment agreement with
Robert A. Blanchard, our President and Chief Executive Officer. This agreement,
which is effective December 1, 2003, replaces the employment contract dated
August 3, 2001. Under Mr. Blanchard's employment agreement, he is to receive a
base salary of $108,000 and is entitled to participate in our stock option plans
and our other generally entitled benefit programs. The term of Mr. Blanchard
employment agreement is 12 months with base salary guaranteed for 6 months. In
addition, Mr. Blanchard is to receive a sign on bonus of 100,000 shares of the
Company's common stock. In addition, additional incentives were granted. Mr.
Blanchard is to receive 200,000 shares of the Company's common stock in the
event EBITDA is positive for any one quarter during fiscal 2004. Mr. Blanchard
is to receive an additional 100,000 shares of the Company's common stock in the
event EBITDA is positive for a second full quarter during fiscal 2004. Cash
bonuses, up to 25% of his annual salary, will also be paid based upon a
four-quarter net revenue and EBITDA targets. Either party may terminate this
agreement upon 30-day notice. In the event of resignation, one month severance
and health benefits will be paid. In the event of termination, three months
severance and health benefits will be paid. On December 10, 2003, the Company's
Board of Directors granted Mr. Blanchard, as part of his employment agreement,
90,000 options to purchase the Company's common stock at an exercise price of
$.26 per common share. These options vest immediately.

     On November 21, 2003, the Company entered into a severance agreement with
Paul H. Jachim, the Company's former Chief Operating Officer and Chief Financial
Officer. This agreement is effective December 1, 2003. In consideration for Mr.
Jachim's resignation from the Company, Mr. Jachim will be paid $6,000 per month
for a period of nine months. Mr. Jachim will make himself reasonably available
for up to forty hours per month as requested by the Company. In addition, Mr.
Jachim will return all Company assets. Effective November 26, 2003, Paul H.
Jachim resigned from the Company's Board of Directors to pursue other
opportunities. On December 10, 2003, the Company's Board of Directors granted
Mr. Jachim, as part of his severance package, 70,000 options to purchase the
Company's common stock at an exercise price of $.26 per common share. These
options vest immediately.

     Under the terms of these employment and severance agreements, the Company
has a future minimum commitment of $117,000 in fiscal 2004. The employment
agreement has severance clauses with up a six-month penalty.

     On December 10, 2003, the Company has entered into a letter of intent, to
be followed by a definitive Note Purchase Agreement, with terms and conditions
being negotiated. The Note Purchase Agreement will provide up to $250,000 of
bridge financing to the Company.

13. GOING CONCERN

     The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
losses from operations over the past several years and anticipates additional
losses in fiscal 2004 and prior to achieving break even. Management has been
historically successful in obtaining financing and has implemented a number of
cost-cutting initiatives to reduce working capital needs. The Company requires
and continues to pursue additional capital for payment of current obligations,
growth and achievement of breakeven.

                                      F-25

<PAGE>


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

     None

ITEM 8A. CONTROLS AND PROCEDURES

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


                                    PART III

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

     Information concerning our directors and executive officers as of November
5, 2003, is set forth below:

             Name                 Age        Position held with Company
             ----                 ---        --------------------------

         Richard Bourke            57     Chairman of the Board
         Robert A. Blanchard       48     President, Chief Executive Officer
                                          and Director
         Paul H. Jachim*           45     Chief Financial Officer, Chief
                                          Operating Officer, Director and
                                          Secretary
         Stanley L. Schloz         60     Director
         Marco Messina             52     Director

     * On November 21, 2003, Mr. Jachim accepted a severance package and has
resigned from BestNet Communications Corp.

