UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   Form 10-KSB

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF
      1934 For the fiscal year ended: December 31, 2000

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

Commission file number: 000-27669


                              ePHONE Telecom, Inc.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its charter)

              Florida                              98-0204749
----------------------------------    ---------------------------------------
  (State or other jurisdiction of        (IRS Employer Identification No.)
   incorporation or organization)

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

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

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

       (Title of Class)             Name of each exchange on which registered
------------------------------      -----------------------------------------
Common shares $0.001 par value                         None

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

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

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  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. |_|

The issuer had revenues of $589,823 for its most recent fiscal year.

<PAGE>

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates  was  approximately  $3,334,000 as of December 31, 2000 (based on
the average bid and asked price of such common equity).

The issuer has not been involved in a bankruptcy proceeding during the past five
years.

As of December 31, 2000 there were 17,453,848 shares of the registrant's  common
stock, par value .001 per share outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.

Transitional Small Business Disclosure Format (Check one): Yes ____; No |X|




<PAGE>



                                Table of Contents

PART I

   Item 1.   DESCRIPTION OF BUSINESS...........................................3
   Item 2.   DESCRIPTION OF PROPERTY..........................................11
   Item 3.   LEGAL PROCEEDINGS................................................11
   Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............11

PART II

   Item 5.   MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.........12
   Item 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........12
   Item 7.   FINANCIAL STATEMENTS.............................................17
   Item 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
             FINANCIAL DISCLOSURE.............................................17

PART III

   Item 9.   DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS..17
   Item 10.  EXECUTIVE COMPENSATION...........................................20
   Item 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...24
   Item 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................27
   Item 13.  EXHIBITS AND REPORTS ON FORM 8K..................................29

SIGNATURES....................................................................31

Supplemental  information to be furnished With Reports Filed Pursuant to Section
15(d) of the Exchange Act by Non-reporting Issuers............................34

ePHONE Telecom Inc. - Financial Statements as of December 31, 2000...........F-1



                                       2
<PAGE>


Forward Looking Statements

Certain  information in this Report  including  statements  made in "Managements
Discussion  and  Analysis",  "Plan  of  Operations",  "Business"  and  elsewhere
contains  "forward-looking  statements" within the meaning of Section 21E of the
Securities  Exchange  Act  of  1934,  as  amended.  All  statements  other  than
statements of historical fact are  "forward-looking  statements" for purposes of
these  provisions,  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
statement  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 Telecom,  Inc. (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:

         |X|      Expectations  and  estimates  as to  completion  dates  of the
                  Network of  Regional  gateways  ePHONE is  installing  and the
                  Network.

         |X|      ePHONE's ability to implement successfully ePHONE `s operating
                  strategy as defined in the business plan of ePHONE.

         |X|      Future  financial   performance  as  estimated  in  ePHONE  `s
                  financial projections.

         |X|      Inaccuracies  in ePHONE `s  forecasts  of  customer  or market
                  demand

         |X|      Highly competitive market conditions

         |X|      Changes  in  or  developments  under  laws,   regulations  and
                  Licensing   requirements   in  regions  ePHONE  is  installing
                  gateways

         |X|      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 our  forward-looking  statements not be correct
and cause our  actual  results  to  materially  vary  from  projections  made in
forward-looking  statements  are set forth in Section E (Risk Factors) of Item 5
below.

                                       3
<PAGE>

                                     PART I

Item 1.       DESCRIPTION OF BUSINESS

         A. Overview

ePHONE was incorporated pursuant to the laws of the State of Florida,  effective
May 3, 1996, as IRA Fund Brokers  Corp.,  changed its name to IFB Corp. on April
6, 1998,  and on March 22, 1999, IFB Corp.  changed its name to ePHONE  Telecom,
Inc.

On March 31, 2000,  ePHONE Telecom entered into a Strategic  Alliance  Agreement
and License  Agreement with Comdial  Corporation  ("Comdial")  and Array Telecom
Corporation  ("Array  Telecom"),   a  wholly  owed  subsidiary  of  Comdial.  In
connection with these agreements ePHONE acquired certain fixed assets from Array
Telecom and obtained an exclusive  license for Comdial's Array Series 3000 Voice
over Internet Protocol (VoIP) gateway technology for a period of 5 years.

In  November  2000,  pursuant  to  written  consents  received  from  holders of
approximately  57% of the  outstanding  common  stock of  ePHONE,  the number of
directors  of ePHONE was  increased  from five to nine.  The four new  directors
elected by these shareholders are Robert G. Clarke,  former Chairman,  President
and Chief Executive Officer of ePHONE, Anthony F. Balinger, President of 7bridge
Systems  Ltd. of Hong Kong,  Charlie  Rodriguez  and Walter  Pickering  who have
served  as   Directors   of  other   public   companies,   including   Waverider
Communications Inc.

Effective  December 1, 2000,  ePHONE accepted the  resignations of Row Zadeh and
Bahram Ossivand as directors of ePHONE. ePHONE has also accepted the resignation
of Mr. Zadeh as President and Chief Executive  Officer and Mr. Ossivand as Chief
Financial  Officer.  Robert G. Clarke has been  appointed  as the new  Chairman,
President and CEO of ePHONE and Charlie  Rodriguez  has been  appointed as Chief
Financial Officer and Vice President - Corporate Affairs.

In connection  with  departing  ePHONE,  Mr. Zadeh,  together with certain other
current employees of ePHONE, has formed a new company named ePHONE Technologies,
Inc. ePHONE and ePHONE  Technologies have entered into a Support and Development
Agreement under which ePHONE Technologies has agreed to provide certain software
development and technical support services to ePHONE. As part of the Support and
Development Agreement,  ePHONE has made an investment in ePHONE Technologies for
which ePHONE received a 20% ownership interest in ePHONE Technologies.

During 2000, ePHONE has derived  approximately  $0.6 million in revenue from the
sale of Array Series 3000  gateways to  equipment  customers  who are  primarily
other network  operators and are not in competition  with ePHONE in market niche
or geographical  focus. On the services side ePHONE `s network has been deployed
in  a  limited  manner  and  is  currently  in  the  testing  phase,  not  fully
operational,  and hence have not yet received any long-distance  voice telephony
services based revenue to date.  ePHONE's vision is to be a leading  provider of
managed  Internet  based  telephony  services  with  applications  that  utilize
convergent  technologies combining voice, data and video transmission over an IP
network.

                                       4
<PAGE>

         B. Strategic Plan

ePHONE's strategy is to deploy and manage a global Internet  telephony  services
network and to create Internet telephony solutions and products.  ePHONE intends
to market and sell these  products  through key  partnerships  while  increasing
shareholder valued by delivering growth in revenue and profit.

The full  services  network  will be owned and  operated by ePHONE.  Some of the
components of the full services  network  include,  Points of Presence (POPs) in
key  cities/locations  in the world,  global  call  termination  capability  and
agreements,  ePHONE Network Operations Center (eNOC), back end processes such as
Settlement and Billing,  reporting  functions and second level customer services
functions.

ePHONE's  technology  platform  is the Array  Series  3000 Voice  over  Internet
Protocol  gateway.   The  Series  3000  gateway  software   technology  and  the
integration with specialized telephony and digital signal processing hardware is
in its third  generation  from when it was first  developed in 1996. The systems
platform  is  based  on  general-purpose  computers  utilizing  the  Windows  NT
operating  system.  ePHONE utilizes this gateway or switch as Points of Presence
(POPs) in ePHONE's global network in the offering of  long-distance  services in
the regions where a POP is deployed.

The Array  Series  3000  Internet  telephony  gateway/router,  which  includes a
calling card  platform and  integration  of the gateway  with  customer  premise
devices for direct-dial  services  comprise the main areas of technology  ePHONE
possesses today. The long distance  telephony  services  originate from end-user
customers in a country or region by:

         (1)      Calling the regional  gateway  from any PSTN phone,  including
                  pay phones, thus utilizing the Prepaid Calling Card service.

         (2)      Connecting  over IP to the  regional  gateway  by  means of an
                  on-site IP gateway device thus  utilizing the Business  Direct
                  service.

         (3)      Automatically  dialing the  regional  gateway  and  performing
                  authentication by means of an on-site programmable auto-dialer
                  from a  business  or  residential  phone  thus  utilizing  the
                  Business or Residential Connect service.

In all cases above,  the gateway obtains the user's  authentication  information
such as account  number and PIN,  authenticates  the user from  information in a
centralized database, takes the user's destination telephone number and based on
a pre-identified  routing table sends the call over Internet  protocol to the IP
address of the gateway that will complete the call,  or where an ePHONE  gateway
is not  installed  send the call to the  least  cost  call  termination  partner
network for completion.

ePHONE is confident that it has significant  business potential in long distance
telecommunications  over the Internet  where ePHONE can pass on savings  derived
from its innovative technology based network to entice early adopting customers.
To date ePHONE has a limited global  network  including key cities in Europe and
North America and worldwide call termination agreements and capability in place.

                                       5
<PAGE>

         C. Network Infrastructure

ePHONE's  global  network is  operated  and  managed  by  ePHONE's  own  Network
Operations Center (eNOC). This center will provide regional ePHONE partners with
the  ability to sign up  customers  instantly,  dispatch  service  for  customer
installation or maintenance  needs,  respond to customer service  questions with
instant  information such as call detail records and provide other  second-level
support.

In  the  deployment  of the  global  VoIP  network  ePHONE  needs  to  form  key
partnership agreements for the following network services.

                  (1)      Co-location Facility:  ePHONE has to situate its VoIP
                           gateway  at major  cities  where it intends to have a
                           presence.  Co-location companies provide the physical
                           facility,  environmental conditions for computing and
                           network equipment,  redundancy in  telecommunications
                           -- PSTN or IP - circuits, rack space, etc. ePHONE has
                           agreements   with   the   following   companies   for
                           co-location of its gateway/switches:

                           Interxion for Frankfurt and Amsterdam

                           Cignal for  Brussels  (currently  being  relocated to
                           Level3)

                           WorldCom for Rotterdam  (location  being  deactivated
                           due to presence in Amsterdam)

                           Ursus for Sunrise, Florida (currently being deployed)

                           GTS for Warsaw

                  (2)      Internet  Service   Provider:   At  each  co-location
                           facility  ePHONE  `s   gateway/switches   require  IP
                           connectivity   typically   provided  by  ISPs.   This
                           provides  for  the  virtual   backbone   (the  public
                           Internet)  of  ePHONE's  network.  This  connectivity
                           provides   for  a  guaranteed   throughput   that  is
                           burst-able  to higher  amounts  for  occasional  peak
                           usage.  ePHONE  has  agreements  with  the  following
                           companies for IP connection to its gateway/switches:

                           WorldCom  for its Herndon  switch,  Rotterdam  (to be
                           decommissioned), and Sunrise for its Florida switch

                           Abovenet for its Frankfurt switch

                           Cignal for its Brussels switch (currently being moved
                           to Level3)

                           Carrier1 for its Amsterdam switch

                           EBone for its Warsaw switch

                                       6
<PAGE>

                  (3)      Local PSTN Connectivity: At each co-location facility
                           ePHONE's  gateway/switches  are also connected to the
                           local public  switched  telephone  network  ("PSTN").
                           This way calls originating from homes, businesses and
                           pay  phones  can  be  directed  to the  local  ePHONE
                           switch.  Conversely, an ePHONE switch can terminate a
                           call originating in another city using the local PSTN
                           connection.  ePHONE has agreements with the following
                           companies   for   local   PSTN   connection   to  its
                           gateway/switches:

