United States
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, DC 20549-0001
                                   FORM 10-KSB

 (MARK ONE)
       |X|        ANNUAL REPORT UNDER  SECTION 13 OR 15(d) OF THE  SECURITIES
                  EXCHANGE ACT OF 1934 For the fiscal year ended  December
                  31, 2002

       |_|        TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE ACT OF 1934 For the  transition  period from
                  ________ to _________

                         Commission File Number 0-27669

                              ePHONE Telecom, Inc.
                 (Name of small business issuer in its charter)

             Florida                                          98-0204749
             -------                                          ----------
 (State or other jurisdiction of                           (I.R.S.  Employer
 incorporation or organization)                         Identification Number)

          1145 Herndon Parkway, Suite 100
                 Herndon Virginia                               20170
                 ----------------                               -----
     (Address of principal executive offices)                (Zip Code)

                                 (703)-787-7000
                            Issuer's telephone number

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

             None                                                None
             ----                                                ----
     (Title of each Class)                              (Name of each exchange
                                                         on which registered)

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

                         COMMON STOCK, $0.001 PAR VALUE

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

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

Issuer's revenues for the year ended December 31, 2002 were $19,222,000.
Aggregate market value of voting stock held by non-affiliates of 36,792,494
shares outstanding at December 31, 2002 was approximately $5,519,000. Amount was
computed using the average bid and ask price as of December 31, 2002, which was
$0.15. As of December 31, 2002, a total of 38,084,994 shares of common stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE - None

Transitional Small Business Disclosure Format (check one): |_| Yes  |X| No


<PAGE>




                              ePHONE TELECOM, INC.

                                   FORM 10-KSB

                                      INDEX

                                            Part I                          Page
                                                                            ----
Item 1.   Description of Business.............................................2

Item 2.   Description of Properties..........................................11

Item 3.   Legal Proceedings .................................................11

Item 4.   Submission of Matters to a Vote of Security Holders ...............11


                                            Part II

Item 5.   Market for Common Equity and Related Stockholder Matters...........11

Item 6.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations......................................13

Item 7.   Financial Statements...............................................22

Item 8.   Changes in and Disagreements with Accountants on
              Accounting and Financial Disclosure............................22


                                           Part III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
              Compliance with Section 16(a) of the Exchange Act..............22

Item 10.  Executive Compensation.............................................25

Item 11.  Security Ownership of Certain Beneficial Owners and Management.....29

Item 12.  Certain Relationships and Related Transactions.....................30

Item 13.  Exhibits and Reports on Form 8-K...................................31

Item 14.  Controls and Procedures............................................32

Registrant Signatures .......................................................33



<PAGE>



FORWARD LOOKING STATEMENTS

Certain information in this report including statements made in "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Description of Business" and elsewhere contain "forward-looking statements".
All statements other than statements of historical fact are "forward-looking
statements", including any projections of earnings, revenues or other financial
items, any statements of the plans and objectives of management for future
operations, any statements concerning proposed new products or services, any
statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing. In some cases,
forward-looking statements can be identified by the use of terminology such as
"may", "will", "expects", "plans", "anticipates", "estimates", "potential", or
"continue", or the negative thereof or other comparable terminology. Although
ePHONE believes that the expectations reflected in its forward-looking
statements are reasonable, it can give no assurance that such expectations or
any of its forward-looking statements will prove to be correct, and actual
results could differ materially from those projected or assumed in these
forward-looking statements.

Forward-looking statements include but are not limited to:

o        Expectations and estimates as to completion dates of the Network of
         Regional gateways ePHONE is installing and the Network;

o        ePHONE's ability to implement successfully ePHONE's operating strategy
         as described in the business plan of ePHONE;

o        Future financial performance as estimated in ePHONE's financial
         projections;

o        ePHONE's forecasts of customer or market demand;

o        Highly competitive market conditions;

o        Changes in or developments under laws, regulations and licensing
         requirements in regions ePHONE is installing gateways; and

o        Changes in telecommunications technology.

This list of categories of forward-looking statements should not be construed as
exhaustive. ePHONE will not update or revise any forward-looking statements.

Certain factors that could cause ePHONE's forward-looking statements not to be
correct and cause ePHONE's actual results to materially vary from projections
made in forward-looking statements as further described under the caption in
Risk Factors contained in our Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 6 below.

                                       1

<PAGE>


PART I


ITEM 1.       DESCRIPTION OF BUSINESS


A.  Overview

ePHONE was incorporated on May 3, 1996 pursuant to the laws of the State of
Florida.

The development of ePHONE's current business plan essentially commenced in June
2001. From the date of incorporation until December 31, 1999, ePHONE did no
business. From January 1, 2000 to June of 2001, it focused on the development of
a business model that was a precursor to the current business plan.

Today ePHONE, is a leading provider of advanced Internet-based communications
services. The Company offers domestic and international voice and other enhanced
services that combine the flexibility and power of the Internet with the
simplicity and ubiquity of a telephone. The Company, based in Herndon, Virginia,
has a FCC 214 carrier-to-carrier and resale license, and other telephony
licenses required to operate its domestic and international services.

During late 2002, the Company began providing retail and wholesale
telecommunication services throughout Canada through its wholly-owned
subsidiary, ePHONE Telecom, Canada.

B.  STRATEGIC PLAN

ePHONE's strategy is to continue operations as a next generation global Voice
over Internet Protocol ("VOIP") provider offering a full complement of
telecommunications and data services utilizing the efficiency and reliability of
new generation VOIP based telecommunication technologies.

This entails operating as a provider of both wholesale and retail services.
Using a private Internet Protocol ("IP") network and the public Internet, ePHONE
has developed the capability to provide voice and data transmission and other
telephony features at high quality and low cost. ePHONE's growing international
network allows ePHONE to capitalize on inexpensive wholesale termination rates,
which can be further leveraged into retail products in order to increase overall
margins.

ePHONE has developed a strategy that builds one element upon the other to
decrease the Company's costs of providing service while increasing market
penetration. ePHONE also employs a channel distribution model based on the
development of partnerships both domestically and internationally. ePHONE's
philosophy is to create and sustain ePHONE as a facilities based marketing and
sales oriented telecommunications company.


C.  BUSINESS PLAN

ePHONE has become a global telecommunications VOIP provider offering a full
complement of telecommunications services, including a variety of retail
services, wholesale arbitrage and data services, using VOIP technology over both
the Internet and private leased circuits. ePHONE believes it can differentiate
itself from the competition through innovative marketing approaches and
techniques while utilizing state of the art technologies to provide a
comprehensive array of competitive service offerings.

ePHONE's approach has four components:

o        Utilization of high quality fiber lines provided by leased
         circuits and private IP connections and use of the Internet where
         efficiency and economics dictate, to carry telecommunications traffic
         and to link nodes in the network.
o        Deliver a range of innovative products and services using its network.
o        Compete as a provider of long distance and international
         services to ensure the most competitive rates are available for the
         retail products.
o        Develop direct international connections and partners to
         further enhance our ability to compete in the wholesale market while
         further improving margins on retail products.

                                       2
<PAGE>

As of the end of fiscal year 2002 ePHONE had deployed 9 network nodes in El
Salvador, Guatemala, Toronto, New York, Minneapolis, Los Angeles, Miami, Reston
and Herndon and is supporting retail programs as well as wholesale arbitrage
traffic. ePHONE is interconnected with 18 carriers for origination of revenue
generating traffic and termination of traffic both domestically and
internationally. The retail programs consist of the following: (i) e-TRANS-PORT,
(ii) Unlimited calling plan, (iii) Canadian Calling Card program, and (iv)
eAccess calling cards in the United States and Canada.

ePHONE formally introduced e-TRANS-PORT in January 2003. e-TRANS-PORT is a
totally self-contained piece of equipment, the size of a pack of chewing gum,
which is installed between the phone and the incoming phone line at the customer
premises. ePHONE's service to the customer is the same as the 1+ long distance
service; except that it is prepaid with the added benefit of portability.
e-TRANS-PORT offers extremely competitive rates and avoids the two stage dialing
by other prepaid services. The customer simply dials the number he is calling
and the e-TRANS-PORT device automatically routes the call through ePHONE's
network.

ePHONE has worked closely with the designer and manufacturer of e-TRANS-PORT and
has integrated the device with our network. ePHONE has secured the exclusive
rights to the version of the device that works with our network, which provides
multiple functions and has a speed of connection that is faster than previous
versions of the device. ePHONE is working with marketing entities to introduce
the product to market through home shopping TV channels and large retail chains
as well as the after market distribution channels for products marketed "As Seen
on TV". The Company is presently in contract negotiations with several major
retailers for the sale of eTRAN-PORT devices and its suite of prepaid
rechargeable calling cards.

ePHONE positions e-TRANS-PORT so the end user may save as much as 70% off their
equal access based 1+ service. Currently, competitive long distance services are
offered by service providers, who require the customer to authorize all routing
of long distance calls to a specific service provider. The approach ePHONE is
taking does not require any inter carrier or service provider coordination. The
customer can use ePHONE's service regardless of which long distance carrier they
are currently using, and they do not need to change carriers or inform them that
they are using the ePHONE service.

ePHONE believes its aggressive approach to marketing and sales is as important
as the technologies being employed. ePHONE has assembled a management team with
diverse telecommunications experience and expertise. ePHONE is committed to
staying at the leading edge of telecommunications and information technologies
but believes its real competitive advantage will be sustained through a creative
and innovative approach to acquiring and maintaining customers and channel
distribution partners.

ePHONE plans for 2003 and beyond are to continue to build its network capacity,
geographic coverage and utility while continuing to introduce new products and
services. ePHONE's wholesale activities are focused on pursuing international
direct interconnections. Direct interconnections are achieved either over the
Internet, or where economically feasible, over leased circuits to ePHONE's or a
partner's equipment located in other countries. ePHONE believes the termination
rates obtained through "directs" will lower termination costs which in turn will
increase margins on both wholesale and retail programs. The development of
direct interconnections is the focus of the franchise program wherein partners
are solicited to install equipment in their own country but the equipment
becomes a part of the ePHONE network and the revenues generated by the equipment
are shared.

D.  NETWORK

ePHONE believes the development of IP telephony as a viable technology for
providing telecommunications services is significant not only because of the
reduction in costs, but also because of the enhanced services that it
facilitates. Unlike legacy telecommunication systems, which are currently used
by most providers of telecommunications services, IP telephony systems are open,
and thereby, allow the integration of numerous services on a single platform.
This integration provides significant cost advantages. Inherent in the
conversion of voice to data over an IP network is an effective and efficient
compression of the conversation. Effectively this means an increase in
utilization of bandwidth or capacity, which translates into a decreased cost.

                                       3
<PAGE>

ePHONE's plan is for their network to be deployed worldwide, and it will consist
of the following main elements:

o    The use of a high quality IP backbone provided by a combination of
     leased lines and the Internet to carry telecommunications traffic and to
     link nodes in the network.

o    Strategically placing nodes in the network that interface with
     end-users and provide the actual services ePHONE will offer through its
     Points of Presence (POPs).

o    Co-location of Nodes in secure facilities to allow low cost
     interconnection to a variety of IP network providers.

o    Global Network Management Center (GNMC). From this centralized
     point of command, ePHONE's technical staff will use their best efforts to
     ensure uninterrupted operation of ePHONE's network and services. The GNMC
     will also serve as a collection point for billing information used in
     invoicing for services rendered.

o    Data Processing Centers.  This duplicated facility provides the
     authentication and rating of our retail services.

1.  IP Backbone

In order to deliver high quality voice services that are comparable to
traditional public telephone services, ePHONE requires a high quality IP
backbone to carry traffic between its POPs. Currently, ePHONE is utilizing
several different carriers to interconnect its POPs.

The technology ePHONE employs allows for the use of both the public internet and
international and domestic private leased circuits. ePHONE's network provides
the flexibility to move to new technologies as they evolve and become practical.
Because of a VOIP technology called Real Time Protocol "RTP" header compression,
the use of private leased circuits allows ePHONE to double the amount of traffic
ePHONE can carry over a given bandwidth. This technology enables ePHONE to
realize even more savings in the transport of traffic than an Internet only
competitive carrier.

2.  Points of Presence (POPs)

In each region where ePHONE establishes a presence, equipment will be deployed.
Each POP will interface to the IP Backbone in order to provide the numerous
services that ePHONE offers. The key components of each of our POPs will be the
following:

o     Network routers used to connect the POP as a whole to the IP
      backbone. These routers will allow access to our IP backbone by any device
      that is part of the company network. Such devices include gateways, and
      other sub-components of our switch.

o     The IP gateway that serves as the interface between the local carrier
      and our IP backbone. This VOIP gateway is the bridge between our network
      and the existing public telephone network.

Application servers are used to deliver actual services to the end user. Similar
to a web server, application servers will be used to host the applications that
end users interact with. These servers are centrally located and accessed by the
POPs either over the Internet or via the ePHONE network.

ePHONE has 9 POP locations in El Salvador, Guatemala, Los Angeles, Miami, New
York, Toronto, Minneapolis, Reston and Herndon, Virginia. These nine POPs form
the core of ePHONE's network. A second tier of POPs placed under the auspices of
the franchise program is intended to provide direct termination to and access
from various countries where the placement of such POPs is technically feasible
and economically profitable. ePHONE expects to be able to place additional local
access POPs during 2003 if suitable commercial opportunities are identified and
as capital resources are available.

3.  Global Network Management Center (GNMC)

The GNMC is the centralized command center from which ePHONE's technical staff
manages the various components of the network, as well as all other services
being provided. The GNMC is staffed 24 hours a day, 7 days a week. The GNMC,
which is connected to the network via a high-speed dedicated IP connection,
provides the following services:

                                       4
<PAGE>

o     Bandwidth monitoring and planning activities to determine the
      appropriate timing and structure of improvements to our network
      infrastructure.

o     Coordination of the deployment of new ePHONE POPs, and extensions of the
      IP backbone to include new regions.

The GNMC is located in ePHONE's corporate headquarters in Herndon, Virginia.

4.       Data Processing Center

In a duplicated, secure data processing center, ePHONE provides the following:

o     Real-time collection of call detail record (CDR) information from all
      ePHONE POPs.

o     Authentication and consolidation of all billing information generated by
      ePHONE POPs located throughout the network.

o     Back office functions such as account setup, management, termination and
      post paid billing.

o     IP network monitoring, to ensure that the IP backbone delivers
      consistently high quality performance and results.

o     Monitoring of the equipment in each POP in the network to ensure
      availability.

o     Monitoring carrier interconnects to ensure adequate quality of
      service and availability of termination to the contracted destinations.

o     Development and deployment of new services to ePHONE POPs.


E.  MARKETING

ePHONE offers a wide range of telecommunications services to carriers and end
users throughout the world. The fundamental service that ePHONE provides is the
ability to reduce telecommunications costs through the use of IP telephony
technology.

ePHONE has already demonstrated the viability of selling long distance telephone
services using IP telephony technology. To extend that viability, ePHONE offers
significantly differentiated retail products and services. We believe there are
three broad categories in which ePHONE delivers services that are more
compelling than the straightforward long distance calling services being offered
currently by telephony carriers.

These categories are:

o   Marketing differentiated services.

    These products are differentiated both by how they are distributed and sold
    and the underlying technologies. Moving telephony services into mass
    marketing channels and adapting the products either technically or
    commercially to offer an innovative product tailored to the specific
    distribution channel is what distinguishes these products from other
    offerings. Examples of this are the Unlimited Domestic Calling Program and
    the eCanada and eACCESS range of calling cards.

                                       5
<PAGE>

o    Enhanced services.

    Through integration of IP telephony products based on open standards, ePHONE
    provides a significantly greater depth of services beyond simple long
    distance calling, including services such as roaming, 1+ dialing, online
    billing and verification. Because of the open architecture, ePHONE is also
    positioned to add services such as unified messaging, "Follow Me" and "Find
    Me" services. Management anticipates introducing these services in the 3rd
    quarter of 2003.

o    Access technology.

   At present, consumers must either physically change their long distance
   provider (at a fee), dial additional access codes or use a pre-paid card with
   its access number and PIN to access lower cost services. ePHONE has developed
   and deployed the e-TRANS-PORT to allow customers to generally return to the
   basic freedom to dial long distance calls in the normal way, but gain
   immediate access to ePHONE's low cost and simple rates. These devices allow
   ePHONE to deliver services providing an ease of use only seen with 1+
   service.

o    Marketing Approach.

   ePHONE uses a combination of in-house and consultant marketing resources to
   develop routes to market its products. The external resources are primarily
   focused on expanding ePHONE's penetration of the retail market for
   e-TRANS-PORT and the eAccess range of calling cards.