     RICHARD BOURKE, is a General Partner of Katsinam Partners LP, an investment
fund focused on micro and small-cap public companies, located in Scottsdale, AZ.
He was an officer and director of Traffic Technology, Inc., a public company
commercializing patented traffic signal technology located in Scottsdale,
Arizona, from July, 2000 until December, 2002, when it was merged with
CalbaTech, Inc., an early stage life sciences company located in Irvine,
California. He was a director of CalbaTech, Inc. until April, 2003. Since 1998
he has been founder, Chairman and Chief Executive Officer of National
Integrative Medicine, Inc., a start-up healthcare services company located in
Scottsdale, Arizona. From 1994 to 1997, he was Executive Vice President and
Chief Financial Officer of The Little Gym International, Inc., Scottsdale, AZ,
an international provider of children's development programs. In 1992 - 1993, he
was Vice President of Corporate Finance for Norcross Securities, a registered
securities broker-dealer in Phoenix, Arizona. From 1987 to 1994, he was
President of Bourke & Company, a financial consulting firm. From 1982 to 1987,
he was President of the Development Corporation of Montana, a geographically
targeted risk capital firm. From 1982 to 1986, he was President of Montana
Beverages, Ltd. and from 1976 to 1990, he was Vice President of Air Plastics,
Inc. He holds a B.A. from Northwestern University and an M.B.A. from Columbia
University Graduate School of Business.

     ROBERT A. BLANCHARD was named President and Chief Executive Officer of the
Company, on August 20, 2001, and was elected to the board of directors of the
Company on July 25, 2002. From July 1999 to August, 2001, Mr. Blanchard was
President and Chief Operating Officer of ProNet Global, Inc., a privately-held
corporation dedicated to world-wide strategic growth and support of independent
business owners affiliated with Quixtar, a leading e-commerce organization.
Through ProNet, Mr. Blanchard was President and CEO of the e-Alliance, a
worldwide strategic alliance of marketing organizations and strategic

                                       25

<PAGE>


partnerships representing approximately $2 billion in annual sales. From 1998 to
1999, Mr. Blanchard was Vice President of Strategy and Business Development for
Reliable Energy, Inc., a management-consulting firm for commercial and
industrial users of natural gas and electricity. From 1997 to 1998, Mr.
Blanchard has also served as Corporate Director for US Xchange, LLC, a
facilities based provider of competitive telecommunications services (CLEC),
Director of Administration for W.K. Kellogg Foundation from 1994 to 1997 and
Director of North America for Amway Corporation. Robert holds a MBA from
Northwestern University and Baccalaureate from Central Michigan University.

     PAUL H. JACHIM was named Chief Financial Officer and Chief Operating
Officer of the Company on December 1, 2001. Mr. Jachim's background includes
extensive and diverse operations experience in technology, service, industrial
and consumer product companies. From November 1, 2000 through November 1, 2001,
Mr. Jachim was President and COO of Pacific TelCom, a unified communication
solution provider and co-owner of a communication network across North America.
Beginning in 1997, prior to joining Pacific TelCom, as President and CEO, he led
the successful creation and launch of Spectra Service Inc., a supply chain
service subsidiary of Union Camp Corporation now International Paper, Memphis,
Tennessee. From 1995 until 1997, as Director of Service Operations, Mr. Jachim
started up a North American network of supply chain management facilities for
Menasha Corporation, Neenah, Wisconsin. Prior to joining Menasha Corporation he
held various positions with Procter & Gamble, Cincinnati, Ohio. His education
consists of a Bachelors Degree in Engineering and an MBA from Kellogg Graduate
School of Management, Northwestern University. On November 21, 2003, Mr. Jachim
accepted a severance package and has resigned from BestNet Communications Corp.

     STANLEY L. SCHLOZ retired from Motorola in 1998 after a 32-year successful
career spanning positions in engineering through senior business management. As
Director, Tactical Systems Operations of the Space and Systems Technology Group
he was responsible for the strategic direction and performance of the electronic
fuse business with over $150M annual sales serving US and foreign governments
along with prime contractors. His organization consisted of over 400 program
management, engineering, marketing, and manufacturing associates. Recently Mr.
Schloz has been engaged in business management consulting. He holds a BSEE from
Iowa State University and has done Advanced Business studies at Arizona State
University.

