##### Table of Contents

---



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended June 30, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



Commission File No. 000-33471



---



YAK COMMUNICATIONS INC.

(Exact name of registrant as specified in its charter)



|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|Florida                                                       |  | 98-0203422                          
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              | 
|300 Consilium Place, Suite 500, Toronto, Ontario              |  | M1H 3G2                             
|(Address of principal executive offices)                      |  | (Zip Code)                          



(647) 722-2752

(Registrants telephone number, including area code)



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



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | N/A                                      



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

Common Stock, par value $.01 per share



Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ̈



Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. x



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ̈No x



Non-affiliates of YAK Communications Inc. held 8,129,716 shares of Common
Stock as of June 30, 2005. The fair market value of the stock held by non-affiliates is $39.4 million based on the sale price of the shares on June 30, 2005.



As of September 14, 2005, 12,897,250 shares of Common Stock, par value $.01, were outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III.



---



---

##### Table of Contents



TABLE OF CONTENTS



Description



Part I



|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|Item     |  |                                                                                       |  | Page
|1.       |  | Business                                                                              |  | 2   
|2.       |  | Properties                                                                            |  | 15  
|3.       |  | Legal Proceedings                                                                     |  | 15  
|4.       |  | Submission of Matters to a Vote of Security Holders                                   |  | 16  
|        
|Part II 
|         |  |                                                                                      
|5.       |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 16  
|6.       |  | Selected Financial Data                                                               |  | 16  
|7.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|7A.      |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 37  
|8.       |  | Financial Statements and Supplementary Data                                           |  | 38  
|9.       |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 38  
|9A.      |  | Controls and Procedures                                                               |  | 38  
|        
|Part III
|         |  |                                                                                      
|10.      |  | Directors and Executive Officers of the Registrant                                    |  | 39  
|11.      |  | Executive Compensation                                                                |  | 43  
|12.      |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 44  
|13.      |  | Certain Relationships and Related Transactions                                        |  | 45  
|14.      |  | Principal Accountant Fees and Services                                                |  | 45  
|        
|Part IV 
|         |  |                                                                                      
|15.      |  | Exhibits, Financial Statement Schedule, and Reports on Form 8-K                       |  | 46  



---

##### Table of Contents

EXPLANATORY NOTE



Yak Communications Inc. is filing this Annual Report on Form 10-K for the fiscal year ended June 30, 2005 (the
Report). In this Report we are restating certain amounts previously reported in our consolidated balance sheets, statements of operations and statements of cash flows for the fiscal years ended June 30, 2004 and 2003, and the notes
related thereto as well as the quarterly results of operations for each of the quarters in fiscal 2004 and the first three quarterly periods of fiscal 2005 as found in Note 16 entitled Quarterly Results of Operations (Unaudited) to the
accompanying consolidated financial statements. As previously disclosed, we reviewed the accounting methodology used with respect to a June 2003 software acquisition transaction and determined to correct and restate our consolidated financial
statements for fiscal years 2003 and 2004, along with the quarterly periods contained in fiscal 2004 and the first quarter of fiscal 2005. On May 31, 2005, we filed various amended Annual Reports on Form 10-K/A and Quarterly Reports on Form
10-Q/A for the applicable annual and quarterly periods.



Subsequent to the May 31, 2005 amended periodic filings, and in conjunction with our continued discussions with the Office of the Chief Accountant (OCA) of the SEC as part of the guidance requested in connection with the
accounting for the subject transaction, we discovered errors in our amended filings. On September 27, 2005, our Board of Directors approved managements recommendation to correct our accounting related to the software acquisition
transaction. The errors originated from:



| |  |  | An error in calculating the discount rate used to determine the fair value of the transaction components for the May 31, 2005 restatements. The error caused the Company to
overstate the value of a long-term note payable, joint venture receivable and the subject software in its amended Annual Report on Form 10-K/A for fiscal year 2003 and subsequent filings.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The revaluation of the long-term note payable in the amended Annual Report on Form 10-K/A for fiscal year 2004 was not consistent with GAAP, notwithstanding the fact that the
resultant gain was deferred.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The deferral of the $0.3 million loss on impairment of the joint venture receivable in the amended Annual Report on Form 10-K/A for fiscal year 2004, should have been recognized in
the fourth fiscal quarter of 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The gain on early extinguishment of debt in the third fiscal quarter of 2005 was overstated by $0.2 million.
| | - |  | ------------------------------------------------------------------------------------------------------------



The changes incorporated into this Form 10-K corrects our financial
statements for fiscal years 2003 and 2004, respectively, as well as each of the quarters in fiscal years 2004 and 2005 to reflect the fair value of certain software acquired by us on June 30, 2003, and to revise our assets and liabilities
accordingly. All applicable amounts relating to these restatements have been reflected in the consolidated financial statements and disclosed in the notes to the consolidated financial statements contained in this Annual Report on Form 10-K. For a
more detailed description of the restatements, see Note 5 entitled Next Generation Software and Financial Restatements and Note 16 entitled Quarterly Results of Operations (Unaudited) to the accompanying Consolidated
Financial Statements.



1



---

##### Table of Contents

PART I



|ITEM 1. | BUSINESS
|------- | --------



Yak Communications Inc. (Yak or the Company) was incorporated in Florida in 1998. We are primarily a switch-based reseller
providing a variety of discount long distance services primarily in Canada and to a lesser degree the United States, to residential and small business markets, as well as telecommunications management services to large enterprises in Canada. We also
provide Voice over Internet Protocol (VoIP) services to customers in Canada, the United States and internationally. Yak is a registered reseller of telecommunication services with both the Canadian Radio Television and Telecommunications
Commission (CRTC) and the U.S. Federal Communications Commission (FCC). We began operations in Toronto in July 1999 and embarked on a systematic growth strategy to all of the major urban centers in Canada.



In July 2003, we purchased Argos Telecom Inc. (renamed Yak for
Business) and Contour Telecom Inc, extending our services to small and medium business customers (SMEs) and telecommunications management services to large enterprises. Effective June 2004, Yak was capable of providing long
distance services in all states in the continental United States. In September 2004, we launched a voice over high-speed internet service and piloted our own facilities-based VoIP network. Use of this internet based product enables our customers to
originate or receive calls from international locations and is a natural extension of our traditional value proposition. Marketing of our VoIP services is expected to expand our market potential by providing a cost effective access to global markets
and positioning our Company as an early supplier of this emerging technology.



Our principal offerings are dial around services (also known as casual calling) with both variable and flat rate pricing. Casual calling allows customers to bypass, or dial around, their
existing long distance carrier on a selective basis by entering a few extra digits prior to making a call, without permanently switching carriers. Yak also provides a 1+ service which routes all long distance calls made by the end user
to our network. While our early marketing strategy was initially targeted to North American immigrant and ethnic communities, the service has gained acceptance and brand loyalty throughout the general population. As of June 30, 2005 we have
approximately 905,000 recurring residential and small business customers measured by unique automatic number identification (ANIs).



We lease lines from other carriers and maintain our own switching systems. We buy bulk time from multiple carrier networks and international providers to
supply services to customers. All of our long distance calls are routed through our Tekelec/SanteraOne switch located in Toronto, Canada. Our switch is interconnected with several North American and international carriers. These interconnection
agreements allow us to both originate and terminate traffic in all geographic locations. The port density and significantly reduced foot print of the SanteraOne switch has enabled us to transition our traffic from our legacy Teltronics/Harris
switches, resulting in significant cost savings and enhanced operational efficiencies. The SanteraOne switch acts as a gateway, processing both traditional circuit switched (PSTN) traffic and internet traffic coming from our VoIP network.



We are the largest provider of Canadian, dial-around services,
with over 70% market share of the dial around market in Canada according to an IDC Canada report published in 2004. Our principal operation and the majority of our customers and sources of revenue are currently based in Canada. In November 2004, we
began a new marketing campaign in the United States to gain share of the $3 billion U.S. dial-around market, as estimated by IDC.



Operating Highlights and Accomplishments in 2005:



| |  |  | Increased net revenue by 15% to $92.7 million for the 12 months ended June 30, 2005 from $80.8 million for the 12 months ended June 30, 2004;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Generated net income of $4.2 million for the 12 months ended June 30, 2005, down 16.01% from the $5.0 million earned for the 12 months ended June 30, 2004;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



2



---

##### Table of Contents

| |  |  | Reduced long term debt by $4.2 million from $5.2 to $1.0 million, or 81%;
| | - |  | -------------------------------------------------------------------------



| |  |  | Implemented Yaks VoIP services in September 2004 and began our promotional activity in January 2005;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Financed our ongoing operations from internally-generated working capital;
| | - |  | --------------------------------------------------------------------------



| |  |  | Began marketing of U.S. dial-around services, to niche market ethnic communities;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Purchased in March 2005 the Ontario and Quebec based local resale customer base and Centrex lines of Navigata Communications Limited thereby acquiring 450 SME customers, totaling
4700 Centrex lines; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Purchased and installed a Geoprobe real-time switching platform to monitor our networks.
| | - |  | ----------------------------------------------------------------------------------------



THE INDUSTRY



The resale of long distance calling was first permitted in the North American market (Canada and the United States) in the 1980s. The highly competitive
and rapidly changing international telecommunications market (deregulation, privatization, the expansion of the resale market) has created significant opportunity for carriers that can offer high-quality, low cost, international long distance
services. This market has been driven by decreased termination costs, a proliferation of call routing options, and increased competition. Meaningful competition in long distance services in Canada has been in effect since the 1990s. Five very large
providers of long distance services dominate the Canadian market: Bell Canada, Telus Corporation, Sprint Canada (acquired by Rogers Communications Inc. on July 1, 2005), Allstream (acquired by MTS on June 4, 2005) and Primus
Telecommunications Canada Inc. For calendar year 2004, the long distance market in Canada was estimated at $4 billion. Recent regulatory reforms and the growing acceptance of VoIP technologies has seen cable companies, Rogers Communications Inc. and
Shaw Communications Inc. enter the Canadian local and long distance markets.



While the Canadian telecommunications sector is still growing, competitive forces have reduced prices and the market revenue has declined from approximately $12 billion to $11 billion. For the three year period ending
2004, non-traditional segments (wireless, Internet and VoIP transmission services) grew from $11 billion to $14 billion. This type of competition has led to service innovation, declining prices and significant industry re-structuring.



According to BMO Telecom Research, the telecommunications sector in the
United States has continued to experience a moderate decline in year over year long term growth. However, long distance revenue growth remains relatively strong, with BellSouth and SBC continuing to post double-digit growth rates. With the
acquisitions of AT&T (by SBC Communications Inc.) and MCI (by Verizon Communications Inc.) the pricing environment that has affected the Canadian market is expected to stabilize in the United States.



The legacy voice market has not experienced significant entry of new players,
and in fact, has witnessed noteworthy consolidation. The five primary providers of long distance services in Canada have maintained their relative market positions. The overall size of the traditional market has been reduced by approximately 9%
primarily due to a decline in prices and the nascent entry of VoIP services. Bell Canada and Telus control approximately 55% of the market, while Allstream, Sprint Canada and Primus have an estimated 24% of the market. The other provincial based
incumbent telecommunication service providers  Aliant and Sasktel  collectively have an approximate 12% market share. The remaining alternative providers have approximately 9%.



Dial-around long distance services remain a viable and innovative alternative
to traditional 1+ long distance services. We believe that our market share has been reinforced by recent consolidation within the industry.



The purchase of Sprint Canada by Rogers, a major Canadian cable, internet and cellular provider, advances Rogers position in the market as a voice service
provider. This acquisition further reduces consumer choice, as cable companies and incumbent telephone companies vie for dominance in the traditional and emerging VoIP markets.



The stability of the traditional market is being disrupted by the rapid entry of VoIP providers. VoIP is a
telecommunications service that allows customers to make telephone calls over a high-speed internet connection, rather than the traditional analogue telephone line. It is therefore dependent on the end user having access to a high-speed internet
connection. Our VoIP product and services are targeted at this user segment and we expect our internet-based telecommunications services to help us maintain and grow our share of the overall market.



3



---

##### Table of Contents

According to a Nielson and Ipsos-Reid survey, North America has significant high-speed internet (cable or
DSL) penetration rates. In March 2005, Canadians had a penetration rate of 77% while only 57% of Americans were connected which provides a significant basis for VoIP growth. At the same time, the portion of the North American market that does not
have access to high-speed internet services provides an opportunity to resell traditional long distances services, such as dial-around or 1+.



Major cable operators, telephone companies and independents have entered the voice resale services market using VoIP technology. The current independent
North American market leader is Vonage Holdings Corp., which announced that it has more than 1 million lines in service in September 2005. In Canada, the first significant VoIP entrant was Primus Canada which, according to their most recent
public filings, currently has 60,000 lines in service. Although these figures represent a small fraction of the total number of lines in service connecting homes and businesses, there is significant potential for growth given the high-speed internet
penetration rates in Canada and the United States. Although cost of customer acquisition in the VoIP marketplace is significantly higher than that of traditional markets, analysts are increasingly bullish about VoIP and its potential impact on the
telecommunications market. The SeaBoard Group (a Canadian technology research and strategy consulting company) expects that there will be approximately 4 million VoIP lines in Canada by 2008, compared with 418,000 by the end of 2005.



STRATEGY



In the near and medium term, we expect our growth to come from several sources:



| |  |  | Increased share of the addressable Canadian and U.S. dial-around and 1+ markets;
| | - |  | --------------------------------------------------------------------------------



| |  |  | Growth of our customer base and product offering to SMEs in Canada through additional marketing campaigns and product development; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expansion of VoIP initiatives.
| | - |  | ------------------------------



We expect to continue to generate increased revenues, positive net income, and strong cash flow from our core Canadian dial-around business. These results
will serve to fund our growth of dial-around and 1+ services in the United States, and the expansion of our VoIP product offering. Our goal is to expand the size of the addressable Canadian marketplace by marketing our product suite outside of major
urban centers. Through a database marketing plan we intend to target those specific geographical areas where we can increase penetration and cost effectively expand our services to our niche markets.



COMPETITION



In both Canada and the United States there are several other dial-around companies competing in the marketplace.



Canada



In Canada, our key competitors include Alterna-Call, a division of Sprint
Canada, and Telehop Communications, Inc., a publicly listed company on the TSX Venture Exchange. Alterna-Call offers dial around services with its principal offering being a domestic (North American) fixed, flat rate calling service. Telehop offers
similar dial-around services, including a regional flat rate product. Telehops annual revenues were approximately $11 million (USD) for the fiscal year ended December 31 2004. Yaks Looney call product is offered as a
direct alternative to our competitors and offers consumers 38 minutes of calling time anywhere in Canada, the U.S., China and Hong Kong for $1 (CAD) and $0.05 per minute thereafter.



United States



In the United States there are many established companies offering dial around services including Americatel Corp., Vartec Telecom, Inc., Sprint Corp.,
and MCI Corp. There are hundreds of other dial-around companies offering their services on a regional basis. Vartec was recently acquired out of bankruptcy proceedings by Comtel Telecom and Comtel Virginia.



4



---

##### Table of Contents

Current product offerings by our competitors vary with different calling plans and rates which are often
dependent on the time of day during which the call is made and are, for the most part, flat rate calling i.e., packaged number of minutes for a set amount of cost. Most of these companies have placed a significant emphasis on North American calling
rates (primarily for inter-state and intra-state calling within the U.S.). We believe that there are significant opportunities in the United States for our company to specialize in a pay as you go program for international discount
calling without the myriad of access and service charges.



VoIP/Broadband



Competition
from traditional telecommunication companies and non-traditional start-ups entering the VoIP market is at an early stage, but this market has shown signs of growth which may be indicative of a material change in the telecommunications marketplace.
Because this market is at such an early stage of technological development, and because the regulatory agencies are adjusting to the advent of this technology, no models have emerged to properly gauge competition. Despite the start-up nature of this
market, several relatively small companies have begun to market VoIP services including Primus Canada and a variety of U.S. based start-ups such as Vonage Holdings Corp., 8x8 Inc., Broadvox Limited LLC and SunRocket, Inc.



No large Canadian incumbent telecommunications company has substantially
entered the VoIP marketplace, although all have announced plans to do so. Cable companies, such as Rogers and Shaw offer their services as an alternative to both the local line and long distance service provided by the incumbent telecommunication
service providers.



Several large telecommunications service
providers have begun to offer VoIP-based products in the United States (including AT&T, Verizon and Qwest) and a number of large cable companies such as Comcast and Time Warner are offering VoIP services as well. Vonage, a private company for
which public information is limited, is also a competitor in the VoIP marketplace.



Skype Technologies S.A. (a private company to be acquired by eBay) offers a software application that allows people to talk and instant message for free using PC-to-PC connections. Skype recently launched VoIP
services enabling computer users to make phone calls from their PCs and other services that allow users to pay for calls placed to the PSTN. Skype reports that its software has been downloaded nearly 145 million times and claims to have
47 million people using its services with more than 1.8 million of such uses using one of its optional pay services.



We believe that our current business with its existing customer base, brand recognition, network infrastructure, carrier relationships, and our technical
and strong management team coupled with our free cash flow will allow us to compete in this marketplace. We plan to target niche markets and provide them with a technologically progressive, feature-rich high-speed internet based product.



DESCRIPTION OF COMPANYS PRODUCTS AND SERVICES



To meet the changing demands of the telecommunications customer, we are
continually developing new products.



Current Products:



Yak Dial-Around



Our dial-around service offers competitively priced long distance services. Customers in Canada and the U.S. dial our
10-10-925 Carrier Identification access Code (CIC) before placing domestic or international long distance calls. The charges for the calls appear on the customers current phone bill. A customer is not required to switch their
carrier, and there are no access and connection fees.



5



---

##### Table of Contents

LooneyCall



We offer a flat rate long distance dial-around product aimed at customers who make long duration long distance calls. LooneyCall enables Canadian
customers to purchase up to 38 minutes of long distance time for $1 (CAD) per call to anywhere in Canada the United States, China and Hong Kong. The charges for the calls appear on the customers current phone bill. A customer is not required
to switch their carrier, and there are no access and connection fees.



1+
Program



We also offer a 1+ Billing program for
high-volume dial-around customers. The customer can sign up with our 1+ program, essentially giving us the authorization to move the customer from their current long distance provider to our switch. The customer would then receive our lower rates
each time he makes a call and would receive a bill directly from Yak. This service requires that the customer dial just 1 or 011 before making long distance calls, without having to dial the normal access code.



Yak Cell



We offer a competitive cellular long distance service that is being sold to residential and business customers across North
America. Cell phone users simply need to register their cellular phone online and provide a method of payment in order to start saving on long distance. The customer is not required to switch their cellular provider in order to use this service.



WorldCity VoIP



We have developed a range of voice services over high-speed internet access
including local, long distance and other value-added services that are designed to help our customers keep in touch more efficiently and economically compared to traditional telephony services. For our customers who currently have a broadband
connection, WorldCity VoIP combines bundled local and long distance (within North America) calling packages with competitive international rates, plus phone features like Caller ID, Three Way Calling and Voicemail for one flat price in
addition to free member-to-member international calling.



Yak Conference



Yak conferencing service enables a business customer to
schedule conference calls for themselves anytime, online. There is no internet access needed for the other participants in the call. The only charges that apply are the applicable long distance telephone charges from the phone company of the
originator.



Yak Travel



The Yak Travel card allows a customer to enjoy low long distance rates while
they travel. Yak Travel enables a customer to call from anywhere in Canada, or the U.S., to anywhere in the world by dialing a local access number and following several voice prompts. This service is billed on either a prepaid or postpaid basis.



Yak for Business



We offer business solutions to small and medium businesses and offer a range
of innovative services in the Information Technology and Telecommunications sectors. Our customized business solutions are geared towards companies working in different industries.



We offer a wide array of voice services to help businesses meet the needs of their customers, suppliers and employees. Our
extensive, scalable voice network enables us to bring precisely the reach needed for a businessregional, national or international. We offer a full range of voice services including extended area service (EAS),



6



---

##### Table of Contents

local line service, toll free service, teleconferencing, long distance, local number portability, telecom system service and support, cabling for both voice
and data, and data services.



Contour Telecom



Contour Telecom Inc. is a telecommunications management company specializing
in voice, data, network, and cost management, helping organizations implement and administer their diverse communication environments. Contour provides customer-focused telecommunications management to medium and large business. The result is active
and objective management that saves our clients money, and provides significant improvement in service. We accomplish this via an ongoing focus on cost reduction, containment and consolidated billing, while continually striving to improve service
levels. We introduce advanced telecom practices and discipline to our clients while they focus their internal resources on their core business activity.



SALES & MARKETING ACTIVITIES



Our marketing strategy is focused on identifying and selling to certain niche markets or collections of customer profiles that use
telecommunication services. We continually reinforce the customer relationship and position the Yak brand by emphasizing services that provide value and quality. We have been successful entering niche ethnic markets across North America by
establishing a strong brand presence offering competitively priced services, custom tailored to the international markets we serve. We currently use print media, television, radio, outdoor advertising, and direct mail marketing materials to develop
brand recognition and generate new customers. Targeted direct mail coupled with print media advertising in community newspapers and on selected television and radio programs has allowed us to reach customers that make long distance domestic and
international calls.



In 2005, we expanded our marketing
strategy to include the promotion of our dial-around services in the United States. Multi-media marketing campaigns were initiated in Florida, New York and California and we entered into agreements with celebrity ethnic spokespersons to further
grow our United States operations. We expect to continue these campaigns and broaden our use of Internet marketing in conjunction with the development of our Internet-enabled products.



TELECOMMUNICATION SWITCHES



In November 2003, we purchased a state-of-the-art Tekelec/SanteraOne
next generation switch. This switch has allowed us to accommodate increased telephony volume while creating certain cost efficiencies. These efficiencies include savings on the fixed cost of leasing lines, reducing the amount of lines
required, lowering the lease costs on rental space, and decreasing the maintenance costs relating to the switch.



With the convergence of voice and data, and the development of next generation technologies such as VoIP, our Harris switches became obsolete.
As a result, in April of 2004 we started to transition from our older Harris environment, into our new SanteraOne switching platform. During the current year, we finalized the decommissioning of each of the older switches in a systematic manner. The
last of the Harris switches was fully decommissioned in August 2004.



We continue to operate our communications network with our Santera switch in Toronto, Canada that we augmented to 40,000 ports in March 2005. In fiscal year 2005, we initiated a network redundancy plan that will have us deploy a second
Santera switch in Miami, Florida during fiscal 2006. This additional switch will carry our U.S. terminating traffic from our U.S. customer base as well as provide disaster recover support and carry overflow traffic from the switch in Toronto. The
new site in Miami also contains a mirror copy of all of our network support systems to provide true redundancy. Additionally, we implemented in fiscal 2005 a Geoprobe real-time monitoring system that assists us in troubleshooting and maintaining our
network.



7



---

##### Table of Contents

We also made use of the next generation capability of the Santera switch and began routing
traffic in Internet Protocol (IP) with other carriers. This will assist us in lowering our traffic termination costs and will be a major focus of the Miami switch deployment where we are co-located with numerous other VoIP providers.



NETWORK



Our Tekelec/SanteraOne switch has positioned us to more efficiently accommodate the expansion of our customer base. The
switch will act as a gateway to both traditional PSTN networks and IP networks. This switch is connected through leased lines to the Local Exchange Carriers (LECs) tandem and central offices by long haul diverse fiber, and also to
Interexchange Carriers (IXCs) networks providing customers access to true coast to coast networks. Dedicated fiber transport is contracted from different carriers to provide us with the most competitive pricing.



Our coast-to-coast leased line network in Canada allows us to
originate and terminate the majority of our traffic on our own network, thereby reducing our overall switching costs. For calls that terminate outside of Canada, we have agreements with other off net International and cross border
carriers, which are selected by running real time least cost routing algorithms.



In addition, Yaks network has expanded further into the U.S. by loading our CIC codes in all Regional Bell Operating Companies (RBOCs) central offices in all mainland 48 states. U.S. customers can
reach this network by dialing our CIC code or signing up to Yaks 1+ program. U.S. originated calls are hauled to our switch in Toronto and terminated on our Canadian network or routed off net if the calls terminate
outside of Canada. Further, redundancy has been built in this U.S. network by connecting our switch to two independent major switching centers in New York City.



For our VoIP customers, all calls are routed through our VoIP network, which is then interconnected with other VoIP networks or to our Santera PSTN/IP
network.



EMPLOYEES



As of June 30, 2005, we have 151 full-time employees including eight
part-time employees, with the following breakdown:



| |  |  | Corporate (10)
| | - |  | --------------



| |  |  | Yak Dial-Around (56)
| | - |  | --------------------



| |  |  | Yak VoIP (10)
| | - |  | -------------



| |  |  | Yak for Business (50)
| | - |  | ---------------------



| |  |  | Contour Telecom (25)
| | - |  | --------------------



All of our part-time employees are paid for their services on an hourly basis. We consider our relations with our employees to be excellent, and none of
our employees are covered by a collective bargaining agreement.



BILLING & COLLECTION AGREEMENTS



We
have entered into agreements with the incumbent LECs, Bell Canada and Telus Corporation for the billing and collection of long distance calling charges made by our customers on the Bell Canada local line network in Ontario and Quebec, and by our
customers on the Telus local line network in British Columbia and Alberta. We also have a billing and collection agreement with MTS covering our services in Manitoba, with Sasktel covering our services in Saskatchewan, and with Aliant Telecom
covering our services in provinces on the East coast. The billing and collection agreements cover all long distance calls made through our dial-around switching long distance service and routing system. We track all such calls made, record
information about the source, destination, and duration of the call, rate the call, and provide the LECs with this data electronically. The LEC billing cycles are several times a month and include these charges to customers on their respective
invoices termed as other carrier charges. The



8



---

##### Table of Contents

LECs then collect these amounts on our behalf. Under the terms of the Billing & Collection Agreement, the LECs are obligated to pay us
within 45 days following the month in which the LECs receive our billing records (subject to offsets for non-collectible accounts). Canadian telecommunications authorities require that all incumbent LECs provide these billing and collection
agreements in perpetuity subject only to our continued compliance with their terms and any changes in applicable regulations.



In addition, we have an agreement with Telus Corporation Clearinghouse Operations (Telus clearinghouse) which allows for the handling,
transporting and delivery of our billing records generated by our switching and billing system to Bell Canada and Telus for invoicing and collection. In conjunction with this agreement, we have developed software and implemented hardware that allows
for electronic encrypted signaling and online transmission of the billable records between our system and that of Telus clearinghouse which will allow them to process the billable records. This online transmission process significantly minimizes
delays and errors in the billing. With respect to MTS and Sasktel we handle, transport and deliver our records to them directly and have developed the necessary software to process these records. The advantage of using Telus clearinghouse
service for the Bell Canada and Telus records is efficiency due to the large volume of records we deliver, since Telus clearinghouse has larger systems in place to process such volume in a timelier manner. The number of records we deliver to MTS and
Sasktel is much smaller, and the cost of delivering these records to them directly is lower than through Telus clearinghouse.



In the United States we have entered into an agreement with Billing Concepts, Inc., which specializes in inter-carrier clearinghouse operations, for
handling, transporting and delivery of our billing records to the LEC for invoicing and collection purposes. Under this U.S. arrangement all amounts invoiced by the LECs on our behalf are paid, less the LECs collection fees, to Billing Concepts, and
in turn Billing Concepts pays our company the amounts received, less their processing fees. This billing and collection arrangement in the U.S., is similar to those arrangements we have established in Canada, however this agreement does not apply to
most of the competitive local exchange carriers (CLECs) in the U.S. As a result, we do not process calls which originate from certain alternative local line carriers in the United States. Unlike in Canada, CLECs represent a larger market
share of calls originating in the U.S. We have developed software on our switching systems to block customers of CLECs for which we do not have billing and collection agreements in place.



GOVERNMENTAL REGULATION



As an international communications company providing telecommunications services in Canada and the United States, we are subject to varying degrees of
regulation in each of the jurisdictions in which we provide services. Laws and regulations applicable to the provision of telecommunications services, and the interpretation of such laws and regulations, differ significantly among the jurisdictions
in which we operate. The summary below describes the primary regulatory developments in the U.S. and Canada that may have a material effect on our business.



In general, the regulation of the telecommunications industry continues to change rapidly both domestically and globally. In both the U.S. and Canada,
telecommunications regulations are from time to time subject to judicial and administrative proceedings, as well as legislative and administrative hearings, in which proposals are made that, if adopted, could change the manner in which our industry
operates. We cannot predict the outcome of these proceedings or their impact on us. There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on us, or that domestic or international
regulations or third parties will not raise material issues with adverse effect on us.



Canada



Registration and Licensing
Requirements. We are registered with the CRTC as a reseller of telecommunications services in Canada. This is a requirement that has been imposed by the CRTC on all persons that resell telecommunications services in Canada.
Registration with the CRTC is the only requirement necessary to have the authorization to resell telecommunications services in Canada. The provision of certain services, however,



9



---

##### Table of Contents

requires additional licensing by the Commission or is subject to certain rules and regulations, regardless of whether the services are provided on a resale
or a facilities basis.



As of January 1, 1999, new
requirements oblige all persons who provide basic international telecommunications services (voice or data) to obtain a license from the CRTC for the provision of such services. Resellers who provide basic international telecommunications services
must therefore obtain an international services license, in addition to registering with the CRTC as a reseller.



The international services licensing regime was established in part because of concerns relating to the potential for anti-competitive behavior involving
foreign monopolists acting in conjunction with a resale affiliate based in Canada. The CRTC also wished to be able to exercise some supervision over Canadian service providers, especially resale affiliates in Canada.



We are required to hold a Class A license as we operate
telecommunications equipment that converts basic international traffic from circuit switched traffic to data. We currently hold a Class A license from the CRTC. The CRTC issues international telecommunications service provider licenses for a
period of five years and has indicated that, once it gains more experience with the licensing regime it will consider extending the terms to the maximum permitted length of 10 years. Licensees who maintain their licenses in good standing may expect
to have them renewed by the CRTC. Currently, there is no fee payable in order to obtain a basic international telecommunications services license.



Once a Class A license is obtained, the licensee must keep it current, by advising the CRTC of any changes to the information about the licensee that
has been filed with the Commission. The licensee must also file an annual affidavit stating that no changes to the information on file have taken place or alternatively describing any such changes and retain all data with respect to basic
international traffic that it converts from data to circuit-switched. Licensees are also obliged to comply with the requirements of the Canadian contribution regime (see below) as a condition of their license and to file an annual affidavit
attesting to the licensees compliance with this requirement. We are currently in full compliance with all filing requirements of our Class A license.