F.  PRODUCTS AND SERVICES

o        Specialty Products

These services are customized to the requirements of a specific distribution
channel or marketing program. Examples of these programs are the Unlimited
Domestic Calling Program and the e-TRANS-PORT product.

These products are driven by the marketing approach and the technology. The
underlying technologies are standard prepaid services, however, the marketing
approach and added features and functionalities including on line review of
calls dialed and charges on the card or distribution channel differentiates the
product and thereby creates a competitive advantage resulting in high margins.

For example, e-TRANS-PORT as to which the Company holds an exclusive license,
has a microchip that does not require a separate power source. It is used to
produce a product that works for all practical purposes the same as a 1+ dialing
program. In addition, the product is mobile since it can be used from almost any
1 or 2 line phone in the domestic US including hotels.

As the network is expanded ePHONE believes its products can be exported to
international markets thus leveraging the development effort that has gone into
the definition and launch of the product in the US. Currently discussions are
underway with a major Asian provider to launch the e-TRANS-PORT product
throughout the Pacific.

o        Prepaid Calling Cards

Since each POP is capable of providing interactive voice response ("IVR"),
balance announcements, real-time billing with automatic cutoff and other key
features, no additional investment is required in order to use the network to
provide prepaid calling card services.

Prepaid calling cards offer a range of products targeted at different markets
and distribution channels. Competitive rates and extensive distribution channels
allow cards to be tailored to each of these markets:

     o    Local Community Cards

          Targeted at local community calling groups with specific calling
          destinations distributed through small retail stores or neighborhood
          contacts.

                                       6
<PAGE>

     o    Promotional Cards

          Cards sold to a corporate entity to promote their product as a
          promotional item.

     o    Travel Cards

          These cards allow a consumer to make calls from a number of specified
          countries at rates that are lower than the consumer would otherwise
          be required to pay.

     o    NPO - non profit organization products

          These products are tailored to the "affinity" market. They provide an
          alternative revenue source for non-profit organizations.

     o    International Cards

          Asadditional local access POPs are put in place, franchise partners
          are able to market their own prepaid products in their market or
          country.

o        Customized Online Billing

Because ePHONE's network is built on Internet Protocol (IP) technology, it is
able to deliver transactional and e-commerce applications identical to those
used by web-based retailers. Since all POPs collect billing information in
real-time, with immediate transmission of billing information to the GNMC,
ePHONE is able to provide online services, such as, allowing customers to review
their bills, signing up for new plans and services, or making changes to
existing services. This service also provides immediate feedback to end users on
the benefits and savings.

This service has been further extended with the addition of an IVR (Interactive
Voice Response system) that provides similar services for users over the phone,
allowing them to sign up for new services and providing information on the
status of their accounts.



G.  WHOLESALE CARRIER AND DIRECTS

ePHONE believes the provision of competitive retail products is dependant on its
ability to obtain competitive rates from suppliers. ePHONE believes it can
obtain these competitive rates by positioning itself as a wholesale service
provider. ePHONE establishes relationships with terminating carriers and uses
its overseas POPs, such as the Company has in El Salvador and Guatemala, and
sells to other carriers with the intent of making a margin on the transaction.

Providing these services allows ePHONE to increase traffic volumes as well as
making bilateral arrangements for both the origination and termination of
traffic with a specific carrier, thereby, reducing the financial exposure in
both directions. ePHONE believes this also increases the number of carriers with
whom ePHONE can contract.

ePHONE has established contractual relationships with a base of carriers who
provide services ranging from local access, 800 access and international
terminations. The relationship with other carriers is very dynamic and requires
an ongoing presence in the market to track rates and develop contractual
relationships as new routes or more competitive rates become available.

ePHONE has established a network of interconnections that is sufficient for the
current business plan purposes and can increase its capacity within days. ePHONE
can terminate calls to any destination in the world and has very competitive
rates through contracted carriers for access and egress in the domestic US.
ePHONE is able to offer competitive products in the retail market and to
terminate traffic on behalf of other carriers competitively.

                                       7
<PAGE>

ePHONE believes it can further improve its rates to international destinations
by interconnecting with carriers or service providers in those international
locations. This is the focus of ePHONE's franchise program. It encourages
companies in international locations to install compatible equipment and provide
access to the local telephone network and to become part of the ePHONE network.
These "directs" bypass intermediaries and allow ePHONE to benefit from lower
termination rates as well as providing access for retail products in that
location. ePHONE connects to these partners via the Internet and there are no
long term transmission commitments to be supported.

H.  SUPPLIERS

A significant amount of technology and management experience was required to
create the network and deliver services to end-users. Although ePHONE has the in
house technical expertise to create some systems, its strategy is to enhance the
current technology team by partnering with other companies that provide the
required technology and can meet ePHONE's requirements. A list of the partners
and suppliers that ePHONE uses are:

o    Cisco Systems, Inc.

      ePHONE maintains a strong, strategic technology and business relationship
      with Cisco Systems. ePHONE's network is built end-to-end with Cisco
      products and technologies, and meets a high standard of reliability and
      performance. Cisco offers an extensive array of VOIP products, IP routers
      and switches. These products can be combined in a variety of different
      ways to provide the desired network functionality. ePHONE's technology
      team believes they have developed an architecture that provides superior
      functionality and flexibility. This architecture has been propagated
      throughout ePHONE's core network.

o    Mind CTI, LTD

      Mind CTI is an Israeli company that has developed a billing system used in
      both data and voice applications. It also provides access control,
      authorization and configuration capabilities. It allows ePHONE to define a
      hierarchy of relationships between carriers, distributors, service
      providers and anyone else with whom ePHONE deals to provide services,
      either as a customer or provider. The Cisco equipment handles the routing
      and sending of traffic while the Mind CTI system keeps track of what
      happened throughout the network and what the cost was and who should be
      charged.

o    Immix Telecom, Inc.

      Immix is a Florida corporation selling autodialers and other access
      devices. Immix produces the device being used for the e-TRANS-PORT
      program. ePHONE has developed a very close working relationship with Immix
      that has allowed ePHONE to closely integrate the e-TRANS-PORT with the
      ePHONE network to provide seamless customer access. ePHONE's contract with
      Immix provides for an exclusive right to distribute the specific device
      ePHONE has developed in conjunction with Immix.

o    Switch and Data

      ePHONE has contracted with Switch and Data to provide co-location
      facilities in New York, Miami, Reston and Los Angeles. Switch and Data
      operates "Carrier Hotels" which are facilities set up to provide a
      location to house telecommunications switches. They possess all the
      attributes required in the form of security, uninterruptible power, air
      conditioning and proximity to other carriers and telecommunications
      facilities.

o    Carriers

      As VoIP Services Provider ePHONE interconnects with a number of other
      carriers. These relationships are fluid, depending on where ePHONE can
      obtain the best rates and to whom ePHONE can sell rates at any given point
      in time. Though other carriers as a group are extremely important to
      ePHONE, no one carrier is in a position to be considered critical to
      ePHONE's success.

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<PAGE>

I.  COMPETITION

The market for Internet voice, fax and other value-added services is
competitive. Internet protocol and Internet telephony service providers, such as
ITXC Corp., route traffic to destinations worldwide and compete directly with
ePHONE, along with Internet telephony service providers Net2Phone. In addition,
major telecommunications carriers, such as AT&T, Deutsche Telekom, MCI WorldCom
and Qwest Communications, have all entered or announced plans to enter the
Internet telephony market. Many of these companies are larger than ePHONE and
have substantially greater managerial and financial resources than we do.
Competition in ePHONE's markets can be expected to continue and may adversely
affect our profitability. ePHONE cannot assure that we will be able to compete
successfully against competitors and may lose customers or fail to grow our
business as a result of this competition.

ePHONE has developed a strategy to take advantage of the current market
conditions while positioning itself to accommodate future developments and
trends. The key elements are simple individually, but require the technology,
management expertise and experience to take advantage of them. ePHONE believes
it has gained a significant competitive advantage through its ability to:

- Capitalize on the current oversupply of bandwidth to continually build out and
improve its network by utilizing private IP connections and leased lines to
provide a reliable, high quality transmission facility. This is achieved with
slightly higher cost than the cost of using the Internet as the transport medium
while providing a managed network environment with superior call quality.

- Utilize the latest standards based technologies to deploy a network capable of
interfacing to both legacy networks (traditional telephone networks) and the
variety of VOIP networks.

- Introduce higher margin retail products such as e-TRANS-PORT, Unlimited
Domestic Calling Program, reseller program and prepaid calling cards and
continue its new product development program.

- Build traffic volume through wholesaling minutes to other carriers.

- Aggregate traffic to increase volumes to certain geographic destinations which
results in decreased cost per minute.

- Utilize in-country partners to provide low cost termination and call
origination in high margin, high traffic volume locations. This allows us to
open new markets while decreasing termination costs. A distinct advantage of
ePHONE's technology is the ability to rapidly and inexpensively deploy nodes or
POPs, which decrease the cost of terminating traffic as well as providing the
opportunity to originate traffic.

For the present, the following companies focusing on the use of VoIP technology
are our main competitors:

o    The Internet Telephone Exchange Carrier (ITXC)

ITXC is a clearinghouse for Internet telephony service provider and operates
ITXC.net. Since April of 1998, ITXC has been used to provide traditional
carriers' international call completion with sufficient quality for carriers to
serve their phone-to-phone customers. ITXC has reportedly installed 167 POPs in
45 countries and 101 cities.

o    iBasis

iBasis was founded in 1996 to provide Internet Protocol (IP) telephony service
to telecommunication carriers around the globe. The company has POPs in Asia,
Europe, the Middle East, and the Americas. iBasis is in wholesale Internet
telephony service.

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<PAGE>

o    Net2Phone

Net2Phone began as a subsidiary of IDT Corporation and is a provider of voice
over public Internet communications services. Net2Phone enables its customers to
place telephone calls from their computers, telephones, or fax machines to any
telephone or fax machine in the world. By routing calls via the public Internet,
Net2Phone enables users to save money on their international phone rates.
Net2Phone developed a proprietary Gateway technology for IP voice services
offered by the company.

Net2Phone's product offerings include PC-to-phone service, IP telephony service
for phone or fax and Real-time PC-to-fax solution. Its network currently reaches
over 30 countries and continues to expand globally.

o    DeltaThree

Founded in 1996, DeltaThree manages a network dedicated to the transmission of
voice over IP. Its services include PC-to-phone, unified messaging, global
access calling cards, and voice greetings accessible from the company's
communications portal. DeltaThree currently operates a network of 37
international POPs.

J.  PARTNERSHIP PROGRAMS

A key element in our overall ePHONE strategy is the Partnership Program.
ePHONE's Partnership Program is designed to facilitate the rapid deployment and
sales of products and services with a minimum capital investment by ePHONE.
There are two elements to our Partnership Program, the Franchise Partner Program
and the Sales Agent Program.

o        Franchise Partner Program

The Franchise partner program focuses on the rapid expansion of our network. The
program is designed to allow interested parties to participate in the deployment
of ePHONE's network by providing capital used to locate an ePHONE POP in a given
area. Once that POP is deployed, ePHONE's Franchise Partner then performs
marketing of our services, taking a share of any profits generated by that
ePHONE switch. We currently have one (1) franchise partner.

o        Sales Partner Program

Under this program, ePHONE recruits resellers who make no capital investment but
specialize in selling services. Sales Partners are required to commit to minimum
sales targets for each of our services that they sell. However, Sales Partners
will be paid a commission based on sales. We currently have fifteen (15) sales
partners.

K.  GOVERNMENT APPROVALS AND REGULATIONS

ePHONE is currently in possession of a Federal Communications Commission 214
license which allows ePHONE to provide telecommunications services in the United
States and as an international carrier. ePHONE has obtained, has filed for, or
is in the process of filing for licenses with the individual states within the
United States of America for provision of intrastate services.

ePHONE's need for licenses in other countries will generally depend on whether
ePHONE operates as a foreign company in those locations or whether ePHONE
partners with licensed local partners. ePHONE is licensed to provide
telecommunication services in Canada.

L.  PATENTS, TRADEMARKS AND ROYALTY AGREEMENTS

ePHONE does not have any patents, trademarks, licenses or protective agreements.
ePHONE has trademarked its logo in Canada and has the trademark for name
"e-TRANS-PORT" . ePHONE has an exclusive license for the use of the e-TRANS-PORT
as it is utilized with our system.

M.  RESEARCH & DEVELOPMENT ACTIVITIES

ePHONE is not undertaking any pure research and development. ePHONE's activities
in this respect consist of working with the products ePHONE has purchased and
licensed from suppliers in order to integrate them into a network and back
office. In this effort ePHONE has found it necessary to develop tools and
processes for its own use in the administration and management of the Network.
These activities will continue as its business requirements grow and change.


                                       10
<PAGE>


N.  EMPLOYEES

As of December 31, 2002, ePHONE had 31 full-time employees in the Virginia
office, consisting of 2 in Development, 12 in Network Operations, 3 in
Marketing, 3 in Customer Service and 11 in Administrative and Accounting. In
addition, ePHONE had 6 part-time employees and 2 individuals providing service
to us as independent consultant. As ePHONE's business and development
efforts expand, additional personnel will be engaged, either as employees or as
contract service suppliers.



ITEM 2.       DESCRIPTION OF PROPERTIES

ePHONE leases approximately 7,400 square feet for the principal executive
offices, which are located at 1145 Herndon Parkway; Suite 100, Herndon, Virginia
20170. Base rent for the current premises is approximately $14,935 per month
subject to annual increases of three percent. The lease requires ePHONE to pay a
portion of the property taxes and certain operating expenses. Management
believes that the current and anticipated facilities are suitable and adequate
for operations.

ITEM 3.  LEGAL PROCEEDINGS

     In April 2003 The Federal Trade Commission commenced a non-public
investigation relating to whether the form of payment authorization which the
Company received from customers who purchased its Unlimited Domestic Calling
Program complied with the requirements of the Electronic Fund Transfer Act and
its implementing Regulation E. At this stage the investigation has not proceeded
beyond a request for voluntary production of documents and it is too early to
determine the outcome.

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

None
                                     PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since June 12, 2000 and prior to December 15, 1999, the shares of ePHONE's
common stock did trade and currently trades on the OTC Bulletin Board - under
the symbol "EPHO". From December 15, 1999 until June 11, 2000, the common shares
traded on the National Quotation Bureau's Electronic Quotation Service (the
"Pink Sheets") under the symbol "EPHO". Shares of the common stock do not trade
on any stock exchange or any other market.

The following table sets forth the closing high and low bid prices of the common
stock for each quarter within the last two years. The quotations reflect
inter-dealer prices and do not represent retail mark-ups, markdowns,
commissions, and may not reflect actual transactions.

Market Information

     2001:                                            High       Low
                                                      ----       ----
         First Quarter.............................   0.44       0.16
         Second Quarter............................   0.41       0.12
         Third Quarter.............................   0.22       0.08
         Fourth Quarter............................   0.35       0.14

     2002:
         First Quarter.............................   0.27       0.16
         Second Quarter............................   0.42       0.18
         Third Quarter.............................   0.30       0.17
         Fourth Quarter............................   0.20       0.12

                                       11
<PAGE>

As of December 31, 2002 there were 200 holders of record of the common stock.
This does not reflect persons or entities that hold stock through various
brokerage firms or depositories.

ePHONE has not paid any cash dividends on common stock and at present does not
intend to pay cash dividends in the foreseeable future. ePHONE plans to retain
earnings, if any, to use in the operation of the business and to fund future
growth.

Equity Compensation Plan Information

The following table sets forth information regarding our equity compensation
plans as of December 31, 2002.

<TABLE>
<CAPTION>

                                                                                     Number of securities
                                                                                    remaining available for
                                                                                     future issuance under
                              Number of securities to       Weighted-average          equity compensation
                              be issued upon exercise       exercise price of          plans (excluding
                              of outstanding options,     outstanding options,     securities reflecting in
                                warrants and rights        warrants and rights            column (a)

Plan category                           (a)                        (b)                        (c)
---------------------------- -------------------------- -------------------------- --------------------------
<S>                                        <C>                   <C>                       <C>
Equity compensation plans
approved by security                       4,214,916             $0.42                     1,785,084
holders
---------------------------- -------------------------- -------------------------- --------------------------
Equity compensation plans
not approved by security                     650,000(1)           0.50                           N/A
holders
---------------------------- -------------------------- -------------------------- --------------------------
Total                                      4,864,916             $0.43                           N/A
---------------------------- -------------------------- -------------------------- --------------------------
</TABLE>

(1)      Below are the individual compensation arrangements not approved
         by security holders as described in the footnotes to our audited
         financial statements filed with the Commission on form 10-KSB as of
         December 31, 2000 and form 10KSB/A as of December 31, 2001.

         o        Options issued to consultants during 2001.......       450,000
         o        Options issued to consultants during 2002.......       200,000
                                                                         -------

               Total..............................................       650,000
                                                                         =======

Unregistered Securities

During March 2002, ePHONE issued 89,000 shares of our common stock to
consultants and two members of our Board of Directors. The fair value of the
shares totaled $23,000 and was recorded based upon the market price of the stock
on the date of issuance.