     MARCO MESSINA is a management consultant and outside director of public
companies. Until May 2003, he was a director of Calbatech Inc, a life sciences
company, subsequent to its merger with Traffic Technology Inc. (TTI) of which he
was the founder and a co-inventor of its products. He was a Director of TTI
since its inception, was its President and Secretary in 1998, its Vice President
from January 1999 to July 2000 and its President and Chief Executive Officer
from August 2000 until 2002. He is one of the inventors and patent holders of of
TTI's Unilight products. Prior to TTI, he was Consulting Practice Director for
Information Systems at Platinum Technology and Computer Associates in 1999-2000.
From 1996 to 1998, he was the President of National Scientific Corp., a publicly
traded company dedicated to semiconductor R&D and intellectual property
development. From 1984 to 1996, he was President of Fenix Consulting Co., Inc.,
an information technology consulting company with clients in the Pacific
Northwest and Europe. Concurrently he was Adjunct Professor of Information
Systems at Seattle University Graduate School of Business. From 1982-1984 he was
President of Rom Labs Inc., a company commercializing an electronic distribution
system for videogames software. From 1974 to 1982 he was a Vice President of
Seafirst Bank and Manager of Bank of Montreal in computer systems operations,
corporate finance, and international banking.


SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

     Based solely on its review of such forms received by it, or written
representations from certain reporting persons, the Company believes that all
Section 16(a) filing requirements applicable to its officers and directors were
complied with during the fiscal year ended August 31, 2003.

                                       26

<PAGE>
<TABLE>
<CAPTION>
ITEM 10.  EXECUTIVE COMPENSATION

     The following table summarizes all compensation paid for services rendered
to us for the fiscal years ended August 31, 2003, 2002 and 2001 by our Chief
Executive Officer and our other employee whose aggregate cash compensation
exceeded $100,000 (the "Named Executive Officers"). None of the Company's other
employees received compensation in excess of $100,000 during the last completed
fiscal year.

                           SUMMARY COMPENSATION TABLE

                                          Annual Compensation                          Long Term Compensation
                                                                                 Awards                     Payouts
                                                         Other Annual                Securities
                                                             Bonus      Restricted   Underlying       LTIP        All Other
      Name and                                           Compensation      Stock      Options/       Payouts    Compensation
 Principal Position     Year    Salary ($)   Bonus ($)        ($)       Awards ($)    SARs ($)         ($)         ($)(1)
-------------------     ----    ---------- ----------     ---------    -----------  -----------   ------------  ------------
<S>                     <C>     <C>        <C>     <C>       <C>           <C>       <C>               <C>          <C>
Robert A. Blanchard     2003    $190,000   $        0        $ 0            $ 0          --            $ 0          $ 0
President and CEO       2002     190,000   $        0        $ 0            $ 0       200,000          $ 0          $ 0
(2) (3)                 2001       7,308   $        0        $ 0            $ 0       475,000          $ 0          $ 0


Paul H. Jachim          2003      165,000  $    2,415        $ 0            $ 0          --            $ 0          $ 0
CFO and COO             2002      123,750  $        0        $ 0            $ 0       560,000          $ 0          $ 0
(4) (5) (6)             2001            0  $        0        $ 0            $ 0          --            $ 0          $ 0

-------------------
(1)  Other annual compensation did not exceed the lesser of $50,000 or 10% of
     the total salary and bonus for any of the officers listed.

(2)  Mr. Blanchard was appointed President and CEO of the Company on August 20,
     2001. Mr. Blanchard's annual salary is $190,000.