Because we do not provide any services on a monopoly basis and are not a resale affiliate, it is highly unlikely that the CRTC will have any concerns
regarding anti-competitive behavior on our part. In addition, because we do not own or operate the underlying transmission facilities used to provide telecommunications services to the public, we are not classified as a Canadian carrier, but rather
as a reseller. As such, we are not subject to the Canadian ownership and control requirements that apply to the facilities-based Canadian carriers.



Contribution Requirements. The CRTC established the contribution regime (a universal access-type regime) in 1992 when it first
opened the long distance market to facilities-based competition. The contribution regime was re-designed in 2000, when the CRTC introduced a revenue-based funding mechanism for subsidizing universal access. The new contribution regime is
broadly-based and requires that contribution be paid on the revenue from the widest possible range of services and service providers. Thus, Incumbent Local Exchange Carriers (ILECs), long distance operators, CLECs, cellular
operators, resellers such as our company and others must all make contribution payments based on their Canadian telecommunications service revenues.



Contribution-eligible revenues are defined as total revenues from Canadian telecommunications services less certain allowable deductions. The most
important deduction for us is the inter-carrier payments deduction. To prevent double taxation, inter-carrier payments to other telecommunications service providers are deducted from the total of Canadian telecommunications service
revenues (except where the services are used to provide a contribution-ineligible service, such as the provision of non-Canadian telecommunications services or where the services are used internally by the acquiring service provider).



For fiscal years 2005 and 2004, the contribution charge was 1.1% of
contribution-eligible revenues. The rate is expected to remain stable or slightly decline in future years. Although we cannot predict whether the CRTC will change its method of contribution assessment and collection in the future, if the
current approach remains unchanged and the overall contribution requirement declines as expected, we do not anticipate that our total contribution payments will become material in future years.



10



---

##### Table of Contents

Voice over Internet Protocol (VoIP) Regulation.



Earlier this year, the CRTC released two decisions on the Canadian
regulatory framework for VoIP services. It affirmed its preliminary position that VoIP services that provide subscribers with access to and/or from the PSTN and the ability to make and/or receive local telephone calls are to be regulated as local
exchange services. Therefore, existing regulatory requirements would apply depending on the class of service provider, i.e. ILECs, CLECs and resellers. This approach allows Yak to offer VoIP services as a local reseller with minimal regulatory
requirements and Yaks competitors in Canada, particularly the incumbent carriers, will be regulated to a much greater degree (e.g. ILECs are required to file tariffs and not price their service below cost). As well, the CRTC enunciated that
underlying broadband access providers should not discriminate against independent VoIP providers, such as Yak. Although Yak views this decision as positive, we are still required to develop and implement local service features (such as basic 911 and
network-based privacy obligations) that will increase Yaks costs to provide VoIP services. The CRTC has yet to set compliance dates other than the requirement that VoIP service providers provide basic 911 by July, 2005. Yak currently offers
basic 911 to our Canadian subscribers, however the CRTC indicated that the requirement to offer basic 911 is only an interim measure and in the future it will require VoIP providers to offer full enhanced 911 once technical obstacles are overcome.



The ILECs have appealed the CRTCs VoIP decision to the
Canadian federal cabinet. The ILECs argue that VoIP services are fundamentally different from current local voice services and it should be unregulated. Should their appeal be successful, ILECs would likely not be required to offer VoIP services
pursuant to tariff and would be able to price below cost and/or have greater latitude to discriminate against independent providers, such as Yak.



Other Regulatory Developments



On February 3, 2005, the CRTC released Telecom Decision CRTC 2005-6 (Decision 2005-6) with respect to the ILECs Competitive Digital Network
services (CDN). In Decision 2005-6, the CRTC set the terms and conditions, as well as the rates that competitors will pay the ILECs for digital network services they rely on to provide services to their customers. Rates for access to
low-speed services, which are legacy copperbased, were set at cost plus 15 per cent. However, rates for high-speed services, which are generally fibre-based and easier to replicate, were reduced from their prior market level to cost plus a
margin of 15 percent. The CRTC found that competitors, such as Yak, still rely heavily on the facilities of telephone companies and that by reducing the prices for underlying facilities, competitors will be able to offer services to more customers
and in more regions and growth in their customer base. We regard this decision as positive and expect to enjoy lower network costs as a result.



United States



In the United States we operate as an IXC. Because we offer basic communications services, e.g., plain old telephone service between
points in two different states (interstate service), and between the U.S. and a foreign country (international services), these services are subject to the provisions of the Communications Act of 1934, as amended (the
Act) and the regulations of the FCC. In addition, we offer basic communications services within a specific state (intrastate service). Intrastate interexchange services are subject to the telecommunications laws of the state
in which the service is provided, as well as subject to regulations made by the states public utility commission (PUC) pursuant to the relevant telecommunications laws.



Interstate and International Services Regulation. The FCC regulates the provision of interstate and
international basic communications services where such services are provided by a common carrier. A common carrier is an entity that offers basic communications services to the public or to all prospective users on standard
rates, terms and conditions. We are considered to be a common carrier. The FCC has substantially deregulated interstate and international common carrier services. Nonetheless, we are required to (1) provide our regulated



11



---

##### Table of Contents

telecommunications services on a non-discriminatory basis upon any reasonable request; (2) charge rates and adopt practices, classifications and
regulations that are just and reasonable; (3) avoid unreasonable discrimination in charges, practices, regulations, facilities and services; and (4) file tariffs setting forth the rates, terms and conditions for our services, or establish
an Internet web site that lists such rates, terms and conditions. Also, we must comply with a variety of license, rate making, reporting and other requirements in our provision of interstate and international telecommunications services, including
but not limited to the payment of annual regulatory fees and other contributions to funds established by the FCC.



In providing international service, we are subject to certain additional rules and requirements. In particular, we must have a license granted by the FCC
to provide international service (sometimes called a Section 214 authorization). We have obtained a Section 214 authorization from the FCC to provide international switched and private line services to foreign locations using our
own facilities or using services we lease from other carriers. Other international service rules also may affect our international business, including rules limiting routes over which U.S. international carriers may be permitted to provide
international switched services over private lines interconnected with the public switched network (referred to as International Simple Resale, or ISR).



Our costs of providing long distance services will be affected by changes in the rates imposed by ILECs as well as
CLECs for origination and termination of calls over local facilities (access charges). Access charges generally comprise a significant portion of the cost of providing interexchange services in the U.S. The FCC has adopted several
orders in recent years having the effect of reducing switched access charges imposed by local telephone companies. The FCC is currently considering further changes in its access charge regime; we cannot predict the outcome of these proceedings or
how such outcome will affect us.



Other carrier compensation
issues similarly may affect our operating expenses as well as our ability to compete with other IXCs and providers of other competitive services, such as VoIP. The FCC has initiated a broad-ranging rulemaking proceeding in which it has
proposed the replacement of various forms of intercarrier compensation; we cannot predict the outcome of this proceeding or its possible effect on our company.



As a provider of interstate and international telecommunications services, we must contribute to the federal universal service fund (FUSF)
established by the FCC. The FUSF ensures that high quality, affordable telecommunications service is available to all Americans. Pursuant to the FCCs universal service rules, all telecommunications providers must contribute a percentage of
their interstate and international end-user telecommunications revenues to the FUSF. Contributions to federal universal service support mechanisms are determined using a quarterly contribution factor calculated by the FCC. The contribution factor is
subject to change quarterly and may be increased or decreased depending upon the needs of the FUSF. The current contribution factor for the fourth quarter of our fiscal year was 11.1%. In July, these rates fell to 10.2% for our first quarter billed
revenue amounts. These costs are passed through to our customers.



The FCC currently is conducting a comprehensive review of the rules governing the methodology by which entities contribute to the FUSF. While the outcome of this proceeding and its effect on our business cannot be predicted, if any of these
proposals are implemented, the amount of our contributions to the FUSF may increase, and could negatively impact our business, prospects, operating margins, cash flows and financial condition. Changes to federal universal service funding obligations
could adversely affect us by increasing the payments owed to support the fund.



As of April 1, 2003, carriers may continue to assess a federal universal service surcharge on their customers, either as a flat amount or a percentage of a customers revenue, however, this surcharge may not
exceed the total amount of the universal service contribution factor currently in effect. As a result, we are precluded from assessing a federal universal service-related charge on our end user customers in excess of the relevant interstate and
international telecommunications portion of customers bill times the relevant contribution factor. We remain able to recover legitimate administrative costs relating to our contribution to the FUSF, provided that such cost recovery is made
through areas other than our universal service line item surcharge.



In addition to cost of service issues affecting IXCs in general, regulatory developments affecting the



12



---

##### Table of Contents

RBOCs may have an impact on our ability to compete. The Telecommunications Act of 1996, which amended the Act, establishes standards for RBOCs
and their affiliates to obtain from the FCC authority to provide long distance telecommunications services originating in their in-region local access and transport areas, or LATAs, to points outside that area. LATAs are geographical regions in the
United States within which a Bell Operating Company may offer local telephone service. The FCC has approved the RBOCs applications to provide in-region interLATA long distance service in most states. Because of their existing base of local
telephone service customers and their extensive telecommunications network, the RBOCS have the potential to be significant long distance competitors in each of the states in which they have obtained in-region, interLATA authority from the FCC.



Intrastate Services Regulation. Our intrastate
long distance operations are subject to various state laws and regulations, including, in most jurisdictions, certification and tariff filing requirements. Some state PUCs also require the filing of periodic reports, the payment of various fees and
surcharges and compliance with service standards and consumer protection rules. State PUCs often require pricing approval or notification for certain stock or asset transfers or, in several states, for the issuance of securities or debt or for name
changes. We have received formal commission approvals of applications to provide IXC resale services in Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana,
Maine, Missouri, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. We are also authorized to provide IXC resale services on a registration, or unregulated basis, in Iowa, New Jersey, Utah, Virginia and the District of Columbia.
Applications for authority to provide intrastate service are pending in Oklahoma and Alaska.



Certificates of authority can generally be conditioned, modified, canceled, terminated, or revoked by state regulatory authorities for failure to comply with state laws and/or the rules, regulations, and policies of
the state regulatory authorities. Fines and other penalties also may be imposed for such violations. PUCs also regulate access charges and other pricing for telecommunications services within each state. The regional Bell operating companies and
other local exchange carriers have been seeking reduced state regulatory requirements, including greater pricing flexibility which, if granted, could subject our long distance services to increased price competition. We may also be required to
contribute to intrastate universal service funds in some states.



VoIP Regulation. In the United States, traditional telephony service has been subject to extensive federal and state regulation. In contrast, information services and Internet services have been subject to less or no
regulation. To date, the FCC has treated Internet service providers as information service providers and has preempted state jurisdiction (although that ruling has been appealed). Information service providers are currently exempt from federal and
state regulations governing common carriers, including the obligation to pay access charges and contribute to the universal service fund. Regulators are struggling to determine the appropriate regulatory treatment of VoIP services given that such
services resemble both traditional telephony and information services.



While the classification of computer-to-phone VoIP services is being considered in the FCCs IP Enabled Servicesproceeding, the FCC has issued orders concerning the appropriate regulatory classification of certain VoIP
services. For example, on February 19, 2004, the FCC granted pulver.coms Petition for Declaratory Ruling that its service is neither telecommunications nor a telecommunications service and that the service is properly classified as
an information service under the 1996 Telecommunications Act. The FCCs Pulver Order addressed only computer-to-computer IP telephony services and was extremely fact specific. Among the factors identified by the FCC
as important to its finding were that the pulver.com service required the use of a broadband Internet connection, users must be online in order to utilize the service, the pulver.com service did not allow for users to make calls to PSTN users, and
the service is offered for free. In response to a petition filed by AT&T, the FCC issued an order in 2004 concluding that AT&Ts phone-to-phone VoIP service is a telecommunications service under the Act. Users of AT&Ts service
described in the petition originate calls using ordinary telephone lines to communicate with other users of ordinary telephone lines and AT&T used VoIP transmission technology for a portion of the call path. The FCC limited its ruling to
services like AT&Ts which do not require a user to have a broadband Internet access or an adapter that converts the telecommunications to and from IP format at the users premises.



13



---

##### Table of Contents

Obligations to Provide E-911.In June 2005, the FCC released a comprehensive VoIP E-911
Order (the Order). The Order applies only to VoIP service offerings that require a broadband connection, enable two-way communications, allow subscribers to receive calls that originate on the PSTN and that can be used to terminate
calls to the PSTN. Such service offerings must include full enhanced 911 (E-911) services with routing and functionality comparable to the enhanced 911 provided by traditional land-line local exchange carriers. VoIP providers
that offer nomadic services, as in the case of Yak, or non-geographic numbers have the additional burden of implementing a nationwide E-911 solution in order to comply with the FCCs unqualified requirement to ensure that all 911 calls are
routed to the appropriate local Public Safety Answering Point (PSAP). The FCC rules require that providers ensure that 911 calls are not routed to a PSAP that does not correspond to the location of the VoIP user, VoIP providers must
implement a system to allow customers to update their registered location in a timely manner.



The FCC Order applies to a number of our VoIP service offerings. We do not currently provide 911 with any of our U.S. based VoIP service offerings. E-911 service requirements must be in place by
November 28, 2005, and the FCC has warned that failure to comply with the rules contained in the Order may be penalized. The FCC indicated that non-compliant VoIP providers will be subject to enforcement action, including substantial
proposed forfeitures and, in appropriate cases, cease and desist orders and proceedings to revoke any FCC licenses held by the VoIP provider. The FCC Order also requires VoIP providers to advise new and existing subscribers of any E-911 service
limitations, and to obtain and keep records of each subscribers acknowledgement of such notification. We expect to comply with these customer notification requirements.



Numerous similarly situated VoIP providers have argued to the FCC that it is not practical for VoIP providers to meet the
FCCs November 28, 2005 deadline given the absence of a legal obligation on the part of the traditional local exchange carriers to provide access to the E-911 routing system to VoIP providers, the absence of a legal obligation on PSAPs to
accept VoIP E-911 calls, the extraordinary expense and effort required to establish the routing and functionalities required, and the inability, to date, of any third-party emergency services provider to offer E-911 solutions to VoIP providers.
Several providers have appealed the FCCs order or have filed petitions for reconsideration of the Order. Several parties in these and other filings have argued that the significant technical and cost barriers make it impractical for VoIP
providers to meet the November 28, 2005 deadline and have urged the FCC to extend or modify its requirements. Several parties have urged the FCC to narrow the scope of its requirements or to otherwise modify its rules to reduce the burden of
complying with the FCCs new VoIP E-911 rules. These appeals, petitions for reconsideration, and additional rulemaking are pending and we cannot predict the outcome of those proceedings.



REPORTS TO SECURITY HOLDERS



We may furnish our stockholders with a copy of this Form 10-K and with
quarterly or semi-annual reports containing unaudited financial information.



For further information about our company, you may read the materials we have filed with the SEC without charge at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can also obtain copies of these materials at prescribed rates from the Public Reference Section of the SEC in Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms.



Our SEC filings and the registration
statement can also be reviewed by accessing the SECs internet site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding registrants that are filed electronically with the SEC.



14



---

##### Table of Contents

|ITEM 2. | PROPERTIES
|------- | ----------



As of June 30, 2005 we have a number of leases in place to support our business. In May 2004, we moved from our offices at 55 Town Centre Court to
300 Consilium Place to gain the efficiencies of having the majority of our operations in one location, and consolidating the acquisitions of Yak for Business and Contour business units. During the 2005 fiscal year, we renewed our lease for our
Montreal office, which supports the Quebec operations of Yak for Business, through December 2008.



We currently lease space at 151 Front Street, Toronto, Ontario and 50 NE 9thStreet, Miami, Florida, to house our telecommunication switches and cross-connect platforms. Both locations are in buildings which house switches for many
other telecommunications carriers. This provides us with the advantage of ease of access to other carriers. These switches are installed in rooms that are environmentally modified, cooled and designed for switching equipment. These facilities have
full battery backup for a full 24 hours in the event of a power failure. Our current lease for the facility at 151 Front Street is for five years (which commenced in March 2002) with annual occupancy costs of approximately $75,000, with an option
for another 5 years at then-current rates. Our current lease for the facility at 50 NE 9thStreet commenced in June
2005, for a three year term, and provides for annual occupancy costs of approximately $117,600.



|                                                    |  |             |  |                      |  |                   |         |                      |   |        
|--------------------------------------------------- |  | ----------- |  | -------------------- |  | ----------------- | ------- | -------------------- | - | -------
|Location                                            |  | Square Feet |  | Lease TermExpiration |  | Annual Rent Costs |         | AnnualOccupancyCosts
|300 Consilium Place, 5thFloor, Toronto, Ontario     |  | 19,240      |  | July 09             |  | $                 | 193,100 |                      | $ | 529,800
|50 NE 9thStreet, Miami, Florida                     |  | 100         |  | May 08              |  | $                 | 60,000  |                      | $ | 117,600
|151 Front Street, Toronto, Ontario                  |  | 1,000       |  | February 07         |  | $                 | 48,000  |                      | $ | 74,800 
|55 Town Centre Court, Suite 610, Toronto, Ontario   |  | 6,500       |  | May 06              |  | $                 | 59,900  |                      | $ | 121,300
|55 Town Centre Court, Suite 600, Toronto, Ontario   |  | 3,733       |  | June 05             |  | $                 | 37,400  |                      | $ | 69,700 
|1 Place du Commerce, Suite 340, Brossard, Ontario   |  | 7,100       |  | December 08         |  | $                 | 55,800  |                      | $ | 105,200
|20803 Biscayne Boulevard, Aventura (Miami), Florida |  | 2,805       |  | June 07             |  | $                 | 75,700  |                      | $ | 77,170 



During the fiscal year
2005, both of our 55 Town Centre locations were vacated in anticipation of our relocation to 300 Consilium Place. No penalties were incurred upon cancellation of the lease for the 55 Town Centre locations.



|ITEM 3. | LEGAL PROCEEDINGS
|------- | -----------------



We are currently not a party to any material litigation which is not incidental to the ordinary course of our business and operations. In the ordinary
course of business, the Company is from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect
upon the financial condition and/or results of operations of the Company. However, in the opinion of the Companys management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the
financial position or results of operations of the Company.



15



---

##### Table of Contents

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



On December 16, 2004, we held our annual meeting of stockholders. At this annual meeting, the stockholders voted upon and approved the following
matters: to elect seven directors and to approve the appointment of our independent auditors.



PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | ---------------------------------------------------------------------



Our Common Stock is currently quoted on the Nasdaq National Market under the symbol YAKC. Prior to
February 9, 2005, our Common Stock was quoted on the Nasdaq SmallCap Market. The following table sets forth the range of the high and low bid quotations for our common stock for the periods indicated. Such market quotations reflect inter-dealer
prices, without mark-up, mark-down or commission and may not necessarily represent actual transactions.



|            |  |      |       |     |   |     
|----------- |  | ---- | ----- | --- | - | ----
|2005        |  | High |       | Low
|1stQuarter  |  | $    | 10.65 |     | $ | 5.50
|2ndQuarter  |  |      | 8.55  |     |   | 5.61
|3rdQuarter  |  |      | 8.50  |     |   | 5.36
|4thQuarter  |  |      | 6.40  |     |   | 4.50
|            |  |     
|2004        |  | High |       | Low
|1stQuarter* |  | $    | 6.97  |     | $ | 5.72
|2ndQuarter* |  |      | 9.99  |     |   | 6.08
|3rdQuarter  |  |      | 19.85 |     |   | 9.40
|4thQuarter  |  |      | 11.23 |     |   | 7.25

---

|* | Amounts have been restated for the 2:1 stock split effectuated on January 29, 2004 to shareholders of record on January 15, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------



As of September 16, 2005, there were approximately 94 holders of record
of our common stock. At September 16, 2005, the closing price of our common stock was $4.15 per share.



We have not paid any dividends on our common stock and we intend to retain all earnings for use in our operations and to finance the development and the
expansion of our business. We do not anticipate paying any dividends on the common stock in the foreseeable future. The payment of dividends is within the discretion of our Board of Directors. Any future decision with respect to dividends will
depend on future earnings, future capital needs and our operating and financial condition, among other factors.



|ITEM 6. | SELECTED FINANCIAL DATA
|------- | -----------------------



The following sets forth our selected consolidated financial data for the fiscal years ended June 30, 2005, 2004, and 2003.



16



---

##### Table of Contents

Statement of Operations Data:



|                                                    |      |                      |        |                |  |   |                |   |  |   |       
|--------------------------------------------------- | ---- | -------------------- | ------ | -------------- |  | - | -------------- | - |  | - | ------
|(In Thousands)                                      |      | Years Ended June 30,
|                                                    | 2005 |                      |        | 2004 Restated* |  |   | 2003 Restated*
|Net Revenue                                         |      | $                    | 92,700 |                |  | $ | 80,802         |   |  | $ | 40,404
|Cost of Revenue                                     |      |                      | 57,636 |                |  |   | 53,149         |   |  |   | 25,403
|Gross Margin                                        |      |                      | 35,064 |                |  |   | 27,653         |   |  |   | 15,001
|General and Administration                          |      |                      | 18,524 |                |  |   | 11,220         |   |  |   | 3,497 
|Sales and Marketing                                 |      |                      | 7,293  |                |  |   | 3,894          |   |  |   | 4,207 
|Depreciation and Amortization                       |      |                      | 2,943  |                |  |   | 2,980          |   |  |   | 803   
|Accounts Receivable Financing                       |      |                      | 429    |                |  |   | 514            |   |  |   | 499   
|Common Stock Issued to Obtain Note Payable          |      |                      |       |                |  |   | 90             |   |  |   |      
|Organizational and Start-Up Costs                   |      |                      | 512    |                |  |   | 261            |   |  |   | 345   
|Writedown of Property and Equipment and License Fee |      |                      |       |                |  |   | 313            |   |  |   | 119   
|Net Income From Operations                          |      |                      | 5,363  |                |  |   | 8,381          |   |  |   | 5,531 
|Share of Net (Gain)/Loss of Affiliate               |      |                      |       |                |  |   | (39            | ) |  |   | 29    
|Interest Expense                                    |      |                      | 464    |                |  |   | 455            |   |  |   | 14    
|Interest Earned                                     |      |                      | (406   | )              |  |   | (159           | ) |  |   |      
|Income from Joint Marketing Agreement               |      |                      | (421   | )              |  |   | (539           | ) |  |   |      
|Long-term debt discount amortization                |      |                      | 391    |                |  |   | 535            |   |  |   |      
|Loss on impairment of joint venture receivable      |      |                      |       |                |  |   | 277            |   |  |   |      
|Gain on settlement                                  |      |                      | (1,242 | )              |  |   |               |   |  |   |      
|Earnings Before Income Tax                          |      |                      | 6,577  |                |  |   | 7,851          |   |  |   | 5,487 
|Provision for Income Taxes                          |      |                      | 2,397  |                |  |   | 2,882          |   |  |   | 1,999 
|Net Earnings                                        |      | $                    | 4,180  |                |  | $ | 4,969          |   |  | $ | 3,489 



Balance Sheet Data:



|                     |      |                      |               |  |               |        |  |   |       
|-------------------- | ---- | -------------------- | ------------- |  | ------------- | ------ |  | - | ------
|(In Thousands)       |      | Years Ended June 30,
|                     | 2005 |                      | 2004 Restated |  | 2003 Restated
|Total Assets         |      | $                    | 51,248        |  | $             | 53,650 |  | $ | 26,743
|Total Liabilities    |      |                      | 18,404        |  |               | 26,326 |  |   | 21,015
|Total Long-Term Debt |      |                      | 977           |  |               | 5,196  |  |   | 5,885 
|Stockholders Equity |      |                      | 32,844        |  |               | 27,324 |  |   | 5,728 

---

|* | For information regarding the restatement of our historical financial statements, see Item 7 Managements Discussion and Analysis of Financial Condition and Results
of Operations  Significant Transactions, Subsequent Events and Financial Restatements and Notes 5 and 16 to our Consolidated Financial Statements included herein.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------



The Managements Discussion and Analysis of Financial Condition and Results of Operations included herein
should be read in conjunction with the Consolidated Financial Statements of Yak Communications Inc. and Subsidiaries, and the related notes to the Financial Statements. Our Financial Statements have been prepared in accordance with U.S. generally
accepted accounting principles and have been audited by our independent auditors.



The financial information in Managements Discussion and Analysis of Financial Condition and Results of Operations refers to our continuing operations.



17



---

##### Table of Contents

Overview



We provide discount, long distance telecommunication services to more than 905,000 recurring residential and small business customers in both Canada and
the United States, using our facilities-based resale model and our Voice over Internet Protocol (VoIP) network. Residential marketing efforts are primarily concentrated toward consumers who make significant numbers of international
calls, directly targeting ethnic markets and communities in major urban centers. Our customer base is diversified across many ethnic communities which we believe subjects us to a minimal risk of significant rate changes as a result of deregulation
or other unforeseen political events in particular countries. We also offer end-to-end telecommunications services to small-to-medium business enterprises in the Canadian market. Our focus is to provide the highest quality, competitively priced
telecommunications services to existing markets. We realize that dial-around long distance is a commodity and there will be a point in the future when we saturate our own marketplace. As a result, we intend to leverage the cash flow that this
business provides to transition into higher growth, higher margin emerging markets such as VoIP.



The 2005 promotional launch of our VoIP network has expanded our market by providing cost effective access to global markets. Use of Internet protocol
enables us to provide Yak service to customers who wish to originate or receive calls from multiple international locations and is a natural extension of our traditional value proposition. We expect that lower costs of providing service should
translate into significant savings for a new base of customers with high-speed internet connections.



Products



Our primary
residential product offering is dial-around services (also known as casual calling) at both variable and flat rate pricing. Casual calling allows our customers to dial-around their existing long distance carrier on any call by entering a
few digits prior to making the call, without permanently switching long distance carriers. We offer 1+ billing which allows our customers to permanently switch all of their calls from their existing long distance carrier to our long
distance service.



We are the largest participant in the
Canadian dial-around market, with over 70% market share. We believe there is opportunity to further expand the Canadian market, and we intend to focus our efforts on retention and growth in this core market. Our goal is to expand the size of the
addressable Canadian marketplace by marketing our product suite outside of major urban centers.



In November 2004, we began a marketing campaign in the United States to gain share of the $3 billion U.S. dial-around market, as estimated by IDC. We
promote our dial around services in the United States, relying on our core strategy of niche marketing to ethnic communities to grow market share. Our CIC (Carrier Identification Code) codes, i.e., 10-10-925 and 1+ service are available in 48
states, and we have a targeted marketing campaign in South Florida, New York and Los Angeles. We have entered into agreements with celebrity ethnic spokespersons, specialized internet marketing organizations and utilized print and outdoor media to
further market and expand our U.S. operations. Our strategic focus in the U.S. is supported by our office in Aventura, Florida. Although the U.S. market is highly competitive, our marketing campaign has yielded positive results during the year ended
June 30, 2005, with monthly minutes growing approximately 316%  from approximately 0.6 million in June 2004 to approximately 2.5 million in June 2005. Although this market is intensely competitive, we believe that through
the implementation of a strategically focused approach, there exists an opportunity to grow this market.



In November 2003, we introduced a dial-around service in Peru. Although Peru represented a very small portion of our total business, this introduction
provided us with an opportunity to develop competitive long distance services and to proactively test the issues relating to VoIP platform migration internationally. In March 2005, we decided to exit the Peru market as we evaluated our returns from
the Peruvian joint venture and the potential for significant growth versus that available in other markets.Operations in Peru are expected to be fully wound down by the end of the first quarter of fiscal 2006.



18



---

##### Table of Contents

Yak for Business, our division targeting the Canadian Small to Medium Enterprise (SME)
market, provides competitively priced voice and data products, including local lines, long distance, data management and point-to-point private lines. In the near future, we also intend to introduce a broadband offering to the SME market.
Additionally, we offer telecom management services to the mid-to-large sized customer base in Canada through our subsidiary Contour Telecom.



In March 2005, we purchased the Ontario and Quebec local resale customer base and centrex lines of Navigata Communications Ltd., a member of the
Saskatchewan Telecommunications (Sasktel) group of companies for $700,000. As a result of this transaction, we acquired a customer base of approximately 450 SME customers, totaling approximately 4,700 Centrex Lines on which resale services are
provided. We plan to integrate the acquired customers and lines into our Yak for Business division.



We also provide long distance alternative services to the rapidly growing cellular telephone consumer market. Through a two-stage dialing process, the
cellular telephone user in both Canada and the United States can access domestic and international long distance services at rates favorable to those charged by their incumbent cellular service provider.



In January 2005, we began marketing our VoIP service, WorldCity
VoIP, to residential customers in Canada and the U.S. For customers who currently have high-speed internet access, WorldCity VoIP includes free member-to-member international calling and combines bundled local and long distance
calling packages with very competitive international rates, plus enhanced calling features like Caller ID, Three Way Calling and Voicemail for one flat price. In addition to the basic package, future releases of the product are expected to provide
services such as unified messaging and virtual international phone numbers, where available. Our VoIP service is generally available everywhere and specific DID (direct dial) numbers are currently available in 53 U.S. cities, 13 Canadian cities and
London, England for incoming calling. To advance both the quality and quantity of our VoIP services, we have engaged the services of Kayote Networks, Inc. and Xten Networks, Inc. Kayote Networks provides recognized industry expertise to help define
VoIP technology solutions that break through the typical interoperability issues that have heretofore inhibited the widespread acceptance of internet based services. Xten provides end user devices that offer consumers choice in how they initiate
VoIP calls. Xten provides soft phone capability that allows customers to make and receive phone calls or video phone calls directly on their personal computer without the need of a regular analogue phone line.



Networks



Over the past four years, we have established and expanded our own private leased line network throughout all major Canadian
provinces. Additionally, we have achieved comparable network breadth in the U.S. by interconnecting with a major U.S. carrier. Currently, this coast- to-coast network delivers all of our telephony traffic. To further enhance the cost and control
advantages of this network, in September 2003, we purchased a Tekelec/Santera switch and Media Gateway. The port density and significantly reduced foot print of this switch has enabled us to transition our traffic from our legacy Teltronics/Harris
switches, resulting in significant cost savings. The Harris switches have now been decommissioned. Our current level of traffic is using approximately 40,000 ports and our Santera switch is expandable to 200,000 ports. As a result, we anticipate
having significant switching capacity in the foreseeable future.