During November 2001, January, May and August of 2002, ePHONE issued 400,000
shares of common stock to Mr. Kuba Farbiarz in exchange for marketing consulting
services rendered.

                                       12
<PAGE>

On various dates during 2002, ePHONE issued 1,106,500 and 253,200 shares of our
common stock for the exercise of stock options by our CEO and CFO and to six
Board Members, respectively, at exercise prices ranging from $0.20 to $0.35 with
the proceeds totaling $434,000.

During February 2002, ePHONE issued 10,000 shares to Rudy Ryckewaert in exchange
for consulting services within rendered valued at $2,200.

During March 2001 and January 2002, ePHONE issued 500,000 shares of common stock
to Mr. Charles Yang in connection with a settlement agreement.

During November 2001, ePHONE issued 500,000 shares to PITRFA, Inc. in connection
with a marketing and distribution agreement.

The issuances were made pursuant to available exemptions from the registration
provisions of the Securities Act of 1933, as amended [specifically, Section
4(2)of the Securities Act) and relevant Blue Sky statutes.]

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

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
that we make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. At each balance sheet date, management evaluates its estimates,
including, but not limited to, those related to accounts receivable,
inventories, and deferred revenue. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates and critical accounting
policies that are most important in fully understanding and evaluating our
financial condition and results of operations are discussed below.

Accounts Receivable

We provide an allowance for all individual receivables judged by us to be
unlikely for collection. The effect of the allowance is to reduce the accounts
receivable reported on our balance sheet to an amount we believe will be
collected. Significant management judgments and estimates must be made and used
in connection with establishing this valuation account. We record an allowance
for doubtful accounts and sales and returns based on a combination of factors in
making this judgment. Specifically, we analyze the age of receivable balances,
our historical bad debts write-off, sales and returns history, and our
customer's creditworthiness to determine the appropriate allowance for doubtful
accounts. At December 31, 2002, our allowance for doubtful accounts was
$321,000, up from $116,000 at December 31, 2001. This increase is due primarily
to one large receivable in 2002 in which collection is uncertain. Although we
consider our allowance for doubtful accounts to be adequate and proper, changes
in economic conditions or customer circumstances could have a material effect on
the reserve balance required.

Inventory Valuation

We use certain estimates and judgments to value our inventory. Our inventory of
$264,000 at the year ended December 31, 2002, is recorded at the lower of cost,
using the weighted average method, or market and is comprised primarily of
e-TRANS-PORT devices that are manufactured by a third party. The e-TRANS-PORT
product launch is still in its early stages and Management is in the process of
developing distribution channels for this product. We have not recorded an
allowance against inventory at December 31, 2002 and 2001. Based on changes in
the facts and circumstances, we will periodically assess the need to establish
an allowance for the e-TRANS-PORT units in the future if it is considered to be
obsolete or slow moving. If such an allowance is necessary, it could have a
material effect on the carrying value of inventory.


                                       13
<PAGE>

Revenue Recognition

We recognize telecommunication services revenues over the period services are
provided. Monthly recurring telecommunications services are billed in advance
and any portion of our services that is billed for which we have not yet
provided services is recorded as deferred revenue. As a result, we defer
recognition of revenues and the proportionate costs of revenues from sales to
distributors until such distributors resell our products to their customers. The
amounts deferred as a result of this policy are reflected as "deferred revenue"
in the accompanying balance sheet.

Overview

Fiscal year 2002 was a milestone year for ePHONE. We achieved unprecedented
revenue amounts as well as positive net income never before realized by this
company. Among our peer telecommunication companies we are one of a very limited
number to achieve a positive net income result for 2002.

Some of the major objectives the company achieved in 2002 were:

         o        Development of our e-TRANS-PORT device.

         o        Launch of a major calling card program in Canada.

         o        Expanded  our  network   presence  in  Los   Angeles,   Miami,
                  Minneapolis, Toronto, Guatemala and El Salvador.

         o        Achieved  record revenue of $19,222,000 for 2002 and the first
                  profitable year in our history.

Results of Operations - December 31, 2002 and 2001

We experienced net income from operations before the arbitration award (see
Comdial Arbitration below) for the year ended December 30, 2002 and net losses
from operations for the year ended December 31, 2001.

                                         Year ended            Year ended
                                        December 31,          December 31,
                                            2002                  2001
                                       ---------------- --- -----------------
Income (loss) before arbitration   $         1,877,000  $        (7,247,000)
award
Arbitration award                          (1,374,000)             (226,000)
                                       ----------------     -----------------
Net income (loss)                  $           503,000  $        (7,021,000)
                                       ================     =================
Net income (loss) per common
share                              $              0.01  $             (0.28)
                                       ================     =================

During the year ended December 31, 2002, increasing business from our retail and
wholesale programs that were introduced in Q3 of FY 2001, as discussed below,
coupled with our ability to keep 2002 general and administrative and selling and
marketing expenses consistent with 2001 were the primary reasons for the overall
improvement in operations.

Revenues

Our revenue from operations for the year ended December 31, 2002 and 2001 was as
follows:

                                         Year ended           Year ended
                                        December 31,         December 31,
                                            2002                 2001
                                       ---------------     -----------------

Service Revenue                     $      19,222,000   $         3,077,000
Product Revenue                                     -               513,000
                                       ---------------     -----------------

                                    $      19,222,000   $         3,590,000
                                       ===============     =================

                                       14
<PAGE>

The majority of the increase in our revenues is attributed to the Company's
retail and wholesale service programs. These programs accounted for all of
ePHONE's revenue for the year ended December 31, 2002 and accounted for 86% or
our revenues during 2001. As ePHONE continues to focus on retail and wholesale
service offerings, sales of equipment are not expected to be significant in the
future. The $513,000 of Array Telecom equipment sales during the year ended
December 31, 2001, will not reoccur.

In the fourth quarter of 2002 we phased out our marketing arrangement with the
telemarketer of our Unlimited Domestic Calling Program. As a result, in the
fourth quarter of 2002 and the first quarter of 2003, we experienced a
decline in revenues from our Unlimited Domestic Calling Program when
compared to earlier periods in 2002. During the 3 months ended March 31, 2003,
revenues from our Unlimited Domestic Calling Program approximated $60,000.
Revenues during 2002 from our Unlimited Domestic Calling Program were
approximately $16,870,000, or 88% of our total revenues. We have
entered into an agreement with a new telemarketer and are also reorganizing our
subscription fulfillment and collection procedures. We continue to actively seek
other telemarketers to sell our services. However, we can give no
assurance that we will be able to successfully implement new telemarketing
arrangements, or should we successfully implement such arrangements, that we
will be able to generate revenues that equal or exceed those previously
experienced.

Cost of Revenues

During the year ended December 31, 2002 and 2001 cost of services revenue and
cost of product revenue were as follows:

                                         Year ended          Year ended
                                        December 31,        December 31,
                                            2002                2001
                                       ---------------     ----------------

Cost of service revenue             $       9,696,000   $        2,025,000
Cost of product revenue                             -              476,000
                                       ---------------     ----------------

                                    $       9,696,000   $        2,501,000
                                       ===============     ================

For the year ended December 31, 2002 and 2001, cost of service revenue
represented commissions, activation fees and processing charges related to our
telecommunications services programs. For the year ended December 31, 2001, cost
of product revenue was related to telecommunications equipment sales. Gross
margin for the year ended December 31, 2002 and 2001 was 50% and 30%,
respectively. During 2001, the product mix consisted of low margin equipment
which was not sold in 2002.

Sales and marketing

Sales and marketing expense increased from $1,212,000 for the year ended
December 31, 2001 to $1,257,000 for 2002. During 2001, our sales and marketing
expenses included compensation paid to consultants for market studies and
competitive intelligence of the Internet telephony market place in several
countries where deploying our network was anticipated. There were no similar
expenditures incurred during the year ended December 31, 2002. Currently, sales
and marketing expense consists primarily of marketing commissions and salaries.

                                       15
<PAGE>

General and administrative

General and administrative expense increased from $5,607,000 for the year ended
December 31, 2001 to $6,385,000 in 2002. We expect general and administrative
expenses to increase in the future in proportion to the increase in sales.

Comdial Arbitration

During the third quarter of 2001, we filed for arbitration against Comdial
seeking rescission of the Array Telecom License Agreement, return of the $2.65
million paid to Comdial, and compensatory and punitive damages of $10,000,000
due to what we believe were violations by Comdial of the Array Telecom License
Agreement. Comdial initially responded to our arbitration demand with a
counterclaim seeking relief from all of our claims and the payment of $215,000
in accrued royalties plus interest. Subsequently, Comdial added an additional
counterclaim alleging that the agreement was still valid and sought the value of
the future royalty payments which were to be made under the agreement. ___ We
gave back the licensed products to Comdial, and consequently, did not believe
that we had an obligation for any additional future royalties based upon the use
of the licensed products.

On August 27, 2002, the American Arbitration Association (AAA) rejected the
Company's claim against Comdial and awarded damages to Comdial on its counter
claim in the amount of $1,731,000 and $38,000 in administrative fees. The
Company had attempted to have the award reconsidered by the AAA and to have the
award vacated by the circuit court for the county of Fairfax, Virginia. Both of
these efforts were unsuccessful. Hence, on November 13th the Company agreed to
settle the issue and pay to Comdial $1,600,000. Management believes this avoided
a very costly and lengthy appeals process with no guarantee of success and will
enable the Company to focus on its operations This charge of $1,374,000 is
reflected in the accompanying financial statements as of December 31, 2002, net
of approximately $226,000 of arbitration cost accrued in 2001. The company has
now resolved all present and future liabilities.

Income taxes

There was no provision for federal or state income taxes for the years ended
December 31, 2001 and 2002 due to the availability of a net operating loss for
income tax purposes.

Results of Operations - Years ended December 31, 2001 and 2000

Revenues

Revenues increased from $590,000 in 2000 to $3,590,000 in 2001. The majority of
the increase is attributed to the Company's "Unlimited Access" Program and our
wholesale strategy, which began in mid August. These programs accounted for 86%
of ePHONE's revenue for the year ended December 31, 2001 and did not account for
any revenue during 2000.

Cost of Revenues

Cost of Revenues increased from $412,000 in 2000 to $2,501,000 in 2001. For the
year ended December 31, 2001, cost of goods sold represented commissions,
activation fees and processing charges related to our telecommunications
services program. Prior to the third quarter of fiscal year 2001, cost of goods
sold was related to telecommunications equipment sales. Gross margin for the
year ended December 31, 2001 and 2000 was 30% for each year.

Sales and Marketing

Sales and marketing expense decreased from $1,853,000 in 2000 to $1,212,000 in
2001. During 2000, our sales and marketing expenses included compensation paid
to consultants for market studies and competitive intelligence of the Internet
telephony market place in several countries where we were deploying our network.
There were no similar expenditures incurred during 2001.

                                       16
<PAGE>
General and Administrative

General and administrative expense increased from $4,787,000 in 2000 to
$5,485,000 in 2001 primarily due to our changes in the business plan and
non-recurring expenses related to the write off of the Array Telecom license.

Write-off of Array Telecom License

In connection with the Comdial Obligation, we decided to discontinue use of the
Array Telecom technology and therefore, wrote off the remaining balance of the
Array Telecom License and related assets and liabilities of $1,180,000 at
December 31, 2001.

Income taxes

There was no provision for federal or state income taxes for the period from our
inception due to our operating losses. At December 31, 2001, we had net
operating loss carryforwards for income tax purposes. A valuation allowance was
established and, accordingly, no benefits were recognized for our net operating
losses and other deferred tax assets.

Liquidity And Capital Resources

During the year ended December 31, 2002, we received $690,000 for the purchase
of 3,448,913 shares of our common stock from the exercise of warrants we had
issued in connection with the sale of special warrants in 2000. On March 30,
2002, the warrants for the purchase of 9,115,161 shares of our common stock
expired unexercised. We also received $321,000 for the issuance of 1,106,500
shares of our common stock for the exercise of 1,106,500 stock options by our
CEO and CFO at prices ranging from $0.20 to $0.35 per share. Six board members
also exercised options to purchase 253,200 shares of our common stock at
exercise prices ranging from $0.20 to $0.35 with the proceeds totaling $81,000.
The proceeds from the exercise of these warrants and stock options, along with
$890,000 of cash generated from our operations during the year ended December
31, 2002, net of our $1,600,000 settlement payment to Comdial and $664,000 in
property, plant and equipment purchases, increased our cash from $36,000 at
December 31, 2001 to $1,252,936 at December 31, 2002.

The Company's financial statements have been prepared on a going concern basis,
which contemplates the realization of assets, and the satisfaction of
liabilities in the normal course of business. Our auditors have included in
their Report of Independent Certified Public Accountants, dated February 10,
2003 (except for the third paragraph of Note 2, as to which the date is April
11, 2003), a fourth (explanatory) paragraph drawing attention to factors that
raise substantial doubt about our ability to continue as a going concern.

In the fourth quarter of 2002, we phased out our marketing agreement with our
Unlimited Domestic Calling Program telemarketer. As a result, we experienced a
decline in revenues from our Unlimited Domestic Calling Program when compared to
earlier in 2002. During the three months ended March 31, 2003, we generated only
$60,000 in revenue from our Unlimited Domestic Program. Even though we have
entered into a new marketing agreement with a new telemarketers, we can give no
assurances that our revenue levels will grow to equal or exceed those we
previously experienced. Revenues during 2002 from our Unlimited Domestic Calling
Program totaled approximately $16,870,000 or 88% of our total revenue. Future
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the telecommunications industry.

The Company continues to earn revenues for its wholesale traffic and our other
retail programs, including prepaid calling cards it sells in both the United
States and Canada. It has entered into new a telemarketing agreement with a new
telemarketing organization, is actively seeking new telemarketing agreements and
is reorganizing its subscription fulfillment and collection procedures. The
Company has also undertaken expense reduction actions during 2003, reducing head
count and non-operational costs. Management believes that, even though it
continues to provide both wholesale and retail services to customers, with the
decline in our Unlimited Domestic Calling Program it needs to raise additional
funding in the short term in order to provide for needed working capital and for
marketing efforts related to the introduction of new products, including
etrans-port. We are currently seeking additional investment capital and believe
that without additional investment capital we will not have sufficient cash to
fund our current activities, and as such, may not be able to continue operating.

Management believes that actions presently being taken provide the opportunity
for the Company to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should we be unable to
continue as a going concern.

It is important to point out that since our inception, we have accumulated a
deficit of $21,838,000, and that we funded our operations, prior to our
generating service revenues beginning in August 2001, primarily with the
proceeds we raised in our special warrant offering in 2000, from the exercise of
warrants during 2001 of $305,000, and from limited equipment sales.  We do
not currently have a line of credit or any other credit facility available to
us.
                                       17
<PAGE>

Investing activities used $664,000 of cash for the purchase of fixed assets and
financing activities provided $959,000 which consisted of $1,093,000 received
from the exercise of warrants and employee stock options offset by payments on
obligations for the year ended December 31, 2002.

We have three equipment commitments totaling $67,000, which expire in 2003 and
2004.

Stock Compensation Activity 2002

During March 2002, we issued 89,000 shares of our common stock to consultants
and two members of our Board of Directors. The fair value of the shares totaled
$23,000 and was recorded based upon the market price of the stock on the date of
issuance.

During 2002, we issued 200,000 shares of our common stock and 200,000 options to
purchase shares of our common stock to a consultant to whom we had issued the
same amount of shares of common stock and options in 2001 with similar terms as
described under Stock Compensation Activity in 2001. The fair value of the
shares and options was $39,000 and $37,000, respectively, and is recorded as
non-cash compensation expense during the year-ended December 31, 2002.

On November 15, 2002 our Board of Directors approved resolutions to reduce from
$0.35 to $0.20 the exercise price of 586,500 stock options held by certain Board
members and executive officers and to accelerate the vesting period of 581,667
stock options held by certain executive officers and a former executive officer.

On various dates during 2002, Management accelerated the vesting on 224,449
stock options held by certain employees.

Since the modifications, we have accounted for these options using variable
accounting. We have not recorded any compensation expense in connection with
these modifications since the new exercise price has been higher than or equal
to the market price.

Stock Compensation Activity During 2001

On February 14, 2001, the Board of Directors approved the issuance of 250,000
stock options to a consultant in an exchange for services rendered under a
consulting agreement. The stock options have an exercise price of $0.50, vested
immediately and expire in three years. The market value of our common stock at
the grant date was $0.23. The fair value associated with these options totaled
$42,500 and was recorded as non-cash compensation during the quarter ended March
31, 2001.