(3)  On June 19, 2001, Mr. Blanchard was granted options to purchase 500,000
     shares, at a per share exercise price of $2.90. These options vest, if
     ever, over a three year period. On February 22, 2002, Mr. Blanchard's
     option agreement with the corporation was modified by mutual consent to
     475,000 shares at a per share price of $2.90 and 200,000 at a per share
     price of $.73. These options vest, if ever, based on performance, over a
     three-year period.

(4)  Mr. Jachim was appointed Chief Operating and Chief Financial Officer of the
     Company on December 1, 2001. His annual salary is $165,000.

(5)  On December 1, 2001, Mr. Jachim was granted options to purchase an
     aggregate of 400,000 shares of our common stock at a per share exercise
     price of $1.55 per share. These options vest, if ever, based on
     performance, over a three-year period. On February 22, 2002, Mr. Jachim was
     granted 160,000 options to purchase shares of stock at $.73. These options
     vest, if ever, based on performance, over a three-year period.

(6)  On November 21, 2003, Mr. Jachim accepted a severance package and has
     resigned from BestNet Communications Corp.

Options Grants
--------------

     There were no options granted to the Named Executive Officers during the
fiscal year ended August 31, 2003.

Option Exercise
---------------

     There were no options exercised by the Named Executive Officers during the
fiscal year ended August 31, 2003.

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

                                                                                                          Value Of
                                                                                                        Unexercised
                                                                          Number of Securities          In-The-Money
                                                                         Underlying Unexercised          Options At
                                   Shares                                   Options At FY-End            FY-End ($)
                                Acquired On                                 (#) Exercisable/            Exercisable/
      Name                      Exercise (#)     Realized Value ($)           Unexercisable           Unexercisable(1)
      ----                      ------------     ------------------           -------------           ----------------
Robert A. Blanchard                 -0-                 $-0-                 75,000/600,000                $0/$0
Paul H. Jachim                      -0-                 $-0-                 80,000/480,000                $0/$0

-------------------
(1)  Calculated based on $.37, which was the closing sales price of our common
     stock as quoted on the OTC Bulletin Board on November 5, 2003, multiplied
     by the number of applicable shares in-the-money less the total exercise
     price.
                                       27
</TABLE>

<PAGE>


EMPLOYMENT AGREEMENTS

     On August 3, 2001, we entered into a three-year employment agreement with
Robert A. Blanchard, our President and Chief Executive Officer, which expires on
August 20, 2004. Under Mr. Blanchard's employment agreement, he is to receive a
base salary of $190,000 and is entitled to participate in our stock option plans
and our other generally entitled benefit programs. On December 10, 2003, the
Board of Directors granted Mr. Blanchard 90,000 options to purchase the
Company's common stock at and exercise price of $.26 per common share. These
options vest immediately

     On November 21, 2003, we entered into a new employment agreement with
Robert A. Blanchard, our President and Chief Executive Officer. This agreement,
which is effective December 1, 2003, replaces the employment contract dated
August 3, 2001. Under Mr. Blanchard's employment agreement, he is to receive a
base salary of $108,000 and is entitled to participate in our stock option plans
and our other generally entitled benefit programs. The term of Mr. Blanchard
employment agreement is 12 months with base salary guaranteed for 6 months. In
addition, Mr. Blanchard is to receive a sign on bonus of 100,000 shares of the
Company's common stock. In addition, additional incentives were granted. Mr.
Blanchard is to receive 200,000 shares of the Company's common stock in the
event EBITDA is positive for any one quarter during fiscal 2004. Mr. Blanchard
is to receive an additional 100,000 shares of the Company's common stock in the
event EBITDA is positive for a second full quarter during fiscal 2004. Cash
bonuses, up to 25% of his annual salary, will also be paid based upon a
four-quarter net revenue and EBITDA targets. Either party may terminate this
agreement upon 30-day notice. In the event of resignation, one month severance
and health benefits will be paid. In the event of termination, three months
severance and health benefits will be paid.