Costs



In addition to the direct cost savings associated with
the transition to and operation of the Santera platform, the transition has also afforded us the opportunity to reduce costs by bringing a greater portion of our traffic onto our own network. Also, we continually pursue other methods of reducing our
variable direct costs such as employing least cost routing of our international traffic, negotiating lower variable costs with multiple carriers to multiple destinations in order to achieve the lowest available cost per minute, and continuing to
expand the capacity of our network to accommodate the growing demand in certain areas of the markets we serve.



19



---

##### Table of Contents

VoIP



We believe that internet-enabled voice services represent an important emerging market opportunity in the communications industry. The service enables
voice communication over broadband IP networks, significantly reducing costs to end users while bundling a broad array of value-added services, e.g., voicemail, call-waiting, caller-ID, call-forwarding, auto-attendant, find-me/follow-me and roaming.



We believe we are well-positioned to capture market share as
VoIP services gain popularity among traditional phone users. We have initiated strong relationships with technology and network providers to incorporate voice over high-speed internet into our current offering. In January 2005, we commenced a
marketing campaign to support our VoIP product launch. We intend to leverage our successful dial-around business model which concentrates in the ethnic communities for international calling, the market reach of current advertising, and the ability
to carry a portion or all of a call over the Internet, to maximize our VoIP initiative gross margin potential.



Foreign Currency



Currently, 96.5% of our net revenue is derived from sales and operations in Canada. The functional currency for this revenue is the Canadian dollar. Our reporting currency for our consolidated financial statements is the U.S. dollar.
Although we expect to derive less of our total business directly from Canada in the future, exchange rates have had and may continue to have a significant, and potentially adverse, effect on our results of operations. Strengthening of the Canadian
dollar relative to the U.S. dollar could have a positive impact on our future results of operations.



Significant Transactions, Subsequent Events and Financial Restatements



On January 24, 2005, we engaged Deloitte & Touche (Deloitte) as our new independent certified public accountants. In connection
with their review of the historical financial statements, Deloitte identified a software acquisition transaction with respect to which the accounting treatment we used was possibly incorrect.



On February 23, 2005, we announced that we would be delaying the filing
of our Form 10-Q for the third fiscal quarter ended December 31, 2004, beyond the extended filing deadline of February 22, 2005, because the work required to review this matter was not able to be completed. Also on February 23, 2005,
the NASDAQ Stock Market advised us that we did not comply with Marketplace Rule 4310(c)(14), which requires Yak to provide NASDAQ with copies of all reports required to be filed with the U.S. Securities and Exchange Commission (SEC). As
a result, NASDAQ appended the fifth character E to our common stock trading symbol as of the opening of business on February 25, 2005.



On March 3, 2005, we entered into a settlement agreement with Consortio Inc. and Convenxia Limited, the sellers of the Next Generation
Software. Pursuant to the settlement agreement, Yak paid $150,000 to the sellers and committed to complete further development of the software for $350,000 in exchange for a discharge of any further obligation under a long-term promissory note
with a principal value of $8.4 million as of December 31, 2004. (For further details, see Note 6 to our consolidated financial statements  Next Generation Software and Financial Restatements).



During the period of February 9, 2003 to March 25, 2005, Deloitte
was unable to reconcile the substance and form of the software acquisition transaction to determine a preferred accounting treatment. On March 25, 2005, Deloitte resigned as our independent certified public accountants.



On March 30, 2005, we sought guidance from the Office of the Chief
Accountant (OCA) of the SEC with respect to the accounting issues arising from the subject software acquisition transaction described above. Due to the judgments involved in the applicable accounting analysis, Yak, in consultation with
its Audit Committee, decided to obtain the guidance of the OCA for its analysis and conclusions regarding the subject software transaction.



20



---

##### Table of Contents

On April 6, 2005, we re-engaged Horwath Orenstein LLP as our new independent certified public
accountants.



As a result of continuing discussions with the
OCA Staff, along with an internal review by our management, the Audit Committee and our independent auditors, we determined in May 2005 to correct accounting errors related to the June 2003 software transaction. These corrections required that
certain previously-filed periodic reports be amended to include restated financial statements, including our consolidated financial statements for fiscal years 2003 and 2004, along with the quarterly periods contained in fiscal 2004 and the first
quarter of fiscal 2005. As a result, we restated our consolidated financial statements to make the following classes of adjustments (the Restatement):



| |  |  | changes in accounting treatment of software acquisition transaction
| | - |  | -------------------------------------------------------------------



| |  |  | correct balance sheet amounts to reflect adjustments resulting from change in accounting treatment
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | adjust consolidated statement of operations and statement of cash flows for interest expense, depreciation expense, other income, and related income tax expense to reflect
changes in the above-referenced accounting treatment
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On May 31, 2005, we filed amendments to certain of our previously filed periodic reports to include the foregoing changes in our restated financial statements, as well as in our delinquent Form 10-Qs for the fiscal quarters ended
December 31, 2004 and March 31, 2005. On June 7, 2005, Nasdaq provided us with formal notice that we were in compliance with the decision of a Nasdaq Listing Qualification Panel regarding the listing of our common stock and that our
common stock would continue to be listed under the symbol YAKC.



Subsequent to the May 31, 2005 amended filings, and in conjunction with its continued discussions with the OCA Staff, we discovered certain additional errors in our amended filings. On September 27, 2005, our Board of Directors
approved managements recommendation to correct our accounting related to the software acquisition transaction, to correct the following:



| |  |  | An error in calculating the discount rate used to determine the fair value of the transaction components for the May 31, 2005 restatements. The error caused the Company to
overstate the value of a long-term note payable, joint venture receivable and the subject software in its amended Annual Report on Form 10-K/A for fiscal year 2003 and subsequent periodic filings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The revaluation of the long-term note payable in the amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2004 was not consistent with GAAP, notwithstanding
the fact that the resultant gain was deferred.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The loss on impairment of the joint venture receivable was incorrectly deferred in the amended Annual Report on Form 10-K/A for fiscal year 2004. The loss should have been
recognized in the fourth fiscal quarter of 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The $1.4 million gain recognized on early extinguishment of debt in the third fiscal quarter of 2005 was overstated by $0.2 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



The foregoing changes have been incorporated into this Annual Report on Form
10-K to correct our financial statements for fiscal years 2003 and 2004, respectively, as well as each of the quarters in fiscal years 2004 and 2005 (except the fourth quarter) to reflect the fair value of certain software acquired by us on
June 30, 2003, and to revise the respective balance sheets accordingly. All applicable amounts relating to these restatements have been reflected in the Consolidated Financial Statements and disclosed in the Notes to the Consolidated Financial
Statements contained in this Form 10-K. The following increases (decreases) present the impact from these corrections on the financial statements presented herein:



21



---

##### Table of Contents

Statement of Operations:



|                                                                                                      |  |                             |   |  |        |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ------ | -
|                                                                                                      |  | For the years ended June 30 |  
|(In thousands)                                                                                        |  | 2004                        |   |  | 2003*  |  
|                                                                                                      |  | $                           |   |  | $      |  
|Interest on note payable                                                                              |  | (78                         | ) |  |       |  
|Loss on impairment of Joint Venture receivable                                                        |  | 277                         |   |  |       |  
|Income from Joint Venture                                                                             |  | (261                        | ) |  |       |  
|Long-term note discount amortization                                                                  |  | 216                         |   |  |       |  
|Loss before income taxes                                                                              |  | 140                         |   |  |       |  
|Provision for income taxes                                                                            |  | (49                         | ) |  |       |  
|Net Loss                                                                                              |  | (91                         | ) |  |       |  
|Earnings per share (Basic and Diluted)                                                                |  | (0.01                       | ) |  |       |  
|*       The subject transaction occurred on June 20, 2003 and the effect on income was insignificant. | 
|                                                                                                      |  |                            
|Balance Sheet:                                                                                        |  |                             |   |  |        |  
|                                                                                                      |  |                            
|                                                                                                      |  | $                           |   |  | $      |  
|Property & Equipment                                                                                  |  | (157                        | ) |  | (157   | )
|Joint venture receivable                                                                              |  | (1,240                      | ) |  | (1,790 | )
|Deferred Revenue - Fair value adjustment                                                              |  | (1,110                      | ) |  |       |  
|Long-term note payable Convenxia                                                                      |  | (148                        | ) |  | (1,948 | )
|Income taxes payable (recoverable)                                                                    |  | (49                         | ) |  |       |  



For a more detailed
description of the restatements, see Note 5 entitled Next Generation Software and Financial Restatements and Note 16 entitled Quarterly Results of Operations (Unaudited) to the accompanying Consolidated Financial Statements.



Also in March 2005, we decided to exit the Peru market as we
re-evaluated the economic returns of our Peruvian joint venture and potential for significant growth as compared to that available in other international markets. Operations in Peru are expected to be fully wound down by the end of the first fiscal
quarter of 2006.



Use of Non-GAAP Financial Measures



We use pro forma information regarding certain non-recurring costs and cost
of revenue in our MD&A. These are non-GAAP financial measures. We use and present non-GAAP financial measures along with GAAP results to evaluate and communicate the performance of the Company. Management believes that these non-GAAP financial
measures provide useful information to investors and contribute to an understanding of our financial performance. In particular, management believes that these non-GAAP financial measures allow investors to monitor and evaluate our ongoing operating
results and trends and gain a better understanding of our past performance as well as period-to-period performance. These measures should not, however, be considered in isolation or as a substitute for measures of performance prepared in accordance
with GAAP.



22



---

##### Table of Contents

Pro-Forma Information:



As a result of several unrelated matters, we have incurred several one-time costs that have had a significant impact on the current periods
earnings. They include the following items:



Impact of
Significant Expenses



|                                                     |  |                                       |      |               |   |     
|---------------------------------------------------- |  | ------------------------------------- | ---- | ------------- | - | ----
|                                                     |  | Impact on NetEarnings ($Million)(USD) |      | Impact on EPS
|Net Earnings/EPS as Reported                         |  | $                                     | 4.19 |               | $ | 0.32
|Estimated Impact of One-Time Events (Tax Affected) : |  |                                       |      |               |   |     
|      Costs associated: Yak Peru/DWSA               |  | $                                     | 0.87 |               | $ | 0.07
|      Due Diligence Costs (proposed acquisitions):  |  | $                                     | 0.57 |               | $ | 0.04
|      SEC Restatement Costs                         |  | $                                     | 0.51 |               | $ | 0.04
|      Recruiting Fees for Management                |  | $                                     | 0.31 |               | $ | 0.02
|Total                                                |  | $                                     | 2.26 |               | $ | 0.17
|Adjusted Net Earnings                                |  | $                                     | 6.45 |               | $ | 0.49



Critical Accounting Policies



The preparation of financial statements, in conformity
with U.S. generally accepted accounting principles (GAAP), requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and
their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment.



This listing of critical accounting policies is not intended to be a comprehensive list of all of the Companys accounting policies. In many cases,
the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP, with no need for managements judgment regarding accounting policy. We believe that of our significant accounting policies, as discussed in Note 2 to
the consolidated financial statements included in this Annual Report on Form 10-K the following accounting policies involve a higher degree of judgment and complexity:



Revenue Recognition



While our revenue recognition policy does not require the exercise of significant judgment or the use of significant estimates, we believe that our policy
is significant as revenue is a key component of our results of operations. We recognize:



| |  |  | revenue for dial-around services and the resale of long-distance services at the time of customer usage based upon minutes of use
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | revenue from the resale of voice and data telecommunications services to business enterprises at the time of customer usage based upon amounts billed by the respective service
providers
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | revenue related to administrative services on a straight-line basis over the term of related contracts
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | unearned revenue for amounts billed in accordance with customer contracts but no yet earned
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | revenue for amounts earned but not yet invoiced
| | - |  | -----------------------------------------------



23



---

##### Table of Contents

Allowance for Doubtful Accounts



As of June 30, 2005, we had $16.7 million of gross trade accounts receivable with a recorded allowance for doubtful
accounts of $0.5 million. We review the adequacy of our allowance for doubtful accounts on an ongoing basis, using historical collection trends, analyses of receivable portfolios by business unit and by reviewing specific accounts and make
adjustments in the allowance as necessary. Changes in economic conditions or dramatic changes in the telecommunications industry could have an impact on the collection of receivable balances or future allowance considerations.



Income Taxes



We account for income taxes in accordance with SFAS No. 109 Accounting for Income Taxes which requires an
asset and liability approach to financial accounting and reporting for income taxes. We have generated deferred income tax liabilities primarily due to the accounting basis of our assets exceeding the tax basis of those same assets. These
liabilities are offset by certain net operating loss carryforwards that are available for twenty years from the date incurred and which begin to expire in the year 2023. Our ability to fully utilize these net operating loss carryforwards is highly
dependent on our ability to generate future income in the tax jurisdictions that the losses originated. If these estimates and assumptions change in the future, we will be required to adjust our deferred tax valuation allowances.



Our income tax accounts reflect estimates of the outcome or settlement of
various asserted and unasserted income tax contingencies including tax audits and administrative appeals. At any point in time, several tax years may be in various stages of audit or appeals or could be subject to audit by various taxing
jurisdictions. This requires a periodic identification and evaluation of significant doubtful or controversial issues, both individually and in the aggregate. The results of these audits, appeals, or expiration of the statute of limitations could
affect our prior estimates for income tax accounts.



The
effective income tax rate in any period may be materially impacted by the overall level of income (loss) before income taxes, the jurisdictional mix and magnitude of income (loss), changes in the income tax laws (which may be retroactive), changes
in the expected outcome or settlement of an income tax contingency, changes in the deferred tax valuation allowance, and adjustments of a deferred tax asset or liability for enacted changes in tax laws or rates.



Customer Lists



As of June 30, 2005, customer lists were recorded at a net book value of $2.0 million, representing the unamortized
cost of customer lists purchased as part of the Argos (now Yak for Business) and Contour acquisitions in July 2003 as well as the customer base purchased from Navigata Communications Ltd. in March 2005, as discussed above. Customer lists are
amortized on a straight-line basis over five years, which represents the estimated customer life-cycle in the telecom industry. If the retention rate for acquired customers is less than initially estimated, accelerated amortization or impairment may
be necessary.



Impairment of Long-lived Assets and Goodwill



As of June 30, 2005, our long-lived assets were comprised primarily
of $13.6 million of property and equipment and $0.5 million of goodwill. We review the carrying value of long-lived assets and goodwill according to Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assetsand SFAS 142 Goodwill and Other Intangible Assets. Our estimate of useful lives on property and equipment are based on assumptions using historical data and industry trends. Impairment is
recorded on long-lived assets when assets are identified for disposal and if the carrying value of the long-lived asset exceeds its anticipated undiscounted future net cash flows. Impairment is recorded on goodwill when the carrying value of a
reporting unit exceeds the anticipated undiscounted future net cash flows of that reporting unit.



24



---

##### Table of Contents

The determination and measurement of an impaired loss requires the continuous use of significant
judgments and estimates. Our assumptions related to estimates of future cash flows are based on historical results of cash flows adjusted for management projections for future periods taking into account known conditions and planned future
activities. Our assumptions regarding the fair value of our long-lived assets and goodwill are based on the discounted future cash flows. Future events may result in differences in managements judgments and estimates. Factors that could result
in increased future impairment charges include increases in interest rates, which would impact discount rates; unfavorable economic conditions or other factors, such as a change in our expectations for growth and public acceptance of IP telephony
technology, which could decrease revenues and profitability; and changes in our cost structure.



Estimating Fair Value



We estimated the fair value of the assets and liabilities associated with the purchase of certain next generation telecommunications software from Consortio, Inc and Convenxia Limited noted above, based on the related estimated
cash flows. Statement of Financial Accounting Concepts No. 7 (SFAC No. 7) provides a framework for using future cash flows and present value as the basis for accounting measurements of fair value. When observable marketplace-determined
values are not available, discounted cash flows are often used to estimate fair value. Consistent with the methodology of SFAC No. 7, we used the expected cash flow approach to estimate fair value, focusing on explicit assumptions about the
range of possible cash outcomes and their respective probabilities.



Stock
Based Compensation



Statement of Financial Accounting
Standard (SFAS) No. 123. Accounting for Stock Based Compensation, defines fair value-based method of accounting for stock-based employee compensation plans and transaction in which an entity issued its equity instruments to acquire goods
or services from non-employees, and encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to account for employee stock-based compensation plans using the
intrinsic-value method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting form Stock issued to Employees, and related interpretations. Accordingly, employee compensation cost for stock is measured as the excess, if
any, of the estimated fair value of our stock at the date of the grant over the amount an employee must pay to acquire the stock.



In December 2004, the FASB issued SFAS No. 123(R) Share-Based Payment, which addresses the accounting for share-based payment transactions. SFAS No.
123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for and recognized in the statement of operations based on their fair value. SFAS No.
123(R) will be effective for public companies that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Management is evaluating the provisions of this standard.
Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Companys financial position and results of operations.



Results of Operations



The following information for the fiscal years ended June 30, 2005, 2004 and 2003 reflects all the items included in
the consolidated statements of operations as a percentage of net revenue (all amounts in U.S. dollars):



|                                                    |  |                     |    |  |               |    |  |               |  
|--------------------------------------------------- |  | ------------------- | -- |  | ------------- | -- |  | ------------- | -
|                                                    |  | Year Ended June 30, |   
|                                                    |  | 2005                |    |  | 2004 Restated |    |  | 2003 Restated |  
|Net Revenue                                         |  | 100                 | %  |  | 100           | %  |  | 100           | %
|Cost of Revenue                                     |  | 62.2                | %  |  | 65.8          | %  |  | 62.9          | %
|Gross Margin                                        |  | 37.8                | %  |  | 34.2          | %  |  | 37.1          | %
|General and Administration                          |  | 20.0                | %  |  | 13.9          | %  |  | 8.7           | %
|Sales and Marketing                                 |  | 7.9                 | %  |  | 4.8           | %  |  | 10.4          | %
|Depreciation and Amortization                       |  | 3.2                 | %  |  | 3.7           | %  |  | 2.0           | %
|Accounts Receivable Financing                       |  | 0.5                 | %  |  | 0.6           | %  |  | 1.2           | %
|Common Stock Issued to Obtain Note Payable          |  |                    |    |  | 0.1           | %  |  |              |  
|Organizational and Start-Up Costs                   |  | 0.6                 | %  |  | 0.3           | %  |  | 0.9           | %
|Writedown of Property and Equipment and License Fee |  |                    |    |  | 0.4           | %  |  | 0.3           | %
|Income from Operations                              |  | 5.8                 | %  |  | 10.4          | %  |  | 13.7          | %
|Share of Net (Gain)/Loss of Affiliate               |  |                    |    |  | 0.0           | %  |  | 0.1           | %
|Interest Expense                                    |  | 0.5                 | %  |  | 0.6           | %  |  |              |  
|Interest Earned                                     |  | (0.4                | %) |  | (0.2          | %) |  |              |  
|Income from Joint Marketing Agreement               |  | (0.5                | %) |  | (0.7          | %) |  |              |  
|Long-term debt discount amortization                |  | 0.4                 | %  |  | 0.7           | %  |  |              |  
|Gain on settlement                                  |  | (1.4                | %) |  |              |    |  |              |  
|Earnings Before Income Tax                          |  | 7.1                 | %  |  | 9.8           | %  |  | 13.6          | %
|Provision for Income Taxes                          |  | 2.6                 | %  |  | 3.6           | %  |  | 4.9           | %
|Net Earnings                                        |  | 4.5                 | %  |  | 6.2           | %  |  | 8.6           | %



25



---

##### Table of Contents

The following information for the fiscal years ended June 30, 2005, 2004 and 2003 is provided for
informational purposes and should be read in conjunction with the Consolidated Financial Statements and Notes (all amounts in U.S. dollars).



For the Year Ended June 30, 2005



|                          |  |         |        |           |     |         |           |       |        
|------------------------- |  | ------- | ------ | --------- | --- | ------- | --------- | ----- | -------
|(All amounts inThousands) |  |         |        |           |     |         |           |      
|                          |  |         |        |          
|Products                  |  | Revenue |        | Customers |     | Minutes |           | Calls
|Dial-Around/1+            |  | $       | 66,484 |           | 831 |         | 1,060,514 |       | 94,689 
|LooneyCall                |  | $       | 8,226  |           | 68  |         | 94,538    |       | 6,954  
|Yakcell                   |  | $       | 406    |           | 6   |         | 4,590     |       | 542    
|                          |  |         |        |           |     |         |           |       |        
|TOTAL                     |  | $       | 75,116 |           | 905 |         | 1,159,642 |       | 102,185



For the Year Ended
June 30, 2004



|                          |  |         |        |           |     |         |         |       |       
|------------------------- |  | ------- | ------ | --------- | --- | ------- | ------- | ----- | ------
|(All amounts inThousands) |  |         |        |           |     |         |         |      
|                          |  |         |        |          
|Products                  |  | Revenue |        | Customers |     | Minutes |         | Calls
|Dial-Around/1+            |  | $       | 54,203 |           | 718 |         | 856,542 |       | 75,150
|LooneyCall                |  | $       | 8,953  |           | 92  |         | 108,255 |       | 7,723 
|Yakcell                   |  | $       | 87     |           | 1   |         | 819     |       | 127   
|                          |  |         |        |           |     |         |         |       |       
|TOTAL                     |  | $       | 63,243 |           | 811 |         | 965,616 |       | 83,000



For the Year Ended
June 30, 2003



|                          |  |         |        |           |     |         |         |       |       
|------------------------- |  | ------- | ------ | --------- | --- | ------- | ------- | ----- | ------
|(All amounts inThousands) |  |         |        |           |     |         |         |      
|                          |  |         |        |          
|Products                  |  | Revenue |        | Customers |     | Minutes |         | Calls
|Dial-Around/1+            |  | $       | 38,375 |           | 553 |         | 514,025 |       | 58,949
|LooneyCall                |  | $       | 2,025  |           | 69  |         | 29,082  |       | 2,021 
|Yakcell                   |  | $       | 4      |           | 1   |         | 39      |       | 5     
|                          |  |         |        |           |     |         |         |       |       
|TOTAL                     |  | $       | 40,404 |           | 623 |         | 543,146 |       | 60,975



Results of Operations for the
fiscal year ended June 30, 2005 as compared to the fiscal year ended June 30, 2004.



Revenue



Net revenue
increased $11.9 million, or 15%, to $92.7 million for the fiscal year ended June 30, 2005, from $80.8 million for the fiscal year ended June 30, 2004. We experienced growth of $11.4 million in dial-around revenue, primarily as a result of
our advertising campaigns and the expansion of our network capability from coast to coast in the Canadian and American markets. The balance of the increase was predominantly due to our 1+ product which added revenues of $0.9 million for
the period ended June 30, 2005, which were partially offset by a decrease in revenues from our LooneyCall product of $0.7 million.



We achieved significant growth in the U.S market during this fiscal year, with revenue in our U.S. operating territories increasing by $2.0 million. This
was achieved by successfully implementing our plan in the U.S, which included actions such as:



| |  |  | Completion of the loading of our CIC access codes in the 48 mainland states
| | - |  | ---------------------------------------------------------------------------



| |  |  | Launch of our 1+ product in the fall of 2004
| | - |  | --------------------------------------------



| |  |  | Targeted marketing campaigns using a variety of media including; the internet, newspaper advertisements, flyers and commercials featuring various spokespeople
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



26



---

##### Table of Contents

The balance of our revenue was derived from our Yak for Business division and Contour Telecom Inc.
subsidiary. The contributed revenue for Yak for Business was essentially unchanged at $11.7 million (unadjusted for foreign exchange) for the fiscal year ended June 30, 2005, when compared to revenue for the fiscal year ended June 30,
2004. Yak for Business intends to continue to focus on our growth opportunities in the small and medium business markets. Contour Telecom contributed revenue of approximately $5.5 for the fiscal year ended June 30, 2005 which represented a
decrease of $0.1 million from the comparable period in 2004 when unadjusted for the foreign exchange rate. For information regarding foreign currency risk, see Item 7.A Quantitative and Qualitative Disclosures about Market Risk,
below.



The Average Rate per Minute (ARPM) we derive from our
core dial around services was $0.064 for the period ending June 30, 2005 as compared to $0.065 for the period ended June 30, 2004. Due to the competitive nature of the business and the fact that long distance services are a commodity
product, we expect continual, gradual erosion in the ARPM in the coming years. See the discussion in Direct Costs below regarding the actions we are taking to control costs and maintain margins.



Direct Costs



Cost of revenue increased $4.5 million or 8.5%, to $57.6 million for the fiscal year ended June 30, 2005, from $53.1
million for the fiscal year ended June 30, 2004. The overall cost of revenue decreased to 62.2% of sales for the fiscal year ended June 30, 2005, from 65.8% of sales for the fiscal year ended June 30, 2004. Margins improved primarily
as a result of the increased utilization of our leased line network. We continue to build out our Canadian network, which enables us to bring a greater share of traffic onto our own network, resulting in a higher utilization of
fixed-cost access lines. As a result of the continued downward pressure on the price of long distance telephony, we are utilizing real-time, least cost routing algorithms and contracting with various carriers to efficiently and effectively manage
direct costs.



The table below presents a breakdown of the
direct costs of our core dial-around business, in Canada and the United States, into its long distance and other components (all revenue amounts in thousands of U.S. dollars):



|                      |  |                                           |  |       |               |  |        |               |       |   |  |        |  |      |  
|--------------------- |  | ----------------------------------------- |  | ----- | ------------- |  | ------ | ------------- | ----- | - |  | ------ |  | ---- | -
|                      |  | Breakdown of Direct Cost for Core Revenue | 
|                      |  | June 30, 2005                             |  |       | June 30, 2004 |  |        | June 30, 2003 |      
|                      |  | $                                         |  | %     |               |  | $      |               | %     |   |  | $      |  | %    |  
|Core Revenue*         |  | 75,116                                    |  | 100.0 | %             |  | 63,243 |               | 100.0 | % |  | 40,404 |  | 100  | %
|Long Distance Charges |  | 20,934                                    |  | 27.9  | %             |  | 22,608 |               | 35.7  | % |  | 14,616 |  | 36.2 | %
|Other Fees**          |  | 23,893                                    |  | 31.6  | %             |  | 17,944 |               | 28.4  | % |  | 10,787 |  | 26.7 | %
|Gross Margin          |  | 30,288                                    |  | 40.5  | %             |  | 22,691 |               | 35.9  | % |  | 15,001 |  | 37.1 | %



|* | Core revenue includes dial-around, 1+, LooneyCall and YakCell.
|- | --------------------------------------------------------------



|** | Other Fees include Line Access charges for our leased line network, Occupancy, Call Processing Fees, CRTC contribution fees (fees paid to the Canadian government), Universal Service
Fund (USF) fees (fees paid to the United States government) and costs to originate and terminate traffic on our leased line network.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of revenue in our dial-around business is comprised primarily of the cost of long distance services, fees for the processing and transporting of
our calls and fixed and variable line access costs. The cost of the pure long distance component of services has decreased to $20.9 million or 27.9% for the fiscal year ended June 30, 2005, from $22.6 million or 35.7% for the fiscal year ended
June 30, 2004. The decrease in the relative percentage of revenue is a result of actively seeking competitive routes and the effect of deregulation on the cost of long distance in other international markets. The cost of the Other
Fees component of services (see list above) has increased to 31.6% for the fiscal year ended June 30, 2005, from 28.4% for the fiscal year ended June 30, 2004. The majority of this increase is due to call processing fees and switch
costs.



27



---

##### Table of Contents

The reconciliation of GAAP financial information to non-GAAP financial information for core revenue is
shown below.



Breakdown of Core Revenue



|                      |  |               |        |               |   |               |  |   |       
|--------------------- |  | ------------- | ------ | ------------- | - | ------------- |  | - | ------
|                      |  |               |       
|                      |  | June 30, 2005 |        | June 30, 2004 |   | June 30, 2003
|(In Thousands)        |  | $             |        |               | $ |               |  | $ |       
|GAAP Revenue          |  |               | 92,700 |               |   | 80,802        |  |   | 40,404
|                      |  |               |       
|Yak for Business      |  |               | 11,745 |               |   | 11,773        |  |   |      
|Contour               |  |               | 5,558  |               |   | 5,646         |  |   |      
|Other                 |  |               | 281    |               |   | 140           |  |   |      
|                      |  |               |       
|Non-GAAP Core Revenue |  |               | 75,116 |               |   | 63,243        |  |   | 40,404



Gross Margins



Our overall gross margin for the Company increased to 37.8% for the fiscal
year ended June 30, 2005, from 34.2% for the fiscal year ended June 30, 2004. The increase in margin can be mainly attributed to efficiently employing real-time least cost routing algorithms and contracting with various carriers in order
to manage the direct costs as efficiently as possible.



We
constantly analyze potential opportunities in the international market with regard to targeted campaigns, and believe there still remain high margin opportunities that can be utilized.



The table below highlights the relative proportion of calls terminating in the U.S. and Canada as compared to those
terminating internationally as well as the total of both categories:



Termination of Traffic by Destination



|                           |  |           |   |  |               |   |  |           |  
|-------------------------- |  | --------- | - |  | ------------- | - |  | --------- | -
|(All amounts in Thousands) |  |           |   |  |               |   |  |           |  
|                           |  |           |  
|Products                   |  | US/Canada |   |  | International |   |  | Total     |  
|2005                       |  |           |   |  |               |   |  |           |  
|Billed Minutes             |  | 909,811   |   |  | 249,830       |   |  | 1,159,642 |  
|                           |  | 78        | % |  | 22            | % |  | 100.0     | %
|2004                       |  |           |   |  |               |   |  |           |  
|Billed Minutes             |  | 724,308   |   |  | 241,308       |   |  | 965,616   |  
|%                          |  | 75.0      | % |  | 25.0          | % |  | 100.0     | %
|2003                       |  |           |   |  |               |   |  |           |  
|Billed Minutes             |  | 375,762   |   |  | 167,384       |   |  | 543,146   |  
|%                          |  | 69.2      | % |  | 30.8          | % |  | 100.0     | %



General & Administrative
Expenses



General and administrative expenses
(G&A) increased $7.3 million or 65.2%, to $18.5 million for the fiscal year ended June 30, 2005, from $11.2 million for the fiscal year ended June 30, 2004. Of this increase, $3.6 million can be attributed mainly to
salaries and benefits. The remaining increase of G&A of $3.7 million can be mainly attributed to increases in legal and consulting fees ($1.4 million), the establishment of an impairment reserve relating to the joint venture in Peru ($0.5
million), bad debts ($0.4 million), and occupancy costs ($0.3 million).