As further described in Legal Proceedings, we entered into a Settlement
agreement with Charles Yang on March 23, 2001. Pursuant to the terms of the
agreement, we agreed to pay Mr. Yang $400,000 in cash in installments by July
23, 2001, and issue Mr. Yang 400,000 shares of our common stock. We recorded
$180,000 in expense related to this settlement during the three months ended
March 31, 2001. The fair value of the stock issued was $80,000 and is recorded
as non-cash compensation in the statement of operations. We did not make the
required payments to Mr. Yang by July 23, 2001 and therefore were required to
issue an additional 100,000 shares of our common stock in accordance with a
Modification of the original Settlement Agreement entered into between us and
Mr. Yang. The fair value of the additional shares totaled $30,000 and is
recorded as non-cash compensation in the December 31, 2001 statement of
operations.

On September 12, 2001 our Board of Directors approved a resolution to reduce
from $0.50 to $0.35 the exercise price of 3,900,000 stock options held by
certain Board members, executive officers and former employees.

                                       18
<PAGE>

During October and November 2001, we issued 200,000 shares of our common stock
and 200,000 options to purchase shares of our common stock to a consultant as
consideration for marketing and business development consulting services
rendered. The fair value of these shares of common stock totaled $49,000 and is
recorded as non-cash compensation expense as of December 31, 2001. The options
have an exercise price of $0.50 and vest immediately. The fair value associated
with these options was $48,045 and is recorded as non-cash compensation expense
during the year ended December 31, 2001. During 2002, under the terms of a
consulting agreement, the Company issued this consultant an additional 200,000
shares of our common stock and 200,000 options to purchase shares of our common
stock.

On November 29, 2001, we entered into an exclusive Marketing and Distribution
Agreement ("Agreement") with PITRFA Inc., a Florida based sales, marketing and
distribution company. As defined in the Agreement, PITRFA will market and
distribute ePHONE's prepaid 1+ long distance service for a period of three
years. Upon signing the Agreement, we issued PITRFA 500,000 shares of our common
stock. The fair value associated with these shares of common stock totaled
$97,015 and is recorded as non-cash compensation expense in our December 31,
2001 Statement of Operations. The Agreement also contains a provision for the
issuance of additional shares of our common stock if our common stock reaches
certain price levels in the future as follows: a) if the price of our common
stock reaches $2.50 per share we will be required to issue PITRFA a second
tranche of 538,973 shares and; b) if the price of our common stock subsequently
reaches $5.00 per share, we will be required to issue PITRFA a third tranche of
538,973 shares. The maximum amount of shares that would be issued if all
milestones are met is 1,616,919, which represents 5% of our common stock
outstanding at the signing of the Agreement.

On December 17, 2001, our Board of Directors approved a resolution to extend the
expiration date of a former officer's stock option agreement from March 31, 2002
to October 1, 2002.

On April 20, 2000, we closed an offering of Special Warrants, receiving net
proceeds of approximately $12,205,000. The total number of Special Warrants we
sold in that offering was 13,780,837. The special warrant agreements contained
certain penalties in the event that we did not meet the prescribed deadlines for
registration of common stock to be issued on the exercise of the special
warrants in both Canada and the United States. We failed to meet these
deadlines, and consequently each special warrant holder was entitled to exercise
their right to have 12.5% of their original investment returned to them and
reduce the number of special warrants they held by the same percentage
("Redemption Right"). In addition, each special warrant holder received an
additional 10% of their original investment in shares of our common stock upon
the exercise of the special warrants. As of September 30, 2001, all special
warrant holders exercised their Redemption Rights, and we returned $1,895,000 to
these investors. We completed the registration of our common stock in Canada,
and our investors exercised their special warrants causing us to issue
13,436,317 shares of our common stock and warrants to purchase 13,436,317 shares
of our common stock for $1.60 per share.

During the year ended December 31, 2001, we raised $305,000 from the exercise of
warrants for the purchase of 848,243 shares of our common stock.

During the third quarter of 2001, we decided to provide our warrant holders with
an enticement to exercise their warrants by reducing the exercise price of the
warrants we issued on the exercise of the special warrants and for all other
outstanding warrants from exercise prices ranging between $1.60 - $0.50 per
share to $0.35 per share. We further reduced the exercise price of the warrants
to $0.20 in 2002 to better reflect the market price of our common stock. As
noted above, during 2002 warrant holders exercised warrants for the purchase of
3,448,913 shares of our common stock for $690,000.

Recent Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to (a) all entities and (b) legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal operation of long-lived
assets, except for certain obligations of lessees. SFAS No. 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not believe the adoption of this statement will have a material
impact on our financial position or results of operations.

                                       19
<PAGE>

Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which established one accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business (as
previously defined in that Opinion). The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 had no impact on the Company's
financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," which rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt" and an amendment of that Statement, and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS
No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets for Motor
Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions.  SFAS
No. 145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions.  SFAS No. 145 is effective for fiscal years beginning after
May 15, 2002.  The Company does not expect the adoption of SFAS No. 145 will
have a material impact on its results of operations or financial position.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses significant issues regarding
the recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 requires
that costs associated with exit or disposal activities be recognized when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is effective for all exit or disposal activities initiated
after December 31, 2002. The Company does not expect the adoption of SFAS No.
146 to have a material impact on our results of operations or financial
position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure ("SFAS 148"). SFAS 148 amends SFAS No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation. In
addition, it also amends the disclosure provisions of SFAS 123 to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
SFAS 148 also amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about the effect in interim financial information. The Company is
currently evaluating whether to adopt the fair value based method of accounting
for stock-based employee compensation. The Company has adopted the disclosure
provisions of SFAS 148 as they relate to entities that use the intrinsic method
of accounting for stock-based compensation.

Risk Factors

The risks and uncertainties described below are not the only ones facing the
company. Additional risks not presently known or that ePHONE currently considers
insignificant may also impair ePHONE's business operations in the future.
ePHONE's business, financial condition and plan of operations could be
materially adversely affected by any of the following risks. The trading price
of shares of ePHONE's common stock could decline due to any of these risks.

                                       20
<PAGE>

o        The market for ePHONE's common stock is limited

There is currently only a limited trading market for ePHONE's common stock.
ePHONE common stock trades on the OTC Bulletin Board under the symbol "EPHO,"
which is a limited market in comparison to the NASDAQ National Market, the
American Stock Exchange and other national securities exchanges.

ePHONE cannot assure investors that the common stock will ever qualify for
inclusion on the NASDAQ National Market or that more than a limited market will
ever develop for the common stock.

o        Penny stock rules limit the liquidity of ePHONE's common stock

ePHONE's common stock may now and in the future be subject to the penny stock
rules under the Securities Exchange Act of 1934, as amended (referred to herein
as the Exchange Act). These rules regulate broker-dealer practices for
transactions in "penny stocks." Penny stocks generally are equity securities
with a price of less than $5.00. The penny stock rules require broker-dealers to
deliver a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson and monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and offer quotations and the
broker-dealer and salesperson compensation information must be given to the
customer orally or in writing prior to completing the transaction and must be
given to the customer in writing before or with the customer's confirmation.

In addition, the penny stock rules require that prior to a transaction, the
broker and/or dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These additional penny stock disclosure
requirements are burdensome and may reduce the trading activity in the market
for ePHONE's common stock. As long as the common stock is subject to the penny
stock rules, holders of such ePHONE common stock may find it more difficult to
sell their securities.

o        An investment in ePHONE may be diluted

ePHONE may issue a substantial number of shares of ePHONE common stock without
investor approval. Any such issuance of ePHONE securities in the future could
reduce an investor's ownership percentage and voting rights in ePHONE and
further dilute the value of his or her investment.

o        ePHONE has incurred net losses in the past

Prior to 2002, ePHONE had incurred net losses each year since its inception.
During the year ended December 31, 2002, ePHONE generated net income before the
arbitration award of $1,877,000. ePHONE's ability to sustain profitable
operations depends on many circumstances. If ePHONE does not sustain
profitability, its ability to respond effectively to market conditions, to make
capital expenditures and to take advantage of business opportunities could be
affected. In addition, ePHONE's prospects must be considered in light of the
risks encountered by companies like ours developing products and services in new
and rapidly evolving markets. ePHONE's failure to perform in these areas could
have a material adverse effect on the business, plan of operations and financial
condition.

o        We May Not be a Going Concern

We have experienced a decline in revenues from our Unlimited Domestic Calling
Program. Revenues from that Program generated only $60,000 in the three months
ended March 31,2003. In 2002, revenues from the Unlimited Domestic Calling
Program were approximately $16,870,000 or approximately 88% of our total
revenues. With the decline in revenues from this Program, we need to raise
additional funding in the short term to provide for needed working capital and
for marketing efforts. We are currently seeking additional investment capital
and believe that without such additional funding we will not have sufficient
cash to fund our current activities, and as such may not be able to continue
operating. See Note 2 to our Financial Statements


                                       21
<PAGE>


o        ePHONE's failure to acquire, integrate and operate new technology could
         harm their competitive position

The telecommunications industry is characterized by rapid and significant
technological advancements and the related introduction of new products and
services. ePHONE does not possess significant intellectual property rights with
respect to the technologies we use, and we are dependent on third parties for
the development of and access to new technology. The effect of technological
changes on ePHONE's business plan cannot be predicted. In addition, it is
impossible for ePHONE to predict with any certainty whether demand for VoIP
services in the future markets will develop or will prove to be an economical
and efficient technology that is capable of attracting customer usage. Failure
by ePHONE to obtain and adapt to new technology in the future markets could have
a material adverse effect on its business and plan of operations.

o        ePHONE does not presently intend to pay dividends on our common stock

ePHONE has never paid dividends on our common stock and does not presently
intend to pay cash dividends on our common stock. Any future decisions as to the
payment of dividends will be at the discretion of ePHONE's Board of Directors,
subject to applicable law.

o    Telecommunications related stock prices have been especially volatile
     and this volatility may depress ePHONE's stock price

The stock market has from time to time experienced significant price and volume
fluctuations which have particularly affected the market prices of the stocks of
high technology and telecommunications-related companies, including companies
like ePHONE, and which may be unrelated or disproportionate to the operating
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimates by
analysts, market conditions in the industry, analysts' reports, announcements by
competitors, regulatory actions or other events or factors, including the risk
factors described in this report, and general economic conditions may have a
significant effect on the market price of ePHONE's common stock. This broad
market and industry volatility may reduce the value of ePHONE's common stock,
regardless of ePHONE's operating performance. Due to this volatility, the value
of ePHONE's common stock could decrease.

o    ePHONE's articles of incorporation provide its officers and directors
     with certain indemnification.

ePHONE's Articles of Incorporation provide that our directors and officers will
not be personally liable to ePHONE or its shareholders for money damages for
breach of their fiduciary duty of care as directors or officers.

ITEM 7.       FINANCIAL STATEMENTS

The information required hereunder in this report is set forth in the "Index to
the Financial Statements" on F-1.

Item 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None.



                                    PART III

Item 9.       Directors, Executive Officers, PROMOTERS AND CONTROL PERSONS;
              COMPLIANCE WITH SECTION 16(a) of the exchange act

Directors and Executive Officers

The directors and executive officers, their ages and positions held as of
December 31, 2002 are listed below. Each director serves until the next annual
meeting of the stockholders or unless they resign earlier. The Board of
Directors elects officers and their terms of office are at the discretion of the
Board of Directors.

                                       22
<PAGE>

Name                      Age    Position Held
----                      ---    -------------
Lawrence Codacovi         68     Chairman of the Board of Directors
Carmine Taglialatela Jr.  55     President and Chief Executive Officer, Director
Charlie Rodriguez         57     Chief Financial Officer and Director
Steve Heap                52     Chief Operating Officer
Eugene Sekulow            71     Director
Sheldon Kamins            54     Director
Robert Stuart             53     Director

The following describes the business experience during the past five years of
ePHONE's Directors and Executive Officers, including for each director, other
directorships held in reporting companies. There are no Family relationships
among any of the persons listed.

Carmine Taglialatela, Jr. - President and Chief Executive Officer and Director.
On April 1, 2001 Mr. Taglialatela was appointed President and Chief Operating
Officer of ePHONE and elected to the Board of Directors. Effective July 1, 2001,
Mr. Taglialatela was appointed Chief Executive Officer of ePHONE. Prior to
joining ePHONE, Mr. Taglialatela was President and Chief Operating Officer of
TELRON Communications and was responsible for the day-to-day operations of the
company and the development of service offerings and expansion of services into
new markets. Mr. Taglialatela has also held Executive Vice President positions
at TELRON and CompassRose International, Inc. At CompassRose he managed a team
of professionals on a variety of client assignments requiring extensive
international telecommunications experience and expertise in strategic business
development, public policy and regulatory matters. Mr. Taglialatela has secured,
on behalf of clients, service authorizations in off shore markets and advised
senior management on courses of action for the development of their
telecommunications business. Between 1989-1977, he was Director International
Public Policy and Regulatory Affairs at MCI Telecommunications Corporation where
he developed and implemented MCI's regulatory and business strategy for access
to international markets and was a member of an expansion team devoted to
expanding MCI's presence in the global market. Mr. Taglialatela holds a BA
Economics from Hunter College, City University of New York and a MBA
Finance/Marketing from Fordham University.

Charlie Rodriguez - Director, Chief Financial Officer, and Vice President,
Corporate Affairs. On December 1, 2000, Mr. Rodriguez was elected as a Director
and appointed as Chief Financial Officer and Vice President - Corporate Affairs.
Mr. Rodriguez previously served as Vice-President of Corporate Affairs and
Corporate Secretary from June 1999 to April 2000. Mr. Rodriguez is also the
President of Management Services of Arizona, a business consulting company
specializing in mergers, acquisitions and financing. Prior to joining ePHONE,
Mr. Rodriguez served as the Chief Financial Officer for Zephyr Technologies,
Inc., biometrics and smartcard software integration companies. Mr. Rodriguez
was a member of the board of directors of Wave Rider Communications, Inc.
(WAVC - otc.bb), a wireless communication company, from January to November
1997, and served as its President and Chief Executive Officer from May 1995 to
January 1997. Mr. Rodriguez holds a Bachelor of Science in Accounting and
Masters in Business Administration Accounting from the University of Arizona.

Steve Heap - Chief Operating Officer. Mr. Heap joined ePHONE on 1 August 2002 as
the Chief Network Officer and on 1 November he was appointed the Chief Operating
Officer and Chief Technology Officer. Mr. Heap's career spans over 25 years in
telecom network strategy, planning, engineering and operations. His most recent
role prior to joining ePhone was as Chief Network Officer in Aleron, the
next-generation IP backbone operator, where, between late 2000 and mid 2002 he
designed, implemented and operated a high-end IP backbone serving over 3M dial
customers. Between 1998 and 2000, he was VP and General Manager of Transmission
Services at Teleglobe, responsible for the strategy, design and implementation
of Teleglobe's $5B multi-service global infrastructure network, based on
submarine and terrestrial dark fiber and optical technology stretching from Asia
to Europe. Prior to that, he was instrumental in the establishment of Concert
Communications, the BT/MCI joint venture, moving to the USA from the UK in 1994
as the JV was defined and formed. This followed key roles in the modernization
and operation of British Telecom's digital voice and transmission network in the
UK.

                                       23
<PAGE>

Lawrence M. Codacovi - Chairman. Mr. Codacovi was appointed as a member of the
Board of Directors on January 1, 2002 and on September 11, 2002 was appointed
Chairman of the Board. Prior to joining ePHONE, Mr. Codacovi was Chairman of
Pangea Ltd., a pan-European fiber optic network spanning northern Europe from
1999 to 2002. From 1988 to 1999, Mr. Codacovi served as Senior Vice President
International Services for MCI WorldCom with the responsibility for expanding
MCI's global reach. Mr. Codacovi previously served as Executive Vice President
and a Board Member with RCA Global Communications from 1980 to 1988. Mr.
Codacovi holds an Associates Degree in Applied Sciences from Brooklyn College, a
Bachelor of Science in International Business from New York University and
Graduate Studies in Global Markets at NYU Graduate School of Business.

Eugene A. Sekulow - Vice Chairman. Eugene Sekulow was appointed as a director of
ePHONE Telecom Inc. on February 22, 2002 and on September 11, 2002 was appointed
Vice Chairman of the Board. Mr. Sekulow is an independent business consultant
focusing on global telecommunications strategy, policy, planning, strategic
partnering, risk analysis and business development. In January 1995, Mr. Sekulow
was named an Adjunct Professor at Columbia University, Graduate School of
Business. On December 1, 1991, Mr. Sekulow was appointed as Executive Vice
President, International, NYNEX Corporation, where he was also the President of
NYNEX International Company. Prior to that, Mr. Sekulow was President of RCA
International Ltd., responsible for the foreign subsidiary manufacturing and
distribution operations of RCA. He is currently Chairman of the German American
Chamber of Commerce and a director of several corporations. In addition, he is
Co-Chairman of the Board of Trustees of the American  Institute for Contemporary
German Studies of The Johns Hopkins University. Mr. Sekulow earned an MA and PhD
in Political Science and Economics at The Johns Hopkins University.