     On November 21, 2003, the Company entered into a severance agreement with
Paul H. Jachim, the Company's former Chief Operating Officer and Chief Financial
Officer. This agreement is effective December 1, 2003. In consideration for Mr.
Jachim's resignation from the Company, Mr. Jachim will be paid $6,000 per month
for a period of nine months. Mr. Jachim will make himself reasonably available
for up to forty hours per month as requested by the Company. In addition, Mr.
Jachim will return all Company assets. On December 10, 2003, the Company's Board
of Directors granted Mr. Jachim, as part of his severance package, 70,000
options to purchase the Company's common stock at an exercise price of $.26 per
common share. These options vest immediately.

COMPENSATION OF DIRECTORS

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

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of November 5, 2003, certain information
with regard to the beneficial ownership of our common stock by (i) each
shareholder known by us to beneficially own 5% or more of our outstanding common
stock, (ii) each director individually, (iii) the named executive officers and
(iv) all of our officers and directors as a group:

                                       28

<PAGE>


                                            Amount and Nature
                                               Percent of
   Name and Address                             Beneficial            Percent
Of Beneficial Owner (1)                        Owner (2)(3)         of Class (3)
-----------------------                     ------------------      ------------

Robert A. Blanchard                              200,000(6)               .67%

Paul H. Jachim(7)                                161,000(7)               .54%

Richard Bourke(5)                                 14,666(8)               .05%

Stanley Schloz(5)                                191,667(9)               .65%

Marco Messina(5)                                  53,266(10)              .18%

Scott Ritchie(5)(19)                               6,666(11)              .02%

Randal S. Moore(4)                                70,000(12)              .24%

James B. Woodcock(4)                              70,000(13)              .24%

Chris J. Grant(4)                                 70,000(14)              .24%

Alexander Christopher Lang c/o Softalk,        2,745,785(15)             9.04%
Inc. 370 Queens Quay West Toronto,
Ontario Canada, M5V3J3

Anthony Silverman                              3,156,591(16)            10.49%

Jerry Peterson                                 1,800,000(17)             6.03%

Cedar Avenue LLC                               4,032,634(18)            13.45%
380 Sherin Drive
Oakville, Ontario  L6L 4J3

All directors and executive officers
as a group (9 persons)                           837,265                 2.78%

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

(1)  Unless otherwise noted, the address of each holder is 5075 Cascade Rd. SE,
     Suite A, Grand Rapids, Michigan 49546.

(2)  A person is deemed to be the beneficial owner of securities that can be
     acquired within 60 days from November 5, 2003 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 29,532,415 shares
     of Common Stock outstanding as of November 5, 2003.

(4)  These directors served on the board of directors until October 21, 2003.

(5)  These directors were elected to the Board of Directors on October 22, 2003
     per the Company's annual shareholder meeting.

(6)  This amount represents 200,000 vested stock options.

(7)  This amount represents 160,000 vested stock options, plus ownership of
     1,000 shares of the Company's common stock.

(8)  This amount represents 6,666 vested stock options, plus ownership of 8,000
     shares of the Company's
         common stock.

(9)  This amount represents 6,666 vested stock options, plus beneficial
     ownership of 185,001 shares of the Company's common stock held in trust for
     which Mr. Schloz is the trustee.

(10) This amount represents 6,666 vested stock options, plus ownership of 46,600
     shares of the Company's common stock.

(11) This amount represents 6,666 vested stock options.

(12) This amount represents 70,000 vested stock options.

(13) This amount represents 70,000 vested stock options.

(14) This amount represents 70,000 vested stock options.

                                       29

<PAGE>
<TABLE>
<CAPTION>


(15) This amount represents 1,920,785 restricted shares of the Company's common
     stock and 825,000 vested stock options.

(16) This amount represents 550,000 warrants to purchase the Company's common
     stock and 2,606,591 shares of the Company's common stock.