                           Teleglobe and XO for its Herndon switch

                           Colt Telecom for its Frankfurt and Brussels switch

                           Worldcom for its Herndon  switch and Rotterdam (to be
                           decommissioned)

                           Carrier1 for its Amsterdam switch

                           GTS for it Warsaw switch

                  (4)      Long  Distance  Re-file  Connectivity:   At  selected
                           co-location facilities ePHONE `s gateway/switches are
                           connected   to   long   distance   telecommunications
                           provider(s)  for  termination  of calls  at  ePHONE's
                           choice for least cost  routing.  Even in cities where
                           ePHONE  has  a  gateway   deployed  it  may  be  more
                           economical  to  complete  a call  via  long  distance
                           re-file. Such companies may provide lower termination
                           costs   due   to   their   volume   commitments   and
                           interconnect    agreements   with   local   telephone
                           companies.   Such  interconnect   agreements  usually
                           require a physical network infrastructure (e.g. under
                           ground fiber, satellite bandwidth,  etc.) to be owned
                           or leased by such a company.  This type of  agreement
                           is also  necessitated  by the fact  that  during  the
                           phased  implementation  of ePHONE `s network and even
                           after  ePHONE `s planned  network  has been  deployed
                           there will be  areas/cities in the world where ePHONE
                           will not have a gateway/switch  deployed.  ePHONE has
                           agreements  with  the  following  companies  for long
                           distance re-file connection to its gateway/switches

                           Teleglobe for its Herndon switch

                           Interxion for its Frankfurt switch

                           Ursus for its Sunrise, Florida switch

In conjunction with network services partners, ePHONE network points of presence
are currently operational in the following cities:

                                       7
<PAGE>

                           Brussels, Belgium,

                           Rotterdam, Netherlands

                           Frankfurt, Germany

                           Herndon-Virginia, USA,

         D. Sales Partners

ePHONE has Sales Partner agreements signed with the following companies:

TeleMax  Communications  for Prepaid  Calling Card  services in Europe:  TeleMax
Communications   Inc.   provides  a  broad  range  of  innovative,   convenient,
cost-effective,  integrated  prepaid  telecommunications  products and services.
TeleMax  utilizes  years of  marketing,  sales and  distribution  experience  to
produce a variety of innovative products carefully designed and tested to target
specific  needs of the customer.  For more  information  about  Telemax,  go to:
http://www.telemaxcanada.com

Innofone  Canada for wholesale  termination of long distance  traffic:  Innofone
develops and operates proprietary added value telecommunications  programs, on a
turnkey,  third party basis for major  institutional  players who are leaders in
financial institutions, online services - ISP's and national retailers. Innofone
programs are designed to add value to customer  relationships  by leveraging the
established  brand  loyalty  and  distribution  channels  of its major  industry
partners.

Tele1 Poland for Prepaid  Calling  Card,  and  Residential  Connect  services in
Poland and other selected  European  countries:  Tele1 is a leading  provider of
prepaid  calling  card  services  in Poland who will  utilize  ePHONE's  prepaid
calling  card  platform  and Internet  telephony  services in marketing  its own
prepaid  calling card products in Poland.  Tele 1's sister  company  Millennium,
Inc.  has also  signed a  distribution  agreement  with  ePHONE for the sales of
prepaid calling cards in other selected countries in Europe and North America.

7bridge  Systems Ltd of Hong Kong for gateway  equipment and global  termination
services.   7bridge,   headquartered   in   Hong   Kong,   is  a   provider   of
telecommunication  services in the Asia Pacific region. 7bridge is developing an
Asian-wide  network for IP telephony  and  value-added  services.  The company's
management team has established business  relationships with  telecommunications
companies  throughout  the Asian  markets to provide  service  solutions  to its
customers.  7bridge  Systems  Ltd.  of Hong  Kong is a  related  party to ePHONE
because  certain of the  executive  officers  and  directors  of ePHONE are also
executive officers and directors of 7bridge Systems Ltd.

PPI-ETC of Poland for Prepaid Calling Card, Business Direct and Business Connect
services in Poland: PPI-ETC Poland Sp. Z.o.o. Group is a distributor of wireless
phones and provides repair services to major wireless phone equipment  companies
in addition to  distribution  of other  office  equipment.  PPI-ETC  maintains a
significant distribution network for its telecommunications  products throughout
Poland.

                                       8
<PAGE>

AlfaBit of Romania  for  gateway  equipment  and  global  termination  services:
AlfaBit Romania is currently  engaged in several  businesses;  AlfaBit is one of
the largest  distributors  of Motorola  equipment in Romania and owns towers for
and operates two-way radio  communications  services.  AlfaBit also offers store
and forward fax over IP services to businesses in Romania.

Scarlet Telecom of the Netherlands  for Prepaid Calling Card,  Business  Direct,
Business and Residential  Connect  services in Netherlands,  Belgium and France:
Scarlet Telecom is a North-European web-based service provider,  offering a wide
range of services, including voice and Internet connectivity.  Scarlet is one of
the five largest  Dutch telecom  companies  offering a wide range of services to
businesses and the community.  Today Scarlet is a flourishing  telecom  business
employing  over a hundred  people and servicing  more than seventy five thousand
subscribers.

         E. Suppliers

A significant  amount of  technology  will be required to create the network and
deliver  services  to  end-users.  ePHONE  will need to  contract or acquire the
technical  expertise to create some  components of its network.  EPHONE plans to
partner with other  companies that provide the required  technology and can meet
the specified requirements. ePHONE does not believe that it will have difficulty
identifying  and  obtaining  the  business or technical  expertise  necessary to
complete its network.  The necessary hardware components are currently available
from commercial  suppliers.  A list of potential suppliers ePHONE has identified
is as follows.

              Infozech

Infozech,  based in  India,  provides  a billing  system  for IP  gateways.  The
Infozech   system  was  found  to  provide   sufficient   capabilities  to  meet
requirements.  Additionally,  Infozech is willing to  customize  its products to
meet specific  requirements.  The main reason for the selection of Infozech as a
provider of billing  software is that  Infozech  has  integrated  their  billing
software with Array's  Series 3000  products.  ePHONE does not have an agreement
with Infozech and propose to purchase  software  programs as needed at prices to
be negotiated from time to time.

              TEK DigiTel

TEK  DigiTel  has been  selected as the  manufacturer  of  embedded  CPE gateway
devices.  TEK DigiTel  manufactures  a product  named the V-Server  iGate.  This
product is a two-port embedded  gateway,  with support for H.323 and proprietary
network protocols.  On the telephony side, the TEK DigiTel product supports both
analog trunk and analog station interfaces.  It also provides two ports (both of
which can either be a station port or a trunk port,  simply by connecting to the
appropriate  port).  TEK  DigiTel  indicates  that  larger  capacity  boxes  are
currently being developed and tested.

For the  connection  to the IP network,  TEK DigiTel  provides two  options:  an
Ethernet  + ISDN BRI  interface  which  allows the TEK  DigiTel  box to act as a
router of traffic between the Internet and local LAN, as well as a Dual Ethernet
version.  The V-Server iGate is priced  reasonably and provides the capabilities
not found in many of the competing products.

                                       9
<PAGE>

ePHONE is currently  performing the  interoperability  and functional testing on
the  TEK  DigiTel   V-Server  iGate  products.   The  testing   revolves  around
interoperability  of the 2 port CPE  devices  with the Array  Telecom  gateways,
Array Telecom large CPE devices,  and with the Infozech  billing  software.  The
results of these tests indicate that the above  technologies  are  interoperable
with one  another,  as well as with the  billing  software.  Further  testing is
underway to verify the ISDN wakeup features described above.

            Other Suppliers

The sections  above  described  the  suppliers of key pieces of equipment in the
network, but did not deal with commodity items such as monitors, keyboards, etc.
However,  ePHONE expects to use the following additional suppliers.  No specific
agreements have been negotiated with these suppliers as of yet.

         F. Competition

ePHONE expects to face competition from larger international  telecommunications
carriers such as AT&T Corp.,  and Internet  service  providers  (ISPs) and other
Internet  companies such as America Online,  Inc. and Yahoo,  Inc. Many of these
potential  competitors have substantially greater financial and other resources.
In addition,  consolidation of telecommunications companies and the formation of
strategic  alliances  within the  telecommunications  industry will give rise to
significant new competitors.

For the present, the following are the main competitors:

            The Internet Telephone eXchange Carrier (ITXC)

ITXC will be a major competitor.  ITXC is a clearinghouse for Internet telephony
service providers and operates ITXC.net. Since April of 1998, ITXC has been used
to provide traditional carriers' international call completion with quality good
enough for these carriers to serve their phone-to-phone  customers. ITXC has, as
of January 2000,  reportedly  installed 167 POPs in 45 countries and 101 cities.
ITXC adds between 5-9 POPs a month.

             iBasis

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

             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  develops its own Gateway  technology for IP voice services offered by
the company.

                                       10
<PAGE>

Recognized  as the  company  who first  bridged  the  Internet  with the  public
switched  telephone  network,  Net2Phone routes millions of minutes monthly over
the public Internet.  According to a recent study by Frost & Sullivan, Net2Phone
leads the Internet telephony services industry with 30% market share.

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
30 countries and expects to be operational in 25 additional countries by the end
of 2000.

            DeltaThree.com

Founded in 1996,  DeltaThree.com 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.com  currently  operates  a  network  of  37
international POPs.  DeltaThree.com is a subsidiary of RSL Communications  Ltd.,
an international facilities-based carrier.

Deltathree.com  operates  a managed  network.  According  to Frost &  Sullivan's
recent  study,  Deltathree.com  routes  17% of all  Internet  telephony  traffic
worldwide.

         G. Government Approvals and Regulations

ePHONE  will  not  attempt  to enter  into  any  market,  which  is  subject  to
regulation,  without  first  determining  that  it can  satisfy  the  regulatory
requirements of operating in such jurisdiction.

In order to conduct telephony business in the United States, ePHONE will have to
prepare and file  applications  and  associated  tariffs for  international  and
interexchange telecommunications certification before the Federal Communications
Commission and State Commissions, respectively.

The need for  licenses  in Europe  may depend on whether  ePHONE  operates  as a
foreign  company in those  locations  or whether  it works with  licensed  local
partners,  and no specific  decisions or arrangements have yet been made in this
regard.

         H. Patents, Trademarks and Royalty Agreements

EPHONE does not have any patents, trademarks, licenses or protective agreements,
other than the license previously  described regarding the products,  technology
and trademarks of Array Telecom and the licenses granted to 7Bridges. The ePHONE
logo has been trademarked in Canada.

         I. Research & Development Activities

To date,  ePHONE has spent  approximately  $723,560 on research and  development
activities related to business,  as previously  described.  There is no specific
allocation  of any of those  costs to future  customers  -  although  it will be
ePHONE's  objective to charge for products and services in sufficient amounts to
recover research and development costs.

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<PAGE>

         J. Employees

As of December  31,  2000,  ePHONE had 25  full-time  employees  in the Herndon,
Virginia office. In addition,  ePHONE had several individuals providing services
as  independent  contractors  or  consultants.  As the business and  development
efforts expand,  additional personnel will be engaged, either as employees or as
contract service suppliers.