Sheldon B. Kamins - Director. Mr. Kamins was appointed as a member of the Board
of Directors on October 11, 2001. Mr. Kamins has been a real estate developer in
the greater metropolitan Washington, D.C. area and a venture capitalist
assisting technology and other companies with public and private financing for
more then the last five years. Mr. Kamins holds a Juris Doctor degree from the
Georgetown University Law Center.

Robert W. Stuart - Director. On June 12, 2002, Mr. Stuart was appointed as a
director of ePHONE Telecom Inc. He is currently the President and CEO of InDepth
Financial Advisors, which he founded in 2000. InDepth is an investment
banking/financial advisory firm specializing in the business plan development
and early stage capital raising process for emerging telecommunications firms.
Prior to founding InDepth Financial Advisors, Mr. Stuart spent more than 20
years as a leading telecom banker at Chase Manhattan Bank, Bankers Trust and
most recently as Managing Director and Co-Head of the Global Telecommunications
Industry Group at CIBC World Markets where he led several high visibility
telecom transactions. Mr. Stuart earned a BS in Engineering & Economics at the
US Naval Academy, where he graduated with distinction, and Master Degrees in
International Relations and International Law & Diplomacy from The Fletcher
School of Law & Diplomacy, Tufts University. He was awarded his PhD in
International Economics from The Fletcher School in 1982.

                                       24
<PAGE>


Other Matters

B.  Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires officers and directors of a company with securities registered
pursuant to Section 12 of the 1934 Act, and persons who own more than 10% of the
registered class of such company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the subject company with copies of all Section16(a)
forms filed. All reports required to be filed under Section 16 during the last
fiscal year have been filed.















                                       25
<PAGE>

Item 10.      EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>

                                            Annual Compensation                  Long Term Compensation
                       ------------------------------------------------------  ----------------------------
Name and Principal                                              Other Annual      Awards         All Other
Position at Fiscal                                              Compensation      Options      Compensation
Year End               Year       Salary ($)       Bonus ($)         ($)         (Shares)           ($)
------------------     ----      ------------     ------------  -------------  -------------  --------------
<S>                    <C>       <C>              <C>                     <C>    <C>                    <C>
Carmine Taglialatela   2002      $ 230,000(1)     $ 250,000 (1)            --      290,000(1)           --
Chief Executive        2002                         125,000 (1)
    Officer            2002                         125,000 (1)
                       2002                          45,000 (1)
                       2001        185,000(1)        50,000 (1)                  1,600,000(1)

Charlie Rodriguez      2002        149,000(2)       150,000 (2)            --      250,000(2)           --
Chief Financial        2002                          75,000 (2)
    Officer            2002                          75,000 (2)
                       2002                      35,000,000 (2)
                       2001        137,000(2)                              --    1,350,000(2)           --
                       2000         19,000(2)            --                --           --              --

Steve Heap             2002         68,000(3)            --                --           --              --
   Chief Operating
Officer and Chief
Technology Officer

James Meadows          2002        139,000(4)            --                --           --              --
   Former Chief
Operating Officer

Sonny Souvannavong     2002        130,000(5)        15,000 (5)            --      275,000(5)
   Former Chief        2001         87,000(5)
Technology Officer
</TABLE>


(1)   Mr. Carmine Taglialatela, Jr. was appointed President and Chief
      Operating Officer and began employment with ePHONE on April 1, 2001. Mr.
      Taglialatela was appointed Chief Executive Officer on July 1, 2001. The
      amounts paid to Mr. Taglialatela from April through December 2001 are
      based on an annual salary of $200,000. Of the 1,600,000 stock options
      issued to Mr. Taglialatela during 2001, 600,000 were issued in April with
      an exercise price of $0.50 and were subsequently repriced to $0.35. ePHONE
      also repriced 290,000 of Mr. Taglialatela's stock options from $0.35 to
      $0.20 during 2002. The repriced options are shown as 2002 grants for
      purposes of this presentation.

      During 2002, Mr. Taglialatela was paid $45,000 as a bonus earned in 2001
      for meeting objectives outlined by the Board of Directors.

      Also, during 2002 the Board of Directors approved the 2002 Incentive Bonus
      Plan (the "Plan"). Under this plan Mr. Taglialatela was able to earn up to
      $500,000 in bonus if certain performance criteria were met measured on a
      quarterly basis. For each quarter during 2002, the Company met the
      performance criteria and Mr. Taglialatela earned his bonus. However, the
      bonus for the 4th quarter which was earned has not been paid. Under the
      Plan, Mr. Taglialatela was required to use approximately 60% of the
      proceeds from the bonus to exercise previously issued stock options he had
      been granted in 2001. To date, the majority of the options that have
      been excercised under the plan have been at $0.35 cents with the balance
      at $0.20. The remaining portion of the bonus was to be paid to Mr.
      Taglialatela in order for him to satisfy his income tax obligations as a
      result of this bonus. As such, after Mr. Taglialatela exercised his
      options, as required under the Plan and paid his income tax related to the
      bonus there was little or no excess bonus remaining.

                                       26
<PAGE>

      The following table represents activity as a result of the bonus earned by
      Mr. Taglialatela during 2002.

<TABLE>
<CAPTION>
         <S>            <C>        <C>
         Q-1 2002       $ 125,000  Paid in 2002 (approximately 60% to exercise options)
         Q-2 2002         125,000  Paid in 2002 (approximately 60% to exercise options)
         Q-3 2002         125,000  Accrued for 2002 - Paid in 2003 (approximately 60% to exercise options)
         Q-4 2002         125,000  Accrued for 2002 - Unpaid
                          -------  -------------------------
                        $ 500,000
</TABLE>

(2)   Mr. Charlie Rodriguez began as ePHONE's Chief Financial Officer in
      December 2000. The amounts paid to Mr. Rodriguez in 2000 are based on an
      annual salary of $145,000. In 2000, ePHONE paid $36,000 in consulting
      payments to a Company controlled by Mr. Rodriguez prior to his employment
      with ePHONE. Included in the 1,350,000 options awarded to Mr. Rodriguez
      during 2001 are 250,000 stock options that were originally granted in 1999
      in consideration for consulting services rendered to the Company. The
      exercise price of these options was repriced in 2001 from $0.50 to $0.35
      and were exercised by Mr. Rodriguez in 2002. ePHONE also repriced 250,000
      of Mr. Rodriguez's stock options from $0.35 to $0.20 during 2002 and the
      amount is shown as a 2002 grant for purposes of this presentation.

      During 2002, Mr. Rodriguez was paid $35,000 as a bonus earned in 2001 for
      meeting objectives outlined by the Board of Directors.

      Also during 2002, the Board of Directors approved the 2002 Incentive Bonus
      Plan (the "Plan"). Under this plan Mr. Rodriguez was able to earn up to
      $300,000 in bonus if certain performance criteria were met measured on a
      quarterly basis. For each quarter during 2002, the Company met the
      performance criteria and Mr. Rodriguez earned his bonus. However, the
      bonus for the 4th quarter which was earned has not been paid. Under the
      Plan, Mr. Rodriguez was required to use approximately 60% of the proceeds
      from the bonus to exercise previously issued stock options he had been
      granted in 2001. To date, the majority of the options that have been
      excercised under the plan have been at $0.35 cents with the balance at
      $0.20. The remaining portion of the bonus was to be paid to Mr. Rodriguez
      in order for him to satisfy his income tax obligations as a result of this
      bonus. As such after Mr. Rodriguez exercised his options, as required
      under the Plan and paid his income tax related to the bonus there was
      little or no excess bonus remaining.

      The following table represents activity as a result of the bonus earned by
      Mr. Rodriguez during 2002.

<TABLE>
<CAPTION>
         <S>            <C>        <C>
         Q-1 2002        $ 75,000  Paid in 2002 (approximately 60% to exercise options)
         Q-2 2002          75,000  Paid in 2002 (approximately 60% to exercise options)
         Q-3 2002          75,000  Accrued for 2002 - Paid in 2003 (approximately 60% to exercise options)
         Q-4 2002          75,000  Accrued for 2002 - Unpaid
                           ------  -------------------------
                        $ 300,000
</TABLE>

(3)   Mr.  Heap's  employment  with  ePHONE  began  August 1,  2002.  The
      amounts  paid to Mr.  Heap are based on an annual  salary of $185,000.
      Mr. Heap became the  Company's  Chief  Technology  Officer and Chief
      Operating  Officer  effective  December 1, 2002. Subject to Management
      approval,  Mr. Heap may earn $17,000 in additional bonus  compensation
      for 2002, which is not reflected in the table above.

                                       27
<PAGE>

(4)   Mr. Meadow's employment with ePHONE as Chief Operating Officer began
      in February 2002. The amounts paid to Mr. Meadows are based on an annual
      salary of $150,000. Included in Mr. Meadows compensation is a $75,000
      severance payment that was made in connection with his leaving ePHONE in
      July 1, 2002.

(5)   Mr.  Souvannavong  began as ePHONE's Chief Technology Officer during April
      2001. The amounts paid to Mr.  Souvannavong  during 2001 are based on an
      annual salary of $125,000. Mr. Souvannavong left ePHONE in December of
      2002.


Report of the Board of Directors on Repricing of Stock Options held by Named
Executives

During the last fiscal year, the Company adjusted the exercise price of certain
stock options held by Carmine Taglialatela and Charlie Rodriguez as follows:

1.       The exercise price of 290,000 stock options held by Mr. Taglialatela
         was reduced from $0.35 to $0.20; and

2.       The exercise price of 250,000 stock options held by Mr. Rodriguez was
         reduced from $0.35 to $0.20.

The Board of Directors, with Messrs. Taglialatela and Rodriguez abstaining,
approved the repricing on November 15, 2002. The Board of Directors had
determined that it was in the Company's best interest to align the interests of
its executive management with the shareholders. A major purpose for which the
options were initially granted was to require Messrs., Taglialatela and
Rodriguez to increase their equity ownership in the Company. It was determined
that this would provide Messrs., Taglialatela and Rodriguez with additional
incentive to remain with the Company and to help maximize shareholder value.
However, the market price of the Company's common stock had fluctuated
significantly from the original exercise price of the stock options and reached
levels which made it unrealistic to expect exercise of the options. The Board of
Directors determined that the fluctuation was a result of difficult external
economic conditions that are beyond the control of Messrs., Taglialatela and
Rodriguez. ___ In order to implement the Company's incentive strategy, the Board
of Directors approved the reduction of the exercise price to $0.20, a price
which reflected the then current market price of the Company's common stock.
Contemporaneous with the repricing, the executives exercised their stock options
and paid the exercise price out of their accrued bonuses earned in 2002.

Option Grants for Fiscal 2002

The following table sets forth as to each of the named Executive Officers
information with respect to option grants during the last fiscal year.

<TABLE>
<CAPTION>
                                   Number of          % of Total Options/
                             Securities Underlying      SARs Granted to       Exercise or
                             Options/ SARs Granted    Employees in Fiscal      Base Price      Expiration Date
            Name                      (#)                    Year                ($/Sh)
-----------------------------------------------------------------------------------------------------------------
<S>                               <C>                       <C>                   <C>            <C>
Carmine Taglialatela Jr.          (1)290,000                15.29%                0.20           4/1/11 - 6/9/11
Charlie Rodriguez                 (1)250,000                13.18%                0.20                   2/14/11
Steve Heap                        (2)200,000                10.54%                0.35                    8/1/12
Steve Heap                        (2)300,000                15.82%                0.35                    8/1/12
</TABLE>

(1)   These options were repriced as previously described. For purposes of
      this presentation, the percentage of total options issued to each
      executive officer is based on the proportion that the number of options
      granted to each executive bears to the total number of options granted to
      all employees during the fiscal year plus the sum of all repriced options
      or 1,896,800 (1,310,000 options granted to all employees plus 586,800
      repriced options).

                                       28
<PAGE>

(2)   As provided for in Mr. Heap's employment agreement with ePHONE
      effective August 1, 2002, 200,000 options were granted with a vesting
      period of 6 months and 300,000 options were issued with a 3 year vesting
      period. During November 2002, the Board approved a resolution to
      accelerate the vesting period on the grant of 200,000 options from a 6
      month vesting term to immediate vesting.

Option Exercises and Values for Fiscal 2002

The following table sets forth as to each of the named Executive Officers
information with respect to option exercises during Fiscal 2001 and the status
of their options on December 31, 2001.

<TABLE>
<CAPTION>
                            Acquired on
                             Exercises      Value                                                    Value of Unexercised
                                (#)      Realized ($)  Number of Securities Underlying Options  In-The-Money Options at Fiscal
                                                                 at Fiscal Year End.                       Year End
                                                           Exercisable         Unexercisable     Exercisable    Unexercisable
<S>                           <C>             <C>           <C>                   <C>                <C>             <C>
Carmine Taglialatela, Jr.     718,000         --             882,000                                 --              --
Charlie Rodriguez             388,500         --             750,000                --               --              --
Steve Heap                                    --             200,000              300,000            --              --
Sonny Sovannavong                             --             141,667                --               --              --
</TABLE>

Compensation of Directors

Non-employee directors receive $5,000 for each Board of Directors meeting
attended during 2002, with the exception of Mr. Clarke and Mr. Fraser who each
received an additional 33,334 shares in lieu of cash for business expenses and
consulting fees during the first quarter. The shares had a fair value of $14,667
as determined based on the price of the Company's common stock at the date of
issuance.


Employment Agreements

         Steve Heap Employment Agreement

         The Company has an employment agreement with Mr. Steven Heap (the "Heap
         Agreement"). The Heap Agreement is a three-year contract, with a term
         beginning on August 1, 2002 and continuing until July 31, 2005. If
         either the Company or Mr. Heap wants to renew this agreement, a written
         notice needs to be provided 60 days before termination of the current
         agreement. Under the terms of the Heap Agreement, Mr. Heap is required
         to devote his full-time efforts to the Company. His initial title was
         Chief Network Officer, and on November 1, 2002 he was appointed Chief
         Operating Officer. The Company is required to compensate Mr. Heap at an
         annual rate of at least $185,000 until EBITDA exceeds $2,500,000 for
         the year 2002. Upon exceeding the said amount, Mr. Heap's salary will
         be increased to $200,000 per year and be reviewed on December 31 of
         each year of the contract.  Mr. Heap will be granted 200,000
         options at the time of employment that will be vested after 6 months of
         employment. After 6 months, an additional 300,000 options will be
         granted to be vested over three years. The Board of Directors
         accelerated the vesting on all his options to be vested as of January
         1, 2003 and his salary increased to $200,000. The Company is also
         obligated to (i) allow Mr. Heap to participate in any incentive bonus
         or option plans approved for senior management of the Company, (ii)
         provide secretarial services and furnished office, (iii) provide
         medical insurance and (iv) pay for all pre-approved reasonable expenses
         that Mr. Heap may incur.

         The Company may terminate the Heap Agreement at any time in the event
         of his disability or for cause, each as defined in the Heap Agreement.
         Mr. Heap may resign from the Company at any time without penalty. If
         the Company terminates the Heap Agreement for disability or cause, the
         Company will have no further obligations to Mr. Heap. If, however, the
         Company terminates the Heap Agreement other than for disability or
         cause, the Company must pay Mr. Heap an amount equal to six months of
         his base salary in a lump sum payable within 15 days of his termination
         date. Mr. Heap must fully cooperate with the Company in all matter
         relating to the winding up of any pending work after his termination.

                                       29
<PAGE>

         Carmine Taglialatela Jr.'s Employment Agreement

         The Company has an employment agreement with Mr. Carmine Taglialatela,
         Jr. (the "Taglialatela Agreement"). The Taglialatela Agreement is a
         three-year contract, with a term beginning on April 1, 2001 and
         continuing until April 1, 2004. If either the Company or Mr.
         Taglialatela want to renew this agreement, a written notice needs to be
         provided 60 days before termination of the current agreement. Under the
         terms of the Taglialatela Agreement, Mr. Taglialatela is required to
         devote his full-time efforts to the Company. His initial title was
         President and Chief Operating Officer. Effective July 1, 2001, Mr.
         Taglialatela was appointed Chief Executive Officer. The Company is
         required to compensate Mr. Taglialatela at an annual rate of at least
         $180,000 until EBITDA exceeds $250,000 for the year 2001. Upon it
         exceeding the said amount, Mr. Taglialatela's salary will be increased
         to $250,000 per year. The Company is also obligated to (i) allow Mr.
         Taglialatela to participate in any incentive bonus or option plans
         approved for senior management of the Company, (ii) provide secretarial
         services and furnished office, (iii) provide medical insurance and (iv)
         pay for all pre-approved reasonable expenses that Mr. Taglialatela may
         incur.