(17) This amount represents 100,000 warrants to purchase the Company's common
     stock , 200,000 shares of the Company's common stock attributable to a
     convertible note and 1,500,000 shares of the Company's common stock.

(18) This amount represents 4,032,634 restricted shares of the Company's common
     stock.

(19) Effective November 13, 2003, Scott Ritchie resigned from the Board of
     Directors.


EQUITY COMPENSATION PLAN

     The following table represents securities authorized for issuance under
equity compensation plans at August 31, 2003.

                           EQUITY COMPENSATION PLAN(1)

                                     Number of Securities                                        Number of Securities
                                      To Be Issued Upon              Weighted Average            Remaining Available
                                   Exercise of Outstanding          Exercise Price of                 For Future
                                           Options                 Outstanding Options           Issuance Under Plan
                                           -------                 -------------------           -------------------
<S>                                       <C>                               <C>                       <C>
Equity compensation plan                  3,808,301                         $1.508                    5,430,384
approved by stockholders:

Equity compensation plan not                 -0-                            $ -0-                        -0-
approved by stockholders:

                                          =========                        ======                     =========
TOTAL                                     3,808,301                        $1.508                     5,430,384
-------------------
     (1) We maintain a 2000 Stock Incentive Plan under which we have issued
2,599,615 shares of our common stock to our employees, and currently have
2,400,385 shares of common stock available for future issuance. Under the 2000
Stock Incentive Plan, the sale price of the shares of common stock is equal to
the fair market value of such shares on the date of the option grant. We also
maintain a 1997 Stock Incentive Plan under which was have issued 1,570,001
shares of our common stock to our employees, and currently have 3,029,999 shares
of common stock available of future issuance. The sale price of the shares of
common stock available under our 1997 Stock Incentive Plan also is equal to the
fair market value of such shares on the date of grant. Both of these plans have
been approved by our shareholders.

     For a description of our 1997 and 2000 Stock Incentive Plans, please see
the description set forth in Note 6 of our Consolidated Financial Statements.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     During 1999 and 2000, the Company entered into various license and purchase
agreements with Softalk and on October 9, 2003 entered into a settlement
agreement based on the arbitration and mediation actions in Canada which was
finalized on December 3, 2003. Those agreements are described below, with the
exception of the Settlement Agreement; for a summary, see Note 8. Softalk is a
developer of certain Internet telephony software and a major shareholder of
BestNet.

ORIGINAL AND RESTATED LICENSE AGREEMENT

     On April 23, 1999, we entered into a license agreement with Softalk
granting us and our subsidiaries a non-exclusive right to distribute, market,
service and sublicense Softalk's services and products to commercial and
individual customer accounts. On July 31, 1999, the original license agreement
was restated to define the term of the license agreement to seven years with an
automatic renewal. Total consideration given for the non-exclusive license

                                       30
</TABLE>

<PAGE>

agreement was $200,000. Additionally, we agreed to pay Softalk an amount equal
to 100% of Softalk's actual direct expenses incurred in connection with the
sale, license and delivery of Softalk products plus a five percent (5%) markup
of the total traffic on the wholesale long distance per minute line costs on a
monthly basis.

AMENDMENT NO. 1 TO RESTATED LICENSE AGREEMENT

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

PURCHASE AGREEMENT

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

     On November 10, 2000, Softalk exercised its exchange rights under the
purchase agreement, resulting in the issuance of 4,329,004 restricted shares of
BestNet common stock in exchange for a like number of shares of Class A
non-voting preferred stock of Interpretel (Canada).

PRODUCT DEVELOPMENT AGREEMENT

     Effective June 14, 2000, we entered into a product development agreement
with Softalk. The agreement engages Softalk to develop software for us and
enhance the performance and features of the Bestnetcall services and to provide
installation and maintenance of certain hardware and software. The term of the
agreement was for a period of one year. Total consideration given for the
agreement was $500,000. In addition, if the work performed under the agreement
exceeded the retainer as calculated at the rate of $70 per person per hour, then
we agreed to compensate Softalk at the rate of $85 per person per hour for the
work performed beyond the amount covered by the retainer. Additional services
provided outside the scope of the agreement were to be compensated at the rate
of $100 per person per hour.