Item 2.           DESCRIPTION OF PROPERTY

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  $14,500 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

Mr.  Charles Yang joined ePHONE in July 1999,  as President and Chief  Operating
Officer in part due to Mr. Yang's strong  representations that he could bring to
ePHONE  extensive  business  connections,  and that those  connections  could be
converted into sales for ePHONE. The Board subsequently  concluded that Mr. Yang
did not have the potential that they originally  believed he had - which is part
of the reason for the breakdown of the  relationship  with Mr. Yang. For further
information  regarding  ePHONE `s  relationship  with Mr. Yang, see Section B of
Item 12 below.

Mr. Yang ceased providing  services to ePHONE as of January 31, 2000. Mr. Yang's
positions  as  President  and Chief  Operating  Office of ePHONE  were  formally
terminated  March 9, 2000.  His employment  agreement is now in arbitration  and
ePHONE does not believe itself to be bound by it.

During 1999,  ePHONE accrued a liability  totaling $300,000 in connection with a
settlement  offer made to Mr. Yang to resolve this matter.  To date Mr. Yang has
not accepted or rejected  this  settlement  offer and the claim is scheduled for
arbitration  in  California  during June 2001.  Based on review of the facts and
circumstances,  management  has provided for what is believed to be a reasonable
estimate at exposure to loss associated with this claim. While acknowledging the
uncertainties  of  arbitration,  management  believes  that this  matter will be
resolved without  material effect to ePHONE `s financial  position or results of
operations.

Other than disclosed above, ePHONE is not involved in, nor has knowledge of, any
threatened or pending legal proceedings against it.

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

None

                                       12
<PAGE>

                                     PART II

Item 5.       MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Since June 12, 2000 and prior to December 15, 1999,  the common shares 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 as  reported  by  publicly
available   sources  to  which  ePHONE  has  access.   The  quotations   reflect
inter-dealer   prices  and  do  not  represent   retail   mark-ups,   markdowns,
commissions, and may not reflect active transactions.

           YEAR AND QUARTER          HIGH BID $           LOW BID $
           ----------------          ----------           ---------

       1999

                1st Quarter             $0.63               $0.50
                2nd Quarter             $2.13               $1.25
                3rd Quarter             $3.13               $0.75
                4th Quarter             $1.65               $0.59
       2000

                1st Quarter             $4.23               $0.75
                2nd Quarter             $2.93               $1.10
                3rd Quarter             $1.66               $0.91
                4th Quarter             $0.94               $0.25

As of  December  31,  2000 there were 47 holders of record of the common  stock.
This does not reflect  persons or entities  that hold stock in "Street"  name or
through various brokerage firms.

EPHONE has not paid any cash  dividends  on common  stock and 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.

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

         A. Plan of Operation

Management's  primary  focus in 2001 is to  continue to build the network and to
begin the principal  business  operations - the  generation  of voice  telephony
services revenue.

                                       13
<PAGE>

ePHONE has begun the market test of Prepaid Calling Card services in Belgium and
Germany and is developing  and testing  Business  Direct,  Business  Connect and
Residential Connect direct dial long-distance  services for these cities. ePHONE
also  plans  to  provide  wholesale  termination  of voice  traffic  for a North
American partner.

In the first quarter of 2001 POPs will be deployed in the following cities.

         Amsterdam, Netherlands
         London, UK
         Warsaw, Poland

ePHONE has plans on expanding its network to the  following  cities in Europe in
the year 2001 and is  working  to  establish  a network  of  partners  with call
origination and call termination needs.

         Austria - Vienna
         Denmark - Copenhagen
         France - Paris
         Germany - Munich
         Greece - Athens
         Italy - Milan and Rome
         Ireland - Dublin
         Portugal - Lisbon
         Spain - Madrid and Barcelona
         Sweden - Stockholm, and
         Switzerland - Geneva

ePHONE is also  planning  on  expansion  to  Argentina  and  Uraguay  in 2001 as
situations permit.

The location of the planned service  deployment areas may change, and new ePHONE
cities may be added in 2001, depending on regulatory and licensing  requirements
or recruitment of regional partners.

Based on existing  contracts,  ePHONE  expects to generate its first  commercial
traffic and revenues in the first quarter of 2001,  building to a monthly volume
of  10,000,000  minutes by December,  2001.  By the end of the year, in order to
carry 10 million minutes, ePHONE will have deployed 13 gateways.

We expect to hire up to 10  additional  full-time  employees  as we roll out our
plan of operations in 2001.  Additional personnel are needed to expand our human
resources in the area of software  development,  system design &  configuration,
installation, customer support, product marketing and accounting.

         B. Liquidity and Capital Resources

ePHONE has funded operations through equity financing,  and does not have a line
of credit or similar credit facility available to it.

                                       14
<PAGE>

ePHONE must rely on its ability to raise money through  equity  financing to set
up ePHONE `s global network, which is the vital part of ePHONE `s business plan.
The  majority  of  funds  raised  will be  allocated  to the  deployment  of the
technology, operating costs and marketing activities.

In a private placement ending in February 2000, ePHONE 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 for net proceeds of $1,012,500.

Also, in the first quarter of 2000, ePHONE offered special warrants at $1.10 per
warrant in a Regulation S private placement.  Each special warrant (the "Special
Warrant") entitled the holder to receive one share of common stock and one share
purchase warrant exercisable at $1.60 within 24 months.

On March 31,  2000,  ePHONE  closed  the first  portion  of the sale of  Special
Warrants,  on April 7, 2000,  closed the sale of a second portion of the Special
Warrants,  and on April 20,  2000,  closed the sale of the final  portion of the
Special Warrants. ePHONE received net proceeds from the sale of Special Warrants
of approximately  $12,205,000.  The total number of Special Warrants ePHONE sold
in this offering was 13,780,837.

The special warrant  agreements  contained  certain  penalties in the event that
ePHONE does 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.  ePHONE failed to meet these deadlines,  and  consequently;  each
special  warrant  holder is 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 will receive an additional 10% of their
original investment in shares of common stock of ePHONE upon the exercise of the
special  warrants.  As of December 31, 2000,  certain  special  warrant  holders
exercised their Redemption  Rights,  with ePHONE  returning  $1,315,430 to these
investors.  Management  believes that the remaining special warrant holders will
exercise  their  Redemption  Right  and  that  ePHONE  will  have to  return  an
additional  $579,435,  which is accounted for as restricted cash at December 31,
2000.  Accordingly,  ePHONE has recorded this amount as an accrued  liability in
the accompanying balance sheet at December 31, 2000.

On March 31, 2000,  ePHONE  entered into a Strategic  Alliance  Agreement  and a
License  Agreement  with  Comdial  Corporation  ("Comdial")  and  Array  Telecom
Corporation  ("Array  Telecom"),  a  wholly  owned  subsidiary  of  Comdial.  In
connection with the Agreement and the License, ePHONE made an initial payment to
Comdial of  $2,650,000.  As part of the  Agreement,  ePHONE  received  the fixed
assets of Array Telecom, with a book value of approximately $431,000 and assumed
the lease of Array  Telecom's  Herndon,  Virginia  facility.  The License grants
ePHONE  an  exclusive  license  for all  Voice  over  Internet  Protocol  (VoIP)
technology  that has been developed by Array Telecom for a period of five years.
The  difference  between the amount  paid to Comdial and the amount  recorded as
fixed  assets  totaled  $2,219,000,  and  represents  the value of the  licensed
technology and is recorded as an intangible asset.

In connection with the License Agreement entered into with Array Telecom, ePHONE
is required to pay an additional $2,180,000 for the VoIP technology over 5 years
with minimum  payments of $180,000 due in the first year and $500,000 in each of
the next four years.  Additional  royalty payments will be payable to the extent
that 2% of gross sales as defined in the Agreement  exceed minimum  payments for
the VoIP technology.  As part of the  arrangement,  ePHONE also agreed to pay an
additional  amount of $350,000 to employees of Array Telecom as compensation for
benefits  forfeited  by  them  as a  result  of the  creation  of the  Strategic
Alliance.

                                       15
<PAGE>

During 2000,  operating  activities  consumed  $4,145,000  of cash. In addition,
ePHONE used $6,812,000 of cash in investing  activities,  which consisted of the
purchase of investments, net of redemptions, deposits to restricted cash, net of
repayments,  the  purchase  of  fixed  assets,  the cost of  termination  of two
executive  officers and the investment in ePHONE  Technologies,  Inc.  totalling
$880,000,  and the purchase of the Array Telecom  license.  ePHONE  received net
cash inflows of $12,400,000 from the sale of common stock and special  warrants.
Cash outflows from both operating  activities and investing  activities  will be
significantly  reduced  during  2001.  At December  31, 2000 ePHONE had cash and
investments totaling $3,697,000, and restricted cash of $579,000, which has been
set aside for redemption by the remaining  Special  Warrant holders at 12.5 % of
their initial  investment.  The only significant planned operation and investing
activities  outside of general  operations  are the minimum  royalty  payment of
$500,000 to Array Telecom and $500,000  paid to Innofone in connection  with the
marketing and networking services agreement with this company,  which may not be
repaid  pursuant to the agreement.  This leaves  $2,696,000 of current funds for
operations.  Management  believes that this amount is sufficient to enable it to
operate until at least the fourth  quarter of 2001, by which time it anticipates
having raised additional equity  financing.  However,  such financing may not be
available when needed or, if available, may not be on terms favorable to ePHONE.
If  additional  funds are raised  through  issuance  of equity  securities,  the
existing stockholders may experience significant dilution.

Current  Liabilities at December 31, 2000 were  $1,504,000,  of which $1,169,000
was accrued liabilities.  Of the accrued liabilities,  the amount of $579,000 is
for the redeemable Special Warrants.

On January 19, 2001 in a subsequent  event,  ePHONE entered into a Marketing and
Networking Services Agreement with Innofone.com (INNF-a company listed in NASDAQ
pink sheets).  This Agreement allows for the two companies to start  cooperating
in  enhancing  ePHONE  `s voice  over  Internet  Protocol  (VoIP)  network  with
termination traffic resulting from Innofone's  marketing programs.  In addition,
ePHONE and Innofone.com will pursue new marketing  programs  including  personal
computer  to  phone  voice  services,  packaging  calling  cards  in  Innofone's
fulfillment kits and other new products and services. ePHONE paid Innofone.com a
set-up fee totaling  $500,000.  Innofone.com  has agreed to repay this amount to
ePHONE  within 90 days of the  agreement  date.  If such  amount is not  repaid,
ePHONE may, at its option,  convert the amount into shares of Innofone's  common
stock at $0.25 per share and a warrant to purchase an additional  share at $0.75
per share. The Agreement expires December 31, 2010.

         C. Stock Compensation Activity During 2000

On May 5, 2000, the Board of Directors adopted the 2000 Long-Term Incentive Plan
and  reserved  6,000,000  shares of common  stock for  issuance  under the Plan.
During 2000,  ePHONE granted  1,500,000 stock options to two officers of ePHONE,
which  vested on the grant  date with the  exercise  price  less than the market
price at grant date. In accordance  with APB 25,  ePHONE  recorded  compensation
expense  totaling  $2,865,000.  These two officers  terminated  employment  with
ePHONE in December 2000 and a total of 6,747,307 stock options were cancelled as
provided for in the officers'  Separation  Agreements.  The balance of 5,247,307
stock  options did not vest during the year and hence did not have any impact on
the financial statements.