The largest component of the increase in G&A was salaries. This is a result of hiring additional senior management (including several executives with extensive telecommunications experience) and customer service representatives to
facilitate the future growth of our business. Additionally, as we move into new markets and introduce new products, we have invested in our front-line customer support organization. We believe that customer service has been a key differentiating
factor for us and we expect that this will continue in the future.



Legal and consulting expenses increased $1.2 million or 87% to $2.5 million for fiscal year ended June 30, 2005. The increase in expense is primarily a result of tax compliance and other legal matters related to the introduction of our
products into the U.S. market; costs incurred due to the accounting restatement with respect to a historical software transaction; fees incurred for Sarbanes-Oxley compliance; as well as fees in connection with regulatory matters and the fees
associated with due diligence efforts associated with certain acquisition opportunities.



We entered into a commercial services and marketing agreement with a joint venture participant in Peru for which an impairment reserve was taken during the fiscal year. Initially, we provided financing to assist in
the joint ventures development of dial-around long-distance service for which we would process the joint ventures international traffic and earn 50% of the profits generated by the business. During the fiscal year, an independent



28



---

##### Table of Contents

valuation was obtained and an impairment on the loan for its full value of $0.5 million was recorded leaving a balance at June 30, 2005 of $nil. At
June 30, 2005 and June 30, 2004, we had made advances of $0.1 million and $0.3 mil respectively under this agreement of which $nil ($0.4 million as of June 30, 2004) is a loan receivable.



Expenditures for occupancy increased by $0.3 million for the fiscal year
ended June 30, 2005 as a result of the consolidation to our new offices at 300 Consilium Place in Toronto, Ontario and the additional locations related to our purchase of Yak for Business and Contour. Please see the discussion in the
Properties section for a complete list of all of the properties currently under lease.



Sales & Marketing



Overall, sales and marketing expenses increased $3.4 million, or 87%, to $7.3 million for the fiscal year ended June 30, 2005, from $3.9 million for the fiscal year ended June 30, 2004. However, in our Canadian territory, the cost
of advertising decreased by $1.7 million to $1.9 million for the fiscal year ended June 30, 2005, primarily due to decreased direct mail and promotional activities for our dial-around product in Ontario and cost reductions resulting from a
switch in advertising agencies. Advertisement spending of $5.3 million in our U.S. markets began in the current calendar year. Upon entering the U.S. market, we invested advertising dollars in certain specific metropolitan areas in order to increase
our brand awareness. The significant increase in the amount of advertising in the U.S. market was to support the launch of our dial-around and 1+ service through a focused campaign of flyers, TV commercials and internet-based advertising.



Interest on Note Payable



On June 20, 2003, we purchased certain next generation
telecommunications software from an unrelated third party for $9.5 million. The consideration paid by Yak was $0.6 million in cash, a non-interest bearing short-term promissory note of $0.4 million and the balance was evidenced by a long-term
promissory note in the amount of $8.5 million. This long-term note bore interest at 7.25% per annum and required quarterly payments of principal and interest of $200,000 and was due July 15, 2012. The sole recourse by the holder of this
long-term note was the software. On March 3, 2005, we entered into a settlement agreement with the sellers of the subject software. Pursuant to the settlement agreement, Yak paid $150,000 to the sellers and committed to complete further
development of the software in an amount of $350,000 over a four-month period. In exchange we received a discharge of any further obligation under the long-term promissory note which had an outstanding principal amount of $8.4 million at
December 31, 2004. All guaranteed payments made under the joint venture agreement were also terminated.



Financing



Accounts
receivable financing costs relating to the factoring of our trade accounts receivable decreased to $0.4 million for the fiscal year ended June 30, 2005, compared with $0.5 million for the fiscal year ended June 30, 2004. Given the amount
of cash on hand, it was determined that financing our receivables was not necessary, and therefore, we fully paid down our factoring facility in March 2005.



Organizational & Startup Costs



Organizational and start-up costs for the continued development of our VoIP initiative were $0.5 million for the year ended June 30, 2005. These
costs were composed primarily of employee-related expenses ($0.3 million), occupancy and office related expenses ($0.1 million), and legal fees ($0.1 million). The VoIP product was announced on September 8, 2004, and as we continue to further
develop the product we anticipate there will be further organizational and startup costs related to this business.



Depreciation & Amortization



Depreciation and amortization remained flat at $2.9 million for the fiscal year ended June 30, 2005 when compared to the fiscal year ended
June 30, 2004. This was due to minimal new capital expenditures and the continued amortization of the property and equipment that have been capitalized on the balance sheet.



29



---

##### Table of Contents

Results of Operations for the fiscal year ended June 30, 2004 as compared to the fiscal year ended June 30,
2003.



Net revenue increased $40.4 million, or 100%, to
$80.8 million for the fiscal year ended June 30, 2004, from $40.4 million for the fiscal year ended June 30, 2003. We experienced steady growth of $15.8 million in the dial-around revenue, as a result of our advertising campaigns and the
expansion of our network capability from coast to coast in the Canadian market. On a year over year basis, our revenue in Western Canada increased $7.1 million, Ontario and Quebec grew by $8.3 million, and Eastern Canada added $0.6 million. Since we
launched our products to the east coast of Canada in October of 2003, we have experienced continual growth. The balance of the increase in our core revenue was as a result of our LooneyCall product which added revenues of $9 million for
the period ended June 30, 2004, compared to just $2.0 million for the period ending June 30, 2003.



Cost of revenue increased $27.7 million or 109.2%, to $53.1 million for the fiscal year ended June 30, 2004, from $25.4 million for the fiscal year
ended June 30, 2003. The overall cost of revenue increased to 65.8% of sales for the fiscal year ended June 30, 2004, from 62.9% of sales for the fiscal year ended June 30, 2003. This increase in cost of sales is a result of the lower
margins of our Contour and Argos businesses as compared to those of our core dial-around operations. As a result of the continual downward pressure on the price of long distance, our company is actively employing real-time least cost routing
algorithms and contracting with various carriers in order to manage the direct costs as efficiently as possible. In addition, to further control costs, we have continued to build out our network, which enables us to bring a greater share
of our traffic onto our own network, resulting in a higher utilization of our fixed-cost access lines.



Sales and marketing expenses decreased $0.3 million or 7.1% to $3.9 million for the fiscal year ended June 30, 2004, from $4.2 million for the fiscal
year ended June 30, 2003. The cost of advertising and promotion increased $0.6 million to $3.7 million for the fiscal year ended June 30, 2004 in our Canadian territory, primarily due to increased direct mail and promotional activities for
our dial-around product in Ontario, to support the introduction to the east coast and to grow the business in the rest of country. Spending for advertising in our U.S. territory decreased by $0.9 million to $0.2 million for the fiscal year ended
June 30, 2004, from $1.1 million for the fiscal year ended June 30, 2003. Upon entering the U.S. market in 2003, we invested advertising dollars in specific metropolitan areas in order to increase our brand awareness. The operating model
that we employed in Canada was not as suitable in the more complex U.S. market and management decided to retrench in the U.S. market and reduced expenditures until our CIC access codes were fully loaded and tested in all 48 states and we had
re-strategized our marketing initiatives. It is managements intention to significantly increase the amount of advertising in the U.S. market to support the launch of our 1+ service in the first quarter of 2005, through a focused campaign of
flyers, TV commercials and internet-based advertising.



General
and administrative expenses (G&A) increased $7.7 million or 221%, to $11.2 million for the fiscal year ended June 30, 2004, from $3.5 million for the fiscal year ended June 30, 2003. Of this increase, $3.9 million can be
attributed directly to our acquisition of Contour and Argos. The remaining increase of G&A of $3.8 million can be attributed mainly to increases of Salaries ($1.9 million), Legal and Audit ($1.1 million), Occupancy ($0.2 million) and Consulting
Services ($0.1 million).



The largest component of the increase
in G&A was salaries, a result of hiring additional administration, technical and customer service employees that were required to support our growth during fiscal year 2004, and support the launch of our VoIP product in the first quarter of
fiscal 2005. It is anticipated that salaries will continue to increase in our Broadband division as we add employees in the technical and customer service areas, proportionate to the growth of that business. In addition, to facilitate our future
growth, we added five executives with extensive telecommunications experience to the management team which increased salaries by $0.3 million for the period ended June 30, 2004.



Legal and Audit expenses increased $1.1 million or 321% to $1.4 million for fiscal year ended June 30, 2004. The
majority of the increase was in professional fees including regulatory matters, support of our VoIP development, in addition to the costs associated with exploring the Companys new growth opportunities and



30



---

##### Table of Contents

financing alternatives. In addition, the Company incurred costs of approximately $0.4 million related to due diligence costs of an acquisition that was
eventually abandoned.



Depreciation and amortization increased
$2.2 million, or 271%, to $3.0 million for the fiscal year ended June 30, 2004, as compared to $0.8 million for the fiscal year ended June 30, 2003. This increase resulted primarily from an increase in capital spending and a reduction in
the estimated useful life of existing telecommunication switching systems, the latter of which amounted to $1.3 million in increased depreciation. The accelerated write-down of the switching systems is based on a conservative view of their remaining
useful lives. Amortization of customer lists for the period was $400,000.



Liquidity and Capital Resources



Our liquidity
requirements arise from cash used in operating activities, purchases of capital assets and interest and principal payments on outstanding indebtedness. To date, we have financed our growth through the private placement of equity securities,
borrowings, accounts receivable financing, vendor financing and capital lease financing.



For the fiscal year ended June 30, 2005, there was a decrease in cash and cash equivalents of $5.4 million, compared to an increase of $16.7 million in the prior fiscal year. Net cash provided from operating
activities during the fiscal year decreased to $1.2 million, as compared to $12.2 million for the fiscal year ended June 30, 2004. This was primarily due to our pay-down of the receivable factoring facility (in the approximate amount of $5.7
million) and the decrease in deferred income taxes ($2.7 million from the prior fiscal year).



Net cash used in investing activities decreased to $7.1 million for the fiscal year ended June 30, 2005, as compared to $10.2 million for the fiscal year ended June 30, 2004. For the fiscal year ended
June 30, 2005, we used cash for acquisition of property and equipment of $6.3 million, primarily for our next generation software and broadband equipment. It is expected that we will continue to add to our network and network
equipment in the coming year to support the growth of the business. In addition, we continue to actively pursue acquisitions that we believe will be accretive in nature to our existing business.



Significant commitments that will require the use of cash in future periods
include obligations under operating leases, capital leases, advances under contract and other agreements, as shown in the following table (in millions):



Payments Due by Period



|                        |  |       |     |                 |   |           |  |           |     |                  |   |   |  |   |  
|----------------------- |  | ----- | --- | --------------- | - | --------- |  | --------- | --- | ---------------- | - | - |  | - | -
|Contractual Obligations |  | Total |     | Less Than 1Year |   | 1-3 Years |  | 3-5 Years |     | More Than5 Years
|Operating Leases        |  | $     | 2.1 |                 | $ | 0.9       |  | $         | 1.2 |                  |   |  |  |   | 
|Telus Advances          |  | $     | 0.4 |                 | $ | 0.4       |  |           |    |                  |   |  |  |   | 
|Carrier Commitments     |  | $     | 5.7 |                 | $ | 3.3       |  | $         | 2.4 |                  |   |  |  |   | 
|Total                   |  | $     | 8.2 |                 | $ | 4.6       |  | $         | 3.6 |                  | $ |  |  | $ | 



Net cash used by
financing activities was $1.3 million for the fiscal year ended June 30, 2005, as compared to $15.6 million provided by financing activities for the fiscal year ended June 30, 2004. During 2005, $1.2 million was used to reduce our long
term debt owed to long distance carriers, whereas money was previously raised via the issuance of common shares in the third quarter of fiscal 2004.



We believe we have sufficient fixed network capacity to meet our anticipated volume of telephony traffic in both Canada and the U.S. during fiscal 2006.
Based on our current products, we do not anticipate spending additional capital on our Canadian switching platform; however, we are currently building an additional switch in the U.S. to provide for long-term growth and network redundancy as well as
accommodating technological change and operating improvements.



31



---

##### Table of Contents

For the twelve months ended June 30, 2005, Yak For Business (formerly known as Argos Telecom) had
revenue of $11.7 million and, Contour Telecom had revenue of $5.5 million. We expect this amount to be substantially equal for the next 12 months. Having now launched our VoIP product, we anticipate releasing additional products aimed specifically
at the small and medium business customer. As a result, we would expect top-line revenue growth and margin improvement in Yak for Business in the future.



As a result of the continued convergence of voice and data, the release of our VoIP product is a significant event because it provides us with a vehicle
for future growth. As high-speed internet based services gain a critical level of acceptance in the marketplace, the ability to bundle other services with this core offering will become an important distinguishing factor between the many
competitors. We plan to continue to research and augment our core offerings with value-added services that are priced competitively and address the demands of the market.



In addition to our VoIP product, we have introduced a new 1+ product in the U.S. market. The introduction of this new
product is consistent with our previously stated intentions of increasing our presence in the U.S. market. Through new product introductions and potentially new acquisitions, we anticipate growing our customer base in the U.S. market substantially
over the medium to long-term.



We believe that our current
operations will be able to continue to generate sufficient cash to meet our current obligations and support the growth of our business through new product introductions, e.g., VoIP and the launch of our 1+ product in the U.S. market. We may seek to
obtain additional funds from public or private equity or debt offerings to fund new opportunities that may arise.



New Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, which eliminates the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS No. 153 will be effective for non-monetary transactions occurring after
June 15, 2005. The Company does not expect the adoption of SFAS No. 153 will have a material impact on the consolidated financial statements.



Stock Based Compensation



Statement of Financial Accounting Standard (SFAS) No. 123. Accounting for Stock Based Compensation, defines fair value-based method of
accounting for stock-based employee compensation plans and transaction in which an entity issued its equity instruments to acquire goods or services from non-employees, and encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. We have chosen to account for employee stock-based compensation plans using the intrinsic-value method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting form
Stock issued to Employees, and related interpretations. Accordingly, employee compensation cost for stock is measured as the excess, if any, of the estimated fair value of our stock at the date of the grant over the amount an employee must pay to
acquire the stock.



In December 2004, the FASB issued SFAS No.
123(R) Share-Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such
transactions be accounted for and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for public companies that do not file as small business issuers as of the beginning of the first interim or
annual reporting period that begins after June 15, 2005. Management is evaluating the provisions of this standard. Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a
material impact on the Companys financial position and results of operations.



Special Note Regarding Forward Looking Statements



Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such statements are based on current expectations, and are not strictly historical statements. Forward-looking statements include, without limitation, statements set forth in this document and elsewhere regarding, among other things:



| |  |  | expectations of future financial performance;
| | - |  | ---------------------------------------------



32



---

##### Table of Contents

| |  |  | market acceptance of new product introductions;
| | - |  | -----------------------------------------------



| |  |  | plans related to our capital expenditures;
| | - |  | ------------------------------------------



| |  |  | assumptions regarding exchange rates; and
| | - |  | -----------------------------------------



| |  |  | potential acquisitions.
| | - |  | -----------------------



Risk Factors



Our
actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause our actual results to differ materially from those in the forward-looking
statements, include, but are not limited to:



| |  |  | access to sufficient working capital to meet our operating and financial needs;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our ability to respond to growing competition in our markets for discount long distance services as well as the extent, timing and success of such competition;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to expand into new markets and to effectively manage our growth;
| | - |  | ----------------------------------------------------------------------------



| |  |  | profitability of our expansion into the U.S. market;
| | - |  | ----------------------------------------------------



| |  |  | customer acceptance and effectiveness of us as a discount long distance provider and our ability to assimilate new technology and to adapt to technological change in the
telecommunications industry;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to develop and provide voice over internet and web-based communications services;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | changes in, or failure to comply with, applicable governmental regulation;
| | - |  | --------------------------------------------------------------------------



| |  |  | changes in tax laws or rates;
| | - |  | -----------------------------



| |  |  | our reliance on our key personnel and the availability of qualified personnel;
| | - |  | ------------------------------------------------------------------------------



| |  |  | general economic conditions or material adverse changes in markets we serve;
| | - |  | ----------------------------------------------------------------------------



| |  |  | risk that our analyses of these risks could be incorrect and that the strategies developed to address them could be unsuccessful;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our accounting assumptions that regulatory agencies, including the Securities and Exchange Commission, may require or that result from changes in the accounting rules or
their application, which could result in an impact on our earnings;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | integrating the operations of newly acquired businesses;
| | - |  | --------------------------------------------------------



| |  |  | successful deployment of new equipment and realization of material savings there from; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | various other factors discussed in this filing.
| | - |  | -----------------------------------------------



Industry trends and specific risks may affect our future business and results. The matters discussed below could cause our future results to differ from
past results or those described in forward-looking statements and could have a material adverse effect on our business, financial condition, results of operations and stock price.



33



---

##### Table of Contents

Our future growth depends on our ability to attract new customers.



Our success will depend on our ability to effectively anticipate and adapt
to customer requirements and offer products and services that meet customer demands. Any failure of our current or prospective customers to purchase products from us for any reason, including a downturn in their economic fortunes, would seriously
harm our ability to grow our business. Increasingly, our growth will depend on our ability to successfully fund and develop and introduce new and enhanced products. The development of new or enhanced products is a costly, complex and uncertain
process that requires us to anticipate accurately future technological and market trends. We cannot be sure whether our new product offerings will be successfully developed and introduced to the market on a timely basis, or at all. If we do not
develop these products in a timely manner, our competitive position and financial condition could be adversely affected.



In addition, as we introduce new or enhanced products, we must also manage the transition from older products to newer products. If we fail to do so, we
may disrupt customer ordering patterns or may not be able to ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Any failure to effectively manage this transition may cause us to lose current and
prospective customers.



Our business is dependent upon our ability to keep
pace with the latest technological changes.



The
international telecommunications industry is changing rapidly due to deregulation, technological improvements, and expansion of telecommunications infrastructure, privatization and the globalization of national economies. There can be no assurance
that one or more of these factors will not vary in a manner that could have a material adverse effect on us. In addition, deregulation of any particular market may cause such market to shift unpredictably. There can be no assurance that we will be
able to compete effectively or adjust our contemplated plan of development to meet changing market conditions. The market for our services and the telecommunications industry generally is in a period of rapid technological evolution, marked by the
introduction of new product and service offerings and increasing transmission capacity for services similar to those provided by us. Failure to respond in a timely and cost-effective way to these technological developments could result in serious
harm to our business and operating results. We have derived, and we expect to continue to derive, a substantial portion of our revenues from providing telecommunications services that are based upon current technologies which are capable of adapting
to future technologies. As a result, our success will depend, in part, on our ability to afford the cost of acquiring new hardware and software associated with new technologies, develop and market service offerings that have significant customer
demand, respond in a timely manner to the technological advances of our customers, evolving industry standards and changing client preferences. Our profitability will depend on our ability to offer, on a timely and cost-effective basis, services
that meet evolving industry standards. There can be no assurance that we will be able to access or adapt to such technological changes at a competitive price, maintain competitive services or obtain new technologies on a timely basis or on
satisfactory terms.



The increase of services offered by our competitors
could adversely impact our business.



Recently,
telecommunications providers have increased the range of telecommunication services they offer to customers. This activity and the potential continuing trend towards offering new services may lead to a greater ability among our competitors to
provide a comprehensive range of telecommunications services, which could lead to a reduction in demand for our services. Moreover, by offering certain services to end users, competitors could reduce the number of our current or potential customers
and increase the bargaining power of our remaining customers, which may adversely impact our business.



34



---

##### Table of Contents

Our business is susceptible to severe pricing pressures from the larger carriers.



The long distance telecommunications industry is significantly impacted by
the marketing campaigns and associated pricing decisions of the larger carriers. There has been downward pressure on prices in the industry in recent years, a trend that we expect to continue. Our competitors within the Canadian market include BCE,
Telus, and Allstream. More recently, Canadas large cable operators have launched or are expected to launch bundled VoIP/long distance services. Additionally, as we launch our products into the U.S. market, our competitors will expand
dramatically and will likely include AT&T, MCI, Sprint, the RBOCs, and the major wireless carriers. The recent acquisition of AT&T Corp. by SBC Communications, and Verizon Communications Inc.s purchase of MCI Inc. may further intensify
competitive pressures in the U.S. long distance market. We would also expect that the competition will be intense in certain emerging markets including those associated with our VoIP product. Many of our competitors are significantly larger than we
are and have substantially greater financial, technical and marketing resources, larger networks, a broader portfolio of service offerings, greater control over transmission lines, stronger name recognition and customer loyalty, and long-standing
relationships with our target customers. As a result, our ability to attract and retain customers particularly in the United States may be adversely affected.



The success of our broadband initiative is dependent on growth and public acceptance of IP telephony as well as our ability to adapt to rapid technological changes
in IP telephony.



The development of broadband telephony
in Canada and the United States is in its nascent stages. It is uncertain as to how competition in our markets for telephony opportunities provided by broadband applications will develop. The financial models for return on pricing, capital
expenditures and return on investment have not been fully developed so it is difficult to gauge what applications will be financially successful. The success of our broadband initiative is dependent upon future demand for IP telephony systems and
services which, in turn, will depend on a number of factors including IP telephony achieving a similar level of reliability that users of the public switched telephone network have come to expect from their telephone service. IP telephony service
providers must offer cost and feature benefits to their customers that are sufficient to cause the customers to switch away from traditional telephony service providers. If any or all of these factors fail to occur, our broadband business may not
grow.



Our services are subject to various types of governmental regulation.



While our retail services have been largely deregulated
by the CRTC, any change in CRTC policy, regulations or interpretations could have a material adverse effect on Yaks operations and financial condition and operating results.



Although we currently comply with the CRTCs obligations to provide basic 911 services, the CRTC indicated that this is
only an interim measure and expects VoIP providers to offer full enhanced 911 services. We may not have the capability to offer enhanced 911 services as required by the CRTC.



We do not currently offer any 911 services in the United States, and may not be able to provide E-911 services, as required
by the FCC Order, by the FCCs November 28, 2005 deadline. Compliance with the FCC Order will require us to negotiate and secure expensive routing arrangements with traditional local exchange carriers and Public Safety Answering Points
throughout the United States. We may also seek to engage a third-party provider of E-911 services for compliance purposes but no third-party provider currently offers a comprehensive nationwide solution. If we are not able to implement a
comprehensive E-911 solution by the November 28, 2005 deadline, we may be compelled to modify our existing offerings, seek an extension or waiver of the FCC requirements, cease providing VoIP service, or be in material violation of the FCC
rules and, as a result, at risk for substantial enforcement penalties.



Further, if the FCC were to determine that those VoIP service providers like Yak, or the services they provide, are subject to FCC regulation, including the payment of access charges and contribution to the universal service funds, it could
have a material adverse affect on our broadband initiative. In addition, although the FCC has declared that certain VoIP services are interstate in nature and therefore subject to federal regulation, state regulatory



35



---

##### Table of Contents

authorities potentially still retain some oversight of may determine thatintrastate IP telephony service and could impose some regulatory burdens on VoIP
providers.should be subject to local regulation, certification and fees. Further, although other aspects of the regulatory status of VoIP telephony remain undecided at the FCC, the FCC and other U.S. regulatory bodies have begun to assert regulatory
authority and impose obligations on VoIP telephony providers. The effect of potential future VoIP telephony laws and regulations on our broadband initiative in the United States cannot yet be determined.



Additionally, our ability to offer VoIP services outside North America is
subject to the local regulatory environment, which may be unknown, complicated and often uncertain. Regulatory treatment of VoIP telephony outside North America varies from country to country. There is no assurance that we will immediately be in
compliance with the applicable laws and regulations of the markets we have identified as promising for our VoIP services. Some countries may assert that we are required to register as a telecommunications



Any future acquisitions could be difficult to integrate, disrupt our business, dilute
stockholder value and adversely affect our operating results.



We may expand our operations through acquisitions over time. This may require significant management time and financial resources because we may need to integrate widely dispersed operations with distinct corporate cultures. Our failure to
manage future acquisitions successfully could seriously harm our operating results. Also, acquisition costs could cause our quarterly operating results to vary significantly. Furthermore, our stockholders would be diluted if we financed the
acquisitions by incurring convertible debt or issuing securities.



The
current expansion of the Company will continue to put pressure on management.



Our continued growth and expansion may place a significant strain on our management, operational and financial resources, and increase demand on our systems and controls. We entered the SME market in July 2003,
launched our VoIP service in September 2004 and expanded into the U.S. 1+ market in the Fall of 2004. To manage our growth effectively, we must continue to implement and improve our operational and financial systems and controls, purchase and
utilize other transmission facilities, and expand, train and manage our employee base. If we inaccurately forecast the movement of traffic onto our network, we could have insufficient or excessive transmission facilities and disproportionate fixed
expenses. As we proceed with our development, operational difficulties could arise from additional demand placed on customer support, billing and management information systems, on our support, sales and marketing and administrative resources and on
our network infrastructure.



We have a significant dependence on
Transmission Facilities-Based Carriers.



We primarily
connect our customers telephone calls through transmission lines that we lease under a variety of arrangements with other facilities-based long distance carriers. Many of these carriers are, or may become, our competitors. Our ability to
maintain and expand our business depends on our ability to maintain favorable relationships with the facilities-based carriers from which we lease transmission lines. Where competition in the underlying access facilities does not exist, regulators
mandate non-discriminatory access to such facilities. If our relationship with one or more of these carriers were to deteriorate or terminate, it could have a material adverse effect upon our cost structure, service quality, network diversity,
results of operations and financial condition. Similarly, if regulators should prematurely deregulate this market, it could have a similar material adverse effect.



Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.



Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and other trading market rules, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and
public disclosure. As a result, we intend to invest all appropriate resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities.



36



---

##### Table of Contents

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial
results.



Effective internal controls are necessary for us
to provide reliable financial reports and effectively prevent fraud. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We have in the past discovered, and may in the future
discover, areas of our internal controls that need improvement. As discussed in Item 9A. Controls and Procedures, we are continuing to work to improve our internal controls. We cannot be certain that these measures will ensure that we implement
and maintain adequate controls over our financial processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to
fail to meet our reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.



Our quarterly results may fluctuate causing our stock price to decline.



A number of factors, many of which are outside of our control, are likely to
cause these fluctuations.



The factors outside
of our control include:



| |  |  | long distance telecommunications market conditions as well as economic conditions generally;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | fluctuations in demand for our services;
| | - |  | ----------------------------------------



| |  |  | reductions in the prices of services offered by our competitors;
| | - |  | ----------------------------------------------------------------



| |  |  | costs of integrating technologies or businesses that we add; and
| | - |  | ----------------------------------------------------------------



| |  |  | changes in foreign exchange rates.
| | - |  | ----------------------------------



The factors substantially within our control include:



| |  |  | the timing of expansion into new markets, both domestically and internationally; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the timing and payments associated with possible acquisitions.
| | - |  | --------------------------------------------------------------



Because our operating results may vary significantly from quarter to quarter, our operating results may not meet the expectations of securities analysts
and investors, and our common stock could decline significantly which may expose us to risks of securities litigation, impair our ability to attract and retain qualified individuals using equity incentives and make it more difficult to complete
acquisitions using equity as consideration.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



Our primary market risk exposures relate to changes in foreign currency exchange rates.



Foreign currencyIn excess of 96.6% of our current revenue is derived from sales and operations in Canada. The
reporting currency for our consolidated financial statements is the U.S. dollar. The functional currency for each of our operating entities is the respective local currency. In the future we expect to derive a greater proportion of our revenues
outside of Canada; however, in the short-term, changes in the exchange rate may continue to have a significant, and potentially adverse effect on our results of operations. Our primary risk of loss regarding foreign currency exchange rate risk is
caused by fluctuations in the U.S. dollar/Canadian dollar.



We
are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our Canadian subsidiary. We translate the Canadian dollar statements of operations into U.S. dollar using the average
exchange rate during the reporting period. Changes in foreign exchange rates affect our



37



---

##### Table of Contents

reported profits and losses and cash flows and may distort comparisons from year to year. As an example, if the U.S. dollar were to strengthen relative to
the Canadian dollar, it would take a greater amount of revenue and profits in Canadian dollars to achieve a similar level of results in U.S. dollars compared to the previous year.



For example, during the year ended June 30, 2005 and 2004, the U.S. dollar weakened compared to the Canadian dollar. As
a result, the revenue from our Canadian subsidiary increased $3.5 million or 3.2% (as compared to 42% in 2004) in Canadian dollars, but increased $8.8 million or 10.9% (as compared to 59% in 2004 when stated in U.S. dollars).



|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



The Companys audited consolidated financial statements for the fiscal years ended June 30, 2005 and June 30, 2004, immediately follow the
signature page to this Form 10-K.



|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|ITEM 9A. | CONTROLS AND PROCEDURES
|-------- | -----------------------



Evaluation of Disclosures. We maintain disclosure controls and procedures that are designed to ensure that information relating to us and
our consolidated subsidiaries required to be disclosed in our periodic filings under the Exchange Act is recorded, processed, summarized and reported in a timely manner in accordance with the requirements of the Exchange Act, and that such
information is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of June 30, 2005, an evaluation, was
completed under the supervision and participation of management, including the Chief Executive Officer and Principal Financial Officer, of the design and operation of the disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.



As more fully discussed in Note 5 to the Consolidated
Financial Statements, we restated our previously issued financial statements as a result of correcting errors relating to the accounting for an historical software acquisition transaction. On May 31, 2005 amended reports were filed with the SEC
with the intent to correct and restate our consolidated financial statements for fiscal years 2003 and 2004, along with the quarterly periods contained in fiscal 2004 and the first quarter of fiscal 2005. Subsequent to the May 31, 2005 amended
filings and in conjunction with our continued discussions with the OCA Staff, as part of the guidance requested in connection with the accounting for the subject transaction, we discovered additional errors in our amended filings. Further
corrections were made to the financial statements contained in this Annual Report on Form 10-K.



Based on the foregoing facts and circumstances, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and
procedures were not effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic filings with the SEC.