LOAN FACILITY

     On August 6, 1999, we entered into a loan facility agreement with Softalk,
Inc. Under the facility, we agreed to loan Softalk up to $2 million at an
interest rate equal to prime plus 1%. Under the terms of this loan, Softalk may
pay back the loan principal plus interest on or before August 6, 2000, or
convert any amounts outstanding, plus interest, on the loan into shares of
Softalk common stock in full satisfaction of money owed under the loan. The
number of shares of Softalk common stock issuable to the Company in repayment of
the full $2 million would equal ten percent (10%) of the value of Softalk at the
time of repayment. As of August 31, 2002, the amount outstanding under this
facility was $1,508,043.

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

                                       31

<PAGE>
                                     PART IV

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

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

(a)(2) Exhibits

       Number                 Description of Filing                       Method
       ------                 ---------------------                       ------

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

         3.2        Bylaws of Wavetech International, Inc.                  (1)

         3.3        Certificate of Amendment to Articles of                  *
                    Incorporation, as originally filed with the
                    Nevada Secretary of State.

         3.4        Amended Certificate of Designations, Rights,             *
                    Preferences and Limitations of Series A
                    Convertible Preferred Stock, as originally filed
                    with the Nevada Secretary of State on November 19,
                    2003.

         3.5        Amended Certificate of Designations, Rights,             *
                    Preferences and Limitations of Series B
                    Convertible Preferred Stock, as originally filed
                    with the Nevada Secretary of State on November 19,
                    2003.

         3.6        Amended Certificate of Designations, Rights,             *
                    Preferences and Limitations of Series C
                    Convertible Preferred Stock, as originally filed
                    with the Nevada Secretary of State on November 19,
                    2003.

         3.7        Action by Unanimous Written Consent by the Board         *
                    of Directors in Lieu of a Special Meeting of
                    BestNet Communications Corp.

          4         2000 Incentive Stock Plan                               (2)

         4.1        Form of warrant issued to Cedar Avenue LLC              (7)

         4.2        Form of warrant issued to Liolios Group, Inc.           (7)

         4.3        Form of warrant issued to Robert C. Caylor              (7)

         4.4        Form of 6% Convertible Note and Warrant Purchase
                    Agreement                                               (8)

         4.5        Form of Unit Purchase Agreement                         (9)

        10.1        Securities Purchase Agreement between Wavetech and
                    the investor and the Placement Agent                    (3)

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

        10.3        Registration Right Agreement                            (3)

        10.4        Securities Purchase Agreement                           (3)

        10.5        Product Customization Agreement                         (4)

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

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

        10.8        Amended and Restated License Agreement                  (5)

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

        10.10       Form of Note and Warrant Purchase Agreement             (6)
                    between BestNet and Equity Securities
                    Investment, Inc.

        10.11       Employment Agreement dated November 21, 2003,            *
                    between BestNet and Robert A. Blanchard

                                  32

<PAGE>


        10.12       Severance Agreement dated November 21, 2003,             *
                    between BestNet and Paul H. Jachim

        10.13       Lease Agreement, dated as of November 22, 2002, by       *
                    and between 5075 Cascade Road, LLC. and BestNet

        10.14       BestNet Communications Corp. Code of Ethics              *

        10.15       Consulting service contract between BestNet              *
                    Communications Corp. and Mr. Anthony Silverman,
                    a principal stockholder

         21         Subsidiaries of the Registrant                           *

        31.1        Certification of Chief Executive Officer                 *

        31.2        Certification of Chief Financial Officer                 *

        32.1        Section 906 Certification of Robert A. Blanchard         *

        32.2        Section 906 Certification of Michael A. Kramarz          *


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

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

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

(3)  Incorporated by reference to exhibit 4.2 to Form 8-K filed on May 16, 2000.