                                       16
<PAGE>

On May 9,  2000,  ePHONE  granted  345,000  shares of common  stock to  Cornwall
Management  Ltd.  as  partial   consideration  for  services  rendered  under  a
consulting  agreement.  The fair value of the shares  totaled  $604,000  and was
recorded  as a non-cash  compensation  expense for the year ended  December  31,
2000.

On May 24, 2000, for a detailed  analysis of Internet  Protocol  development and
market  opportunities in various major countries,  ePHONE granted  Sobois-Livert
Investment  Corporation  warrants to purchase  250,000 shares of common stock at
$0.60 per share and, as agreed to, upon completion of the consulting  engagement
and delivery of certain reports,  additional warrants to purchase 488,833 shares
of common  stock at $1.10 per  share.  Both sets of  warrants  expire on May 24,
2002. The fair value of these warrants totaled $299,000 and has been recorded by
ePHONE as non-cash compensation  included in general and administrative  expense
during 2000.

On July 12, 2000,  ePHONE `s Board of Directors  voted to rescind a  performance
share plan previously  adopted in 1999 pursuant to which up to 15,000,000 shares
of ePHONE  common  stock  would  have been  issued.  Concurrently,  the Board of
Directors  agreed to grant for no additional  consideration a total of 3,666,448
shares of ePHONE common stock in consideration to certain  individuals who would
have been eligible to receive shares of common stock under the performance share
plan.  ePHONE  recorded a  $3,700,000  charge  related to the  granting of these
shares of common stock.

         D. New Accounting Pronouncements

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities".  This  Statement  requires  companies to recognize all
derivatives as either assets or liabilities,  with the  instruments  measured at
fair value. The accounting for changes in fair value and gains or losses depends
on the  intended  use of the  derivative  and  its  resulting  designation.  The
statement was  originally  effective for fiscal years  beginning  after June 15,
1999. In July 1999, FASB delayed  implementation  of this standard for one year,
to June 30,  2000.  ePHONE  will  adopt  SFAS 133 in the first  quarter of 2001.
ePHONE believes that the  implementation  of SFAS 133 will have no effect on its
financial statements.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  No.  101,  "Revenue  Recognition  in  Financial  Statements".  The SAB
expresses the SEC's views on applying generally accepted  accounting  principles
to revenue recognition in financial statements.  ePHONE's application of the SAB
did not have a material impact on its financial statements, however, certain SEC
staff  interpretations of the SAB have not been published and may have an effect
on the applicability of the SAB in relation to ePHONE's financial statements.

                                       17
<PAGE>

In  March  2000,   the  Financial   Accounting   Standards   Board  issued  FASB
Interpretation  No. 44,  "Accounting  for Certain  Transactions  Involving Stock
Compensation,  an  Interpretation  of APB Opinion No. 25". With the exception of
certain  provisions that required earlier  application,  this  interpretation is
effective for all applicable transactions beginning July 1, 2000. ePHONE adopted
FIN 44 during  the  quarter  ended  September  30,  2000.  The  adoption  of the
Interpretation  did not have a  significant  impact on the  ePHONE's  results of
operations or its financial position

         E. Risk Factors

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

   The market for our common stock is limited

There is currently only a limited  trading  market for our 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.

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

   Penny stock rules limit the liquidity of our common stock

Our 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 our common stock.  As long as our common stock is subject to the penny stock
rules,  holders of such ePHONE  common stock may find it more  difficult to sell
their securities.

                                       18
<PAGE>

   An investment in ePHONE may be diluted

We may issue a substantial number of shares of our 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.

   We may be unable to raise the additional  capital  necessary to continue
growing our business

We will require significant amounts of additional capital to fund:

o the expansion of our network;

o the  acquisition of businesses and investments in joint ventures and strategic
  alliances; and

o working capital.

Implementing  the phased  build-out  of our  network  will  require  significant
amounts of additional  capital not currently  accessible to us. We cannot assure
you that we will be able to obtain  sufficient  capital on  acceptable  terms to
fund the full reach of our planned network.

The exact amount and timing of our future capital  requirements will depend upon
many factors, including:

o the cost of developing and expanding our networks and services;

o the development of new services;

o our ability to penetrate new markets;

o regulatory changes;

o the status of competing services;

o the magnitude of potential acquisitions,  investments and strategic alliances;
  and

o our plan of operations.

   We have not been operating  very long and have a history of incurring  losses
which may make it difficult to fund operations

We have a limited  operating  history on which you can evaluate our business and
prospects,  and we have  not yet  commenced  commercial  operations  in the long
distance  sector  of our  business.  We  have  incurred  net  losses  since  our
inception. In 2000 and 1999, we incurred net losses of approximately $13,701,000
and  $1,591,000,  respectively.  Our ability to achieve  and sustain  profitable
operations  depends on many  circumstances,  including  our ability to establish
effective distribution  channels,  market demand, pricing and competition in the
telecommunications  industry in the  countries  where we  operate.  If we do not
achieve and sustain profitability,  our ability to respond effectively to market
conditions,  to make  capital  expenditures  and to take  advantage  of business
opportunities could be negatively affected.  In addition,  our prospects must be
considered  in light of the risks  encountered  by companies  like us developing
products  and  services  in new and  rapidly  evolving  markets.  Our failure to
perform in these areas  could have a material  adverse  effect on our  business,
plan of operations and financial condition.

                                       19
<PAGE>

   We may never  generate  sufficient  revenue  to attain  profitability  if our
future customers,  telecommunications  carriers and other communications service
providers  are  reluctant  to use  our  services  or do not  use  our  services,
including any new services, in sufficient volume

If the market for Internet  telephony  and new  services  does not develop as we
expect,  or  develops  more  slowly  than we  expect,  our  business,  financial
condition and plan of operations will be materially adversely affected.

Our  future  customers  may be  reluctant  to use our  services  for a number of
reasons, including:

o perceptions that the quality of voice transmitted over the Internet is low;

o perceptions that Internet telephony is unreliable;

o lack of acceptance of our business model by customers; and

o our  inability to originate and deliver  traffic over the Internet  easily and
  with significant cost advantages.

The growth of our  business  depends on our  distribution  channels and partners
generating an increased  volume of customers with adequate  international  voice
traffic.  If the volume of  international  voice traffic  fails to increase,  or
decreases,  and these  third-parties do not succeed in their selling activities,
our ability to become profitable will be materially adversely affected.

   We may face quality and capacity problems over our network upon failures by
third parties

Our business model depends on the availability of the Internet to transmit voice
and fax calls,  and to provide other  value-added  services.  Third parties also
maintain,  and in many cases own, the traditional voice networks as well as data
networks and other  components  that comprise the Internet.  Some of these third
parties are national  telephone  companies.  They may increase their charges for
using these lines at any time and decrease our profitability. They may also fail
to properly  maintain their lines and disrupt our ability to provide  service to
our  customers.  Any failure by these third parties to maintain  these lines and
networks that leads to a material  disruption  of our ability to complete  calls
over the Internet could  discourage our customers from using our network,  which
could  have  the  effect  of  delaying  or  preventing  our  ability  to  become
profitable.  Our  CPE  devices,  billing  system  and  other  components  of our
technology  are provided by third party  organizations.  Lack of  performance or
significant  price  changes  by these  providers  will also  lead to a  material
disruption  of our ability to offer our products in an easy,  efficient and cost
effective  manner,  which could have the effect of delaying  or  preventing  our
ability to become profitable.

   We may not be able to succeed in the intensely competitive market for our
services

                                       20
<PAGE>

The market for Internet voice, fax and other  value-added  services is extremely
competitive  and will likely  become more  competitive.  Internet  protocol  and
Internet  telephony  service  providers,  such as GRIC  Communications  and ITXC
Corp.,  route traffic to  destinations  worldwide and compete  directly with us,
along with Internet telephony service providers, such as 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 we are and
have  substantially  greater  managerial  and  financial  resources  than we do.
Intense  competition  in our markets can be expected to continue to put downward
pressure on prices and adversely affect our profitability.  We cannot assure you
that we will be able to compete  successfully against our competitors and we may
lose customers or fail to grow our business as a result of this competition.

   Growth of our business depends upon our ability to manage expansion and
development effectively

Our ability to grow  effectively  will require us to  implement  and improve our
operating,  financial and accounting  systems and to hire,  train and manage new
employees.  Among other things,  the continued  expansion and development of our
business will also depend upon our ability to:

o construct our planned Network;

o secure financing;

o install telecommunications infrastructure;

o obtain any required government authorizations;

o evaluate and penetrate potential new markets;

o hire enough qualified employees; and

o build an effective distribution channel.

In addition, we must perform these tasks in a timely manner, at reasonable costs
and on satisfactory terms and conditions.

Our  expansion  may  involve   acquiring  other   companies  or  assets.   These
acquisitions  could divert our resources and management and require  integration
with  our  existing  operations.  Failure  to  effectively  manage  our  planned
expansion  could  have  a  material  adverse  effect  on our  business,  growth,
financial  condition and plan of  operations  and the market price of our common
stock.  We cannot  assure you that we will be successful or timely in developing
and marketing service enhancements or new services that respond to technological
change,  changes in customer requirements and emerging industry standards.  Even
if we are  successful,  we  cannot  assure  you  that  our  lack of  significant
experience  with  respect to a new service or market will not hinder our ability
to successfully capitalize on any such opportunity.

   We may undertake  strategic  acquisitions in the future and any  difficulties
from  integrating  such  acquisitions  could  damage  our  ability  to attain or
maintain profitability

                                       21
<PAGE>

We may  acquire  businesses  and  technologies  that  complement  or augment our
existing businesses,  services and technologies.  Integrating any newly acquired
businesses or technologies could be expensive and time-consuming.  We may not be
able to integrate any acquired business  successfully.  Moreover, we may need to
raise  additional  funds through  public or private debt or equity  financing to
acquire any businesses,  which may result in dilution for  stockholders  and the
incurrence of indebtedness.  We may not be able to operate  acquired  businesses
profitably or otherwise implement our growth strategy successfully.

   If we  are  not  able  to  keep  up  with  rapid  technological  change  in a
cost-effective way, the relative quality of our services could suffer

The technology upon which the services we intend to provide is changing rapidly.
Significant  technological  changes  could  render  the  equipment  which we use
obsolete,  and competitors may begin to offer new services that we are unable to
offer. We must adapt to our rapidly changing market by continually improving the
responsiveness,  reliability,  services  and  features  of  our  network  and by
developing  new features and  applications  to meet  customer  needs.  If we are
unable to  successfully  respond to these  developments  or do not  respond in a
cost-effective way, we may not be able to offer competitive services.

   Our failure to acquire, integrate and operate new technology could harm our
competitive position

The  telecommunications  industry  is  characterized  by rapid  and  significant
technological  advancements  and the related  introduction  of new  products and
services.  We do not  possess  significant  intellectual  property  rights  with
respect to all of 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 our business plan cannot be predicted.  In addition, it is impossible
for us to predict with any  certainty  whether  demand for VoIP  services in our
future  markets will  develop or will prove to be an  economical  and  efficient
technology that is capable of attracting customer usage. Failure by us to obtain
and adapt to new technology in our future markets could have a material  adverse
effect on our business and plan of operations.