Changes in Internal Control over Financial Reporting. We have
been conducting a review and evaluation of our internal controls as part of our preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Our work is preliminary but throughout the process we have
initiated revisions and enhancements to improve our internal control over financial reporting. As discussed more fully above in Evaluation of Disclosures, we amended previously issued financial statements to correct errors relating to the accounting
for an historical software acquisition transaction.



We have
been without a full-time Chief Financial Officer throughout the second half of fiscal 2005. We have hired an experienced, certified public accountant in our financial reporting department and have engaged accounting consultants and other outside
professionals during the year to assist in the performance of certain CFO functions on an interim basis and to maintain and improve our internal controls over financial reporting. We have



38



---

##### Table of Contents

commenced a search for a full-time CFO. Also during the fourth quarter of fiscal 2005, we began implementation of a new general ledger system that we expect
to be operational in the first fiscal quarter of 2006. Except as otherwise discussed herein, there have been no changes in our internal control over financial reporting that occurred during the fiscal year that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.



PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF THE COMPANY
|-------- | ----------------------------------------------------------------



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



|                          |  |     |  |                                                              
|------------------------- |  | --- |  | -------------------------------------------------------------
|NAME                      |  | AGE |  | POSITION                                                     
|Charles Zwebner           |  | 46  |  | President, Chief Executive Officer and Director              
|Anthony Greenwood         |  | 47  |  | Director and Secretary                                       
|Anthony Heller            |  | 54  |  | Director                                                     
|Adrian Garbacz(1)         |  | 46  |  | Director                                                     
|Joseph Grunwald(1) (2)    |  | 42  |  | Director                                                     
|R. Gregory Breetz, Jr.(1) |  | 43  |  | Director                                                     
|Kevin Crumbo(2)           |  | 39  |  | Director                                                     
|Valerie Ferraro           |  | 54  |  | President  Yak Communications (Canada) Inc.                 
|David Hurwitz             |  | 42  |  | President VoIP Initiative                                    
|Margaret Noble            |  | 44  |  | Chief Accounting Officer, Interim Principal Financial Officer



|(1) | Member of Audit and Governance and Nominating Committees.
|--- | ---------------------------------------------------------



|(2) | Member of Compensation Committee.
|--- | ---------------------------------



BOARD OF DIRECTORS



CHARLES ZWEBNER.



Mr. Zwebner is the founder of our company, and has served as our President, Chief Executive Officer, and Chairman of our Board of Directors since our
inception in December 1998. Prior to organizing our company, he served as the President of CardCaller Canada Inc. (1992-1998) and was a member of its Board of Directors. Mr. Zwebner founded CardCaller Canada in 1992, which developed the first
Canadian fixed amount prepaid, multilingual telephone calling card. In June 1997, the shareholders, including Mr. Zwebner, of CardCall International Holdings, Inc. (CIH), the parent of CardCaller Canada, sold all of their shares in
CIH to a U.S. public corporation. Mr. Zwebner continued as President and a director of CardCaller Canada until his resignation in August 1998. Prior to Mr. Zwebners resignation, the new owner of CIH disposed of substantially all of
the assets of that company. Mr. Zwebner holds a B.A. in Computer Science and Business Administration from York University.



39



---

##### Table of Contents

ANTHONY GREENWOOD



Mr. Greenwood has served as a Director of our company since December 2001. He is a Canadian attorney with Greenwoods
Barristers & Solicitors. He was educated in Europe and North America, and practices law and acts as a consultant to both Canadian and U.S. private and public corporations in the area of business law, cross border financing, and dispute
resolutions. He is a member of the International Law and Business Law sections of the American Bar Association and sits on several committees including the International Business Law Committee of the Section of Business Law. He is also a member of
the Canadian Bar Association, the London, England-based International Bar Association, and the Tokyo-based Inter-Pacific Bar Association. Mr. Greenwood is an author of many academic articles in the areas of secured financing, corporate finance,
financial service regulation, and international debt recovery & dispute resolution, and is an associate editor of the Canadian-based international Banking & Finance Law Review and an editor of the Australian-based
international law publication Journal of Banking and Finance, Law & Practice. Mr. Greenwood is also a part time lecturer at the Osgoode Hall Law School (Toronto, Canada).



ANTHONY HELLER.



Mr. Heller has served as a Director of our company since December 1998.
He has served as the President of Plazacorp Investments Limited (a real estate development company based in Toronto, Canada) since 1994. Since 1994, Plazacorp has completed over $300 million worth of real estate developments principally in Canada.
Mr. Heller has also been involved in venture capital financings and has consulted to both privately held and publicly traded companies in which he has invested.



ADRIAN GARBACZ



Mr. Garbacz has been a member of our board of directors since January 21, 2003. Mr. Garbacz is currently
self-employed in the real estate and development industry in New York. Previously, he was the Chief Executive Officer of The Grisdale Group of Companies in Queens, NY, which was also involved in the real estate development and finance industry.
Mr. Garbacz received a B.A. in Accounting (1985) from Touro College and his certified public accountant designation in the state of New York in 1987. Mr. Garbacz is a member of the audit committee of our board of directors.



JOSEPH GRUNWALD



Mr. Grunwald has been a member of our board of directors since
January 21, 2003. Mr. Grunwald has been involved in the banking industry for over 15 years. He is currently a Senior Vice President with Safra Bank, New York, NY where he is Director of Domestic Business Development. Mr. Grunwald
received a B.A. in Economics (1983) from the City University of New York and an M.B.A. from Long Island University (1986). Joseph Grunwald is a member of the audit committee of our board of directors.



R. GREGORY BREETZ, JR.



Mr. Breetz has served as a Director since 2004. He is currently an
Executive-in-Residence for Dolphin Equity Partners, a New York City based venture capital fund. Dolphin Equity invests primarily in telecommunications and media companies. Prior to joining Dolphin, Mr. Breetz was with XO Communications and
McCaw Cellular in various financial roles. Mr. Breetz has a BS in Accounting from the University of Kentucky and is a CPA. Mr. Breetz currently serves as the Chairman of the Audit Committee.



KEVIN CRUMBO



Mr. Crumbo began his career in San Francisco at the tax practice of
Coopers & Lybrand and subsequently moved into the financial analysis industry working for a Fortune 200 financial services firm. He later advanced into senior financial roles for bioscience and healthcare companies with highlights including
successful turn-arounds, private placements, and various business combinations. Now leading Kraft Corporate Recovery Services, LLC, he



40



---

##### Table of Contents

assists clients in a variety of industries with turn-around management, corporate governance reviews, and litigation support. Telecommunications companies
comprise a large portion of his consulting clients, and he has recently consulted with Yak on a variety of matters. Mr. Crumbo received a B.S. in Accounting from the University of Kentucky in 1988 and M.B.A. from Vanderbilt University in 1996.
He holds certificates in public and forensic accounting. Though he does not practice as a certified public or other accountant, he has earned certificates in both public and forensic accounting.



MANAGEMENT



A brief description of management of the Company is as follows:



VALERIE FERRARO



Ms. Ferraro joined Yak Communications in 2004 following a 30-year career with Bell Canada. She has extensive experience
leading multi-discipline organizations in the small/medium and Enterprise-level business markets, and has directed Sales, Engineering and Project Management organizations in Voice, Data and Internet based technologies. A multi-year member of Bell
Canadas Presidents Club, she pioneered the development of the companys Wholesale division  the Carrier Services Group (CSG). As the Sr. Director, CSG, Ms. Ferraro held primary responsibility for the
organizational design, marketing and sales strategy, regulatory compliance, customer and employee satisfaction, revenue growth and financial controls of the organization. Under her leadership, CSG experienced four digit increases in revenue growth
and profitability increases, as the group mandate expanded to include National Canadian Wholesale, as well as United States and International markets. Ms. Ferraro holds a BA(Hon) and has completed numerous professional management and financial
courses at the various Canadian universities.



DAVID HURWITZ



Mr. Hurwitz became
President of the VoIP Initiative in November 2003. He has over 18 years experience in the competitive telecommunications industry, encompassing business development, general management, strategic sales and marketing initiatives, and
M&A. Prior to joining Yak, Mr. Hurwitz founded InTandem Communications, Inc., a telecommunications reseller acquired by Cognigen Networks In September of 2003. For 8 1/2years prior to InTandem, Mr. Hurwitz served as COO and subsequently President & CEO of Capsule Communications, Inc., a publicly traded long
distance carrier that was acquired by Covista Communications, Inc. in February of 2002. Mr. Hurwitz has also held management-level positions with RCN Corporation, InterNet Communications Services, Inc. and FiberNet, Inc.



MARGARET NOBLE



In 1985 Ms. Noble was accredited as a Certified Management Accountant.
Since her accreditation she has held various accounting and computer system positions in the high tech, entertainment and telecommunication industries. Her 22 years of experience includes strategic planning and problem solving, internal controls
compliance, systems implementation as well as part of senior management teams. Most recently Ms. Noble was part of the senior management team at Magnetic North as the principal financial officer.



Meetings of the Board of Directors; Committees



During the fiscal year ended June 30, 2005, there were 13 meetings of
the Board. Each director attended in excess of 75% of the total number of meetings of the Board during fiscal year 2005. In addition, from time to time, the members of the Board and its Audit Committee acted by unanimous written consent pursuant to
Florida law.



Audit Committee



The Board of Directors has an Audit Committee which currently consists of
Messrs. Garbacz, Grunwald and Breetz. The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of the



41



---

##### Table of Contents

accounting, auditing and reporting practices of the Company. During the fiscal year ended June 30, 2005, the Audit Committee held 16 meetings. The Audit
Committee has the authority and responsibility to hire one or more independent auditors to audit the Companys books, records and financial statements and to review the Companys systems of accounting (including its systems of internal
control), to discuss with such independent auditors the results of such audit and review, to conduct periodic independent reviews of the systems of accounting (including systems of internal control), and to make reports periodically to the Board of
Directors with respect to its findings. The Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to serve on the Committee.



All of the members of the Audit Committee are independent of the Company (as
defined under current Rule 4200(a)(15) of the National Association of Securities Dealers (NASD) listing standards). We consider Mr. Breetz a financial expert as defined under Item 401 of Regulation S-K.



Governance and Nominating Committee



The Governance and Nominating Committee consists of Messrs. Garbacz,
Grunwald and Breetz, all of whom meet the independence requirements prescribed by the Marketplace Rules of the NASD. The committee is responsible for recommending candidates for election to the Board of Directors for approval and nomination by the
Board of Directors. The committee is also responsible for making recommendations to the Board of Directors or otherwise acting with respect to corporate governance matters, including board size and membership qualifications, new director
orientation, committee structure and membership, communications with shareholders, and board and committee self-evaluations. The Governance and Nominating Committee operates under a written charter adopted by our Board of Directors.



Compensation Committee



The Compensation Committee consists of Messrs. Crumbo and Grunwald, both of whom meet the independence requirements
prescribed by the Marketplace Rules of the NASD. The committee is responsible for reviewing and approving, on behalf of our Board of Directors, management recommendations regarding all forms of compensation to be provided to our executive officers
and directors, including stock compensation, and all bonus and stock compensation to all employees. The Compensation Committee operates under a written charter adopted by our Board of Directors.



Code of Ethics



We have adopted a Code of Ethics applicable to all directors, officers and employees, including the chief executive officer,
senior financial officers and other persons performing similar functions. The Code of Ethics is a statement of business practices and principles of behavior that support our commitment to conducting business while maintaining the highest standards
of business conduct and ethics. Our Code of Ethics covers topics including, but not limited to, compliance resources, conflicts of interest, compliance with laws, rules and regulations, internal reporting of violations and accountability for
adherence to the Code. Any amendment of the Code of Ethics or any waiver of its provisions for a director, executive officer or senior financial officer must be approved by the Board of Directors. We will publicly disclose any such waivers or
amendments pursuant to applicable SEC and NASDAQ Stock Market regulations.



Compliance with Section 16(a) of the Exchange Act



Section 16(a) of the Securities Exchange Act of 1934 requires the Companys executive officers and directors, and persons who beneficially own more than ten percent (10%) of a registered class of the
Companys equity securities (collectively Reporting Persons), to file reports of ownership and changes in ownership with the Securities and Exchange Commission. In addition, under Section 16(a), trusts for which a Reporting
Person is a trustee and a beneficiary (or for which a member of his immediate family is a beneficiary) may have a separate reporting obligation with regard to ownership of the Common Stock and other equity securities of the Company.



42



---

##### Table of Contents

Such Reporting Persons are required by rules of the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) reports
they file. Based solely upon a review of the copies of such forms furnished to the Company and written representations from the Reporting Persons, the Company believes that during the fiscal year ended June 30, 2005, all persons subject to the
reporting requirements of Section 16(a) filed the required reports on a timely basis.



|ITEM 11. | EXECUTIVE COMPENSATION
|-------- | ----------------------



Compensation



The following table sets forth information about the compensation paid or accrued by the Company to the Companys chief executive officer and the
three most highly compensated executive officers, for the last three completed fiscal years:



SUMMARY COMPENSATION TABLE



|                                                                               |  |                     |  |        |                       |       |     |                             |  |                   |  |   |              |    
|------------------------------------------------------------------------------ |  | ------------------- |  | ------ | --------------------- | ----- | --- | --------------------------- |  | ----------------- |  | - | ------------ | ---
|                                                                               |  | Annual Compensation |  | Awards |                      
|Name and Principal Position                                                    |  | Year                |  | Salary |                       | Bonus |     | SecuritiesUnderlyingOptions |  | OtherCompensation | 
|Charles Zwebner  President, and Chief Executive Officer                       |  | 200520042003        |  | $$$    | 320,000210,000120,000 |       | $$$ | 150,00067,000175,000        |  |                |  | $ | 12,815,000 | (1)
|David Hurwitz  Chief Operating Officer (2)                                    |  | 200520042003        |  | $$     | 222,000102,000       |       | $   | 40,000                    |  | 130,000         |  |   |           |    
|Valerie Ferraro  President  Yak Communications (Canada) Inc. (3)             |  | 200520042003        |  | $      | 194,000             |       | $   | 76,000                    |  |                |  |   |           |    
|Margaret Noble  Chief Accounting Officer, Interim Principal Financial Officer |  | 200520042003        |  | $$     | 110,00091,500        |       | $$  | 13,00022,000               |  |                |  |   |           |    



|(1) | On December 31, 2003, the Company issued 2,260,934 shares of its common stock to Mr. Zwebner in connection with the exchange of an option to purchase 2,568,000 held by
Mr. Zwebner. Such shares of common stock were valued at an aggregate of $12,815,000, or 2,260,934 shares of common stock assuming a discounted market price of $5.67 per share as of November 30, 2003. See Compensation of Officers
 Employment Agreements below.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | David Hurwitz joined the Company in November, 2003.
|--- | ---------------------------------------------------



|(3) | Valerie Ferraro joined the Company in February, 2004.
|--- | -----------------------------------------------------



Compensation of Directors



The compensation plan for each independent director is as follows: (i) $3,000 per quarter; and (ii) $6,000 per annum (in addition to items
(i) and (iii) hereof); and (iii) $3,000 for attendance at the Companys annual meeting of shareholders, along with travel expenses related thereto; and (iv) issuance of 2,000 shares of the common stock of the Company per
annum for continued service on the Board of Directors.



In
addition to the foregoing, the members of our Audit Committee received additional compensation for their extraordinary services in connection with the restatement of certain of our historical financial statements (see Significant Transactions,
Subsequent Events and Financial Restatements). The members of the Audit Committee received fees of $17,000 each and the chairman received fees of $50,000. These amounts were reviewed by the Compensation Committee and recommended to the full
Board of Directors which approved the amounts and payment of the fees. The fees were based on an hourly rate of $200.



43



---

##### Table of Contents

STOCK OPTION PLAN



In June 1999, we established a Stock Option Plan for key employees which covers up to 640,000 shares of our common stock. There are currently two officers
with outstanding options as follows:



|                |  |                   |  |                |  |              |  |             |  |                               
|--------------- |  | ----------------- |  | -------------- |  | ------------ |  | ----------- |  | ------------------------------
|Employee        |  | Option Grant Date |  | Vesting Period |  | # of Options |  | Grant Price |  | OptionsVested at June 30, 2005
|Valerie Ferraro |  | May 11, 2004      |  | 5 Years        |  | 50,000       |  | 6.57        |  | 10,000                        
|David Hurwitz   |  | November 17, 2003 |  | 4 Years        |  | 130,000      |  | 6.50        |  | 32,500                        



STOCK AWARD PLAN



The Company has authorized a one-time Stock Award Plan whereby the Company
may issue up to an aggregate of 40,000 shares of its common stock to certain of its employees as the Board of Directors may determine in its discretion, as of December 28, 2001, all 40,000 shares were issued under this Plan.



|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- | --------------------------------------------------------------



The following table sets forth the beneficial ownership of shares of our common stock by (i) each person who is known to us to be the beneficial
owner of more than 5% of our common stock; (ii) each director and named executive officer (defined above) individually; and (iii) all directors and executive officers as a group. Beneficial ownership of common stock has been determined for
this purpose in accordance with Rules 13d-3 and 13d-5 of the Securities and Exchange Commission, under the Securities Exchange Act of 1934, as amended, which provide, among other things, that a person is deemed to be the beneficial owner of common
stock if such person, directly or indirectly, has or shares voting power or investment power with respect to the common stock or has the right to acquire such ownership within sixty days after the date of this registration statement. Unless
otherwise indicated, the address of each person listed is c/o Yak Communications Inc., 300 Consilium Place, Suite 500, Toronto, Ontario M1H 3G2.



|                                                             |  |                  |     |  |                     
|------------------------------------------------------------ |  | ---------------- | --- |  | --------------------
|Name and Address of Beneficial Owners                        |  | Number of Shares |     |  | Percent of Class (1)
|Directors and Executive Officers                             |  |                  |     |  |                     
|                                                             |  |                 
|Charles Zwebner                                              |  | 3,299,734        | (2) |  | 25.6                
|                                                             |  |                 
|Anthony Heller                                               |  | 944,800          | (3) |  | 7.3                 
|                                                             |  |                 
|David B. Hurwitz                                             |  | 130,000          |     |  | 1.0                 
|                                                             |  |                 
|Anthony Greenwood                                            |  | 15,000           |     |  | *                   
|                                                             |  |                 
|Adrian Garbacz                                               |  | 4,000            |     |  | *                   
|                                                             |  |                 
|Joseph Grunwald                                              |  | 4,000            |     |  | *                   
|                                                             |  |                 
|Valerie Ferraro                                              |  | 50,000           |     |  | *                   
|                                                             |  |                 
|Margaret Noble                                               |  | 15,000           |     |  | *                   
|                                                             |  |                 
|All Directors and Executive Officers as a Group (10 persons) |  | 4,462,534        |     |  | 34.6                



|* | Less than 1%.
|- | -------------



44



---

##### Table of Contents

|(1) | Based on 12,897,250 shares of common stock outstanding as of September 16, 2005.
|--- | --------------------------------------------------------------------------------



|(2) | Includes 1,523,800 shares of common stock currently held in the name of 1231912 Ontario, Inc., a corporation controlled by Charles Zwebner.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Includes 400,000 shares of common stock currently held in the name of 1054311 Ontario limited and 254,000 shares of common stock currently held in the name of Helmsbridge Holdings,
Ltd., corporations controlled by Anthony Heller.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- | ----------------------------------------------



We paid professional fees for consulting and executive search services for the current year of $173,000 to Kraft Corporate Recovery Services, LLC
(Kraft) and Kraft Search Associates, LLC. Mr. Crumbo, a member of our Board of Directors, is a principal and employee of Kraft. This director became a related party in October 2004 and as of June 30, 2005 there was a balance of
$136,000 owing. These services were provided pursuant to written agreements copies of which are included in our Form 8-K filed on April 6, 2005. These agreements were approved by our Audit Committee.



We paid professional fees for legal services for the years ending
June 30, 2005, 2004 and 2003 of $171,000, $160,000 and $109,000 respectively to Greenwoods Barristers and Solicitors, of which Anthony Greenwood is a director and minority shareholder. These legal services were provided pursuant to a standard
engagement agreement between us and Greenwoods Barristers and Solicitors. This engagement agreement was approved by our Audit Committee. For the fiscal years ended June 30, 2005, 2004 and 2003 there was no balance owing.



We paid $18,000 of marketing and design fees for the year ending
June 30, 2005 to Mitchell Shore, a former officer and minority shareholder. This former officer ceased to be a related party as of June 30, 2004. In the years ended June 30, 2004 and 2003, $142,000 and $122,000 was paid respectively
to a corporation controlled by Mr. Shore as a related party transaction.



On November 12, 2002, the Company entered into a Commercial Services and Marketing Agreement with Digital Way, S.A., a Peruvian corporation (Digital Way). In addition, Yak Communications (Canada),
Inc., a subsidiary of the Company, entered into a Telecommunications Services and Disbursement Agreement with Digital Way. Pursuant to these agreements, the Company was providing certain telecommunication services to Digital Way. The operations of
this joint venture are expected to be wound down by the end of the first fiscal quarter of 2006. As of July 31, 2005 the agreement between the two above mentioned companies was terminated. Digital Way is partly-owned by Universal Communications
Systems, Inc., a public company whose chairman and principal shareholder is Michael Zwebner. Michael Zwebner is also a director of Digital Way. Michael Zwebner and Charles Zwebner are brothers. See Managements Discussion and Analysis of
Financial Condition and Results of Operations.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------



The following table summarizes the aggregate fees billed and expected to be billed to us by Horwath Orenstein LLP:



|                                       |  |      |         |      |   |        
|-------------------------------------- |  | ---- | ------- | ---- | - | -------
|Principal Accountant Fees and Services
|                                       |  |     
|                                       |  | 2005 |         | 2004
|Audit Fees (a)                         |  | $    | 168,000 |      | $ | 100,000
|Audit-Related Fees (b)                 |  |      | 84,000  |      |   | 30,000 
|Tax Fees (c)                           |  |      | 16,000  |      |   | 12,000 
|All Other Fees (d)                     |  |      | 22,000  |      |   | 93,000 
|                                       |  |      |         |      |   |        
|Total                                  |  | $    | 290,000 |      | $ | 235,000
|                                       |  |      |         |      |   |        



|(a) | Audit Fees include the aggregate fees billed by our auditors, for professional services rendered for the audit of the Companys annual financial statement, along with fees for
the reviews of the financial statements included in the Companys Quarterly Reports on Form 10-QSB during that fiscal .
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



45



---

##### Table of Contents

|(b) | Audit Related Fees include the aggregate of fees billed for services related to the Companys SEC and Nasdaq filings and applications and preparation of special audit reports
filed with the CRTC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(c) | Tax Fees include the aggregate fees billed by our auditors for taxation compliance related services.
|--- | ----------------------------------------------------------------------------------------------------



|(d) | All Other Fees include the aggregate fees billed by our auditors for services rendered to the Company, other than the services covered in Audit Fees. These fees
primarily related to non-audit acquisition services relating to the Companys due diligence review and other due diligence engagements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PART IV



|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
|-------- | ---------------------------------------------------------------



|(a) | Exhibits.
|--- | ---------



|            |  |                                                                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION OF DOCUMENT                                                                                                                                                                                                                             
|3.1(1)      |  | Articles of Incorporation of the Company, as filed on December 24, 1998, with the Secretary of State of the State of Florida.                                                                                                                       
|            | 
|3.2(1)      |  | Articles of Amendment to the Articles of Incorporation of the Company, increasing the number of authorized common stock from 50 million shares to 100 million shares, as filed on June 4, 1999,
with the Secretary of State of the State of Florida.
|            | 
|3.3(1)      |  | Articles of Amendment to the Articles of Incorporation of the Company, designating Series A Convertible Preferred Stock, as filed on July 27, 1999, with the Secretary of State of the State of
Florida.                                            
|            | 
|3.4(1)      |  | Bylaws of the Company.                                                                                                                                                                                                                              
|            | 
|10.1        |  | EMI Translation Service Agreement, dated October 24, 2004, between Telus Communications, Inc. and the Company.                                                                                                                                      
|            | 
|10.2        |  | Invoice Ready Billing and Information Management Services Agreement, extended April 21, 2005, between Yak Communications (America) Inc. and Billing Concepts, Inc.                                                                                  
|            | 
|10.3        |  | Lease of Office Space Agreement, dated November 6, 2003, between Yak Communications (Canada) Inc. and Oxford Properties Group Inc.                                                                                                                  
|            | 
|10.4(2)     |  | Employment Agreement between the Company, Yak Communications (Canada), Inc. and Charles Zwebner, effective as of January 1, 2004.                                                                                                                   
|            | 
|10.5(2)     |  | Professional Services Agreement between Yak Communications (Canada) Inc. and Convexia Limited, dated as of April 7, 2004.                                                                                                                           
|            | 
|10.6(1)     |  | 1999 Stock Option Plan.                                                                                                                                                                                                                             



46



---

##### Table of Contents

|         |  |                                                                                                                                                                                                                    
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7(1)  |  | Billing and Collection Services Agreement, dated August 8, 2000, between the Company and Telus Corporation.                                                                                                        
|         | 
|10.8(3)  |  | Billing and Collection Services Agreement, dated November 1, 2001, between the Company and Bell Canada.                                                                                                            
|         | 
|10.9(3)  |  | Receivables Sale Agreement, dated as of February 8, 2002, by and between Yak Communications (Canada) Inc., Yak Communications (America), Inc., Yak Communications (USA), Inc. and Textron
Financial Canada Limited.
|         | 
|10.10(4) |  | Stock Purchase Agreement, dated as of March 28, 2003, by and between Yak Communications (USA), Inc. and Odyssey Management Group, Inc.                                                                             
|         | 
|10.11(5) |  | Software Acquisition Agreement, dated as of June 20, 2003, by and between Yak Communications (Canada) Inc., Consortio, Inc. and Convenxia Limited.                                                                 
|         | 
|10.12(6) |  | Share and Debt Purchase Agreement, dated as of May 5, 2003, by and among Yak Communications (Canada) Inc., AT&T Canada Corp. and AT&T Canada Ltd.                                                                  
|         | 
|10.13    |  | Engagement Letter with Kraft Corporate Recovery Services, LLC, dated March 31, 2005.                                                                                                                               
|         | 
|10.14    |  | Search Assignment Agreement with Kraft Search Associates, LLC, dated March 31, 2005.                                                                                                                               
|         | 
|21       |  | Subsidiaries.                                                                                                                                                                                                      
|         | 
|23       |  | Consent of Horwath Orenstein LLP.                                                                                                                                                                                  
|         | 
|31.1     |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                                                                                  
|         | 
|31.2     |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer                                                                                                                                              
|         | 
|32.1     |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 
|         | 
|32.2     |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                             

---

|(1) | Incorporated by reference from our Registration Statement on Form 10SB, as filed with the SEC on January 3, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from our Annual Report on Form 10-KSB as filed with the SEC on September 27, 2004.
|--- | ------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference from our Annual Report on Form 10-KSB as filed with the SEC on September 27, 2002.
|--- | ------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference from our Current Report on Form 8-K as filed with the SEC on April 15, 2003.
|--- | ------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference from our Current Report on Form 8-K as filed with the SEC on July 7, 2003.
|--- | ----------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference from our Current Report on Form 8-K as filed with the SEC on July 15, 2003.
|--- | -----------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference from our Current Report on Form 8-K as filed with the SEC on April 6, 2005.
|--- | -----------------------------------------------------------------------------------------------------



47



---

##### Table of Contents

|(b) | Reports on Form 8-K.
|--- | --------------------



None.



48



---

##### Table of Contents

SIGNATURES



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



|                        |  |                         |  |     |  |                          |  |                                                                                 
|----------------------- |  | ----------------------- |  | --- |  | ------------------------ |  | --------------------------------------------------------------------------------
|                        |  | Yak Communications Inc.
|                        |  |                         | 
|Date:September 28, 2005 |  |                         |  | By: |  | /s/    CHARLES ZWEBNER  
|                        |  |                         |  |     |  |                          |  | Charles Zwebner, Chairman of the Board of Directors & Chief Executive Officer   
|                        |  |                         | 
|                        |  |                         |  | By: |  | /s/    MARGARET NOBLE   
|                        |  |                         |  |     |  |                          |  | Margaret Noble, Chief Accounting Officer and Interim Principal Financial Officer
|                        |  |                         | 
|                        |  |                         |  | By: |  | /s/    ADRIAN GARBACZ   
|                        |  |                         |  |     |  |                          |  | Adrian Garbacz, Director                                                        
|                        |  |                         | 
|                        |  |                         |  | By: |  | /s/    ANTHONY GREENWOOD
|                        |  |                         |  |     |  |                          |  | Anthony Greenwood, Director                                                     
|                        |  |                         | 
|                        |  |                         |  | By: |  | /s/    ANTHONY HELLER   
|                        |  |                         |  |     |  |                          |  | Anthony Heller, Director                                                        
|                        |  |                         | 
|                        |  |                         |  | By: |  | /s/    JOSEPH GRUNWALD  
|                        |  |                         |  |     |  |                          |  | Joseph Grunwald, Director                                                       
|                        |  |                         | 
|                        |  |                         |  | By: |  | /s/    KEVIN CRUMBO     
|                        |  |                         |  |     |  |                          |  | Kevin Crumbo, Director                                                          
|                        |  |                         | 
|                        |  |                         |  | By: |  | /s/    R. GREGORY BREETZ
|                        |  |                         |  |     |  |                          |  | R. Gregory Breetz, Director                                                     



49



---

##### Table of Contents

CONSOLIDATED

FINANCIAL STATEMENTS



YAK COMMUNICATIONS INC. AND
SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



For the years ended June 30, 2005 and 2004



---

##### Table of Contents

[Letterhead of Horwath Orenstein LLP]



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of



Yak Communication Inc. and Subsidiaries (formerly Yak Communications (USA), Inc.) Miami, Florida



We have audited the accompanying consolidated balance sheets of Yak Communication Inc. and
Subsidiaries (the Company)as of June 30, 2005 and 2004 and the related consolidated statements of income and comprehensive income, stockholders equity and cash flows for each of the years in the three-year period ended
June 30, 2005. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of 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 consolidated
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Yak Communication Inc. and Subsidiaries as of June 30, 2005 and 2004 and the
results of their operations and their cash flows for each of the three years in the period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America.