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

(5)  Incorporated by reference to the Form 10-K for the fiscal year ended August
     31, 1999, exhibits 10.6, 10.7, 10.8 and 10.9 were numbered exhibits 10.1,
     10.2, 10.3 and 10.4 respectively in the Form 10-K for the year ended August
     31, 1999.

(6)  Incorporated by reference to exhibit 10.10 to Form S-2 Registration
     Statement (File No. 333-89848).

(7)  Incorporated by reference to the Form 10-KSB for the fiscal year ended
     August 31, 2002, exhibits 4.1, 4.2, 4.3.

(8)  Incorporated by reference to the Form 10-QSB for the quarter ended November
     30, 2002, exhibit 4.4 was exhibit 10.1 in the Form 10-QSB for the quarter
     ended November 30, 2002.

(9)  Incorporated by reference to the Form 10-QSB for the quarter ended May 31,
     2003, exhibit 4.5 was exhibit 10.1 in the Form 10-QSB for the quarter ended
     May 31, 2003.

                                       33

<PAGE>



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

     June 9, 2003      BestNet Communications Corp. issues a press release
                       covering its earnings for the 3rd Quarter ended
                       May 31, 2003

     July 11, 2003     BestNet Communications Corp. issues a press release
                       announcing its record fiscal 3rd Quarter 2003 financial
                       results



ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

     The audit fees charged to the Company by Semple & Cooper, LLP for the
audits of fiscal years ended August 31, 2002 and August 31, 2001 were
approximately $29,000 and 28,000, respectively.

     The following table sets forth approximate fees billed to us by our
auditors during the fiscal years ended August 31, 2003 and 2002 for: (i)
services rendered for the audit of our annual financial statements and the
review of our quarterly financial statements; (ii) services by our auditor that
are reasonably related to the performance of the audit or review of our
financial statements and that are not reported as Audit Fees; (iii) services
rendered in connection with tax compliance, tax advice and tax planning; and
(iv) all other fees for services rendered.

         ---------------------------- ---------------- ----------------
                                      August 31, 2003  August 31, 2002
                                      ---------------  ---------------
         ---------------------------- ---------------- ----------------
         (i)     Audit Fees              $     29,000     $     28,000
         ---------------------------- ---------------- ----------------
         (ii)    Audit Related Fees      $     20,000     $     18,000
         ---------------------------- ---------------- ----------------
         (iii)   Tax Fees                $     13,000     $      7,000
         ---------------------------- ---------------- ----------------
         (iv)    All Other Fees          $     18,000     $     22,000
         ---------------------------- ---------------- ----------------

                                       34

<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 12, 2003                    By:  /s/  Robert A. Blanchard
                                               --------------------------------
                                            Name:     Robert A. Blanchard
                                            Title:    President & CEO


Date:  December 12, 2003                    By:  /s/  Michael A. Kramarz
                                               --------------------------------
                                            Name:     Michael A. Kramarz
                                            Title:    Controller


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

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

By:  /s/  Robert A. Blanchard                           Date:  December 12, 2003
   --------------------------------------------
          Robert A. Blanchard, President &
          Chief Executive Officer
          (Principal Executive Officer)

By:  /s/  Michael A. Kramarz                            Date:  December 12, 2003
    -------------------------------------------
          Michael A. Kramarz, Controller

By:  /s/  Richard Bourke                                Date:  December 12, 2003
   --------------------------------------------
          Richard Bourke, Chairman of the Board

By:  /s/  Stanley L. Schloz                             Date:  December 12, 2003
    -------------------------------------------
          Stanley L. Schloz, Director

By:  /s/  Marco Messina                                 Date:  December 12, 2003
   --------------------------------------------
          Marco Messina, Director

                                       35