   We face multiple risks associated with the Internet

As is typical in newer  industries,  demand and market acceptance remain unknown
factors in the provision of  Internet-related  services.  In addition,  critical
issues  concerning the commercial use of the Internet remain  unresolved and may
impact  the  growth  of  Internet  use.  Despite  growing  interest  in the many
commercial  uses of the  Internet,  many  businesses  around the world have been
deterred from purchasing  Internet-related  services. These businesses have been
deterred for a number of reasons, including:

o inconsistent service;

o lack of cost-effective, high-speed options;

o limited access points;

o inability to integrate business applications on the Internet;

o the need to deal with multiple and frequently incompatible vendors;

o inadequate protection of information moving across the Internet;

o a lack of tools to simplify Internet access and use.

                                       22
<PAGE>

Published reports have also indicated that capacity constraints caused by growth
in the use of the Internet may, unless  resolved,  constrain  development of the
Internet to the extent that users  experience  delays,  transmission  errors and
other  difficulties.  For example,  inadequate  transmission  infrastructure  in
developing  countries in which we plan to operate (such as an  insufficiency  of
telephone   lines  for  Internet   access)   could   forestall   the  growth  of
Internet-related services in that region.  Furthermore, in some parts the world,
the Internet is not seen as an alternative  method of exchanging  information or
doing business and we cannot guarantee that the Internet will be widely accepted
in the region as an alternative means of communicating and conducting business.

The  nature  and scope of  existing  or  future  laws in  various  jurisdictions
relating  to the  Internet  is  uncertain  and may take years to  resolve.  This
uncertainty  could expose us to substantial  liability for which we might not be
indemnified.  Any new or  existing  legislation  or  regulation  relating to the
Internet  could  have a  material  adverse  effect  on  our  business,  plan  of
operations and financial condition.

   If the Internet infrastructure is not adequately maintained, we may be unable
to  maintain  the  quality  of our  services  and  provide  them in a timely and
consistent manner

Our  future   success  will  depend  upon  the   maintenance   of  the  Internet
infrastructure,  including a reliable network backbone with the necessary speed,
data capacity and security for providing  reliability and timely Internet access
and services.  To the extent that the Internet continues to experience increased
numbers of users, frequency of use or bandwidth  requirements,  the Internet may
become  congested  and be unable to  support  the  demands  placed on it and its
performance or reliability may decline thereby impairing our ability to complete
calls  using the  Internet  at  consistently  high  quality.  The  Internet  has
experienced  a variety of outages  and other  delays as a result of  failures of
portions of its infrastructure or otherwise.  Any future outages or delays could
adversely  affect our  ability to  complete  calls.  Moreover,  critical  issues
concerning the commercial use of the Internet, including security, cost, ease of
use and  access,  intellectual  property  ownership  and other  legal  liability
issues,  remain  unresolved and could  materially and adversely  affect both the
growth of Internet usage generally and our business in particular.

   We are dependent on key personnel for our future success

Our success depends to a significant  degree on members of our senior management
and certain key employees,  who generally are not bound by employment  contracts
with us. Our  success  also  depends in part upon our ability to hire and retain
highly  skilled and  qualified  operating,  marketing,  financial  and technical
personnel.   Competition  for  qualified  employees  in  the  telecommunications
industry is intense and, accordingly,  we cannot assure you that we will be able
to hire or retain necessary personnel.

In addition,  the  successful  implementation  of our network will require us to
recruit, hire and retain a significant number of highly skilled employees. There
may be a limited supply of qualified personnel in the countries in which we plan
development of our operations.

                                       23
<PAGE>

   A  variety  of risks  associated  with  our  international  operations  could
materially adversely affect our business

Because we intend to provide substantially all of our services  internationally,
we are subject to additional  risks  related to operating in foreign  countries.
These risks include:

o unexpected  changes in tariffs,  trade  barriers and  regulatory  requirements
relating to Internet access or Internet telephony;

o economic weakness, including inflation, or political instability in particular
foreign economies and markets;

o difficulty in collecting accounts receivable;

o foreign taxes; and

o foreign  currency  fluctuations,  which could  result in  increased  operating
expenses and reduced revenues.

These  and  other  risks  associated  with  our  international   operations  may
materially  adversely  affect  our  ability  to  attain or  maintain  profitable
operations.

   International governmental regulation and legal uncertainties could limit our
ability to provide our services or make them more expensive

The  regulatory  treatment of Internet  telephony  outside of the United  States
varies widely from country to country. A number of countries  currently prohibit
or limit competition in the provision of traditional  voice telephony  services.
Some  countries  prohibit,  limit or regulate  how  companies  provide  Internet
telephony.  Some countries have indicated they will evaluate  proposed  Internet
telephony  service on a case-by-case  basis and determine whether to regulate it
as a voice  service or as another  telecommunications  service,  and in doing so
potentially imposing settlement rates on Internet telephony providers.  Finally,
many countries have not yet addressed Internet telephony in their legislation or
regulations.  Increased  regulation of the Internet  and/or  Internet  telephony
providers,  or the  prohibition of Internet  telephony in one or more countries,
could limit our ability to provide our services or make them more expensive.

In addition,  as we make our services available in foreign countries,  and as we
work to enable sales by our  customers to end-users in foreign  countries,  such
countries  may claim that we are  required  to qualify  to do  business  in that
particular  country,  that we are  otherwise  subject to  regulation,  including
requirements  to obtain  authorization,  or that we are  prohibited in all cases
from conducting our business in that foreign country.  Our failure to qualify as
a foreign  corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could seriously restrict our ability to
provide services in such jurisdiction, or limit our ability to enforce contracts
in that  jurisdiction.  Our customers  also  currently are, or in the future may
become,  subject  to these  same  requirements.  We cannot  assure  you that our
customers are currently in compliance  with any such  requirements  or that they
will be able to continue to comply  with any such  requirements.  The failure of
our customers to comply with applicable  laws and  regulations  could prevent us
from being able to conduct business with them. Additionally, it is possible that
laws may be applied by the United  States  and/or  other  countries to transport
services provided over the Internet, including laws governing:

                                       24
<PAGE>

o sales and other taxes;

o user privacy;

o pricing controls;

o characteristics and quality of products and services;

o consumer protection;

o cross-border  commerce,  including laws that would impose tariffs,  duties and
  other import restrictions;

o copyright, trademark and patent infringement; and

o claims  based on the  nature  and  content of  Internet  materials,  including
  defamation, negligence and the failure to meet necessary obligations.

If foreign  governments  or other bodies begin to regulate or prohibit  Internet
telephony,  this regulation  could have a material adverse effect on our ability
to attain or maintain profitability.

   We do not intend to pay dividends on our common stock

We have never paid dividends on our common stock and do not currently  intend to
pay cash dividends on our common stock.  Any future  decisions as to the payment
of dividends  will be at the  discretion of our Board of  Directors,  subject to
applicable law. See "Dividend Policy."

   Internet-related stock prices are especially volatile and this volatility may
depress our 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 Internet-related companies, including companies like us, 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  registration  statement and general  economic  conditions may
have a significant  effect on the market price of our common  stock.  This broad
market  and  industry  volatility  may  reduce  the value of our  common  stock,
regardless of our operating  performance.  Due to this volatility,  the value of
our common stock could significantly decrease.

   Our success and competitive position depends on our ability to protect our
proprietary technology

                                       25
<PAGE>

Our success depends, in part, upon our intellectual property rights. To date, we
have relied primarily on a combination of trade secret,  trademark and copyright
laws,  and  non-disclosure  and other  contractual  restrictions  on copying and
distribution to protect our proprietary  technology and our brand names. We have
not yet filed any patents related to our  technology.  Litigation to enforce our
intellectual  property  rights or  protect  our trade  secrets  could  result in
substantial  costs and may not be  successful.  Any  inability  to  protect  our
intellectual  property  rights  could  seriously  harm our  business,  operating
results and  financial  conditions.  In  addition,  the laws of certain  foreign
countries may not protect our intellectual property rights to the same extent as
do the laws of the  United  States.  Our means of  protecting  our  intellectual
property  rights in the  United  States or abroad may not be  adequate  to fully
protect our intellectual property rights.

Furthermore,  the laws of some foreign  countries  may not protect  intellectual
property  rights to the same extent as do the laws of the United States.  It may
be  difficult  for us to enforce  certain of our  intellectual  property  rights
against  third  parties who may have acquired  intellectual  property  rights by
filing unauthorized applications in foreign countries to register the marks that
we use  because  of their  familiarity  with  our  worldwide  operations.  Since
Internet-related  industries  such  as  ours  are  exposed  to the  intellectual
property  laws  of  numerous   foreign   countries  and  trademark   rights  are
territorial,  the  enforceability  and scope of protection  of our  intellectual
property is uncertain.  The  unauthorized  use of our  intellectual  property by
third parties may damage our brand.

Defending against intellectual  property  infringement claims could be expensive
and disruptive to our business.

   We are subject to claims of intellectual property  infringement,  which could
divert management resources and harm our reputation

We cannot be certain  that our products and services do not or will not infringe
upon valid patents, trademarks, copyrights or other intellectual property rights
held or claimed by third parties. Third parties may claim that we have infringed
their  patent,  trademark,  copyright or other  proprietary  rights.  It is also
possible that claims will be made for indemnification resulting from allegations
of infringement.  Claims like these could divert management's attention,  affect
our  reputation  and  otherwise  harm our  business.  In addition,  intellectual
property  claims could be asserted  against us as a result of the use by us, our
customers or other third  parties of our  products.  These claims could  include
claims  by  our  consultants  and  employees  that  intellectual  property  they
developed  does not belong to us. Any claims,  with or without  merit,  could be
time consuming,  costly,  cause product shipment delays or require that we enter
into royalty or licensing  agreements.  These licenses might not be available on
reasonable  terms,  or at all.  As a result,  any claim like this could harm our
business.  Additionally,  we may incur substantial expenses in defending against
these third party  infringement  claims,  regardless of their merit.  Successful
infringement  claims against us may result in substantial  monetary liability or
may materially disrupt the conduct of our business.

   We  rely  on  third-party  technologies,  and a  termination  of  any  of our
relationships  with third-party  vendors could adversely affect our revenues and
business

We rely in part on technology  that we license from third parties.  We integrate
this technology with our own technology in order to provide a complete solution.
This technology may contain  defects that we cannot control.  The loss of any of
these technologies could cause delays introducing our products or services until
equivalent technology, if available, is identified, licensed and integrated.

                                       26
<PAGE>

   Our articles of incorporation provide our officers and directors with certain
indemnification.

Our 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 the fiduciary  duty of care as a director or officer.  Conversely,  directors
and officers are liable for:

o any breach of duty of loyalty to ePHONE or its shareholders,

o facts and  omissions  not in good  faith or those  which  involve  intentional
  misconduct or a knowing violation of law,

o willful or  negligent  violation  of Florida  law with  respect to payments of
  dividends, and

o any transaction from which a director  involved  derived an improper  personal
  benefit.

Thus, under certain circumstances,  neither ePHONE nor the stockholders would be
able to recover damages even if directors take actions that harm ePHONE.