         The Company may terminate the Taglialatela Agreement at any time in the
         event of his disability or for cause, each as defined in the
         Taglialatela Agreement. Mr. Taglialatela may resign from the Company at
         any time without penalty. If the Company terminates the Taglialatela
         Agreement for disability or cause, the Company will have no further
         obligations to Mr. Taglialatela. If, however, the Company terminates
         the Taglialatela Agreement other than for disability or cause, the
         Company must pay Mr. Taglialatela an amount equal to twelve (12) months
         of his base salary in a lump sum payable within 15 days of his
         termination date, or if agreed between him and the Company, twelve
         monthly installments may be paid. Mr. Taglialatela must fully cooperate
         with the Company as relates to any transition subsequent to his
         termination.

Item 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

The following tables set forth information, as of December 31, 2002, with
respect to the beneficial owners of our common stock for:

o        each person or group of persons, who we know beneficially own more than
         5% of any class of our outstanding stock;

o        each of our executive officers named in the Summary Compensation Table;

o        each of our directors; and

o        all executive officers and directors as a group.

In general, under the SEC's rules, a person is deemed to be a "beneficial owner"
of a security if that person has or shares the power to vote or direct the
voting of such security or has the power to dispose or direct the disposition of
such security. A person is also deemed to be the beneficial owner of any
securities of which the person has the right to acquire beneficial ownership
within 60 days.

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                                                        Percent of
                                                                                        outstanding
                                                                    Shares of            shares of
                                                                  common stock         common stock
                                                                  beneficially         beneficially
                 Name and Address of Holder                           owned                owned
-------------------------------------------------------------    ----------------     ----------------
<S>                                                                 <C>                         <C>
Larry Codacovi                                                        100,000(1)                0.26%
    18 Reynolds Lane
    Katonah, NY 10536
    Chairman of the Board
Carmine Taglialatela, Jr.                                           1,600,000(2)                4.11%
    9565 Briar Lane
    Delaplane, VA 20144
    President and Chief Executive Officer
Charlie Rodriguez                                                   1,138,500(2)                2.93%
    1662 W.  Petunia Place
    Tucson, AZ 85737
    Director, Chief Financial Officer
Steve Heap                                                            200,000(3)                0.52%
    12408 Fairfax Station Road
    Clifton, VA 20124
    Chief Operating Officer and Chief Technology Officer
Sheldon Kamins                                                        100,000(1)                0.26%
    10220 River Road
    Potomac, MD 20854
    Director
Robert Stuart                                                         100,000(4)                0.26%
    1237 Balfour Drive
    Arnold , MD 21012
    Director
Eugene Sekulow                                                        100,000(4)                0.26%
    50 Main Street, Suite 1000
    White Plains, NY 10606
    Director
Sonny Souvannavong                                                    141,667(5)                0.37%
    2230 George C.  Marshall Drive, #1001
    Falls Church, VA 22043
    Former Chief Technology Officer
James Meadows                                                                 --                   --
    Former Chief Operating Officer
Executive Officers and Directors as a Group of 9                       3,480,167                8.64%
</TABLE>


(1) Consists of 50,000 shares of common stock and options to acquire 50,000
shares of common stock.

(2) Consists of 718,000 shares and 882,000 options to acquire shares of common
stock.

(3) Consists of 388,500 shares of common stock and options to acquire 750,000
shares of common stock.

(4) Consists of 43,000 shares of common stock and options to acquire 57,000
shares of common stock.

(5)  Consists of options to acquire shares of common stock.

                                       31
<PAGE>

Item 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During the year ended December 31, 2001 we incurred costs for management
services provided by companies in which certain directors of ours have a
controlling interest and incurred consulting fees to certain directors of ours
totaling $68,000.

During the year ended December 31, 2001, we paid $248,000 to ePHONE
Technologies, Inc., a company we hold a 20% equity interest in, for consulting
services. At December 31, 2001, we recognized an impairment write-down of
substantially all of the remaining carrying value of this investment. The
write-down totaled $184,000 and is recorded as general and administrative
expense in the Statement of Operations at December 31, 2001. The remaining
carrying value of this investment is $1,000 and is recorded as a non-current
other asset at December 31, 2002 and 2001.

During 2001 we also paid $100,000, as provided for in a Service and Deployment
Agreement with 7bridge Systems, LTD, a related party, a company in which our
Former Chairman of the Board and Chief Financial Officer have an interest in.

During 2002, no related party transactions occurred nor are anticipated going
forward.

Item 13.      Exhibits and Reports on Form 8-K

     The following documents are filed as part of this Form 10-KSB:

A.       Exhibits

           Exhibit No.    Description
           ------------   ------------------------------------------------------
           3.1.........   Articles of Incorporation (1)
           3.2.........   Amendment to Articles of Incorporation (1)
           3.3.........   Bylaws (1)
           3.4.........   Amended and Restated Articles of Incorporation (2)
           10.1........   Specimen of form of Option Incentive Agreement (1)
           10.2........   Agency Agreement dated as of March 16, 2000 between
                          ePHONE and Groome Capital.com, Inc.  (3)
           10.3........   ePHONE Telecom, Inc. 2000 Long-Term Incentive Plan (4)
           10.4........   Employment Agreement with James Meadows, Chief
                          Operating Officer (6)
           10.5........   Employment Agreement with Carmine Taglialatela,
                          President and Chief Executive Officer (6)
           10.6........   Employment Agreement with Steven Heap ,Chief Operating
                          Officer (6)
           99.1........   Settlement Agreement and Mutual General Release
                          between Charlie Yang and ePHONE Telecom, Inc., dated
                          March 23, 2001 (5)
           99.2........   Settlement Agreement between Comdial Corporation,
                          Array Telecom Corporation and ePHONE dated
                          November 13, 2002 (7)
           99.3........   Certification Pursuant to 18 U.S.C Section 1350, as
                          Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                          Act of 2002
           99.4........   Certification Pursuant to 18 U.S.C Section 1350, as
                          Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                          Act of 2002

(1)      Previously  filed as an exhibit to ePHONE's Form 10-SB,  filed with the
         Commission on October 15, 1999.

(2)      Previously  filed as an exhibit to  Amendment  No. 2 to  ePHONE's  Form
         10-SB, filed with the Commission on January 5, 2000.

(3)      Previously  filed as an exhibit to  Amendment  No. 5 to  ePHONE's  Form
         10-SB, filed with the Commission on June 5, 2000.

                                       32
<PAGE>

(4)      Previously  filed as an  exhibit to  ePHONE's  form SB-2 filed with the
         Commission on August 9, 2000.

(5)      Previously  filed as an exhibit to  ePHONE's  form 8-K,  filed with the
         Commission on April 16, 2001.

(6)      Previously filed as an exhibit to ePHONE's form 10-KSB,  filed with the
         Commission on April 15, 2001.

(7)      Previously filed as an exhibit to ePHONE's Form 10-QSB,  filed with the
         Commission on November 14, 2002.

       B.  Reports on Form 8-K:
           On November 8, 2002, ePHONE filed with the Commission a current
           report on 8-K related to a court order denying ePHONE's motion to
           vacate an arbitration award to Comdial Corporation and its subsidiary
           Array Telecom Corporation.

Item 14.      Controls and Procedures

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting such officers to material information relating to
our company required to be included in our periodic filings with the Commission.
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of this
evaluation.


                                       33
<PAGE>

SIGNATURE PAGE

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

                                  ePHONE Telecom, Inc.
                                  (Registrant)

                                 By /s/   Carmine Taglialatela, Jr.
                                          -----------------------------------
                                          (Carmine Taglialatela, Jr., CEO)

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

              Signature                                        Date


  By /s/ Carmine Taglialatela, Jr.                        April 15, 2003
--------------------------------------------
(Carmine Taglialatela, Jr., CEO, Director)
    (Principal Executive Officer)


      By /s/ Charlie Rodriguez                            April 15, 2003
--------------------------------------------
(Charlie Rodriguez, Chief Financial Officer)
(Principal Financial and Accounting Officer)


      By /s/ Lawrence Codacovi*                           April 15, 2003
--------------------------------------------
    (Lawrence Codacovi, Chairman)


       By /s/ Eugene Sekulow*                             April 15, 2003
--------------------------------------------
   (Eugene Sekulow, Vice Chairman)


       By /s/ Sheldon Kamins*                             April 15, 2003
--------------------------------------------
     (Sheldon Kamins, Director)


        By /s/ Robert Stuart*                             April 15, 2003
--------------------------------------------
      (Robert Stuart, Director)


*By: Charlie Rodriguez
     ---------------------------------------
     Attorney-In-Fact



                                       34
<PAGE>

                                  CERTIFICATION

         I, Carmine Taglialatela, Jr., Chief Executive Officer, certify that:

1.   I have reviewed this annual report on Form 10-KSB of ePHONE Telecom, Inc;

2.   Based on my knowledge, this annual report does not contain any
     untrue statement of a material fact or omit to state a material fact
     necessary to make the statements made, in light of the circumstances under
     which such statements were made, not misleading with respect to the period
     covered by this annual report;

3.   Based on my knowledge, the financial statements, and other
     financial information included in this annual report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     annual report;

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

         a)       Designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       Evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       Presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

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

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

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

6.   The registrant's other certifying officer and I have indicated in
     this annual report whether there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:    April 15, 2003

By:      /s/ Carmine Taglialatela, Jr., Chief Executive Officer
                           (Signature and Title)


<PAGE>


                                  CERTIFICATION

         I, Charlie Rodriguez, Chief Financial Officer, certify that:

1.   I have reviewed this annual report on Form 10-KSB of ePHONE Telecom, Inc;

2.   Based on my knowledge, this annual report does not contain any
     untrue statement of a material fact or omit to state a material fact
     necessary to make the statements made, in light of the circumstances under
     which such statements were made, not misleading with respect to the period
     covered by this annual report;

3.   Based on my knowledge, the financial statements, and other
     financial information included in this annual report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     annual report;

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

         a)       Designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       Evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       Presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

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

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

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

6.   The registrant's other certifying officer and I have indicated in
     this annual report whether there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date:    April 15, 2003

By:      /s/ Charlie Rodriguez, Chief Financial Officer
                           (Signature and Title)



<PAGE>



Index to Consolidated Financial Statements                                Page
--------------------------------------------------------------------------------


Report of Independent Certified Public Accountants...................    F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001.........    F-3

Consolidated Statements of Operations for the Two Years Ended
December 31, 2002 and 2001...........................................    F-4

Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 2002 and 2001.......................    F-5

Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001...........................................    F-6

Notes to Consolidated Financial Statements...........................F-7 - F-17



































                                       F-1


<PAGE>


Report of Independent Certified Public Accountants

Board of Directors and Stockholders
ePHONE Telecom, Inc.

We have audited the accompanying consolidated balance sheets of ePHONE Telecom,
Inc. as of December 31, 2002 and 2001, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ePHONE Telecom,
Inc., as of December 31, 2002 and 2001, and the consolidated results of its
operations and its consolidated cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has experienced a significant decline in revenue since the phase out of its
marketing agreement for its Unlimited Domestic Calling Program in the fourth
quarter of 2002. This factor as discussed in Note 2 to the financial statements,
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Vienna, Virginia
February 10, 2003

(Except for the third paragraph of Note 2, as to which the date is
April 11, 2003.)

                                      F-2
<PAGE>
                              ePHONE Telecom, Inc.

                           Consolidated Balance Sheets



<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                       2002                  2001
                                                                                -------------------- ---------------------

<S>                                                                             <C>                 <C>
Current Assets:
   Cash and cash equivalents                                                    $        1,252,936  $            35,970
   Accounts receivable, net of allowance
     of $321,000 and $116,000 at December 31, 2002
     and 2001, respectively                                                                419,049              155,759
   Inventory                                                                               263,608               16,500
   Other receivables                                                                        86,789               65,481
                                                                                ------------------- --------------------

     Total Current Assets                                                                2,022,382              273,710

Property and equipment, net                                                              1,686,704            1,296,561

Other assets                                                                                68,043               18,043
                                                                                ------------------- --------------------

Total Assets                                                                    $        3,777,129  $         1,588,314
                                                                                ------------------- --------------------

Liabilities and Stockholders' Equity (Deficit):

Current Liabilities:
   Accounts payable                                                             $          961,745  $           850,179
   Accrued liabilities                                                                   1,187,355              429,189
   Accrued obligation cost                                                                      --              225,576
   Deferred revenue                                                                        278,956              367,009
   Capital lease obligation, current portion                                                51,385               22,663
                                                                                ------------------- --------------------

     Total Current Liabilities                                                           2,479,441            1,894,616
                                                                                ------------------- --------------------

Capital lease obligation, net of current portion                                            15,626               15,839
Other long term obligation, net of current portion                                          52,500              142,500

Commitments and Contingencies                                                                   --                   --

Stockholders' Equity (Deficit):
   Common stock, par value $0.001:
     150,000,000 shares authorized, 38,084,994 and
     32,987,381 issued and outstanding at December 31, 2002
     and 2001, respectively.                                                                38,085               32,987
   Additional paid-in capital                                                           23,029,524           21,843,199
   Accumulated deficit                                                                (21,838,047)         (22,340,827)
                                                                                ------------------- --------------------

Total Stockholders' Equity (Deficit)                                                     1,229,562            (464,641)
                                                                                ------------------- --------------------

Total Liabilities and Stockholders' Equity (Deficit)                            $        3,777,129  $         1,588,314
                                                                                ------------------- --------------------
</TABLE>

See accompanying notes to consolidated financial statements
                                       F-3
<PAGE>

                              ePHONE Telecom, Inc.

                      Consolidated Statements of Operations



<TABLE>
<CAPTION>

                                                                                        Years Ended December 31,
                                                                                         2002                 2001
                                                                                 ----------------- --------------------
<S>                                                                              <C>               <C>
Revenues                                                                         $     19,221,928  $         3,589,840
Cost of Revenues                                                                        9,696,392            2,501,033
                                                                                 ----------------- --------------------

Gross Margin                                                                            9,525,536            1,088,807

   Operating expenses
     Sales and marketing                                                                1,256,932            1,212,026
     General and administrative                                                         6,384,891            5,607,375
     Write off of Array Telecom license and the disposal of
      obsolete inventory and equipment net                                                     --            1,188,383
                                                                                 ----------------- --------------------

Operating income (loss) before arbitration cost                                         1,883,713          (6,918,977)

Arbitration cost                                                                        1,374,425              225,576
                                                                                 ----------------- --------------------

Income (loss) from operations                                                             509,288          (7,144,553)

Interest and other (income), net                                                            6,508            (123,424)
                                                                                 ----------------- --------------------

Earnings (loss) before taxes                                                              502,780          (7,021,129)

Income tax expense                                                                             --                   --
                                                                                 ----------------- --------------------

Net Income (Loss)                                                                $        502,780  $       (7,021,129)

Earnings (loss) per share--(basic and diluted)                                   $           0.01  $            (0.28)
                                                                                 ----------------- --------------------

Weighted average number of common
   shares outstanding                                                                   36,251,792         24,910,425
</TABLE>

           See accompanying notes to consolidated financial statements






                                       F-4


<PAGE>

                              ePHONE Telecom, Inc.

            Consolidated Statements of Stockholders' Equity (Deficit)




<TABLE>
<CAPTION>
                                                                               Accumulated
                                      Common Shares          Additional          Other
                               -------------------------       Paid-In        Comprehensive       Accumulated
                                 Shares        Amount          Capital        Income (Loss)         Deficit             Total
                              -------------   ----------   ---------------  -----------------   ---------------   ----------------

<S>                             <C>        <C>          <C>               <C>                <C>               <C>
Balance, December 31, 2000      17,453,848 $     17,454 $      21,204,687 $           22,221 $    (15,319,698) $        5,924,664
Stock options issued in
   exchange for services                --           --            90,545                 --                --             90,545
   Common stock issued in
legal settlement                   500,000          500           109,500                 --                --            110,000
Common stock issued in
exchange for services              748,973          749           147,466                 --                --            148,215
Proceeds from issuance
of common stock                    848,243          848           304,437                 --                --            305,285
Conversion of Special Warrants  13,436,317       13,436          (13,436)                 --                --                 --
   Net Loss                             --           --                --                 --       (7,021,129)        (7,021,129)
Change in unrealized gain               --           --                --           (22,221)                --           (22,221)
                                                                                                                         --------
Total comprehensive loss                --           --                --                 --                --        (7,043,350)
                              -------------   ----------   ---------------  -----------------   ---------------   ----------------

Balance, December 31, 2001      32,987,381 $     32,987 $      21,843,199 $               -- $    (22,340,827) $        (464,641)
Stock issued for services          289,000          289            61,426                 --                --             61,715
Stock options issued to
   consultant for services              --           --            37,056                 --                --             37,056
Exercise of warrants for cash    3,448,913        3,449           686,334                 --                --            689,783
Exercise of employee stock
   options for cash              1,359,700        1,360           401,509                 --                --            402,869
   Net Income                           --           --                --                 --           502,780            502,780
                              -------------   ----------   ---------------  -----------------   ---------------   ----------------

Balance, December 31, 2002      38,084,994 $     38,085 $      23,029,524 $               -- $    (21,838,047) $        1,229,562
                              =============   ==========   ===============  =================   ===============   ================
</TABLE>


See accompanying notes to consolidated financial statements




                                       F-5


<PAGE>

                              ePHONE Telecom, Inc.