As described in note 5 to the consolidated financial statements, the Company restated its
consolidated financial statements as of and for the years ended June 30, 2004 and 2003.



LOGO



|                |  |                      
|--------------- |  | ---------------------
|Toronto, Canada |  | Chartered Accountants



September 15, 2005, except for Note 5
as to which the date is September 27, 2005



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED BALANCE SHEET

AS AT JUNE 30,



|                                          |  |      |  |        |  |               
|----------------------------------------- |  | ---- |  | ------ |  | --------------
|(in $ thousands)                          |  | Note |  | 2005   |  | 2004(Restated)
|                                          |  |      |  | $      |  | $             
|ASSETS                                    |  |      |  |        |  |               
|CURRENT                                   |  |      |  |        |  |               
|Cash and cash equivalents                 |  |      |  | 16,751 |  | 22,149        
|Accounts receivable, net                  |  | 3    |  | 16,220 |  | 15,649        
|Prepaid expenses and other current assets |  |      |  | 1,413  |  | 725           
|                                          |  |      |  |        |  |               
|TOTAL CURRENT ASSETS                      |  |      |  | 34,384 |  | 38,523        
|JOINT VENTURE RECEIVABLE                  |  | 5    |  |       |  | 2,805         
|PROPERTY AND EQUIPMENT, NET               |  | 4    |  | 13,559 |  | 9,596         
|LOAN RECEIVABLE                           |  | 6    |  |       |  | 445           
|INTANGIBLES, NET                          |  | 2    |  | 2,005  |  | 1,585         
|GOODWILL                                  |  |      |  | 503    |  | 458           
|DEFERRED INCOME TAXES                     |  | 9    |  | 797    |  | 238           
|                                          |  |      |  |        |  |               
|                                          |  |      |  | 51,248 |  | 53,650        
|                                          |  |      |  |        |  |               



The accompanying notes
are an integral part of these consolidated financial statements.



F - 1



---

##### Table of Contents



YAK COMMUNICATIONS INC.
AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED BALANCE SHEET

AS AT JUNE 30,



|                                                                |  |      |  |        |  |               
|--------------------------------------------------------------- |  | ---- |  | ------ |  | --------------
|(in $ thousands)                                                |  | Note |  | 2005   |  | 2004(Restated)
|                                                                |  |      |  | $      |  | $             
|LIABILITIES                                                     |  |      |  |        |  |               
|CURRENT                                                         |  |      |  |        |  |               
|Accounts payable and accrued liabilities                        |  |      |  | 11,891 |  | 11,509        
|Due to Factor                                                   |  | 3    |  |       |  | 5,658         
|Income taxes payable                                            |  |      |  | 3,547  |  | 1,185         
|Current portion of advances from TELUS Communications Inc.      |  | 7    |  | 382    |  | 1,239         
|Current portion of obligations under capital leases             |  | 8    |  | 511    |  | 393           
|Current portion of note payable                                 |  |      |  |       |  | 195           
|Unearned Revenue                                                |  |      |  | 1,096  |  | 951           
|                                                                |  |      |  |        |  |               
|                                                                |  |      |  | 17,427 |  | 21,130        
|                                                                |  |      |  |        |  |               
|LONG-TERM DEBT                                                  |  |      |  |        |  |               
|Advances from TELUS Communications Inc.                         |  | 7    |  |       |  | 349           
|Obligations under capital leases                                |  | 8    |  | 977    |  | 1,073         
|Note payable                                                    |  | 5    |  |       |  | 3,774         
|                                                                |  |      |  |        |  |               
|                                                                |  |      |  | 977    |  | 5,196         
|                                                                |  |      |  |        |  |               
|                                                                |  |      |  | 18,404 |  | 26,326        
|                                                                |  |      |  |        |  |               
|STOCKHOLDERS EQUITY                                            |  |      |  |        |  |               
|COMMON STOCK                                                    |  | 10   |  | 225    |  | 225           
|ADDITIONAL PAID-IN CAPITAL                                      |  |      |  | 16,692 |  | 16,582        
|COMMON STOCK PURCHASE WARRANTS                                  |  |      |  | 2,433  |  | 2,433         
|ACCUMULATED OTHER COMPREHENSIVE INCOME - TRANSLATION ADJUSTMENT |  |      |  | 1,343  |  | 113           
|RETAINED EARNINGS                                               |  |      |  | 12,151 |  | 7,971         
|                                                                |  |      |  |        |  |               
|                                                                |  |      |  | 32,844 |  | 27,324        
|                                                                |  |      |  |        |  |               
|                                                                |  |      |  | 51,248 |  | 53,650        
|                                                                |  |      |  |        |  |               



The accompanying notes
are an integral part of these consolidated financial statements.



F - 2



---

##### Table of Contents



YAK COMMUNICATIONS INC.
AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                              |  |      |  |              |   |  |                          |   |  |                             |   |                               |       |                              |   |                                     |   |  |                           |   |  |                                    |   |  |        |  
|------------------------------------------------------------- |  | ---- |  | ------------ | - |  | ------------------------ | - |  | --------------------------- | - | ----------------------------- | ----- | ---------------------------- | - | ----------------------------------- | - |  | ------------------------- | - |  | ---------------------------------- | - |  | ------ | -
|                                                              |  |      |  | Common stock |   |  | Additionalpaid-incapital |   |  | Commonstockpurchasewarrants |   | Series APreferred stockShares |       | Series APreferredstockAmount |   | Accumulatedothercomprehensiveincome |   |  | Retainedearnings(deficit) |   |  | TotalStockholdersEquity (Deficit) |  
|(in $ thousands)                                              |  | Note |  | Shares       |   |  | Amount                   |   |  |                             |   |                               |       |                              |  
|                                                              |  |      |  |              |   |  | $                        |   |  | $                           |   |                               | $     |                              |   |                                     | $ |  | $                         |   |  | $                                  |   |  | $      |  
|Balance, June 30, 2002                                        |  |      |  | 9,584        |   |  | 201                      |   |  | 1,732                       |   |                               |      |                              |  |                                     |  |  | 67                        |   |  | (487                               | ) |  | 1,513  |  
|Foreign currency translation adjustment                       |  |      |  |             |   |  |                         |   |  |                            |   |                               |      |                              |  |                                     |  |  | 410                       |   |  |                                   |   |  | 410    |  
|Common stock redeemed                                         |  |      |  | (800         | ) |  | (4                       | ) |  | (796                        | ) |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | (800   | )
|Common stock issued for cash                                  |  |      |  | 320          |   |  | 2                        |   |  | 998                         |   |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 1,000  |  
|Common stock issued for services                              |  |      |  | 29           |   |  |                         |   |  | 116                         |   |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 116    |  
|Net earnings                                                  |  |      |  |             |   |  |                         |   |  |                            |   |                               |      |                              |  |                                     |  |  |                          |   |  | 3,489                              |   |  | 3,489  |  
|                                                              |  |      |  |              |   |  |                          |   |  |                             |   |                               |       |                              |   |                                     |   |  |                           |   |  |                                    |   |  |        |  
|Balance, June 30, 2003 (Restated)                             |  |      |  | 9,133        |   |  | 199                      |   |  | 2,050                       |   |                               |      |                              |  |                                     |  |  | 477                       |   |  | 3,002                              |   |  | 5,728  |  
|Foreign currency translation adjustment                       |  |      |  |             |   |  |                         |   |  |                            |   |                               |      |                              |  |                                     |  |  | (364                      | ) |  |                                   |   |  | (364   | )
|Common stock issued to obtain note payable                    |  |      |  | 20           |   |  |                         |   |  | 90                          |   |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 90     |  
|Common stock issued in exchange for stock options surrendered |  |      |  | 2,261        |   |  | 11                       |   |  | (11                         | ) |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  |       |  
|Common stock issued for services                              |  |      |  | 9            |   |  |                         |   |  | 51                          |   |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 51     |  
|Stock compensation expense                                    |  | 11   |  |             |   |  |                         |   |  | 26                          |   |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 26     |  
|Common stock issued for cash                                  |  |      |  | 1,470        |   |  | 15                       |   |  | 14,376                      |   |                               | 2,433 |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 16,824 |  
|Net earnings                                                  |  |      |  |             |   |  |                         |   |  |                            |   |                               |      |                              |  |                                     |  |  |                          |   |  | 4,969                              |   |  | 4,969  |  
|                                                              |  |      |  |              |   |  |                          |   |  |                             |   |                               |       |                              |   |                                     |   |  |                           |   |  |                                    |   |  |        |  
|Balance, June 30, 2004 (Restated)                             |  |      |  | 12,893       |   |  | 225                      |   |  | 16,582                      |   |                               | 2,433 |                              |  |                                     |  |  | 113                       |   |  | 7,971                              |   |  | 27,324 |  
|Foreign currency translation adjustment                       |  |      |  |             |   |  |                         |   |  |                            |   |                               |      |                              |  |                                     |  |  | 1,230                     |   |  |                                   |   |  | 1,230  |  
|Common stock issued for services                              |  |      |  | 4            |   |  |                         |   |  | 29                          |   |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 29     |  
|Stock compensation expense                                    |  | 11   |  |             |   |  |                         |   |  | 81                          |   |                               |      |                              |  |                                     |  |  |                          |   |  |                                   |   |  | 81     |  
|Net earnings                                                  |  |      |  |             |   |  |                         |   |  |                            |   |                               |      |                              |  |                                     |  |  |                          |   |  | 4,180                              |   |  | 4,180  |  
|                                                              |  |      |  |              |   |  |                          |   |  |                             |   |                               |       |                              |   |                                     |   |  |                           |   |  |                                    |   |  |        |  
|Balance, June 30, 2005                                        |  |      |  | 12,897       |   |  | 225                      |   |  | 16,692                      |   |                               | 2,433 |                              |  |                                     |  |  | 1,343                     |   |  | 12,151                             |   |  | 32,844 |  
|                                                              |  |      |  |              |   |  |                          |   |  |                             |   |                               |       |                              |   |                                     |   |  |                           |   |  |                                    |   |  |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



F - 3



---

##### Table of Contents



YAK COMMUNICATIONS INC.
AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEAR ENDED, JUNE 30



|                                                             |  |      |  |        |   |  |                |   |  |               
|------------------------------------------------------------ |  | ---- |  | ------ | - |  | -------------- | - |  | --------------
|(in $ thousands, except per share amounts)                   |  | Note |  | 2005   |   |  | 2004(Restated) |   |  | 2003(Restated)
|                                                             |  |      |  | $      |   |  | $              |   |  | $             
|NET REVENUE                                                  |  |      |  | 92,700 |   |  | 80,802         |   |  | 40,404        
|COST OF REVENUE                                              |  |      |  | 57,636 |   |  | 53,149         |   |  | 25,403        
|                                                             |  |      |  |        |   |  |                |   |  |               
|GROSS MARGIN                                                 |  |      |  | 35,064 |   |  | 27,653         |   |  | 15,001        
|                                                             |  |      |  |        |   |  |                |   |  |               
|OPERATING EXPENSES                                           |  |      |  |        |   |  |                |   |  |               
|General and administration                                   |  |      |  | 18,524 |   |  | 11,220         |   |  | 3,497         
|Sales and marketing                                          |  |      |  | 7,293  |   |  | 3,894          |   |  | 4,207         
|Accounts receivable financing                                |  |      |  | 429    |   |  | 514            |   |  | 499           
|Depreciation and amortization                                |  |      |  | 2,943  |   |  | 2,980          |   |  | 803           
|Common stock issued to obtain note payable                   |  |      |  |       |   |  | 90             |   |  |              
|Organizational and start-up costs                            |  |      |  | 512    |   |  | 261            |   |  | 345           
|Writedown of property and equipment and licence fee          |  |      |  |       |   |  | 313            |   |  | 119           
|                                                             |  |      |  |        |   |  |                |   |  |               
|TOTAL OPERATING EXPENSES                                     |  |      |  | 29,701 |   |  | 19,272         |   |  | 9,470         
|                                                             |  |      |  |        |   |  |                |   |  |               
|INCOME FROM OPERATIONS                                       |  |      |  | 5,363  |   |  | 8,381          |   |  | 5,531         
|                                                             |  |      |  |        |   |  |                |   |  |               
|OTHER EXPENSES (INCOME)                                      |  |      |  |        |   |  |                |   |  |               
|Share of net (gain)/loss of affiliate                        |  |      |  |       |   |  | (39            | ) |  | 29            
|Interest expense                                             |  |      |  | 464    |   |  | 455            |   |  | 14            
|Interest earned                                              |  |      |  | (406   | ) |  | (159           | ) |  |              
|Income from joint marketing agreement                        |  |      |  | (421   | ) |  | (539           | ) |  |              
|Long-term debt discount amortization                         |  |      |  | 391    |   |  | 535            |   |  |              
|Loss on Impairment of joint venture receivable               |  |      |  |       |   |  | 277            |   |  |              
|Gain on settlement                                           |  | 5    |  | (1,242 | ) |  |               |   |  |              
|                                                             |  |      |  |        |   |  |                |   |  |               
|                                                             |  |      |  | (1,214 | ) |  | 530            |   |  | 43            
|                                                             |  |      |  |        |   |  |                |   |  |               
|EARNINGS BEFORE INCOME TAX                                   |  |      |  | 6,577  |   |  | 7,851          |   |  | 5,488         
|PROVISION FOR INCOME TAXES                                   |  | 9    |  | 2,397  |   |  | 2,882          |   |  | 1,999         
|                                                             |  |      |  |        |   |  |                |   |  |               
|NET EARNINGS                                                 |  |      |  | 4,180  |   |  | 4,969          |   |  | 3,489         
|OTHER COMPREHENSIVE INCOME                                   |  |      |  |        |   |  |                |   |  |               
|Foreign currency translation adjustment                      |  |      |  | 1,230  |   |  | (364           | ) |  | 410           
|                                                             |  |      |  |        |   |  |                |   |  |               
|COMPREHENSIVE INCOME                                         |  |      |  | 5,410  |   |  | 4,605          |   |  | 3,899         
|                                                             |  |      |  |        |   |  |                |   |  |               
|BASIC EARNINGS PER SHARE                                     |  | 17   |  | 0.32   |   |  | 0.46           |   |  | 0.37          
|                                                             |  |      |  |        |   |  |                |   |  |               
|DILUTED EARNINGS PER SHARE                                   |  | 17   |  | 0.32   |   |  | 0.44           |   |  | 0.29          
|                                                             |  |      |  |        |   |  |                |   |  |               
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING         |  |      |  | 12,895 |   |  | 10,706         |   |  | 9,328         
|                                                             |  |      |  |        |   |  |                |   |  |               
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION |  |      |  | 12,901 |   |  | 11,405         |   |  | 11,896        
|                                                             |  |      |  |        |   |  |                |   |  |               



The accompanying notes
are an integral part of these consolidated financial statements.



F - 4



---

##### Table of Contents



YAK COMMUNICATIONS INC.
AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED, JUNE 30



|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|----------------------------------------------------------------------- |  | ---- |  | ------ | - |  | --------------- | - |  | --------------- | -
|(in $ thousands)                                                        |  | Note |  | 2005   |   |  | 2004 (Restated) |   |  | 2003 (Restated) |  
|                                                                        |  |      |  | $      |   |  | $               |   |  | $               |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                    |  |      |  |        |   |  |                 |   |  |                 |  
|Net earnings                                                            |  |      |  | 4,180  |   |  | 4,969           |   |  | 3,489           |  
|Adjustments for                                                         |  |      |  |        |   |  |                 |   |  |                 |  
|Amortization of discount                                                |  |      |  | 391    |   |  | 535             |   |  |                |  
|Depreciation and amortization                                           |  |      |  | 2,943  |   |  | 2,980           |   |  | 803             |  
|Deferred income taxes                                                   |  | 9    |  | (559   | ) |  | 2,130           |   |  | 346             |  
|Writedown of property and equipment and licence fee                     |  |      |  |       |   |  | 313             |   |  | 119             |  
|Impairment of loan receivable                                           |  | 6    |  | 499    |   |  |                |   |  |                |  
|Settlement of JV/Note payable agreement                                 |  |      |  | (2,406 | ) |  |                |   |  |                |  
|Stock compensation expense                                              |  |      |  | 81     |   |  | 26              |   |  |                |  
|Loss on impairment of joint venture receivable                          |  |      |  |       |   |  | 277             |   |  |                |  
|Loss on sale of property, equipment and software                        |  |      |  | 49     |   |  |                |   |  | 2               |  
|Common stock issued through business operations                         |  |      |  | 29     |   |  | 141             |   |  | 116             |  
|Share of net (gain)/loss of affiliate                                   |  |      |  |       |   |  | (39             | ) |  | 29              |  
|Changes in assets and liabilities                                       |  | 19   |  | (4,028 | ) |  | 807             |   |  | 2,100           |  
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|Net cash from operating activities                                      |  |      |  | 1,179  |   |  | 12,139          |   |  | 7,004           |  
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                          |  |      |  |        |   |  |                 |   |  |                 |  
|Purchase of property and equipment                                      |  |      |  | (6,322 | ) |  | (4,995          | ) |  | (2,795          | )
|Purchase of intangibles                                                 |  |      |  | (713   | ) |  |                |   |  |                |  
|Proceeds from sale of property, equipment, and software                 |  |      |  | 13     |   |  |                |   |  |                |  
|Purchase of shares of Contour Telecom                                   |  |      |  |       |   |  | (5,473          | ) |  |                |  
|Investment in Odyssey Management Group, Inc.                            |  |      |  |       |   |  | 510             |   |  | (500            | )
|Foreign exchange difference on purchase of shares of Contour Telecom    |  |      |  |       |   |  | 52              |   |  |                |  
|Loan receivable                                                         |  |      |  | (54    | ) |  | (285            | ) |  | (161            | )
|Increase in deferred acquisition cost                                   |  |      |  |       |   |  |                |   |  | (1,659          | )
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|Net cash used in investing activities                                   |  |      |  | (7,076 | ) |  | (10,191         | ) |  | (5,115          | )
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES                          |  |      |  |        |   |  |                 |   |  |                 |  
|Issuance of common shares                                               |  |      |  |       |   |  | 16,823          |   |  | 1,000           |  
|Repayments on obligations under capital leases                          |  |      |  | (291   | ) |  | (35             | ) |  | (111            | )
|Repayments on advances from TELUS Communications Inc.                   |  |      |  | (1,206 | ) |  | (1,028          | ) |  | 2,472           |  
|Repayments on notes payable                                             |  |      |  |       |   |  | (567            | ) |  |                |  
|Repurchase of capital stock                                             |  |      |  |       |   |  |                |   |  | (800            | )
|Receipt of principal portion of Joint Venture receivable                |  |      |  | 215    |   |  | 374             |   |  |                |  
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|Net cash from (used in) financing activities                            |  |      |  | (1,282 | ) |  | 15,567          |   |  | 2,561           |  
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS            |  |      |  | 1,781  |   |  | (809            | ) |  | 410             |  
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                        |  |      |  | (5,398 | ) |  | 16,706          |   |  | 4,860           |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          |  |      |  | 22,149 |   |  | 5,443           |   |  | 583             |  
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                |  |      |  | 16,751 |   |  | 22,149          |   |  | 5,443           |  
|                                                                        |  |      |  |        |   |  |                 |   |  |                 |  
|Supplemental disclosure of cash flow information:                       |  |      |  |        |   |  |                 |   |  |                 |  
|Interest paid                                                           |  |      |  | 464    |   |  | 1,132           |   |  | 14              |  
|Taxes paid                                                              |  |      |  | 736    |   |  | 1,361           |   |  |                |  
|Supplemental disclosure of non-cash investing and financing activities: |  |      |  |        |   |  |                 |   |  |                 |  
|Capital leases for acquisition of furniture and equipment               |  |      |  | 312    |   |  | 1,473           |   |  |                |  
|Notes payable on purchase of software (Note 5)                          |  |      |  |       |   |  |                |   |  | 3,718           |  
|Joint Venture receivable on purchase of software (Note 5)               |  |      |  |       |   |  |                |   |  | 3,195           |  
|Issuance of common stock for services rendered                          |  |      |  | 29     |   |  |                |   |  | 116             |  
|Acquisition of Software                                                 |  |      |  |       |   |  |                |   |  | 1,561           |  



The accompanying notes
are an integral part of these consolidated financial statements.



F - 5



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|1. | ORGANIZATION AND BUSINESS
|-- | -------------------------



On December 15, 2003, Yak Communications Inc. (Yak or the Company) changed its name from Yak Communications (USA) Inc. Yak is
a switch-based reseller providing a variety of discount long distance services primarily in Canada and to a lesser degree the United States, to residential and small business markets, as well as telecommunications management services to large
enterprises in Canada. The Company also provides Voice over Internet Protocol (VoIP) services to customers in Canada, the United States and internationally. The Company was incorporated in the State of Florida on December 24, 1998
and operates as a holding company of its wholly-owned subsidiaries in the United States and Canada.



The Company began offering its services to consumers in Canada in July 1999 and in the United States commencing December 2001.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



These consolidated financial statements are presented in United States dollars and have been prepared in accordance with U.S. generally accepted
accounting principles and reflect the following policies:



Principles of consolidation



These
consolidated financial statements include the accounts of Yak Communications Inc. and its wholly-owned subsidiaries - Yak Communications (America), Inc., Yak Communications (Canada) Inc., Yak Broadband Inc., and Contour Telecom Inc. (collectively
referred to as the Company). All intercompany balances and transactions are eliminated upon consolidation.



Use of estimates



The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the period in which they become known.



F - 6



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Revenue recognition



The Company records revenue using the following recognition policies:



| | (a) | Dial-around services and the resale of long-distance services revenues are recorded at the time of customer usage based upon minutes of use.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Revenue from the resale of voice and data telecommunications services to business enterprises is recorded at the time of customer usage based upon amounts billed by the respective
service providers.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Revenue related to administrative services is recorded on a straight-line basis over the term of related contracts.
| | --- | -------------------------------------------------------------------------------------------------------------------



| | (d) | Amounts billed in accordance with customer contracts but not yet earned are recorded as unearned revenue. Amounts earned but not yet invoiced are recorded as revenue.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cost of revenue



Cost of revenue includes network costs that consist of the cost of
long-distance services, processing costs, line access and usage costs. These costs are recognized as incurred.



Contour Telecom Inc.s supplier service costs come directly from the telecommunications carriers and are recorded at the time of customer usage based
upon amounts billed by the respective service providers.



Cash and cash equivalents



Cash and cash
equivalents are comprised of cash and term deposits with original maturity dates of 90 days or less. Cash and cash equivalents are stated at cost which approximates market value, and are concentrated in three major financial institutions.



F - 7



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Property, equipment and software



Property, equipment and software (including assets under capital leases) are
stated at cost less accumulated amortization. Amortization is computed on individual assets using the declining balance method at rates adequate to amortize the cost of applicable assets over their useful lives the estimated useful lives of the
assets, generally three to ten years. Leasehold improvements are amortized over the term of the lease.



Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity of assets as well as expenditures
necessary to place assets into readiness for use. Expenditures for maintenance and repairs are expensed as incurred. In accordance with Statement of Position 98-1, Accounting of the Costs of Computer Software Developed or Obtained for Internal
Use(SOP 98-1), costs for internal use software that are incurred in the preliminary project stage and in the post-implementation stage are expensed as incurred. Costs incurred during the application development stage are capitalized
and amortized over the estimated useful life of the software, beginning when the software is placed in use.



Impairment of long-lived assets



In accordance with Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144), the Company reviews long-lived assets for impairment whenever facts and circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment loss is recognized only if the
carrying amount of the asset is not recoverable and exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated discounted future net cash flows expected to be
generated by the asset. If the assets carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. Fair values are determined by using a combination of
comparable market values and discounted cash flows as appropriate.



Goodwill and Intangible Assets



In accordance
with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), with indefinite useful lives are not amortized, while those identified intangible assets with finite useful lives are
amortized over their useful lives. Finite life intangibles are customer lists and are stated at cost less accumulated amortization which is calculated on a straight-line basis over five years.



F - 8



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Goodwill and Intangible Assets (contd)



Aggregate amortization expense for intangible assets for the years ended
June 30, 2005, 2004 and 2003, was $475, $400 and $nil, respectively. Estimated amortization expense for intangible assets for each of the five remaining succeeding fiscal years is as follows:



|                     |  |        |    
|-------------------- |  | ------ | ---
|Year ending June 30, |  | Amount
|2006                 |  | $      | 588
|2007                 |  | $      | 588
|2008                 |  | $      | 588
|2009                 |  | $      | 141
|2010                 |  | $      | 100



Goodwill represents
the excess, if any, of the purchase consideration over the fair value of the identifiable tangible and intangible net assets. Under SFAS No. 142, goodwill is tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The Companys annual test of impairment is June 30th. The impairment test is carried out in two steps. In the first step, the carrying amount of the reporting unit is compared with
its fair value. When the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not to be impaired and the second step of the impairment test is unnecessary. The second step is carried out when the
fair value of a reporting unit is less than its carrying value. In this case, the total fair value attributable to that reporting unit is allocated to the assets and liabilities of the reporting unit as though it were purchased on the impairment
testing date. If the amount attributable to goodwill is less than the existing carrying value of the goodwill as recorded, the shortfall is recognized as an impairment loss and presented as a separate line in the income statement.



Intangible assets that have indefinite lives and are acquired in business
combinations individually or with a group of other assets are also tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the carrying amount
of the intangible asset with its fair value, and an impairment loss is recognized in the income statement for the excess, if any.



There was no impairment of goodwill or other indefinite life intangibles for the years ended June 30, 2005, 2004 and 2003.



F - 9



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Joint venture (Peru)



The Companys proportionate share of revenues, expenses, assets and liabilities in an unincorporated joint venture are
consolidated in the Companys accounts.



Cost of
Start-up Activities



The Company expenses the cost of
start-up activities and organizational costs as related to broadband activities incurred in accordance with Statement of Position 98-5, Reporting on the Costs of Start-up Activities(SOP 98-5).



Advertising and promotion expense



In accordance with the Statement of Position 93-7, Reporting on
Advertising Costs(SOP 93-7), the Company charges the production costs of commercials and programming to operations in the period during which the production first aired. The costs of other advertising, promotion and marketing
programs are charged to operations in the period incurred. The cost of promotional marketing materials are deferred and expensed as used. For the years ended June 30, 2005, 2004 and 2003, advertising expenses totaled $6,510, $3,213 and $4,052
respectively.



Income taxes



The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes(SFAS 109), which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities
are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision is the tax payable or refundable for the period plus
or minus the change during the period in deferred tax assets and liabilities.



Computation of earnings per common share



Basic earnings per share is computed by dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed
giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options and common stock warrants.



F - 10



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Foreign currency translation and foreign assets



In accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation(SFAS 52), assets and liabilities of the Companys foreign subsidiary are translated into United States dollars at the exchange rates in effect on the reporting date. Income and expenses are
translated at an average exchange rate for the respective period. For the foreign subsidiary which utilizes its local currency as its functional currency, the resulting translation gains and losses are included in other comprehensive income. Other
gains or losses resulting from foreign exchange transactions are reflected in earnings.



Financial instruments - Valuation



In accordance with Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments(SFAS 107), requires disclosure of the fair value of certain
financial instruments for which it is practicable to estimate fair value. For purposes of the disclosure requirements, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation. The carrying values of cash and cash equivalents, accounts receivable, Joint venture receivable, loan receivable, accounts payable and other current liabilities and capital leases are
reasonable estimates of their fair value due to the short-term nature of the underlying financial instruments. The carrying value of the capital leases is a reasonable estimate of their fair value based on current rates for equipment obligations.



Financial instruments - Risk



Unless otherwise noted, it is managements opinion that the Company is
not exposed to significant interest or currency risks arising from financial instruments as the Companys subsidiaries are self-sustaining operations. The Company has in place systems to minimize credit risk and prevent fraudulent use by
customers. On occasion, defaults occur on receivables. The Company makes a provision for losses when deemed necessary.



F - 11



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Estimating Fair Value



Management estimated the fair value of the assets and liabilities associated with the purchase of certain next
generation telecommunications software from Consortio, Inc. and Convenxia Limited, based on the related estimated cash flows. Statement of Financial Accounting Concepts No. 7 (SFAC No. 7) provides a framework for using
future cash flows and present value as the basis for accounting measurements of fair value. When observable marketplace-determined values are not available, discounted cash flows are often used to estimate fair value. In accordance with SFAC
No. 7, the Company used the expected cash flow approach to estimate fair value, focusing on explicit assumptions about the range of possible cash outcomes and their respective probabilities.



Credit Risk



The Company assesses the collectability of its accounts receivable and
provides an allowance for doubtful accounts as it deems reasonable. Ninety-seven percent of the companys accounts receivable relate to Canadian customers.



A reconciliation of the allowance for doubtful accounts provision for the year is presented below:



|                                              |  |                    |   |  |                |   |  |                |  
|--------------------------------------------- |  | ------------------ | - |  | -------------- | - |  | -------------- | -
|                                              |  | For the Year-Ended |  
|                                              |  | 2005               |   |  | 2004(Restated) |   |  | 2003(Restated) |  
|                                              |  | $                  |   |  | $              |   |  | $              |  
|Opening balance                               |  | 348                |   |  | 15             |   |  | 20             |  
|Additional allowance provided during the year |  | 700                |   |  | 471            |   |  | 39             |  
|Bad debts write-off                           |  | (495               | ) |  | (138           | ) |  | (44            | )
|                                              |  |                    |   |  |                |   |  |                |  
|Ending Balance                                |  | 553                |   |  | 348            |   |  | 15             |  
|                                              |  |                    |   |  |                |   |  |                |  



For the year-ended
June 30, 2005, 2004 and 2003 there is no interest accrued on overdue amounts.



F - 12



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands, except per share amounts)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Stock-based compensation



Compensation expense under stock options is reported using the intrinsic method under the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees and related interpretations. Under this method compensation cost is reflected in net income for options granted with
an exercise price less than market price of the underlying common stock at the date of grant. The Company has adopted only the disclosure provision of SFAS 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148
Accounting for Stock-Based Compensation -Transition and Disclosure.