Item 7.       FINANCIAL STATEMENTS

The information required hereunder in this report are set forth in the "Index to
Financial Statements" on page F1.

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

None

                                    PART III

Item 9.       DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

         A. Directors and Executive Officers

The directors  and  executive officers,  their ages  and positions  held  as  of
March 1, 2001 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.

                                       27
<PAGE>

           NAME                 AGE               POSITION HELD
           ----                 ---               -------------
Robert G. Clarke                55      Chairman of the Board, President and
                                        Chief Executive Officer
Roy E. Olmsted                  47      Chief Operating Officer
Charlie Rodriguez               55      Chief Financial Officer and Vice
                                        President - Corporate Affairs; Director
John G. Fraser                  53      Director
Fariborz Ghadar                 53      Director
Anthony Balinger                47      Director
Walter Pickering                51      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.

Robert G. Clarke.  On December 1, 2000,  Mr. Clarke was appointed as Chairman of
the Board of  Directors,  President  and Chief  Executive  Officer and currently
serves in those capacities. During the last five years, Mr. Clarke has served as
a Director  and as  President  and Chief  Executive  Officer  at various  times,
including  serving as the Chairman of the Board of Directors from August 9, 1999
to a meeting of the Board of Directors on July 21,  2000,  and as the  President
and Chief Executive Officer from March 9, 2000 until April 1, 2000 and from June
3, 1999 to August 8, 1999.

Mr. Clarke has also acted an  independent  business  consultant,  assisting high
technology  start-up  companies  with  public and private  financings,  business
planning,  assembling management teams and business opportunity assessments. Mr.
Clarke holds a Bachelor of Commerce  degree from Memorial  University and Master
of Business Administration from the University of Western Ontario.

Charlie Rodriguez.  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., a biometrics and smartcard software integration company. Mr. Rodriguez was
a member of the board of  directors of WaveRider  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  and  Accounting  from the
University of Arizona.

Roy E. Olmsted.  Mr.  Olmsted  became Chief  Operating  Officer in January 2001.
Prior to joining ePHONE, Mr. Olmsted was Vice president Business Development for
Speechlink  Communications,  a vendor  of  service  provisioning  platforms  and
unified  messaging systems to the  telecommunications  market from March 1999 to
September  2000.  From 1993 to 1998 Mr. Olmsted was President of TAS Ltd. - Hong
Kong, the first call center in Hong Kong,  specializing  in inbound  telemarket,
outbound  telemarketing  and  message  center  support.  Mr.  Olmsted  has  held
positions at Tandem  Computers,  Inc.,  Hewlett Packard Canada and Sperry Univac
Canada.

                                       28
<PAGE>

John G. Fraser.  Mr. Fraser has been a director of ePHONE since June 1999. Prior
to joining  ePHONE,  Mr.  Fraser was  Vice-Chairman  of KPMG  Canada,  Chartered
Accountants.  Mr. Fraser held various positions within KPMG Canada from November
1976 until February  1998.  Mr. Fraser has a Masters in Business  Administration
from University of Pittsburgh and a Bachelor of Commerce and Administration from
Victoria University, Wellington, New Zealand.

Dr. Fariborz  Ghadar.  Dr. Ghadar has been a director of ePHONE since the Annual
General Meeting in September 2000. He is the William A. Schreyer,  Merrill Lynch
Chair of Global  Management,  Policies  and Planning of The  Pennsylvania  State
University  Smeal  College of  Business  Administration.  Prior to  joining  The
Pennsylvania  State  University,  Dr.  Ghadar was  Professor and Chairman of the
International  Business Department at The George Washington University School of
Business and Public  Management.  Dr. Ghadar received a D.B.A.  and M.B.A.  from
Harvard  Business  School,  an M.S.  in  Mechanical  Engineering  and a B.S.  in
Chemical  Engineering  from M.I.T.  Dr. Ghadar  currently serves on the Board of
Directors of Lason, Inc.

Anthony  Balinger.  Mr. Balinger has been a director of ePHONE since December 1,
2000.  Mr.  Balinger is also  President of 7bridge  Systems Ltd. of Hong Kong. A
Fellow of the Hong Kong  Institute  of  Directors,  Mr.  Balinger  is a seasoned
telecom  professional  with  30  years  experience  in  the   telecommunications
industry.

Mr. Balinger started his career with British Telecom, where he spent 13 years as
a Digital  Design  engineer.  Thereafter he joined Cable & Wireless as a project
engineer for Mercury  Communications,  and then  transferring to commercial,  he
headed  Mercury's City of London support  services.  In 1989 he was subsequently
transferred to New York to head Cable and Wireless North  America's  Banking and
Finance  division.  Cable and  Wireless  loaned him to OPTUS  communications  of
Australia where he headed the International Products division. In 1993 he joined
Executive  TeleCard  Ltd.,  (a NASDAQ  listed  company) as the  director of Asia
Pacific.  In 1995 he joined the Board of Directors  Executive  TeleCard Ltd. and
went on to serve as Chief  Executive and President  before  finally  retiring as
Vice Chairman in 1999.

Walter Pickering.  Mr. Pickering has been a director of ePHONE since December 1,
2000. He has over 20 years of management  experience in real estate development,
construction and high technology.  Since 1988 he has been president of Corporate
Information Group Ltd., a high technology consulting firm specializing in market
assessment  and strategic  planning.  The firm covers a wide range of technology
sectors,  including  biotechnology,   medical  devices,  telecommunications  and
information technology.  Since 1998 Pickering has been Executive Director of the
Canadian Institute for Market Intelligence,  a federal corporation working under
contract to the National  Research Council of Canada.  The role of the Institute
is to provide competitive intelligence services, due diligence and management of
international  technology  transfer events for small and  medium-sized  Canadian
technology  companies.  Pickering  has worked  extensively  with the private and
public sectors of Japan, China, Hong Kong, Thailand, Singapore and Korea.

                                       29
<PAGE>

         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 Section
16(a) forms filed.  All reports  required to be filed under Section 16 have been
filed

Item 10.      EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following sets forth certain summary information
concerning  compensation  paid for the years ended December 31, 2000 and 1999 to
(i) Robert Clarke, President,  Chief Executive Officer and Chairman of the Board
of Directors;  (ii) Row Zadeh,  former  President,  Chief Executive  Officer and
Chairman  of the  Board  of  Directors;  (iii)  Bahram  Ossivand,  former  Chief
Financial Officer and Director;  and (iv) Syd Rahman,  Vice  President-Sales and
Marketing.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                   ANNUAL COMPENSATION                      LONG TERM COMPENSATION
                                            -----------------------------------     ---------------------------------------
    NAME AND PRINCIPAL           YEAR           SALARY          OTHER ANNUAL          AWARDS OPTIONS          ALL OTHER
         POSITION                                               COMPENSATION             (SHARES)           COMPENSATION
---------------------------    ---------    ---------------    ----------------     -------------------    ----------------
<S>                              <C>          <C>                   <C>                  <C>                  <C>
Robert Clarke                    2000                --(1)                 --                   --                --
  President and Chief            1999                --(1)                               1,000,000                --
  Executive Officer
  and Chairman of the
  Board of Directors
Row Zadeh                        2000          134,000(2)                                                     10,000(3)
  Former President
  and Chief Executive
  Officer and
  Chairman of the
  Board of Directors
Bahram Ossivand                  2000          100,000(2)          35,000(3)                                  15,000(3)
Syd Rahman                                     108,000(4)
</TABLE>


(1)      Mr. Clarke as described on page 28, served as Chief  Executive  Officer
         and President at various  times during 2000 and 1999.  While serving as
         an  executive  officer,  Mr.  Clarke  received  no  cash  compensation.
         However,  a company in which he has a  controlling  interest,  received
         consulting  payments  totaling  $68,000  and  $48,000 in 2000 and 1999,
         respectively.

(2)      Mr. Zadeh and Mr.  Ossivand  were  employed from April 2000 to December
         2000  (8  months).   During  this  period,  ePHONE  granted  these  two
         individuals stock options for the purchase of up to 6,747,307 shares of
         the common stock.  These options were canceled in connection with their
         termination and are not included in table above.

                                       30
<PAGE>

(3)      Mr. Zadeh and Mr. Ossivand were paid separation payments of $10,000 and
         $15,000,  respectively.  Additionally,  as provided  in Mr.  Ossivand's
         separation  agreement,   ePHONE  reimbursed  certain  relocation  costs
         incurred by Mr. Ossivand.

(4)      Mr. Rahman's employment with ePHONE terminated in February 2001.

OPTION GRANTS TABLE.  The following  table sets forth  information  on grants of
stock options during fiscal 2000 to an officer of ePHONE.

<TABLE>
<CAPTION>
                            OPTIONS          PERCENT OF TOTAL OPTIONS
       NAME                 GRANTED          GRANTED TO EMPLOYEES IN       EXERCISE OR BASE
                           (SHARES)                   YEAR                  PRICE ($/SHARE)           EXPIRATION DATE
--------------------     --------------    ----------------------------    ------------------    --------------------------
<S>                         <C>                        <C>                      <C>                   <C>
Syd Rahman(1)               258,874                    2.65%                    $  1.09                 May 16, 2010
                             50,000                    0.51%                       0.88               October 10, 2010

</TABLE>

FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE.
<TABLE>
<CAPTION>

                                      NUMBER OF SECURITIES UNDERLYING                 VALUE OF UNEXERCISED
                                  UNEXERCISED OPTIONS AT FISCAL YEAR END              IN-THE-MONEY OPTIONS
                                                                                      AT FISCAL YEAR END ($)

                                EXERCISABLE           UNEXERCISABLE             EXERCISABLE            UNEXERCISABLE
<S>                              <C>                    <C>                          <C>                     <C>
Robert  Clarke                   1,000,000                       --                  --                      --
Syd Rahman(1)                           --              308,874(1)                   --                      --
</TABLE>

(1)      Mr.  Rahman's  employment  with ePHONE was terminated in February 2001.
         All of Mr.  Rahman's  stock options were unvested at that time and will
         be  canceled by ePHONE as  provided  for under the Long Term  Incentive
         Plan.

Compensation of Directors

Non-employee  directors  received cash compensation at a rate of $8,000 per year
in 2000.  Directors are reimbursed for expenses they incur in attending meetings
at the board or board committee.

In addition to making the  consulting  payments to a company  controlled  by Mr.
Clarke  mentioned  above,  ePHONE made  consulting  payments of $36,000  each to
companies  controlled by Mr. Charlie Rodriguez and Mr. John Fraser respectively,
both directors at December 31, 2000.

                                       31
<PAGE>

Employment Agreements

At December 31, 2000, ePHONE was not party to employment  agreements with any of
its officers or employers.  Employment  Agreements that ePHONE executed upon the
employment of Mr. Zadeh and Mr. Ossivand were cancelled in connection with their
termination in December 2000 and the execution of Separation Agreements.