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                                2002                  2001
                                                                       ------------------- ----------------------

<S>                                                                    <C>                 <C>
Cash Flows from Operating Activities:
   Net income (loss)                                                   $          502,780  $         (7,021,129)
   Adjustments to reconcile net income (loss) to net cash flows from
     operating activities:
       Depreciation and amortization                                              345,655                785,575
       Stock compensation issued for services rendered                             98,771                258,215
       Stock option benefits charged to operations                                     --                 90,545
       Allowance for returns and uncollectible accounts receivable                205,000                116,405
       Write down of investment in ePHONE Technologies, Inc.                           --                184,000
       Write off of Array Telecom license and the disposal of                                          1,188,383
         obsolete inventory and equipment
       Deferred royalty expense                                                        --                193,334
       Inventory reserve                                                               --                108,900
       Realized gain                                                                   --               (45,470)
       Changes in operating assets and liabilities:
         Accounts receivable and other receivables                              (633,489)              (135,661)
         Inventory                                                              (247,108)                 78,175
         Other assets                                                            (50,000)                 85,500
         Accounts payable                                                         111,566                540,921
         Accrued liabilities                                                      758,166              (371,979)
         Accrued obligation cost                                                (225,576)                     --
         Deferred revenue                                                          55,838                223,118
         Customer deposits                                                             --               (25,853)
                                                                       ------------------- ----------------------

Net cash flows provided by (used in) operating activities                         921,603            (3,747,021)

Cash flows from investing activities:
   Purchase of fixed assets                                                     (663,563)              (813,857)
   Purchase of marketable securities                                                   --              2,194,157
   Deposit to restricted cash, net                                                     --                579,435
                                                                       ------------------- ----------------------

Net cash flows (used in) provided by investing activities                       (663,563)              1,959,735

Cash flows provided by financing activities:
   Proceeds received from exercise of warrants                                    689,783                305,285
   Proceeds received from exercise of employee stock options                      402,869                     --
   Repayments on long-term obligation                                            (90,000)                     --
   Repayments on capital lease                                                   (43,726)                (8,007)
                                                                       ------------------- ----------------------

Net cash flows provided by financing activities                                   958,926                297,278
                                                                       ------------------- ----------------------

Net increase (decrease) in cash and cash equivalents                            1,216,966            (1,490,008)

Cash and cash equivalents, beginning of year                                       35,970              1,525,978
                                                                       ------------------- ----------------------

Cash and cash equivalents, end of year                                 $        1,252,936  $              35,970
                                                                       ------------------- ----------------------
</TABLE>


See accompanying notes to consolidated financial statements
                                       F-6


<PAGE>


NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

ePHONE Telecom, Inc. ("ePHONE") was incorporated in 1996 under the laws of the
State of Florida, and is traded on the OTC Electronic Bulletin Board operated by
the National Association of Securities Dealers, Inc. under the trading symbol
"EPHO".

We provide telecommunication services to retail and wholesale customers. Our
vision is to become a global telecommunications carrier providing a full
complement of telecommunications services, including phone-to-phone one-step
dialing, using Voice over Internet Protocol ("VoIP") technology. Using a call
origination approach that involves its own Customer Premise Equipment ("CPE"),
and a combination of its own dedicated Internet Protocol ("IP") network, the
public Internet and the public switched telephone network ("PSTN"), we plan to
develop the capacity to provide voice and fax transmission and other telephony
features at high quality and low cost.


During the fourth quarter of 2002, the Company began offering telecommunication
services to retail customers in Canada through its wholly-owned subsidiary,
ePHONE Telecom, Canada.


PRINCIPLES OF CONSOLIDATION

The financial statements include the accounts of the Company and its
wholly-owned subsidiary. All significant intercompany transactions and balances
are eliminated upon consolidation.

USE OF ESTIMATES

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

FAIR VALUE INFORMATION

The estimated fair value of the Company's financial instruments, which include
cash, receivables, accounts payable, and long term payables reported in the
balance sheet, approximate their carrying value given the their short
maturities. The carrying value of long-term payables approximates its fair value
since interest on the debt is at market rate.

CASH AND CASH EQUIVALENTS

We consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.

SUPPLEMENTAL CASH FLOW INFORMATION AND NON CASH INVESTING AND FINANCING
ACTIVITIES

For the years ended December 31, 2002 and 2001, we paid no income taxes or
interest. During the years ended December 31, 2002 and 2001, we entered into
capital lease obligations for property and equipment totaling $72,235 and
$46,509, respectively.

INVENTORY

Inventory consists primarily of e-TRANS-PORT devices held for resale and is
stated at the lower of cost, utilizing the weighted average method, or market.

                                       F-7
<PAGE>

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, generally 5
to 7 years. ___ Equipment leased under capital leases is stated at the present
value of future lease obligations and is amortized over estimated useful lives.
Routine repairs and maintenance are expensed as incurred.

IMPAIRMENT OF LONG-LIVED ASSETS

We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the expected future net cash
flows generated by the assets. If the assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. During the year ended
December 31, 2001, our analyses indicated that there was an impairment of the
long lived assets associated with the Array Telecom License, as described in
Note 7, and our investment in ePHONE Tech, as described in Note 3. There were no
such impairments during 2002.

REVENUE RECOGNITION

We recognize telecommunication services revenues over the period services are
provided. Monthly recurring telecommunications services are billed in advance
and any portion of our services that is billed for which we have not yet
provided services is recorded as deferred revenue. We establish an allowance for
doubtful accounts based upon factors, which include historical trends and other
information.

STOCK-BASED COMPENSATION

We account for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations, and comply with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS 148, "Stock Compensation - Transition and
Disclosure". Under APB No. 25, compensation expense is based on the difference,
if any, on the date of the grant, between the fair value of our common stock and
the exercise price.

The following table illustrates the effect on net income (loss) and net income
(loss) per share had compensation costs for the stock-based compensation plan
been determined based on grant date fair values of awards under the provisions
of SFAS No. 123, for the years ended December 31:

<TABLE>
<CAPTION>
                                                                                 2002             2001
                                                                             -------------  --------------
<S>                                                                          <C>            <C>
   Net income (loss)
            As reported:                                                     $     502,780  $   (7,021,129)
            Less total stock-based compensation expense
   determined under fair value-based method for all awards, net  of
   related tax effects                                                            (234,603)       (702,942)
                                                                             -------------  --------------

            Pro forma                                                        $     268,177  $   (7,724,071)
                                                                             =============  ==============

   Net income (loss), basic and diluted
            As reported                                                      $       $0.01  $        (0.28)
            Pro forma                                                        $       $0.01  $        (0.31)
</TABLE>

We account for non-employee stock-based awards in which services are the
consideration received for the equity instruments issued based on the fair value
of the consideration received or the fair value of the equity instrument issued,
whichever is more reliably measured. We determined the value of stock grants
made to both employees and non-employees based on the quoted market price of our
common stock on the date of grant. We determine the fair value of warrants and
options we granted to non-employees using the Black-Scholes option pricing
model.

                                      F-8
<PAGE>

INCOME TAXES

Deferred income taxes result primarily from temporary differences between
financial and income tax reporting. Deferred tax assets and liabilities are
determined based on the differences between the financial statement bases and
tax bases of assets and liabilities using enacted tax rates. A valuation
allowance is recorded to reduce the deferred tax asset to that portion that is
expected to more likely than not be realized.

NET INCOME (LOSS) PER SHARE

We report basic and diluted income (loss) per share. Basic income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of outstanding shares of common stock. Diluted earnings per share is computed by
dividing net income (loss) by the weighted average number of shares adjusted for
the potential dilution that could occur if stock options, warrants and other
convertible securities were exercised or converted into common stock.

For the years ended December 31, 2002 and 2001, options and warrants to purchase
4,864,916 and 24,661,540 shares of common stock, respectively, were outstanding
but were not included in the computation of diluted earnings per share because
the effect would have been anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to (a) all entities and (b) legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal operation of long-lived
assets, except for certain obligations of lessees.  SFAS No. 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not believe the adoption of this statement will have a material
impact on our financial position or results of operations.

Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which established one accounting
model to be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the
Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business (as
previously defined in that Opinion). The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 had no impact on the Company's
financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt" and an amendment of that Statement, and SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS
No. 44, "Accounting for Intangible Assets for Motor Carriers." SFAS No. 145
amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. SFAS No. 145
is effective for fiscal years beginning after May 15, 2002. The Company does not
expect the adoption of SFAS No. 145 will have a material impact on its results
of operations or financial position.

                                      F-9
<PAGE>

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses significant issues regarding
the recognition, measurement, and reporting of costs associated with exit and
disposal activities, including restructuring activities. SFAS No. 146 requires
that costs associated with exit or disposal activities be recognized when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is effective for all exit or disposal activities initiated
after December 31, 2002. The Company does not expect the adoption of SFAS No.
146 to have a material impact on our results of operations or financial
position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), to provide alternative
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. In addition,
it also amends the disclosure provisions of SFAS 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. SFAS 148
also amends APB Opinion No. 28, Interim Financial Reporting, to require
disclosure about the effect in interim financial information. The Company is
currently evaluating whether to adopt the fair value based method of accounting
for stock-based employee compensation.

RECLASSIFICATIONS

Certain 2001 balances and disclosures have been reclassified to conform to the
2002 presentation.

NOTE 2 - GOING CONCERN

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates the realization of assets, and the satisfaction of liabilities in
the normal course of business and the continuation of the Company as a going
concern. Fiscal year 2002 represented our first profitable year. Prior to 2002,
we had incurred losses since inception and at December 31, 2002 had
accumulated a deficit of $21,838,000. We have funded our operations, prior to
the successful launch of our Unlimited Domestic Calling Program leading to a
profitable 2002, primarily with the proceeds we raised in our special warrant
offering in 2000, from the exercise of warrants during 2001, and from limited
equipment sales. We do not currently have a line of credit or any other credit
facility available to us.

In the fourth quarter of 2002, we phased out our marketing arrangement with the
telemarketer of our Unlimited Domestic Calling Program. As a result, we
experienced a very significant decline in revenues from our Unlimited Domestic
Calling Program when compared to earlier in 2002. During the three months ended
March 31, 2003, we generated only $60,000. (unaudited) in revenue from our
Unlimited Domestic Program. Even though we have entered into new marketing
agreements with new telemarketers, we can give no assurances that our revenue
levels will grow to equal or exceed those we previously experienced. Revenues
during 2002 from our Unlimited Domestic Calling Program totaled approximately
$16,870,000 or 88% of our total revenue. Future prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in the telecommunications industry.

In April 2003, the Company was informed by the Federal Trade Commission that
they have commenced a non-public investigation relating to whether the form of
payment authorization which the Company received from customers who purchased
its Unlimited Domestic Calling Program complied with the requirements of the
Electronic Fund Transfer Act and its implementing Regulation E. Management
believes that at this stage it is too early to determine whether the
investigation will result in a loss to the Company or to estimate the amount of
such loss, if any.

The Company continues to earn revenues for its wholesale traffic and its other
retail programs, including prepaid calling cards it sells in both the United
States and Canada. It has entered into new telemarketing agreements with several
new telemarketing organizations and is reorganizing its subscription fulfillment
and collection procedures. The Company has also undertaken expense reduction
actions during 2003, reducing head count and non-operational costs. Management
believes that, even though it continues to provide both wholesale and retail
services to customers, with the decline in the Unlimited Domestic Calling
Program it needs to raise additional funding in the short term in order to
provide for needed working capital and for marketing efforts related to the
introduction of new products, including etrans-port. We are currently seeking
additional investment capital and believe that without additional investment
capital we will not have sufficient cash to fund our current activities, and as
such, may not be able to continue operating.

                                      F-10
<PAGE>

Management believes that actions presently being taken provide the opportunity
for the Company to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should we be unable to
continue as a going concern.

NOTE 3 - RELATED PARTY TRANSACTIONS

During the year ended December 31, 2001 we incurred costs for management
services provided by companies in which certain directors of ours have a
controlling interest and incurred consulting fees to certain directors of ours
totaling $68,000, respectively.

During the year ended December 31, 2001, we paid $248,000 to ePHONE
Technologies, Inc., a company we hold a 20% equity interest in, for consulting
services. At December 31, 2001, we recognized an impairment write-down of
substantially all of the remaining carrying value of this investment. The
write-down totaled $184,000 and is recorded as general and administrative
expense in the Statement of Operations at December 31, 2001. The remaining
carrying value of this investment is $1,000 and is recorded as a non-current
other asset at December 31, 2002 and 2001.

During 2001, we also paid $25,000 in consulting fees to one of our officers, and
paid $100,000, as provided for in a Service and Deployment Agreement to 7bridge
Systems, LTD, a company in which both our former Chairman of the Board and Chief
Financial Officer have an interest in.

NOTE 4 - PROPERTY AND EQUIPMENT AND CAPITAL LEASE OBLIGATION

Property and equipment consisted of the following:

                                                          December 31,
                                                ------------------------------
                                                   2002                2001
                                                ---------------    -----------
Computer equipment........................      $  220,645          $  198,785
Furniture and fixtures....................         340,986             340,986
Telecommunications equipment..............         939,682             322,303
Other equipment...........................         807,579             711,022
                                                ----------          ----------
                                                 2,308,892           1,573,096
Less: accumulated depreciation............        (622,188)           (276,535)
                                                -----------         ----------
Property and equipment, net...............      $1,686,704          $1,296,561
                                                ==========          ==========

At December 31, 2002 and 2001, property and equipment includes capitalized lease
assets of $118,744 and $46,509 and accumulated depreciation on capitalized lease
assets of $25,123 and $7,306, respectively. Payments for the capital lease
obligation by fiscal year are as follows:

Year ending December 31,

2003.................................................             $    60,676
2004.................................................                  15,736
                                                                  -----------
Total gross payments..............................                     76,412
Less amount representing interest...............                       (8,951)
                                                                  -----------
                                                                       67,461
Less current portion...............................                   (51,835)
                                                                  -----------
Long-term portion of capitalized lease obligation                 $    15,626
                                                                  ===========

                                      F-11
<PAGE>

Depreciation expense (including depreciation on the capitalized lease asset
during 2001) was $345,655 and $230,928 for the years ended December 31, 2002 and
2001, respectively.

NOTE 5 - ACCRUED LIABILITIES AND LONG TERM OBLIGATION

Accrued expenses consist of the following:

                                                          December 31,
                                                ------------------------------
                                                    2002              2001
                                                -------------      -----------
Accrued vacation..........................      $      72,257      $    32,411
Accrued compensation......................            631,457           35,443
Accrued legal fees........................             50,000          147,300
Other.....................................            433,641          214,035
                                                    ---------          -------

                                                $   1,187,355      $   429,189
                                                    =========          =======

During 2001 we were involved in arbitration, resulting from the termination of
our former President and Chief Operating Officer, Mr. Charles Yang. On March 23,
2001, we entered into a Settlement Agreement and Mutual General Release (the
"Settlement Agreement") to resolve all claims and disputes between ePHONE and
Mr. Yang, including all claims relating to Mr. Yang's employment by and
separation from ePHONE. Pursuant to the terms of the Settlement Agreement, we
agreed to pay Mr. Yang $400,000 in cash installments by July 23, 2001, and issue
Mr. Yang 400,000 shares of our common stock as further described in Note 9. We
had previously accrued $300,000 during 1999, and the additional $100,000
liability related to the settlement was accrued during the year ended December
31, 2001.