Had compensation cost for the Companys grants of stock-based compensation been recorded consistent with the fair value-based method of accounting per SFAS No. 123, as amended by SFAS No. 148, the
Companys pro forma net earnings, and pro forma basic and diluted net earnings per share for the periods ended June 30, would have been as follows:



|                                                                                       |  |          |   |  |                |   |  |               
|-------------------------------------------------------------------------------------- |  | -------- | - |  | -------------- | - |  | --------------
|                                                                                       |  | June 30,
|                                                                                       |  | 2005     |   |  | 2004(Restated) |   |  | 2003(Restated)
|                                                                                       |  | $        |   |  | $              |   |  | $             
|Net earnings as reported                                                               |  | 4,180    |   |  | 4,969          |   |  | 3,489         
|Less: Stock-based compensation determined under fair value based method for all awards |  | (210     | ) |  | (162           | ) |  |              
|Addback: Intrinsic value                                                               |  | 81       |   |  | 26             |   |  |              
|                                                                                       |  |          |   |  |                |   |  |               
|Pro forma net earnings                                                                 |  | 4,051    |   |  | 4,833          |   |  | 3,489         
|                                                                                       |  |          |   |  |                |   |  |               
|Basic net earnings per share                                                           |  |          |   |  |                |   |  |               
|As reported                                                                            |  | 0.32     |   |  | 0.46           |   |  | 0.37          
|Pro forma                                                                              |  | 0.32     |   |  | 0.45           |   |  | 0.37          
|Diluted net earnings per share                                                         |  |          |   |  |                |   |  |               
|As reported                                                                            |  | 0.32     |   |  | 0.44           |   |  | 0.29          
|Pro forma                                                                              |  | 0.31     |   |  | 0.43           |   |  | 0.29          



F - 13



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Stock-based compensation (contd)



For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting periods. Because options vest over a period of several years and additional awards are generally made each year, the pro forma information presented above is not necessarily indicative
of the effects on reported or pro forma net earnings or losses for future years.



The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



|                |  |          |   |  |                |   |  |               
|--------------- |  | -------- | - |  | -------------- | - |  | --------------
|                |  | June 30,
|                |  | 2005     |   |  | 2004(Restated) |   |  | 2003(Restated)
|Risk free rate: |  | 3.0      | % |  | 3.0            | % |  |              
|Dividends:      |  |         |   |  |               |   |  |              
|Volatility:     |  | 79.3     | % |  | 60.0           | % |  |              
|Expected Life:  |  | 5 years  |   |  | 5 years        |   |  |              



F - 14



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (contd)
|-- | ---------------------------------------------------



Reclassifications



Certain reclassifications were made to prior year balances to conform to the current period presentation.



New Accounting Pronouncements



In December, 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Accounting Standard No. 123(R), Share-Based Payment, (SFAS 123(R)), which addresses the accounting for share-based compensation transactions. SFAS 123(R) eliminates the ability to
account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for and recognized in the statement of operations based on their fair value. SFAS 123(R) will be effective for public
companies that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is evaluating the provisions and will apply this standard beginning in 2006.
Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Companys future financial position and results of operations.



In December 2004, the FASB issued Statement of Accounting Standard
No. 153, Exchanges of Nonmonetary Assets(SFAS 153), which eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. SFAS No. 153 will be effective for nonmonetary transactions occurring after June 15, 2005. The Company does not expect the adoption of SFAS No. 153 will have a material impact on the consolidated
financial statements.



F - 15



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|3. | DUE TO FACTOR
|-- | -------------



The amounts due to factor are secured by an assignment of the Companys accounts receivable. The Company has an agreement, expiring February 2006, to
finance undivided interests in certain accounts receivable with recourse to the Factor. Payments are received by the Factor from the financed accounts receivable; the collections are reinvested by the Factor in new accounts receivable of the
Company, and a yield, as defined in the agreement is transferred to the Factor. At June 30, 2005 the amounts assigned under the agreement that had not been collected were $nil (June 30, 2004 - $8,271).



|4. | PROPERTY AND EQUIPMENT
|-- | ----------------------



Property and equipment consist of the following:



|                                                     |  |        |  |                         |  |                |  |                       
|---------------------------------------------------- |  | ------ |  | ----------------------- |  | -------------- |  | ----------------------
|                                                     |  |        |  |                         |  | June 30,2005   |  | June 30,2004(Restated)
|                                                     |  | Cost   |  | AccumulatedAmortization |  | Net book value
|                                                     |  | $      |  | $                       |  | $              |  | $                     
|Telecom switching systems                            |  | 6,791  |  | 3,685                   |  | 3,106          |  | 2,862                 
|Next Generation software (Note 5)                  |  | 4,067  |  | 307                     |  | 3,760          |  | 2,123                 
|Billing, administration and customer service systems |  | 2,121  |  | 939                     |  | 1,182          |  | 1,232                 
|Installed lines                                      |  | 1,963  |  | 614                     |  | 1,349          |  | 799                   
|Broadband Equipment                                  |  | 1,562  |  | 183                     |  | 1,379          |  | 591                   
|Office furniture and equipment                       |  | 3,329  |  | 2,259                   |  | 1,070          |  | 549                   
|Computer equipment                                   |  | 1,244  |  | 610                     |  | 634            |  | 506                   
|Carrier identification codes loading                 |  | 834    |  | 238                     |  | 596            |  | 466                   
|Leasehold improvements                               |  | 723    |  | 249                     |  | 474            |  | 455                   
|Computer software                                    |  | 292    |  | 283                     |  | 9              |  | 10                    
|Automobile                                           |  |       |  |                        |  |               |  | 3                     
|                                                     |  |        |  |                         |  |                |  |                       
|                                                     |  | 22,926 |  | 9,367                   |  | 13,559         |  | 9,596                 
|                                                     |  |        |  |                         |  |                |  |                       



F - 16



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|4. | PROPERTY AND EQUIPMENT (contd)
|-- | -------------------------------



Telecom switching systems include assets under capital leases having a gross value of approximately
$1,756 and net book value of approximately $1,463 as at June 30, 2005 and $1,366 and $1,230 as at June 30, 2004 respectively. Office furniture and equipment includes assets under capital leases having a gross value of approximately $366
and a net book value of approximately $300 as at June 30, 2005. At June 30, 2004 there were no such assets under capital lease.



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS
|-- | ---------------------------------------------------



Initial Software Transaction



On June 20, 2003, the Companys wholly-owned subsidiary, Yak Communications (Canada) Inc. (Yak Canada), acquired certain next
generation telecommunications software from Consortio, Inc., a Delaware corporation and Convenxia Limited, a corporation organized under the laws of the United Kingdom (collectively, the Sellers), pursuant to the terms and
conditions of a Software Acquisition Agreement. Payments made or due to the Sellers for the software were as follows: (a) $0.6 million in cash was paid at the closing of the transaction; (b) delivery of a non-interest bearing short-term
promissory note executed in favor of Consortio, Inc. in the principal amount of $0.4 million providing for equal monthly payments of $40 thousand and (c) the balance of the purchase price was evidenced by a long-term promissory note executed in
favor of Consortio, Inc. in the principal amount of $8.5 million bearing interest at 7.25% per annum. Under the long-term note, interest and principal were payable quarterly in the amount of $175 thousand commencing September 30, 2003 with
the balance due July 15, 2012. The sole recourse of the lender under the long-term note was the subject software. Yak Canada was also issued a warrant to purchase up to 8% of the issued and outstanding common stock of Convenxia Limited, with an
exercise period ending June 30, 2012. The exercise price is based on a predetermined formula using a calculation of fair value of the grantor at the time of exercise.



In addition to the purchase of the software, Yak Canada and the Sellers entered into a joint venture agreement under which
an exclusive license was granted to the Sellers for the use of the software for telecommunication services outside Canada to non-Yak customers. Under the joint venture agreement, Yak Canada was entitled to receive 4% of all gross revenue arising
from the sale of services using the acquired software pursuant to such license with minimum quarterly payments of $150 thousand through June 30, 2006 and, thereafter, 2.75% of gross revenue with minimum quarterly payments of $175 thousand. The
expiration date of the joint venture was July 15, 2015.



F - 17



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS (contd)
|-- | ------------------------------------------------------------



May 31, 2005 Restatement of June 30, 2003 and June 30, 2004 Financial
Statements



During the fourth fiscal quarter of fiscal
2005, the Company determined that the assumptions on which the valuations of this software acquisition were made and the agreement recorded were in error. On May 31, 2005, the financial statements for fiscal years ended June 30, 2003 and
2004 were amended and restated. As a result, in its June 30, 2003 amended Annual Report on Form 10-K/A filed on May 31, 2005, the Company estimated the fair value of each of the components of the software transaction as follows:



|                         |  |   |            
|------------------------ |  | - | -----------
|Software                 |  | $ | 1.7 million
|Warrants                 |  |   | 0.1 million
|Joint venture receivable |  |   | 5.0 million
|                         |  |   |            
|Total assets acquired    |  | $ | 6.8 million
|Cash paid                |  | $ | 0.7 million
|Short-term note payable  |  |   | 0.4 million
|Long-term note payable   |  |   | 5.7 million
|                         |  |   |            
|Total consideration paid |  | $ | 6.8 million



The assumptions
underlying the restatement of the software and warrant fair values were as follows:



| |  |  | Software - The Company valued the acquired software at $5.9 million, which is the mid-point of a range of $5.4 million to $6.4 million as determined by management based on a
third-party valuation. Applying by analogy the concepts of Statement of Financial Accounting Standards No. 141 (FAS 141), the Company allocated, on a pro rata basis, the excess of the fair value of the assets acquired over the fair value of the
consideration paid ($4.2 million) to reduce the amounts that otherwise would have been assigned to the non-financial acquired asset (the software). As a result, the amount recorded for the acquired software was reduced for accounting purposes from
its estimated fair value of $5.9 million to its carrying value of $1.7 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 18



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS (contd)
|-- | ------------------------------------------------------------



| |  |  | Warrants  The fair value of the Convenxia warrants was derived using the Black-Scholes valuation model. The range of possible cash outcomes varied based on estimated future
revenues of Convenxia Limited. Because Convenxia is a privately-held entity, enterprise valuation multiples and volatility inputs necessary for the Black-Scholes model were derived from comparable public company statistics.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Estimates of the fair value of the joint venture receivable, the short-term note payable and the long-term note payable were based on the guidance of Statement of Financial
Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements (SFAC No. 7) which provides a framework for using future cash flows and present value as the basis for accounting measurements of fair
value. Consistent with the methodology of SFAC No. 7, the Company used the expected cash flow approach to estimate fair value, focusing on explicit assumptions regarding the range of possible cash outcomes and their respective probabilities.
These fair values are based on the following assumptions:
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Receivable from joint venture: The range of possible cash outcomes varied based on the expected length of time that the joint venture would remain intact. The present value of
contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost of capital plus 200 basis points.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Short-term note payable: The present value of contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost of capital.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Long-term note payable: Similar to the joint venture receivable fair value estimate, the range of possible cash outcomes varied based on the expected length of time that the joint
venture would remain intact and also on the probabilities that the balloon payment would ultimately be paid in 2012. The present value of contractual cash flows was calculated using a discount rate equal to the Companys weighted average cost
of capital.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Subsequent to the May 31, 2005
filing of its amended 2003 and 2004 annual reports, and in conjunction with its continued discussions with the Office of the Chief Accountant (OCA) of the Securities and Exchange Commission in connection with the Companys request
for guidance in this regard, management discovered that a calculation error was made in its determination of the fair value of various components of the Convenxia transaction. On September 27, 2005, Yaks Board of Directors approved
managements recommendation to correct this accounting. For additional details see comments under Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements included in this Annual
Report, below.



F - 19



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS (contd)
|-- | ------------------------------------------------------------



Effect of 2004 Strategic Change



In the fourth quarter of fiscal 2004, the Company made the determination
that the development of the software for Yaks own internal use would require the full time and effort of all involved parties. The Company believed that the continuing development of the software for internal use over the next several years
would be the key aspect of the software transaction and not its commercialization. In addition, the Company became increasingly aware that whichever software was developed for next generation use, e.g., VoIP, it was more likely than not
to become obsolete on or before the due date of the balloon payment on the long-term note (June 2012).



Given these two issues, in its amended Annual Report on Form 10-K/A for fiscal year 2004, the Company modified the probability assumptions for the range
of possible cash outcomes related to the fair value calculations of the receivable from the joint venture and the long-term note payable. The probabilities that the cash flows from the joint venture would be received, or that the $7.3 million
balloon payment otherwise due in 2012 on the long-term note would be paid by Yak were reduced to zero probability (from a 20% probability in prior assumptions). Accordingly, in its amended Annual Report on Form 10-K/A for fiscal year 2004, the
Company reduced the fair value of the long-term note payable at June 30, 2004 by $1.7 million, from $5.8 million to $4.1 million and concurrently recorded an impairment in the fair value of the joint venture receivable of $0.6 million, from
$4.6 million to $4.0 million. Because the note liability was not legally extinguished and only the expected cash flow inflows and outflows changed, the resultant net gain of $1.1 million was deferred and classified on the fiscal year 2004 balance
sheet as Deferred Revenue. There was no impact on the Companys Consolidated Statements of Income nor on the Consolidated Statements of Cash Flows for the three months ended June 30, 2004.



As discussed above, subsequent to its recent (May 31, 2005) filing of its
amended financial statements for fiscal year 2004, and in conjunction with its continued discussions with the OCA, management determined that the reduction in fair value of the long-term note payable and the deferral of the loss on impairment of the
joint venture receivable were errors in accounting. As stated above, Yaks Board of Directors has approved managements recommendation to correct this accounting. For additional details see comments under Second Restatement of
Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements included in this Annual Report, below.



F - 20



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS (contd)
|-- | ------------------------------------------------------------



March 2005 Note Settlement



On March 3, 2005, the Company entered into a settlement agreement with
the Sellers. Pursuant to the settlement agreement, Yak paid $150 thousand to the Sellers and committed to complete $350 thousand of further development of the software in exchange for a discharge of any further obligation under the long-term note,
which note had a principal amount of $8.4 million outstanding at December 31, 2004. Pursuant to the settlement agreement, all guaranteed payments made under the joint venture agreement would also cease. Accordingly, the Company reduced the
amount recorded for the fair value of the long-term note payable at March 31, 2005 by $4.1 million, to $150 thousand and concurrently recorded an impairment of fair value of the joint venture receivable of $3.8 million, reducing the carrying
value to zero. Because the note liability was legally extinguished, the resultant net gain of $300 thousand and the previously deferred gain of $1.1 million from the fourth fiscal quarter of 2004 were recognized in the third fiscal quarter of 2005.
A total gain on early extinguishment of debt of $1.4 million was recognized in the Companys Consolidated Statements of Income for the quarter ended March 31, 2005.



As discussed above, subsequent to its recent (May 31, 2005) filing of its amended financial statements for the quarter ended
March 31, 2005, and in conjunction with its continued discussions with the OCA, management determined that the gain recognized on early extinguishment of debt was overstated by $200 thousand. As stated above, Yaks Board of Directors
approved managements recommendation to correct this accounting. For additional details see comments under Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004 Financial Statements included in
this Annual Report, below.



F - 21



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS (contd)
|-- | ------------------------------------------------------------



Second Restatement of Amounts Previously Reported in June 30, 2003 and June 30, 2004
Financial Statements included in this Annual Report



Subsequent to the May 31, 2005 filing of its amended Annual Report on Form 10-K/A for fiscal years 2003 and 2004, and as a result of our continuing discussions with the OCA, the Company discovered errors in its amended filings.
Yaks Board of Directors has approved managements recommendation to correct its accounting for the Convenxia software transaction. The errors originated from:



| |  |  | An error in calculating the discount rate used to determine the fair value of the transaction components for the May 31, 2005 restatements. The error caused the Company to
overstate the value of the long-term note payable, the joint venture receivable and the software in its amended Annual Report on Form 10-K/A for fiscal year 2003 and subsequent filings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The revaluation of the long-term note payable in the amended Annual Report on Form 10- K/A for the fiscal year ended June 30, 2004 10-K/A was not consistent with GAAP,
notwithstanding the fact that the resultant gain was deferred.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The loss on impairment of the joint venture receivable was incorrectly deferred in the amended Annual Report on Form 10-K/A for fiscal year 2004. The loss should have been
recognized in the fourth fiscal quarter of 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The $1.4 million gain recognized on early extinguishment of debt in the third fiscal quarter of 2005 was overstated by $200 thousand.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



As a result of these corrections, the Company in this Annual Reports has
restated the amounts previously reported in its financial statements for fiscal years 2003 and 2004, as well as each of the quarters in fiscal years 2004 and 2005. Consequently, Yaks previously issued financial statements for these periods
should no longer be relied upon.



F - 22



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|5. | NEXT GENERATION SOFTWARE AND FINANCIAL RESTATEMENTS (contd)
|-- | ------------------------------------------------------------



The following presents the impact from these corrections on the financial statements presented
herein:



Statement of Operations:



|                                           |  |                              |   |  |                |   |  |                 |  |                
|------------------------------------------ |  | ---------------------------- | - |  | -------------- | - |  | --------------- |  | ---------------
|                                           |  | For the years ended June 30,
|(In Thousands)                             |  | Asreported2004               |   |  | Asrestated2004 |   |  | Asreported2003* |  | Asrestated2003*
|                                           |  | $                            |   |  | $              |   |  | $               |  | $              
|Loss on impairment of JV receivable        |  |                             |   |  | 277            |   |  |                |  |               
|Interest on short-term loan                |  | 25                           |   |  | 25             |   |  |                |  |               
|Interest on note payable                   |  | 508                          |   |  | 430            |   |  |                |  |               
|Income from joint marketing agreement      |  | (278                         | ) |  | (539           | ) |  |                |  |               
|Depreciation and amortization              |  | 2,980                        |   |  | 2,980          |   |  | 803             |  | 803            
|Amortization of discount on long-term debt |  | 319                          |   |  | 535            |   |  |                |  |               
|Income before income tax provision         |  | 7,992                        |   |  | 7,851          |   |  | 5,487           |  | 5,487          
|Provision for income taxes                 |  | 2,931                        |   |  | 2,882          |   |  | 1,999           |  | 1,999          
|Net income                                 |  | 5,061                        |   |  | 4,969          |   |  | 3,488           |  | 3,488          
|Earnings per shareBasic                   |  | 0.47                         |   |  | 0.46           |   |  | 0.37            |  | 0.37           
|Earnings per shareDiluted                 |  | 0.44                         |   |  | 0.44           |   |  | 0.29            |  | 0.29           
|Foreign currency adjustment                |  | (364                         | ) |  | (364           | ) |  | 410             |  | 410            
|Comprehensive income                       |  | 4,697                        |   |  | 4,605          |   |  | 3,898           |  | 3,898          



|* | The subject transaction occurred on June 20, 2003 and the effect on income was insignificant.
|- | ---------------------------------------------------------------------------------------------



Balance Sheet:



|                                                         |  |                |   |  |                |   |  |                |  |               
|-------------------------------------------------------- |  | -------------- | - |  | -------------- | - |  | -------------- |  | --------------
|                                                         |  | As at June 30,
|(In Thousands)                                           |  | Asreported2004 |   |  | Asrestated2004 |   |  | Asreported2003 |  | Asrestated2003
|                                                         |  | $              |   |  | $              |   |  | $              |  | $             
|Property & equipment                                     |  | 9,753          |   |  | 9,596          |   |  | 5,919          |  | 5,762         
|Warrants in Convenxia (included in other current assets) |  | 60             |   |  | 60             |   |  | 60             |  | 60            
|Joint venture receivable                                 |  | 4,045          |   |  | 2,805          |   |  | 4,985          |  | 3,195         
|Deferred revenue - Fair value adjustment                 |  | 1,110          |   |  |               |   |  |               |  |              
|Current portion of Convenxia note payable                |  | 195            |   |  | 195            |   |  | 192            |  | 192           
|Short-term note payable Convenxia                        |  |               |   |  |               |   |  | 375            |  | 375           
|Long-term note payable Convenxia                         |  | 3,922          |   |  | 3,774          |   |  | 5,474          |  | 3,526         
|Income taxes payable (recoverable)                       |  | 1,234          |   |  | 1,185          |   |  | 1,712          |  | 1,712         
|Deferred tax (asset) liability                           |  | (238           | ) |  | (238           | ) |  | 760            |  | 760           



The effect of the
restatement on the Companys previously reported interim financial statements for each of the quarters in fiscal year 2004 and the first three interim periods of 2005 can be found in Note 16 Quarterly Results of Operations
(Unaudited).



F - 23



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|6. | LOAN RECEIVABLE
|-- | ---------------



The Company entered into a commercial services and marketing agreement with the Companys Joint Venture participant in Peru to provide financing to
assist in the Joint Ventures development of dial-around long-distance service for which the Company will process the Joint Ventures international traffic and earn 50% of the profits generated by the business. During the year, the joint
venture was terminated and an impairment on the loan for its full value of $499 was recorded leaving a balance at June 30, 2005 of $nil. For the years ended June 30, 2005 and June 30, 2004 the Company had made advances of $54 and $285
respectively under this agreement, of which $nil ($445 - June 30, 2004) is a loan receivable (see Note 20).



|7. | ADVANCES FROM TELUS COMMUNICATIONS INC. (Telus)
|-- | -----------------------------------------------



In fiscal 2003, in return for the Companys commitment to promote its advertising and marketing activities, Telus (a third party network line
provider) provided the Company with a deferral of amounts due to Telus to a total maximum value of $3,250. The deferral was calculated as 25% of the value of monthly billed revenue to the Company by Telus in the preceding month to a maximum of $270
per month. This deferral is based on the requirement that 75% of the Companys long-distance business is allocated to Telus.



Repayment of the deferred amounts commenced September 15, 2003 and ends October 15, 2005. Repayments are a minimum of $113 per month, plus
additional amounts based upon volumes. Up to June 30, 2005, the Companys monthly payments have been the minimum amount. The repayments are non-interest bearing as long as no payments are in default, and are classified as:



|          |  |              |  |                       
|--------- |  | ------------ |  | ----------------------
|          |  | June 30,2005 |  | June 30,2004(Restated)
|          |  | $            |  | $                     
|Current   |  | 382          |  | 1,239                 
|Long-term |  |             |  | 349                   
|          |  |              |  |                       
|          |  | 382          |  | 1,588                 
|          |  |              |  |                       



|8. | OBLIGATIONS UNDER CAPITAL LEASES
|-- | --------------------------------



The Companys capital leases are for terms of 24 to 60 months at annual interest rates ranging from 9.25% to 15.00%. The year ending June 30,
2007 includes a buyout of $243.



F - 24



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|8. | OBLIGATIONS UNDER CAPITAL LEASES (contd)
|-- | -----------------------------------------



The future minimum lease payments as at June 30, 2005 required under the capital lease
agreements are as follows:



|                              |  |      
|----------------------------- |  | -----
|                              |  | $    
|Year ending June 30, 2006     |  | 631  
|Year ending June 30, 2007     |  | 576  
|Year ending June 30, 2008     |  | 422  
|Year ending June 30, 2009     |  | 61   
|Year ending June 30, 2010     |  |     
|                              |  |      
|Total minimum lease payments  |  | 1,690
|Amounts representing interest |  | 203  
|                              |  |      
|Principal                     |  | 1,487
|Current portion               |  | 511  
|                              |  |      
|                              |  | 976  
|                              |  |      



|9. | INCOME TAXES
|-- | ------------



The domestic and international components of earnings (loss) before income taxes are as follows:



|                             |  |        |   |  |                |   |  |                |  
|---------------------------- |  | ------ | - |  | -------------- | - |  | -------------- | -
|                             |  | 2005   |   |  | 2004(Restated) |   |  | 2003(Restated) |  
|                             |  | $      |   |  | $              |   |  | $              |  
|United States                |  | (7,416 | ) |  | (1,287         | ) |  | (383           | )
|Foreign                      |  | 13,993 |   |  | 9,138          |   |  | 5,871          |  
|                             |  |        |   |  |                |   |  |                |  
|Earnings before income taxes |  | 6,577  |   |  | 7,851          |   |  | 5,488          |  
|                             |  |        |   |  |                |   |  |                |  



F - 25



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|9. | INCOME TAXES (contd)
|-- | ---------------------



The components of the income tax expense are as follows:



|                   |  |        |   |  |                |   |  |               
|------------------ |  | ------ | - |  | -------------- | - |  | --------------
|                   |  | 2005   |   |  | 2004(Restated) |   |  | 2003(Restated)
|                   |  | $      |   |  | $              |   |  | $             
|Current            |  |        |   |  |                |   |  |               
|United States      |  |       |   |  |               |   |  |              
|Foreign            |  | 3,147  |   |  | 752            |   |  | 1,652         
|Deferred           |  |        |   |  |                |   |  |               
|United States      |  | (2,455 | ) |  | (412           | ) |  |              
|Foreign            |  | 1,705  |   |  | 2,542          |   |  | 347           
|                   |  |        |   |  |                |   |  |               
|Income tax expense |  | 2,397  |   |  | 2,882          |   |  | 1,999         
|                   |  |        |   |  |                |   |  |               



The tax benefits
associated with employee exercises of non-qualified stock options and disqualifying dispositions of stock acquired with incentive stock options, generally reduce taxes currently payable. However, no tax benefits were recorded related to compensation
incurred by issuance of additional paid-in capital in 2005, 2004, and 2003. Consequently, a valuation allowance was recorded against the entire benefit.



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes have been recognized in the Companys accounts as follows:



|                                                                                                          |  |        |   |  |                |  
|--------------------------------------------------------------------------------------------------------- |  | ------ | - |  | -------------- | -
|                                                                                                          |  | 2005   |   |  | 2004(Restated) |  
|                                                                                                          |  | $      |   |  | $              |  
|Accounting value of property and equipment in excess of tax base (tax base in excess of accounting value) |  | (1,729 | ) |  | (24            | )
|Unrealized United States tax loss carryforward                                                            |  | 2,526  |   |  | 262            |  
|                                                                                                          |  |        |   |  |                |  
|Deferred income taxes (liability)                                                                         |  | 797    |   |  | 238            |  
|                                                                                                          |  |        |   |  |                |  



F - 26



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|9. | INCOME TAXES (contd)
|-- | ---------------------



U.S. income taxes and foreign withholding taxes are not provided on undistributed earnings of foreign
subsidiaries, which are considered to be indefinitely reinvested in the operations of such subsidiaries. The amount of these earnings was approximately $20,918 and $10,211 for the years ended June 30, 2005 and 2004 respectively. Determination
of the net amount of unrecognized U.S. income tax with respect to these earnings is not practicable.



A reconciliation of the tax provision of the Company at the U.S. statutory rate to the provision for income tax as reported is as follows:



|                                  |  |              |   |  |                        |   |  |                        |  
|--------------------------------- |  | ------------ | - |  | ---------------------- | - |  | ---------------------- | -
|                                  |  | June 30,2005 |   |  | June 30,2004(Restated) |   |  | June 30,2003(Restated) |  
|                                  |  | $            |   |  | $                      |   |  | $                      |  
|Tax Benefit at                    |  |              |   |  |                        |   |  |                        |  
|U.S. statutory rate               |  | (2,521       | ) |  | (438                   | ) |  | (130                   | )
|U.S. state and local income taxes |  | (148         | ) |  | (26                    | ) |  | (8                     | )
|Foreign tax differential          |  | 4,914        |   |  | 3,302                  |   |  | 2,120                  |  
|Other                             |  | 152          |   |  | 44                     |   |  | 17                     |  
|                                  |  |              |   |  |                        |   |  |                        |  
|Provision for income taxes        |  | 2,397        |   |  | 2,882                  |   |  | 1,999                  |  
|                                  |  |              |   |  |                        |   |  |                        |  



The Company has
losses of approximately $7,984 available to reduce future taxable income. Such benefits will be recorded as an adjustment to the tax provision in the year realized. The losses will expire as follows:



|     |  |      
|---- |  | -----
|     |  | $    
|2020 |  | 53   
|2021 |  | 202  
|2022 |  | 91   
|2023 |  | 268  
|2024 |  | 149  
|2025 |  | 7,221
|     |  |      
|     |  | 7,984
|     |  |      



F - 27



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands, except per share amounts)



|10. | COMMON STOCK
|--- | ------------



Common Stock, par value of $0.01,100,000,000 shares authorized.



Series A Preferred Stock, no par value, 1,000,000 shares authorized.



On July 15, 2003, 20,000 common shares were issued, as consideration for a short-term loan in the amount of $714 due
December 31, 2003, to an unrelated party.



On
December 30, 2003, pursuant to a stock option granted in December 2000, issued 2,260,934 shares of its common stock to its chief executive officer and director. The option provided for the issuance of 2,568,000 shares of common stock less the
surrender of 307,066 shares of common stock which was the number of shares determined by an independent valuator on December 5, 2003, assuming a discounted market price of $5.67 per share as of November 30, 2003. The transaction was
accounted for as a cashless exercise of the option as the option holder held 1,523,800 common shares prior to December 30, 2003.



On December 31, 2003, 9,000 common shares were issued to directors for services rendered with a value of $51.



On January 29, 2004 a two-for-one stock split of the Companys
outstanding shares was distributed to shareholders of record at January 15, 2004. For every one share of the Companys common stock held on the record date, a holder received one additional share. All share information has been adjusted
retroactively for the stock split.



On March 18, 2004,
1,470,000 common shares were issued for gross proceeds of $18,008 less direct costs associated with the transaction of $997 for net proceeds of $17,011. An additional $187 of costs were incurred in the quarter ended June 30, 2004 bringing the
final net proceeds to $16,823. Attached to these shares were common stock warrants issued to purchase 367,500 shares of the Companys common stock. These warrants have an exercise price of $17.00 and expire March 18, 2010.



On October 14, 2004, 4,000 common shares were issued to directors for
services rendered of $29.