In connection  with the  termination  of these  officers,  ePHONE entered into a
Support and Development Agreement with ePHONE Technologies, Inc (ePHONE Tech), a
company formed by the  terminated  executive  officers in December 2000.  ePHONE
Tech  will,  under  this  Agreement,  provide  ePHONE  with  internet  telephony
technology   support   and   development   services   at  an  hourly  rate  plus
reimbursements  for certain support services,  as defined in the agreement.  The
term of the  agreement is one year and may be renewed for  consecutive  one-year
terms. As provided for in the agreement,  ePHONE purchased a 20% equity interest
in ePHONE Tech. Since the agreement contained a provision,  allowing ePHONE Tech
to  repurchase  ePHONE's  equity  interest for $185,000 at any time prior to the
third  anniversary of the agreement,  ePHONE  recorded its equity  investment in
ePHONE Tech at $185,000.  The remaining portion of the $880,000 (which consisted
of $865,000 in cash and $15,000 in  equipment)  or $695,000  ePHONE  incurred in
connection  with the  termination  of these  executive  officers  is included in
general and administrative expense for the year ended December 31, 2000.

Long-Term Incentive Plan

On May 5, 2000, the 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  stockholders of ePHONE approved the Plan at the Annual Meeting of
ePHONE stockholders on August 23, 2000.

The  purpose  of the  2000  Long-Term  Incentive  Plan is to  assist  ePHONE  in
attracting,  retaining and providing  incentives  to key  individuals  who serve
ePHONE by offering them the opportunity to acquire or increase their proprietary
interest in ePHONE and to promote the  identification  of their  interests  with
those of the stockholders of ePHONE.

Eligibility;  Shares  Available  for Grants and Awards.  The Plan  provides  for
grants and awards of nonqualified stock options,  incentive stock options, stock
appreciation rights,  restricted stock and incentive shares,  referred to herein
as the Awards,  to  officers,  key  employees,  directors,  persons  hired to be
employees  of  ePHONE  and who the  Board  determines  will be  officers  or key
employees  upon  commencement  of  employment,  and  consultants  or independent
contractors to ePHONE who are determined to render key services. Incentive stock
options may not be granted to persons who are not employees of ePHONE.

Administration.  The Plan is  administered  by the  Board,  which  currently  is
comprised  of six  directors.  Subject  to the terms of the  Plan,  the Board is
authorized to determine eligibility, to make Awards, and to otherwise administer
the Plan.

The Board may  terminate  the Plan at any time and may amend it in any  respect,
except that no amendment,  alteration or  termination of the Plan may be made by
the  Board  without  approval  of  (a)  ePHONE's   stockholders  to  the  extent
stockholder approval of an amendment is required to comply with the requirements
of applicable  laws or  regulations;  and (b) each affected  participant if such
amendment,  alteration or  termination  would impair the rights of a participant
under any prior Award.  The Plan will  terminate  on May 5, 2010.  The Plan will
remain  in  effect  after  its  termination  for the  purpose  of  administering
outstanding Awards.

                                       32
<PAGE>

Limits on Aggregate Awards. The Plan limits the number of shares of Common Stock
with  respect to which any employee  may receive  Awards  during the term of the
Plan to 1,250,000 shares. Under current tax law requirements, to the extent that
the aggregate fair market value of stock with respect to which  incentive  stock
options granted under the Plan are exercisable for the first time by an employee
during any calendar year exceeds  $100,000  (determined at the time of the grant
of the option),  the option will not be treated as an incentive stock option for
federal income tax purposes.

Stock Options.  The Plan authorizes the grant of nonqualified  stock options and
incentive  stock  options.  The  exercise of an option  permits the  optionee to
purchase shares of Common Stock at a specified exercise price per share. Options
granted under the Plan are exercisable  upon such terms and  conditions,  as the
Board shall determine.

The exercise price per share and manner of payment for shares purchased pursuant
to options are  determined by the Board,  subject to the terms of the Plan.  The
per share exercise price of incentive  stock options  granted under the Plan may
not be less than the fair market value per share of the Common Stock at the time
of the grant,  except that incentive stock options granted to an employee who is
a 10% stockholder (after applying certain stock ownership attribution rules) may
not have an exercise price less than 110% of such fair market value.

The Plan provides  that the term during which  options  granted may be exercised
shall be determined by the Board,  except that no option may be exercised  after
ten years  (five  years in the case of  incentive  stock  options  granted to an
employee  who  is a 10%  stockholder  after  applying  certain  stock  ownership
attribution rules) following its date of grant.

Stock  Appreciation  Rights.  The Plan  authorizes  the  Board  to  grant  stock
appreciation rights in connection with, and at the same time as, the grant of an
option under the Plan or by amendment of an outstanding option granted under the
Plan  ("related  rights").   Stock  appreciation  rights  may  also  be  granted
independently  of any  option  granted  under  the Plan  ("nonrelated  rights").
Subject to the terms of a particular grant, a stock  appreciation right entitles
the  grantee  upon  exercise  to elect to  receive  in cash,  Common  Stock or a
combination  thereof,  the excess of the fair market value of a specified number
of shares of Common Stock at the time of exercise  over the fair market value of
such number of shares of Common Stock at the date of grant, or, in the case of a
related right,  the exercise price  provided in the related  option.  The period
during which a right may be exercised is  determined  by the Board,  but a right
may not be exercised after ten years from the date of grant or, in the case of a
related right, the expiration of the related option.

Restricted  Stock.  Restricted  stock awards  consist of shares of Common Stock,
awarded without payment of cash  consideration  by the grantee unless  otherwise
specified  in the  agreement  relating  thereto,  that  are  restricted  against
transfer,  subject to forfeiture and subject to such other terms, conditions and
restrictions,  for such period or periods,  as shall be determined by the Board.
Such terms may  provide,  in the  discretion  of the Board,  for the  vesting of
restricted  stock awards to be contingent  upon the  achievement  of one or more
performance goals  established by the Board and specified in the agreement.  The
performance goals may be based on earnings or earnings growth,  sales, return on
assets, equity or investment,  regulatory  compliance,  satisfactory internal or
external audits, improvement of financial ratings, achievement of balance sheet,
income statement or other financial statement objectives, or any other objective
goals established by the Board and specified in the agreement.  The goals may be
absolute  in  their  terms  or  measured  against  or in  relationship  to other
companies similarly or otherwise situated.

                                       33
<PAGE>

Restricted  stock  awarded  under the Plan and the right to vote  shares of such
restricted  stock and to receive  dividends  thereon may not be sold,  assigned,
transferred,   exchanged,   pledged,   hypothecated  or  encumbered  during  the
restriction period. With the exception of these restrictions upon transfer,  the
recipient  of a  restricted  stock award has all other  rights of a  stockholder
including,  but not limited to, the right to receive  dividends and the right to
vote shares awarded.

Incentive Shares.  Incentive shares awarded under the Plan are contingent awards
of shares of Common  Stock  that may be issued  subject to  achievement  of such
performance  goals (as described above with respect to restricted  stock awards)
or other  goals and on such  other  terms  and  conditions  as the  Board  deems
appropriate and specifies in the agreement relating thereto.  Unlike in the case
of  restricted  stock,  shares of Common  Stock would not be issued  immediately
pursuant  to  incentive  share  awards,  but  instead  would be issued  upon the
achievement or  satisfaction of such  performance  goals or other goals or terms
and  conditions.  Accordingly,  a person who has  received an award of incentive
shares may not vote or receive  dividends  with  respect to the shares of Common
Stock subject to the award until such shares are issued upon the  achievement or
satisfaction of such  performance  goals or other goals or terms and conditions.
The  grantee  would not have to pay any cash  consideration  to ePHONE  upon the
award of  incentive  shares or upon the  issuance of the shares of Common  Stock
pursuant to the award.

Awards Under Plan

The Board of Directors  granted a total of 4,276,000  options to purchase shares
of Common Stock pursuant to the Plan during 2000.  Options to purchase 1,247,307
shares of Common Stock were granted to Mr. Row Zadeh,  the former  President and
Chief  Executive  Officer of ePHONE.  Mr. Zadeh  surrendered  these options upon
leaving the employment of ePHONE.  Options to purchase  848,885 shares of Common
Stock have been granted to other  executive  officers of ePHONE,  and options to
purchase  2,179,008  shares of Common Stock have been granted to other employees
of ePHONE.

Item 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The  following  table  contains  information  with  respect  to  the  beneficial
ownership of outstanding common shares as of December 31, 2000 by:

         o        each  stockholder  known to be the  beneficial  owner of 5% or
                  more of outstanding common shares;

         o        each of the executive officers and directors individually; and

         o        all of the executive officers and directors as a group.

                                       34
<PAGE>

In general,  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 a beneficial  owner of any  securities of which the person has
the right to acquire beneficial ownership within 60 days.

For purposes of calculating  these  beneficial  ownership  percentages  for each
person below, all special warrants, warrants and options held by such person, if
applicable,  are assumed to have been  exercised  and the shares of common stock
issuable  upon such  exercise  have  been  issued to such  person.  All  special
warrants,  warrants and options held by the persons listed below are exercisable
within 60 days after December 31, 2000.

                                          NUMBER OF COMMON
                                         SHARES BENEFICALLY           PERCENT OF
                                          OWNED OR DEEMED             BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER     BENEFICIALLY OWNED            OWNERSHIP

Robert G. Clarke                           1,066,668(1)                    5.77%
    1489 Marine Drive, Suite 616
    West Vancouver, B.C.
    Canada

Charlie Rodriguez                            250,000(2)                    1.41%
    1662 W. Petunia Place
    Tucson, Arizona 85737
    Director, Chief Financial Officer
    and Vice President--Corporate Affairs

Roy E. Olmsted                                  -0-                         -0-
    13 Plainsman Road
    Mississauga, Ontario L5N 1C4
    Chief Operating Officer

John Fraser                                  316,668(3)                    1.80%
    104 Elm Avenue
    Totonto, Ontario
    M4W 1P2
    Director

Fariborz Ghadar                                 -0-                         -0-
    555 Orlando Avenue
    State College, PA 16803
    Director Nominee

Anthony Balinger                                -0-                         -0-
    Suite 1803m CLI Building
    313-317 Hennessy Road
    Wanchai, Hong Kong
    Director

Walter Pickering                                -0-                         -0-
    8026 Modesto Drive
    Delta, British Columbia V4C 4B1
    Director

                                       35
<PAGE>
                                          NUMBER OF COMMON
                                         SHARES BENEFICALLY           PERCENT OF
                                          OWNED OR DEEMED             BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER     BENEFICIALLY OWNED            OWNERSHIP


Executive Officers and Directors             1,633,336                     8.59%
    as a group of seven (7)

Americana International Inc. (4)             2,550,000                    14.61%
    Hong Kong

Brouillette Charpentier                      2,925,000(5)                 14.35%
    1100 Rene Levesque Blvd.
    Suite 2500
    Montreal, QC H3B 5C9

Kinked Investments Limited                   4,407,000(5)                 20.16%
    625 Rene Levesque Blvd., Suite 205
    Montreal, Quebec H3B 1R2

J. P. Langlais                               2,500,000(6)                 13.55%
    4840 Acorn Street
    Suite 102, Montreal,
    P.Q. H4C 1L6
    Canada

GroomeCapital.com Inc.                       2,104,501(7)                 10.76%
    1 Place Ville Marie,
    Suite 2707
    Montreal, QC

Marc Herbert                                 1,500,001                     8.59%
    2 Avenue de New York
    Paris 75116
    France

MDL Investments                              2,386,600(5)                 12.03%
    999 de Maisonneuve West Suite 1775
    Montreal, QC,
    H3A 3L4

9084-8953 Quebec Inc.                        1,425,000(5)                  7.55%
    625 Rene Levesque Blvd., Suite 205
    Montreal, QC H3B 1R2

Casurina Limited Partnership                 1,447,876(5)                  7.66%
    c/o Frank Mersch
    200 King Street West
    Suite 2004
    Toronto, ON M5H 3T4


(1)      Includes  33,334  shares of common  stock,  warrants to acquire  33,334
         shares of common  stock,  and  options to acquire  1,000,000  shares of
         common stock.