We did not make the required cash payments by July 23, 2001 and the balance due
Mr. Yang was $150,000 at December 31, 2001. Effective January 29, 2002, we
entered into a Modification Agreement of the original Settlement Agreement and
were required to issue Mr. Yang an additional 100,000 shares of our common
stock, as further described in Note 9, and pay an additional $75,000, which was
recorded as a general and administrative expense as of December 31, 2001. The
total amount due Mr. Yang of $225,000 began being repaid in February 2002 in 30
monthly installments of $7,500. The remaining payments due to Mr. Yang by fiscal
year are as follows:

Year ending December 31,

2003................................................        $    90,000
2004................................................             52,500
                                                                 ------
                                                                142,500

Current portion included in accrued liabilities                 (90,000)
                                                             ----------
Long-term obligation.............................           $    52,500
                                                             ==========

NOTE 6 - STOCKHOLDERS' EQUITY

COMMON STOCK

Beginning in November 1999 and ending in February 2000, we sold a total of
1,350,000 "units" for $0.75 a unit to investors outside the United States
pursuant to Regulation S under the Securities Act of 1933, as amended (referred
to herein as the Securities Act). Each "unit" consisted of one share of our
common stock and one warrant to purchase an additional share of common stock at
$1.25. On September 12, 2001, our Board of Directors approved a resolution to
reduce the exercise price of the warrant included with each unit to $0.35 and
effective February 23, 2002, further reduced the exercise price to $0.20 to
reflect the market price and provide an inducement for the warrant holders to
exercise the warrants. During the year ended December 31, 2001, investors
exercised warrants for the purchase of 848,243 shares with proceeds totaling
$296,885. During December 2001, we also received $8,400 for the exercise of
warrants for which shares of common stock were issued in 2002. The remaining
warrants expired March 30, 2002.

                                      F-12
<PAGE>


On March 23, 2001, we entered into a Settlement Agreement with Charles Yang,
which was subsequently modified in January 2002 as described in Note 8. In
accordance with the Settlement Agreement and subsequent Modification Agreement,
we issued a total of 500,000 shares of our common stock to Mr. Yang. The fair
value of these shares totaled $110,000 and was recorded as non-cash compensation
expense as of December 31, 2001.

During August 2001, 13,436,317 Special Warrants were converted into 13,436,317
shares of our common stock as described under Special Warrants below.

During October and November 2001, we issued 200,000 shares of our common stock
to a consultant who provided marketing and business development services to
ePHONE. We issued this same consultant 200,000 additional shares of our common
stock during 2002 as further described under non-employee stock compensation
below.

During November 2001, we issued 500,000 shares of our common stock to PITRFA,
Inc., a marketing and distribution company, as further described under
non-employee stock compensation below.

During February 2002, we negotiated a settlement agreement with a former
consultant in which we were required to issue 10,000 shares of common stock in
exchange for past services rendered. The fair value of the common stock was
$2,200 and is recorded as general and administrative expense as of December 31,
2001.

During March 2002, we issued 3,448,913 shares of our common stock for the
exercise of stock purchase warrants as further described under Special Warrants.

Also during March 2002, we issued 89,000 shares of our common stock to
consultants and two members of our Board of Directors. The fair value of the
shares totaled $23,000 and was recorded based upon the market price of the stock
on the date of issuance.

During 2002, we issued 1,106,500 shares of our common stock for the exercise of
1,106,500 stock options by our CEO and CFO at exercise prices ranging from $0.20
to $0.35 per share with proceeds to the company totaling $321,000. Six board
members also exercised options to purchase 253,200 shares of our common stock at
exercise prices ranging from $0.20 to $0.35 with the proceeds totaling $81,000.

SPECIAL WARRANTS

In early 2000, we sold a total of 13,780,837 special warrants to investors
outside of the United States pursuant to Regulation S under the Securities Act.
Each special warrant was purchased for $1.10, and each special warrant when
exercised entitled the holder to one share of common stock for no additional
consideration and one purchase warrant to purchase an additional share of common
stock for $1.60. Holders of special warrants were originally entitled to receive
up to 13,780,837 shares of common stock in the aggregate upon exercise of the
special warrants and up to an additional 13,780,837 shares of common stock in
the aggregate upon exercise of the purchase warrants. The purchase warrants
expired on March 30, 2002.

The special warrant agreements contained certain penalties in the event that we
did not meet the prescribed deadlines for registration of common stock to be
issued on the exercise of the special warrants in both Canada and the United
States. We failed to meet these deadlines, and consequently; each special
warrant holder was entitled to exercise their right to have 12.5% of their
original investment returned to them and reduce the number of special warrants
they are holding by the same percentage ("Redemption Right"). In addition, each
special warrant holder had the right to receive an additional 10% of their
original investment in shares of our common stock upon the exercise of the
special warrants. As of December 31, 2001, all special warrant holders exercised
their Redemption Right and we returned $1,894,865 to these investors.

                                      F-13
<PAGE>

On August 13, 2001 final receipts from the regulators of the British Colombia,
Alberta, Ontario and Quebec provinces in Canada were received for the
registration prospectus dated August 7, 2001. Each Special Warrant was then
deemed converted, as provided for in the special warrant agreement, into one
share of common stock and a warrant to purchase one share of common stock at an
exercise price of $1.60 per share expiring on March 30, 2002. Upon exercise of
the special warrants, taking into consideration the exercise of Redemption
Rights by all the investors, and the issuance of additional shares of our common
stock equal to 10% of the special warrant holders initial investment, we issued
a total of 13,436,317 shares of common stock and stock purchase warrants for the
purchase of up to 13,436,317 shares of our common stock for $1.60 per share to
these investors. On September 26, 2001, our Board of Directors approved a
resolution to reduce the price of the stock purchase warrants to $0.35 and
effective February 23, 2002 further reduced the exercise price to $0.20 to
reflect the market price and provide an inducement for the warrant holders to
exercise the warrants. Proceeds from the Special Warrant offering totaled
$12,149,571, net of $1,114,485 in offering costs and $1,894,865 returned to
shareholders upon the exercise of their Redemption Right.

In March 2002, the Company received approximately $690,000 for the exercise of
the stock purchase warrants issued in connection with the Special Warrants for
the purchase of 3,450,000 shares of common stock. On March 31, 2002, the
remaining warrants for the purchase of 9,115,000 shares of common stock expired
unexercised.

NON-EMPLOYEE STOCK COMPENSATION ISSUED IN EXCHANGE FOR SERVICES RECEIVED

On February 14, 2001, our Board of Directors approved the issuance of 250,000
stock options to a consultant in an exchange for services rendered. The stock
options have an exercise price of $0.50, vest immediately and expire in three
years. The market value of our common stock at the grant date was $0.23. The
fair value associated with these options totaled $42,500 and was recorded as
non-cash compensation during the year ended December 31, 2001.

During 2001, we issued 200,000 shares of our common stock and 200,000 options to
purchase shares of our common stock to a consultant as consideration for
marketing and business development consulting services rendered. The fair value
of these shares of common stock totaled $49,000 and is recorded as general and
administrative expense as of December 31, 2001. The options have an exercise
price of $0.50 and vest immediately. The fair value associated with these
options was $48,045 and is recorded as non-cash compensation expense during the
year ended December 31, 2001. During 2002, we issued this consultant an
additional 200,000 shares of our common stock and 200,000 options to purchase
shares of our common stock with terms similar to the options issued in 2001. The
fair value of the shares and options was $38,800 and $37,056, respectively, and
is recorded as general and administrative expense during the year-ended December
31, 2002.

On November 29, 2001, we entered into an exclusive Marketing and Distribution
Agreement "Agreement" with PITRFA Inc., a Florida based sales, marketing and
distribution company. As defined in the agreement, PITRFA was to market and
distribute ePHONE's prepaid 1+ long distance service for a period of three
years. Upon signing the Agreement, we issued PITRFA 500,000 shares of our common
stock. The fair value associated with these shares of common stock totaled
$97,015 and is recorded as general and administrative expense during the year
ended December 31, 2001. This agreement was mutually terminated during 2002.

The following table summarizes information for non-employee stock options and
stock purchase warrants granted for services, and issued in connection with
private placements we have completed:

<TABLE>
<CAPTION>
                                       Year Ended December 31, 2002                  Year Ended December 31, 2001
                              ----------------------------------------------- -------------------------------------------
                                                     Weighted Average Price                           Weighted Average
                                Number of Shares           Per Share            Number of Shares      Price Per Share
<S>                                  <C>                     <C>                      <C>                    <C>
Beginning balance........            17,423,758              $0.42                    4,385,684              $0.91
Granted (including Special
Warrant Conversion in 2001)
                                        200,000              $0.50                   13,886,317              $0.35
Exercised................            (3,448,913)             $0.20                     (848,243)             $0.35
Cancelled................           (13,524,845)             $0.44                           --                 --
                                   -------------    --------------                 ------------             ------
Ending balance...........               650,000              $0.50                   17,423,758              $0.42
                                   ============     ==============                 ============              =====
</TABLE>

                                      F-14
<PAGE>

EMPLOYEE STOCK COMPENSATION

On May 5, 2000, our Board of Directors adopted the 2000 Long-Term Incentive Plan
(the "Plan") and reserved 6,000,000 shares of common stock for issuance under
the Plan. The Plan provides for grants and awards of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock and
incentive shares to officers, key employees, directors, persons hired to be
employees, and who the Board determines will be officers or key employees upon
commencement of employment, and consultants or independent contractors for
rendering key services. The Board will determine the exercise price per share of
the Common Stock purchasable under a stock option and the options will have
various vesting schedules ranging from immediate vesting to vesting on specified
dates and over various periods of time. In general, options granted under this
plan will expire in ten years from the date of grant.

On September 12, 2001 our Board of Directors approved a resolution to reduce
from $0.50 to $0.35 the exercise price of 3,900,000 stock options held by
certain Board members, executive officers and former employees.

On November 15, 2002 our Board of Directors approved resolutions to reduce from
$0.35 to $0.20 the exercise price of 586,500 stock options held by certain Board
members and executive officers and to accelerate the vesting period of 581,667
stock options held by certain executive officers and a former executive officer.

On various dates during 2002, Management accelerated the vesting on 224,449
stock options held by certain employees.

Since the modifications, we have accounted for these options using variable
accounting. We have not recorded any compensation expense in connection with
these modifications since the new exercise price has been higher than or equal
to the market price.

The following table summarizes information concerning our stock options:

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                              -------------------------------------------------------------------------------------------
                                                   2002                                          2001
                              ----------------------------------------------- -------------------------------------------
                                Number of Shares     Weighted Average Price     Number of Shares      Weighted Average
                                                           Per Share                                  Price Per Share
<S>                                  <C>                     <C>                     <C>                     <C>
Beginning balance........             7,197,782              $0.40                    5,268,963              $0.81
Granted..................             1,310,000               0.34                    5,713,333               0.41
Exercised................            (1,359,700)              0.28                           --                 --
Cancelled................            (2,933,166)              0.37                   (3,784,244)              0.90
                                     -----------              ----                 -------------             -----
Ending balance...........             4,214,916              $0.42                    7,197,782              $0.40
                                   ============              =====                 ============              =====
</TABLE>

The following table summarizes information about stock options issued to
employees, outstanding at December 31, 2002:

<TABLE>
<CAPTION>
                                        Options Outstanding                              Options Exercisable
 Range of Exercise        Number of       Weighted-Average   Weighted-Average   Number Exercisable  Weighted-Average
       Prices            Outstanding         Remaining        Exercise Price                         Exercise Price
                                          Contractual Life
                      ------------------ ------------------- ------------------ ------------------- ------------------
<C>                           <C>               <C>                <C>                   <C>              <C>
$0.20 - $0.35                 3,228,800         8.08               $0.35                 2,815,800        $0.35
$0.50 - $0.50                   661,667         5.97               $0.50                   423,331        $0.50
$0.60 - $1.09                   196,449         7.38               $1.09                   196,449        $1.09
$1.19 - $1.59                    28,000         7.55               $1.44                    28,000        $1.44
                              ---------         ----               -----                 ---------        -----
                              4,214,916         7.71               $0.42                 3,463,580        $0.42
                              =========         ====               =====                 =========        =====
</TABLE>

                                      F-15
<PAGE>

SFAS No. 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as disclosed in Note 2.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option-pricing models. These models require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated value. The Company's 2002
and 2001 fair value calculation for pro forma purposes was made using the
Black-Scholes option-pricing model with the following assumptions:

The weighted-average fair values of each option at the date of grant for 2002
and 2001 was $0.19 and $0.16, respectively, and were estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used in 2002 and 2001: dividend yield of 0%;
expected volatility of 130% in 2002 and 150% in 2001; risk-free interest rate of
3.36% in 2002 and 4.08% in 2001; and expected lives of 3 years.

NOTE 7 - COMDIAL ARBITRATION SETTLEMENT AND IMPAIRMENT CHARGE

During the third quarter of 2001, we filed for arbitration against Comdial
seeking rescission of the Array Telecom License Agreement, return of the $2.65
million paid to Comdial, and compensatory and punitive damages of $10,000,000
due to what we believe were violations by Comdial of the Array Telecom License
Agreement. Comdial initially responded to our arbitration demand with a
counterclaim seeking relief from all of our claims and the payment of $215,000
in accrued royalties plus interest. Subsequently, Comdial added an additional
counterclaim alleging that the agreement was still valid and sought the value of
the future royalty payments which were to be made under the agreement. We
gave back the licensed products to Comdial, and consequently, did not believe
that we had an obligation for any additional future royalties based upon the use
of the licensed products. We also discontinued use of the Array Telecom
technology and therefore, wrote off the remaining balance of the Array Telecom
License. The net impairment charge of $1,188,383 was reflected in the
accompanying financial statements as of December 31, 2001.

On August 27, 2002, the American Arbitration Association (AAA) rejected the
Company's claim against Comdial and awarded damages to Comdial on its counter
claim in the amount of $1,730,903 and $38,192 in administrative fees. The
Company had attempted to have the award reconsidered by the AAA and to have the
award vacated by the circuit court for the county of Fairfax, Virginia. Both of
these efforts were unsuccessful. Hence, on November 13th the Company agreed to
settle the issue and pay to Comdial $1,600,000. Management believes this avoided
a very costly and lengthy appeals process with no guarantee of success and will
enable the Company to focus on its operations. This charge of $1,374,425 is
reflected in the accompanying financial statements as of December 31, 2002, net
of approximately $226,000 of arbitration cost accrued in 2001.

NOTE 8 - COMMITMENTS

Herndon Office Lease

The following is a schedule of the future payments with respect to our Herndon,
Virginia non-cancelable office lease:


Year Ending December 31,
2003.......................................    $  184,372
2004.......................................        62,060
                                                   ------

Total future minimum payments......            $  246,432
                                                  =======


Rent expense was $196,488 and $165,258 for the years ended December 31, 2002 and
2001, respectively.

As described in Note 2, the Company has been informed by the Federal Trade
Commission that they have commenced a non-public investigation relating to the
form of payment authorization for the Unlimited Domestic Calling Program.

                                      F-16
<PAGE>

NOTE 9 - INCOME TAXES

No provision for US federal or state income taxes have been recorded in any
period due to our net operating loss carry forward

Deferred income taxes reflect the net effects of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
deferred income tax assets for federal and state income taxes are as follows:

Income Taxes

                                                  2002            2001
                                                  ----            ----
Deferred income tax assets (liabilities):
   Book basis in property over tax basis       $   (191,000)     $        --
   Investment writedown                             343,000          343,000
   Non-cash compensation                            557,000          543,000
   Net operating loss carryforward                6,334,000        6,407,000
   Other                                            234,000           46,000
                                                -----------      -----------

                                                  7,277,000        7,339,000
Valuation allowance                              (7,277,000)      (7,339,000)
                                                -----------      -----------

Net deferred tax asset                         $         --      $        --
                                                -----------      -----------


Reconciliation between actual tax expense and tax computed at the statutory
Federal rate of 34 percent for 2002 and 2001 are as follows:

                                                     2002             2001
                                                  ---------------------------
     U.S. Federal Income tax rate at 34%        $   171,000     $  (2,387,000)
     State taxes, net of federal tax benefit         25,000          (351,000)
     Change in valuation allowance                  (62,000)        2,845,000
     Expenses not deductible for tax purposes         7,000            12,000
     Adjustment for prior year taxes               (141,000)         (119,000)
                                                  ---------------------------

     Income tax provision (benefit)             $       --      $          --
                                                  ---------------------------

Realization of deferred tax assets is dependent upon future earnings, if any. We
have recorded a full valuation allowance against our deferred tax assets since
we believe it is more likely than not that these assets will not be realized. No
income tax benefit has been recorded for all periods presented because of the
valuation allowance.


At December 31, 2002, we have available, for U.S. income tax purposes, net
operating loss carryforwards of approximately $16,240,000 which can be used to
offset future taxable income through 2019. There can be no assurance that we
will realize the benefit of the net operating loss carryforward. In addition,
our utilization of our net operating loss carryforward may be limited pursuant
to Internal Revenue Code Section 382, due to cumulative changes in ownership in
excess of 50% within a three year period.





                                      F-17