F - 28



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands, except per share amounts)



|11. | STOCK OPTION PLAN
|--- | -----------------



Effective June 30, 1999, the Company adopted a Stock Option Plan (the Plan) which permits the issuance of stock options to selected
employees and directors. The Company reserved 640,000 shares of common stock for grant under the Plan. Options granted may be either nonqualified or incentive stock options and will expire no later than 20 years from the date of grant (10 years for
incentive options).



|                                                     |  |                        |   |  |                                |     
|---------------------------------------------------- |  | ---------------------- | - |  | ------------------------------ | ----
|                                                     |  | Number ofStock Options |   |  | Weighted-AverageExercise Price
|Outstanding, June 30, 2003                           |  |                       |   |  | $                              |    
|Granted (Fair value of stock upon issuance was 7.25) |  | 280,000                |   |  |                                | 6.51
|Exercised                                            |  |                       |   |  |                                |    
|Forfeited/expired                                    |  |                       |   |  |                                |    
|                                                     |  |                        |   |  |                                |     
|Outstanding, June 30, 2004                           |  | 280,000                |   |  |                                | 6.51
|Granted (Fair value of stock upon issuance was 7.30) |  | 50,000                 |   |  |                                | 6.41
|Exercised                                            |  |                       |   |  |                                |    
|Forfeited/expired                                    |  | (50,000                | ) |  |                                | 6.50
|                                                     |  |                        |   |  |                                |     
|Outstanding, June 30, 2005                           |  | 280,000                |   |  |                                | 6.50



Stock-based compensation



|                    |      |                     |         |                                                    |      |                                 |   |                   |  |                                |  |   |     
|------------------- | ---- | ------------------- | ------- | -------------------------------------------------- | ---- | ------------------------------- | - | ----------------- |  | ------------------------------ |  | - | ----
|Options Outstanding |      | Options Exercisable
|Exercise Price      |      | NumberOutstanding   |         | Weighted -AverageRemaining ContractualLife (Years) |      | Weighted- AverageExercise Price |   | NumberExercisable |  | Weighted-AverageExercise Price
|$                   | 6.41 |                     | 50,000  |                                                    | 4.19 |                                 | $ | 6.41              |  |                               |  | $ | 6.41
|$                   | 6.50 |                     | 180,000 |                                                    | 2.38 |                                 | $ | 6.50              |  | 45,000                         |  | $ | 6.50
|$                   | 6.57 |                     | 50,000  |                                                    | 3.87 |                                 | $ | 6.57              |  | 12,500                         |  | $ | 6.57



In addition to these
Stock Option Plans, on December 21, 2000, nonqualified options for 2,568,000 common shares were granted to an individual who is a director and chief executive officer and are exercisable at $0.78 per share on or before December 31, 2003,
or upon the sale of the Company. These options were exchanged for 2,260,934 shares of Common Stock on December 30, 2003 (see Note 10).



F - 29



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|12. | COMMITMENTS
|--- | -----------



The Company has operating lease commitments for its premises, service vehicles and operating lease commitments for network access lines which expire at
various dates through July 2009. The future minimum lease payments (exclusive of operating costs and payments for additional usage) for the years ending June 30, are as follows:



|                 |  |                    |  |                          |  |                 
|---------------- |  | ------------------ |  | ------------------------ |  | ----------------
|Expiring through |  | TelecomObligations |  | Facility/RentObligations |  | OtherCommitments
|2006             |  | 4,012              |  | 530                      |  | 30              
|2007             |  | 1,899              |  | 514                      |  | 30              
|2008             |  | 353                |  | 397                      |  | 19              
|2009             |  | 106                |  | 246                      |  | 3               
|2010             |  |                   |  | 16                       |  |                



Under the terms of an
agreement with one of their long distance providers, the Company is committed to purchase a minimum amount of long distance services for $570 for the year ending June 30, 2006.



|13. | RELATED PARTY TRANSACTIONS
|--- | --------------------------



| | (a) | The Company paid professional fees for consulting and executive search services for the current year of $173 to a company in which he is a director and minority shareholder. This
director became a related party in October 2004 and as of June 30, 2005 there was a balance of $136 owing.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The Company paid $18 of marketing and design fees for the year ending June 30, 2005 to a former officer and minority shareholder. This former officer ceased to be a related
party as of June 30, 2004. In the years ended June 30, 2004 and 2003, $142 and $122 was paid respectively to a corporation controlled by this same former officer and minority shareholder as a related party transaction. As of June 30,
2005, 2004 and 2003 there was a balance of $nil, $41 and $117 owing respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F - 30



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|13. | RELATED PARTY TRANSACTIONS (contd)
|--- | -----------------------------------



| | (c) | The Company paid professional fees for legal services for the years ending June 30, 2005, 2004 and 2003 of $171, $160 and $109 respectively to a director and minority
shareholder. For the years ended June 30, 2005, 2004 and 2003 there was no balance owing.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | The Company made advances to the joint venture in Peru for the year ended June 30, 2005 and 2004 in the amount of $54 and $286. (see Note 6 - Loan Receivable). A minority
shareholder and director of the other joint venture participant is related to the CEO of the Company (see Note 20).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These transactions have all been accounted for at their exchange amounts.



|14. | ECONOMIC DEPENDENCE
|--- | -------------------



The Company is dependent in Canada upon carriers to provide billing and collection services to its customers under renewable agreements. The Company is
also dependent upon TELUS Communications Inc. to provide billing, transport and handling services under a renewable agreement which expires in June 2007. Management expects that these agreements will be renewed.



The Company purchases long-distance services from a number of carriers and
does not believe that there is an economic dependence on any one carrier.



F - 31



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|15. | SEGMENTED AND RELATED INFORMATION
|--- | ---------------------------------



The Company operates in one reportable segment in offering discounted long-distance services to residential customers and telecommunications services to
small and medium sized businesses in three geographic regions - Canada, United States and International (primarily Peru). Summary information with respect to the Companys operations by geographic regions are as follows:



|                                  |  |        |   |  |                |   |  |                |  
|--------------------------------- |  | ------ | - |  | -------------- | - |  | -------------- | -
|                                  |  | 2005   |   |  | 2004(Restated) |   |  | 2003(Restated) |  
|                                  |  | $      |   |  | $              |   |  | $              |  
|Net revenue                       |  |        |   |  |                |   |  |                |  
|Canada                            |  | 89,434 |   |  | 79,569         |   |  | 39,005         |  
|United States                     |  | 3,036  |   |  | 1,074          |   |  | 1,399          |  
|International                     |  | 230    |   |  | 159            |   |  |               |  
|                                  |  |        |   |  |                |   |  |                |  
|                                  |  | 92,700 |   |  | 80,802         |   |  | 40,404         |  
|                                  |  |        |   |  |                |   |  |                |  
|Earnings (loss) before income tax |  |        |   |  |                |   |  |                |  
|Canada                            |  | 14,390 |   |  | 9,517          |   |  | 7,946          |  
|United States                     |  | (7,416 | ) |  | (1,663         | ) |  | (2,267         | )
|International                     |  | (397   | ) |  | (3             | ) |  | (191           | )
|                                  |  |        |   |  |                |   |  |                |  
|                                  |  | 6,577  |   |  | 7,851          |   |  | 5,488          |  
|                                  |  |        |   |  |                |   |  |                |  
|                                  |  |        |  
|                                  |  | 2005   |   |  | 2004(Restated) |   |  | 2003(Restated) |  
|                                  |  | $      |   |  | $              |   |  | $              |  
|Long-lived Assets                 |  |        |   |  |                |   |  |                |  
|Canada                            |  | 15,425 |   |  | 11,506         |   |  | 7,856          |  
|United States                     |  | 642    |   |  | 474            |   |  | 196            |  
|International                     |  |       |   |  | 104            |   |  |               |  
|                                  |  |        |   |  |                |   |  |                |  
|                                  |  | 16,067 |   |  | 12,084         |   |  | 8,052          |  
|                                  |  |        |   |  |                |   |  |                |  



The Canadian assets
include goodwill as at June 30, 2005 and June 30, 2004 of $503 and $458 respectively and other intangibles of $2,005 and $1,585 respectively.



In accordance with FAS 131, the asset segment includes all long-lived assets other than financial instruments, deferred policy acquisition costs and
deferred tax assets for the current year.



F - 32



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands, except per share amounts)



|16. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
|--- | -------------------------------------------



At June 30, 2005, the Company restated the amounts previously reported in its financial statements as of and for the year ended June 30, 2004 as
well as each of the quarters in fiscal year 2004 and the first three interim periods in 2005. All applicable amounts relating to these restatements have been reflected in the consolidated financial statements and these notes to the consolidated
financial statements. See Note 5 for further information relating to the restatements. Comparative earnings per share figures have been adjusted to reflect the stock split on January 29, 2004 (Note 10).



|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            
|---------------------------------------- |  | ------------- |  | -------------- |  | ------------------------------------ |  | -------------- |  | ----------- |  | ----------- |  | -----------
|                                         |  |               |  |                |  | Fiscal 2005 - For the Quarters Ended |  |               
|                                         |  | First Quarter |  | Second Quarter |  | Third Quarter                        |  | Fourth Quarter
|                                         |  | As Reported   |  | As Restated    |  | As Reported                          |  | As Restated    |  | As Reported |  | As Restated |  | As Reported
|                                         |  |               |  | Note 5         |  |                                      |  | Note 5         |  |             |  | Note 5      |  |            
|Assets                                   |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            
|Total current assets                     |  | 39,043        |  | 39,043         |  | 38,718                               |  | 38,718         |  | 37,836      |  | 37,836      |  | 34,384     
|Joint venture receivable                 |  | 3,976         |  | 2,782          |  | 3,904                                |  | 2,759          |  |            |  |            |  |           
|Property & Equipment, Net                |  | 11,993        |  | 11,837         |  | 12,556                               |  | 12,399         |  | 12,694      |  | 12,538      |  | 13,559     
|Loan Receivable                          |  | 414           |  | 414            |  | 200                                  |  | 200            |  |            |  |            |  |           
|Net Intangibles and Goodwill             |  | 2,085         |  | 2,085          |  | 2,109                                |  | 2,109          |  | 2,680       |  | 2,680       |  | 2,508      
|Deferred Income Taxes                    |  | 321           |  | 321            |  | 366                                  |  | 366            |  | 924         |  | 924         |  | 797        
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            
|Total Assets                             |  | 57,832        |  | 56,482         |  | 57,853                               |  | 56,551         |  | 54,134      |  | 53,978      |  | 51,248     
|Current Liabilities                      |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            
|Accounts Payable and Accrued Liabilities |  | 11,876        |  | 11,876         |  | 9,317                                |  | 9,317          |  | 10,220      |  | 10,220      |  | 11,891     
|Due to Factor                            |  | 5,298         |  | 5,298          |  | 5,790                                |  | 5,790          |  | 4,095       |  | 4,095       |  |           
|Income Taxes Payable                     |  | 1,940         |  | 1,908          |  | 2,516                                |  | 2,503          |  | 3,829       |  | 3,775       |  | 3,547      
|Current portion of long term debt        |  | 1,932         |  | 1,932          |  | 1,670                                |  | 1,670          |  | 1,255       |  | 1,255       |  | 893        
|Deferred Revenue                         |  | 1,110         |  | 0              |  | 1,110                                |  |               |  |            |  |            |  |           
|Unearned Revenue                         |  | 1,000         |  | 1,000          |  | 998                                  |  | 998            |  | 1,183       |  | 1,183       |  | 1,096      
|Long Term Debt                           |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            
|Advances from TELUS Commun. Inc.         |  | 42            |  | 42             |  |                                     |  |               |  |            |  |            |  |           
|Obligations under capital leases         |  | 1,297         |  | 1,297          |  | 1,234                                |  | 1,234          |  | 1,106       |  | 1,106       |  | 977        
|Note Payable                             |  | 4,054         |  | 3,904          |  | 4,186                                |  | 4,034          |  |            |  |            |  |           
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            
|                                         |  | 28,549        |  | 27,257         |  | 26,821                               |  | 25,546         |  | 21,688      |  | 21,634      |  | 18,404     
|Common Stock & Paid-In Capital           |  | 19,253        |  | 19,253         |  | 19,291                               |  | 19,291         |  | 19,331      |  | 19,331      |  | 19,350     
|Accumulated Comprehensive Income         |  | 634           |  | 634            |  | 1,100                                |  | 1,100          |  | 913         |  | 913         |  | 1,343      
|Retained Earnings                        |  | 9,396         |  | 9,338          |  | 10,641                               |  | 10,614         |  | 12,202      |  | 12,100      |  | 12,151     
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            
|Total Liab. and Shareholders Equity     |  | 57,832        |  | 56,482         |  | 57,853                               |  | 56,551         |  | 54,134      |  | 53,978      |  | 51,248     
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |            



|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |        |   |  |   |        |  
|------------------------------------- |  | ------------- | ------ | - | -------------- | - | ------ | ------------- |  | - | -------------- | - |  | ----------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                      |  |               |        |  
|                                      |  | First Quarter |        |   | Second Quarter |   |        | Third Quarter |  |   | Fourth Quarter |  
|                                      |  | As Reported   |        |   | As Restated    |   |        | As Reported   |  |   | As Restated    |   |  | As Reported |        |   | As Restated |   |        | As Reported | 
|                                      |  |               |        |   | Note 5         |   |        |               |  |   | Note 5         |   |  |             |        |   | Note 5      |   |        |             | 
|Net revenue                           |  | $             | 21,197 |   |                | $ | 21,197 |               |  | $ | 24,153         |   |  | $           | 24,153 |   |             | $ | 23,850 |             |  | $ | 23,850 |   |  | $ | 23,500 |  
|Gross margin                          |  |               | 7,439  |   |                |   | 7,439  |               |  |   | 9,532          |   |  |             | 9,532  |   |             |   | 9,052  |             |  |   | 9,052  |   |  |   | 9,041  |  
|Income from Operations                |  |               | 2,154  |   |                |   | 2,154  |               |  |   | 2,004          |   |  |             | 2,004  |   |             |   | 1,058  |             |  |   | 1,058  |   |  |   | 147    |  
|Other Expenses (Income)               |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |        |   |  |   |        |  
|Interest expense                      |  |               | 142    |   |                |   | 142    |               |  |   | 154            |   |  |             | 154    |   |             |   | 153    |             |  |   | 152    |   |  |   | 17     |  
|Interest earned                       |  |               | (78    | ) |                |   | (78    | )             |  |   | (105           | ) |  |             | (105   | ) |             |   | (117   | )           |  |   | (117   | ) |  |   | (107   | )
|Income from joint marketing agreement |  |               | (93    | ) |                |   | (141   | )             |  |   | (92            | ) |  |             | (140   | ) |             |   | (87    | )           |  |   | (135   | ) |  |   | (5     | )
|Long-term debt discount amortization  |  |               | 132    |   |                |   | 131    |               |  |   | 132            |   |  |             | 130    |   |             |   | 132    |             |  |   | 130    |   |  |   |       |  
|Gain on settlement                    |  |               |       |   |                |   |       |               |  |   |               |   |  |             |       |   |             |   | (1,447 | )           |  |   | (1,242 | ) |  |   |       |  
|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |        |   |  |   |        |  
|Earnings Before Income Tax            |  |               | 2,051  |   |                |   | 2,100  |               |  |   | 1,915          |   |  |             | 1,965  |   |             |   | 2,424  |             |  |   | 2,270  |   |  |   | 242    |  
|Provision for Income Tax              |  |               | 717    |   |                |   | 734    |               |  |   | 671            |   |  |             | 689    |   |             |   | 863    |             |  |   | 822    |   |  |   | 152    |  
|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |        |   |  |   |        |  
|Net earnings                          |  |               | 1,334  |   |                |   | 1,366  |               |  |   | 1,244          |   |  |             | 1,276  |   |             |   | 1,561  |             |  |   | 1,448  |   |  |   | 90     |  
|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |        |   |  |   |        |  
|Earnings per share -                  |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |        |   |  |   |        |  
|Basic - EPS                           |  |               | 0.10   |   |                |   | 0.11   |               |  |   | 0.10           |   |  |             | 0.10   |   |             |   | 0.12   |             |  |   | 0.11   |   |  |   | 0.01   |  
|Diluted - EPS                         |  |               | 0.10   |   |                |   | 0.11   |               |  |   | 0.10           |   |  |             | 0.10   |   |             |   | 0.12   |             |  |   | 0.11   |   |  |   | 0.01   |  



F - 33



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands, except per share amounts)



|16. | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (contd)
|--- | ----------------------------------------------------



|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            
|---------------------------------------- |  | ------------- |  | -------------- |  | ------------------------------------ |  | -------------- |  | ----------- |  | ----------- |  | ----------- |  | -----------
|                                         |  |               |  |                |  | Fiscal 2004 - For the Quarters Ended |  |                |  |            
|                                         |  | First Quarter |  | Second Quarter |  | Third Quarter                        |  | Fourth Quarter
|                                         |  | As Reported   |  | As Restated    |  | As Reported                          |  | As Restated    |  | As Reported |  | As Restated |  | As Reported |  | As Restated
|                                         |  |               |  | Note 5         |  |                                      |  | Note 5         |  |             |  | Note 5      |  |             |  | Note 5     
|Assets                                   |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            
|Total current assets                     |  | 18,184        |  | 18,184         |  | 19,669                               |  | 19,669         |  | 38,373      |  | 38,373      |  | 38,523      |  | 38,523     
|Joint venture receivable                 |  | 4,894         |  | 3,168          |  | 4,801                                |  | 3,141          |  | 4,707       |  | 3,112       |  | 4,046       |  | 2,805      
|Property & Equipment, Net                |  | 7,194         |  | 7,037          |  | 7,407                                |  | 7,249          |  | 8,633       |  | 8,476       |  | 9,753       |  | 9,596      
|Loan Receivable                          |  | 251           |  | 251            |  | 379                                  |  | 379            |  | 416         |  | 416         |  | 445         |  | 445        
|Deferred Acquisition Costs               |  |              |  |               |  |                                     |  |               |  | 228         |  | 228         |  |            |  |           
|Investment in affiliate                  |  | 435           |  | 435            |  | 406                                  |  | 406            |  | 490         |  | 490         |  |            |  |           
|Net Intangibles and Goodwill             |  | 2,275         |  | 2,275          |  | 2,339                                |  | 2,339          |  | 2,214       |  | 2,214       |  | 2,043       |  | 2,043      
|Deferred Income Taxes                    |  | 1,520         |  | 1,520          |  | 708                                  |  | 708            |  | 43          |  | 43          |  | 238         |  | 238        
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            
|Total Assets                             |  | 34,753        |  | 32,870         |  | 35,709                               |  | 33,891         |  | 55,104      |  | 53,352      |  | 55,048      |  | 53,650     
|Current Liabilities                      |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            
|Accounts Payable and Accrued Liabilities |  | 10,989        |  | 10,989         |  | 11,198                               |  | 11,198         |  | 13,318      |  | 13,318      |  | 11,509      |  | 11,509     
|Due to Factor                            |  | 4,687         |  | 4,687          |  | 5,306                                |  | 5,306          |  | 5,453       |  | 5,453       |  | 5,658       |  | 5,658      
|Income Taxes Payable                     |  | 1,405         |  | 1,417          |  | 1,041                                |  | 1,065          |  | 432         |  | 468         |  | 1,234       |  | 1,185      
|Current portion of long term debt        |  | 2,434         |  | 2,434          |  | 1,684                                |  | 1,684          |  | 1,632       |  | 1,632       |  | 1,827       |  | 1,827      
|Deferred Revenue                         |  | 974           |  | 974            |  | 1,028                                |  | 1,028          |  | 1,012       |  | 1,012       |  | 1,110       |  | 0          
|Unearned Revenue                         |  |              |  |               |  |                                     |  |               |  |            |  |            |  | 951         |  | 951        
|Long Term Debt                           |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            
|Advances from TELUS Commun. Inc.         |  | 1,270         |  | 1,270          |  | 1,006                                |  | 1,006          |  | 677         |  | 677         |  | 349         |  | 349        
|Obligations under capital leases         |  | 15            |  | 15             |  | 10                                   |  | 10             |  | 67          |  | 67          |  | 1,073       |  | 1,073      
|Note Payable                             |  | 5,486         |  | 3,568          |  | 5,501                                |  | 3,614          |  | 5,517       |  | 3,662       |  | 3,922       |  | 3,774      
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            
|                                         |  | 27,260        |  | 25,354         |  | 26,774                               |  | 24,911         |  | 28,108      |  | 26,289      |  | 27,633      |  | 26,326     
|                                         |  |               |  |                |  |                                      |  |               
|Common Stock & Paid-In Capital           |  | 2,340         |  | 2,340          |  | 2,394                                |  | 2,394          |  | 19,416      |  | 19,416      |  | 19,240      |  | 19,240     
|Accumulated Comprehensive Income         |  | 473           |  | 473            |  | 709                                  |  | 709            |  | 617         |  | 617         |  | 113         |  | 113        
|Retained Earnings                        |  | 4,680         |  | 4,703          |  | 5,832                                |  | 5,877          |  | 6,963       |  | 7,030       |  | 8,062       |  | 7,971      
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            
|Total Liab. and Shareholders Equity     |  | 34,753        |  | 32,870         |  | 35,709                               |  | 33,891         |  | 55,104      |  | 53,352      |  | 55,048      |  | 53,650     
|                                         |  |               |  |                |  |                                      |  |                |  |             |  |             |  |             |  |            



|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|------------------------------------- |  | ------------- | ------ | - | -------------- | - | ------ | ------------- |  | - | -------------- | - |  | ----------- | ------ | - | ----------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | - |  | - | ------ | -
|                                      |  |               |        |  
|                                      |  | First Quarter |        |   | Second Quarter |   |        | Third Quarter |  |   | Fourth Quarter |  
|                                      |  | As Reported   |        |   | As Restated    |   |        | As Reported   |  |   | As Restated    |   |  | As Reported |        |   | As Restated |   |        | As Reported |  |   | As Restated |  
|                                      |  |               |        |   | Note 5         |   |        |               |  |   | Note 5         |   |  |             |        |   | Note 5      |   |        |             |  |   | Note 5      |  
|Net Revenue                           |  | $             | 18,791 |   |                | $ | 18,791 |               |  | $ | 20,240         |   |  | $           | 20,240 |   |             | $ | 21,465 |             |  | $ | 21,465      |   |  | $ | 20,306 |   |  | $ | 20,306 |  
|Gross margin                          |  |               | 6,595  |   |                |   | 6,595  |               |  |   | 6,944          |   |  |             | 6,944  |   |             |   | 7,098  |             |  |   | 7,098       |   |  |   | 7,018  |   |  |   | 7,018  |  
|Income from Operations                |  |               | 2,639  |   |                |   | 2,639  |               |  |   | 2,059          |   |  |             | 2,059  |   |             |   | 1,828  |             |  |   | 1,828       |   |  |   | 1,856  |   |  |   | 1,856  |  
|Other Expenses (Income)               |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Share of net/gain loss of affiliate   |  |               | 35     |   |                |   | 35     |               |  |   | 30             |   |  |             | 30     |   |             |   | 34     |             |  |   | 34          |   |  |   | (138   | ) |  |   | (138   | )
|Interest expense                      |  |               | 139    |   |                |   | 115    |               |  |   | 136            |   |  |             | 113    |   |             |   | 134    |             |  |   | 112         |   |  |   | 137    |   |  |   | 116    |  
|Interest earned                       |  |               | (20    | ) |                |   | (20    | )             |  |   | (18            | ) |  |             | (18    | ) |             |   | (33    | )           |  |   | (33         | ) |  |   | (88    | ) |  |   | (88    | )
|Income from joint marketing agreement |  |               | (71    | ) |                |   | (136   | )             |  |   | (70            | ) |  |             | (135   | ) |             |   | (69    | )           |  |   | (134        | ) |  |   | (67    | ) |  |   | (133   | )
|Long-term debt discount amortization  |  |               | 80     |   |                |   | 134    |               |  |   | 80             |   |  |             | 134    |   |             |   | 80     |             |  |   | 134         |   |  |   | 80     |   |  |   | 134    |  
|Loss on impairment of JV receivable   |  |               |       |   |                |   |       |               |  |   |               |   |  |             |       |   |             |   |       |             |  |   |            |   |  |   |       |   |  |   | 277    |  
|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Earnings Before Income Tax            |  |               | 2,476  |   |                |   | 2,512  |               |  |   | 1,901          |   |  |             | 1,936  |   |             |   | 1,682  |             |  |   | 1,716       |   |  |   | 1,932  |   |  |   | 1,688  |  
|Provision for Income Tax              |  |               | 797    |   |                |   | 810    |               |  |   | 750            |   |  |             | 762    |   |             |   | 551    |             |  |   | 563         |   |  |   | 833    |   |  |   | 747    |  
|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Net earnings                          |  |               | 1,679  |   |                |   | 1,702  |               |  |   | 1,151          |   |  |             | 1,174  |   |             |   | 1,131  |             |  |   | 1,153       |   |  |   | 1,099  |   |  |   | 941    |  
|                                      |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Earnings per share -                  |  |               |        |   |                |   |        |               |  |   |                |   |  |             |        |   |             |   |        |             |  |   |             |   |  |   |        |   |  |   |        |  
|Basic - EPS                           |  |               | 0.18   |   |                |   | 0.19   |               |  |   | 0.13           |   |  |             | 0.13   |   |             |   | 0.10   |             |  |   | 0.10        |   |  |   | 0.10   |   |  |   | 0.09   |  
|Diluted - EPS                         |  |               | 0.14   |   |                |   | 0.15   |               |  |   | 0.10           |   |  |             | 0.10   |   |             |   | 0.10   |             |  |   | 0.10        |   |  |   | 0.10   |   |  |   | 0.09   |  



F - 34



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|17. | EARNINGS PER SHARE
|--- | ------------------



Basic earnings per share is determined by dividing net income applicable to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share amounts are similarly computed, but include the effect, when dilutive, of the Companys weighted average number of stock options outstanding. Potentially dilutive common stock purchase
warrants have not been considered in the computation of earnings per share in fiscal 2005 and 2004 because the effect would be antidilutive.



Earnings per share for the years ended June 30, 2005, 2004 and 2003 are calculated as follows:



|                                                             |  |      |        |                |   |                |  |   |       
|------------------------------------------------------------ |  | ---- | ------ | -------------- | - | -------------- |  | - | ------
|                                                             |  | 2005 |        | 2004(Restated) |   | 2003(Restated)
|                                                             |  | $    |        | $              |   | $             
|Net earnings applicable to common stockholders - basic       |  |      | 4,180  |                |   | 4,969          |  |   | 3,489 
|                                                             |  |      |        |                |   |                |  |   |       
|Net earnings applicable to common stockholders - diluted     |  |      | 4,180  |                |   | 4,969          |  |   | 3,489 
|                                                             |  |      |        |                |   |                |  |   |       
|Average shares outstanding:                                  |  |      |        |                |   |                |  |   |       
|Weighted average number of common shares outstanding - basic |  |      | 12,895 |                |   | 10,706         |  |   | 9,328 
|Effect of dilutive securities:                               |  |      |        |                |   |                |  |   |       
|Stock options                                                |  |      | 6      |                |   | 699            |  |   | 2,568 
|                                                             |  |      |        |                |   |                |  |   |       
|                                                             |  |      | 12,901 |                |   | 11,405         |  |   | 11,896
|                                                             |  |      |        |                |   |                |  |   |       
|Basic earnings per share                                     |  | $    | 0.32   |                | $ | 0.46           |  | $ | 0.37  
|                                                             |  |      |        |                |   |                |  |   |       
|Diluted earnings per share                                   |  | $    | 0.32   |                | $ | 0.44           |  | $ | 0.29  
|                                                             |  |      |        |                |   |                |  |   |       



|18. | CONTINGENCIES
|--- | -------------



Various lawsuits and claims are pending against the Company and estimated provisions have been included in current liabilities where appropriate. It is
the opinion of management that the final determination of these claims will not have a material adverse effect on the financial position on the results of the Company.



F - 35



---

##### Table of Contents

YAK COMMUNICATIONS INC. AND SUBSIDIARIES

(formerly Yak Communications (USA), Inc.)



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



(in $ thousands)



|19. | STATEMENT OF CASH FLOWS
|--- | -----------------------



The following recap presents the detail of the net change in assets and liabilities presented in the statement of cash flows for the years ended
June 30, 2005, 2004 and 2003:



|                                         |  |              |   |  |                        |   |  |                        |  
|---------------------------------------- |  | ------------ | - |  | ---------------------- | - |  | ---------------------- | -
|                                         |  | June 30,2005 |   |  | June 30,2004(Restated) |   |  | June 30,2003(Restated) |  
|                                         |  | $            |   |  | $                      |   |  | $                      |  
|Decrease (increase) in:                  |  |              |   |  |                        |   |  |                        |  
|Accounts receivable                      |  | (571         | ) |  | (6,312                 | ) |  | (4,449                 | )
|Prepaid expenses and sundry              |  | (688         | ) |  | (8                     | ) |  | (168                   | )
|Income taxes recoverable                 |  |             |   |  |                       |   |  | 6                      |  
|Increase (decrease) in:                  |  |              |   |  |                        |   |  |                        |  
|Deferred revenue                         |  | 145          |   |  | 951                    |   |  |                       |  
|Accounts payable and accrued liabilities |  | 382          |   |  | 4,393                  |   |  | 3,314                  |  
|Due to Factor                            |  | (5,658       | ) |  | 967                    |   |  | 1,685                  |  
|Income taxes payable                     |  | 2,362        |   |  | (478                   | ) |  | 1,712                  |  
|Add: Net assets acquired from Contour    |  |             |   |  | 1,294                  |   |  |                       |  
|                                         |  |              |   |  |                        |   |  |                        |  
|                                         |  | (4,028       | ) |  | 807                    |   |  | 2,100                  |  
|                                         |  |              |   |  |                        |   |  |                        |  



|20. | SUBSEQUENT EVENTS
|--- | -----------------



Subsequent to year end, the Company entered into a settlement agreement with its joint venture participant in Peru to terminate the venture and
discontinue its operations. Accordingly, subsequent to the year ended June 30, 2005, the Company has written off its proportionate share of assets and liabilities of the joint venture resulting in a further impairment of $85, concurrent with
the discontinuation of the joint venture.



F - 36



---

##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION OF DOCUMENT                                                                                                                                
|10.1        |  | EMI Translation and Record Transport Service Agreement, dated as of June 1, 2004, by and between Yak Communications (Canada) Inc. and Telus Corporation
|            | 
|10.2        |  | Letter Agreement, dated April 11, 2005, by and between Yak Communications (America) Inc. and Billing Concepts, Inc.                                    
|            | 
|10.3        |  | Lease of Office Space Agreement, dated November 6, 2003, between Yak Communications (Canada) Inc. and Oxford Properties Group Inc.                     
|            | 
|21          |  | Subsidiaries                                                                                                                                           
|            | 
|23          |  | Consent of Horwath Orenstein LLP.                                                                                                                      
|            | 
|31.1        |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer                                                                                      
|            | 
|31.2        |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer                                                                                  
|            | 
|32.1        |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     
|            | 
|32.2        |  | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.