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

                                       36
<PAGE>

(3)      Includes  33,334  shares of common  stock,  warrants to acquire  33,334
         shares of common stock, and options to acquire 250,000 shares of common
         stock.

(4)      Management  is advised  that the owner of 100% of the issued  shares of
         Americana   International   Inc.  is  Gary  Kenneth  Urwin,   Chartered
         Accountant, of 27 Hamilton Parade, Pymble, Sydney, Australia. Mr. Urwin
         has no other relationship to ePHONE.

(5)      Consists of shares of common stock to be received  upon exercise of the
         special warrants;  one-half constitutes shares of common stock that may
         be received  upon  exercise of  purchase  warrants to be received  upon
         exercise of special  warrants.  The number of common shares included in
         this table  have been  adjusted  to reflect  the return at 12.5% of the
         original  investment  and the 10%  penalty  due to ePHONE  not  meeting
         certain  conditions  of  the  Special  Warrant  Agreements,  which  are
         described more fully in Note 9 to the financial statements.

(6)      Includes  1,500,000  shares of  common  stock and  options  to  acquire
         1,000,000 shares of common stock.

(7)      Includes 482,625 shares of common stock to be received upon exercise of
         special  warrants,  482,625 shares of common stock that may be received
         upon  exercise of purchase  warrants  to be received  upon  exercise of
         special  warrants,  889,251 shares of common stock that may be received
         upon exercise of broker  warrants,  and 250,000  shares of common stock
         that may be received upon exercise of broker options.

Item 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Founding Shares

On May 8, 1996,  immediately  following  incorporation,  ePHONE issued 1,000,000
common shares for services rendered for a deemed price of $0.001 per share for a
total of $1,000. Of these, 975,000 shares were issued to Ira Schwartz,  the sole
director and officer at that time.

Charlie Yang

By an  agreement,  dated  July 8,  1999  and  referred  to  herein  as the  July
agreement,  which is now in dispute,  ePHONE engaged Charles Yang to provide his
services on a full-time  basis as President  and Chief  Operating  Officer for a
basic term of 4 years.  The July agreement  provides for the payment to Mr. Yang
of a fee of $7,500 per month initially,  escalating to $17,500 per month for the
period  April 1 - June 30, 2000.  For the second,  third and fourth years of Mr.
Yang's  engagement,  his compensation would be reviewed but would have increased
by a minimum of not less than 15% over the amount  paid to him in the  preceding
year.

The  Agreement  also provided for Mr. Yang to be granted  options and,  pursuant
thereto,  Mr. Yang was  granted  options to purchase  500,000  common  shares of
ePHONE  exercisable  at $0.50 per  share,  during  the term of his  tenure.  The
options vesting on the following schedule:

                                       37
<PAGE>

         o        100,000 shares on execution of the July agreement

         o        200,000 shares on October 1, 1999

         o        200,000 shares on January 1, 2000

In the July  agreement,  ePHONE also agreed to acquire from Mr. Yang 100% of the
issued  shares of a company  owned by him,  General-Tel  Inc.,  in exchange  for
1,500,000 shares of common stock. The July Agreement  provides that ePHONE must,
within 6 months of the closing of the acquisition of General-Tel,  raise funding
of not less than  $1,100,000.  If such  financing is not raised  within the said
deadline,  Mr.  Yang  will  be  entitled  to  cancel  the  negotiations  or  the
acquisition  agreement  and have 100% of the shares of  General-Tel  transferred
back to him. In consideration,  he must return 1,350,000 shares of common stock.
As part of the dispute  with Mr.  Yang,  ePHONE will not  purchase the shares of
General-Tel.

ePHONE has agreed to issue Mr. Yang 2,000,000  shares of common stock.  ePHONE's
Canadian  lawyers will hold the  certificates  for the shares of common stock in
escrow,  and 25% of such shares - i.e.  500,000 shares - will be released to Mr.
Yang upon achieving the performance thresholds of up to $50,000,000 in sales.

The July agreement  required that Mr. Yang bring the benefit of all negotiations
and  technical  knowledge  initiated or held by him to sell hardware or services
with respect to a  technology  referred to as Wireless  Local Loop,  referred to
herein as WLL.  ePHONE  had agreed to issue Mr.  Yang  1,000,000  voting  common
shares if he succeeded in  developing an agreement for the sale of WLL to one or
more purchasers - such shares to be issued on the following schedule:

         o        300,000 shares upon  completion of negotiation  and signing of
                  Memorandum of Understanding with the purchaser of WLL;

         o        300,000 shares upon completion of signing of a formal contract
                  for the sale of WLL;

         o        400,000  shares upon  receipt from the sale of WLL of payments
                  and revenues of not less than $500,000.

Further,  Mr. Yang would have  received 10% of the gross  profits  ePHONE earned
from the sales of WLL.

Pursuant  to the  terms  of the July  agreement,  Mr.  Yang was also to  receive
royalties from the sale of products or services on the following basis:

         o        from  sales of  equipment  or  services  in China,  Vietnam or
                  Taiwan,  provided the gross profit margin is not less than 20%
                  from such sales, Mr. Yang will be paid 5% of the gross profits
                  from such business; and

         o        for countries other than China, Vietnam or Taiwan where ePHONE
                  would pay sales  commissions to  representatives  or agents in
                  such other country, Mr. Yang would have been paid monies equal
                  to 1% of the  amount of the  gross  sales  revenues  from such
                  countries;  where  sales to China,  Vietnam or Taiwan  produce
                  gross  profits of less than 20% then Mr. Yang would  have,  in
                  lieu of the aforesaid 5%, receive  commissions  equal to 1% of
                  the gross sales revenues from such countries.

                                       38
<PAGE>

A breakdown in the  relationship  between Mr. Yang and ePHONE developed in early
2000 and he ceased  providing  any services to ePHONE on January 31,  2000.  Mr.
Yang was formally  terminated on March 9, 2000.  Mr. Yang is claiming that he is
entitled to 1,500,000 common shares and 500,000 options to purchase common stock
at $0.50 per share. During 1999, ePHONE accrued a liability totaling $300,000 in
connection with a settlement  offer made to Mr. Yang to resolve this matter.  To
date Mr. Yang has not accepted or rejected this  settlement  offer and the claim
is scheduled for arbitration in California  during June 2001. Based on review of
the facts and circumstances,  management has provided for what is believed to be
a  reasonable  estimate at exposure to loss  associated  with this claim.  While
acknowledging  the uncertainties of arbitration,  management  believes that this
matter will be resolved without material effect to ePHONE `s financial  position
or results of operations.

Other Transactions

For  the  years  ended  2000  and  1999,   ePHONE  paid   $68,000  and  $48,000,
respectively,  for  management  services  provided  by a company in which  Chief
Executive Officer Robert Clarke has a controlling interest. During 2000, $56,000
of sales was made to a company in which Mr. Clarke has an interest.

During 1999  ePHONE was  advanced  approximately  $62,000,  on an interest  free
basis,  by Mr.  Clarke,  as we needed funds.  No formal loan  documentation  was
executed in connection with these advances of funds,  Mr. Clarke was not granted
any  security  interest  in any of the  assets  and no date  was  fixed  for the
repayment of these advances. These amounts were fully repaid to Mr. Clarke prior
to December 31, 1999.

Item 13.      EXHIBITS AND REPORTS ON FORM 8K. (Paul Freshour to Complete)

Number      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     -- Engagement Agreement dated July 8,1999 of Charles Yang (1)

10.2     -- Separation  Agreement  and General  Release by and between Row J.
            Zadeh and ePHONE Telecom, Inc., dated December 1, 2000 (6)

10.3     -- Separation  Agreement  and General  Release by and  between  Bahram
            Ossivand and ePHONE Telecom, Inc., dated December 1, 2000 (6)

                                       39
<PAGE>

10.4     -- Support and  Development  Agreement by and between  ePHONE  Telecom,
            Inc. and ePHONE Technologies, Inc., dated December 1, 2000 (6)

10.5     -- Specimen of form of Option Incentive Agreement (1)

10.6     -- Agreement in Principle  dated  October 22, 1999 with Saigon Post and
            Telecommunications Corp. (2)

10.7     -- Agency  Agreement  dated as of March 16,  2000  between  ePHONE  and
            Groome Capital.com, Inc. (3)

10.8     -- Strategic  Alliance  Agreement  dated as of March 31, 2000  between
            ePHONE and Comdial Corporation (4)

10.9     -- License  Agreement dated as of March 31, 2000 between ePHONE,  Array
            Telecom Corp. and Comdial Corporation (4)

10.10    -- ePHONE Telecom, Inc. 2000 Long-Term Incentive Plan (5)

10.11    -- Strategic  Alliance  Agreement  between ePHONE and  7BridgesSystems,
            Inc. dated as of July 7, 2000. (5)

10.12    -- ePHONE and Telemax  Partnership for Prepaid Calling Card Products in
            Europe (5)

10.10    -- Sales Partner Agent Agreement with MA&C Europe,  NV dated August 17,
            2000 (5)

23       -- Consent of Grant Thornton, LLP. (filed herewith)

24       -- Powers of Attorney (filed herewith)

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

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

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

(4)  Previously  filed as an  exhibit  to  ePHONE's  Form 8-K,  filed  with the
Securities and Exchange Commission on April 17, 2000.

(5)  Previously  filed as an  exhibit  to  ePHONE's  Form  SB-2  filed  with the
Securities and Exchange Commission

(6)  Previously  filed  as an  exhibit  in  ePHONE's  Form 8-K  filed  with the
Securities and Exchange Commission on December 8, 2000

REPORTS ON FORM 8K.

                                       40
<PAGE>

On December 8, 2000,  ePHONE filed with the  Commission a current  report on 8-K
related to the resignations of Row Zadeh and Bahram Ossivand.

On December 13, 2000,  ePHONE filed with the Comission a current  report on form
8-K announcing an increase in the size of the Board of Directors.
















                                       41
<PAGE>


                                   SIGNATURES

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

ePHONE Telecom, Inc.
(Registrant)


By /s/ Robert G. Clarke
------------------------------------------------
(Robert G. Clarke, CEO)

Date: March 6, 2001
------------------------------------------------

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

By /s/ Robert G. Clarke
------------------------------------------------
(Robert G. Clarke, CEO, Director) (Principal Executive Officer)

Date: March 6, 2001
------------------------------------------------



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

Date: March 6, 2001
------------------------------------------------



By /s/ John Fraser*
------------------------------------------------
(John Fraser, Director)

Date: March 6, 2001
------------------------------------------------



By /s/
------------------------------------------------
(Fariborz Ghadar, Director)

Date:
------------------------------------------------



By /s/
------------------------------------------------
(Walter Pickering, Director)

Date:
------------------------------------------------

                                       42
<PAGE>



By /s/ Anthony Balinger*
------------------------------------------------
(Anthony Balinger, Director)

Date: March 6, 2001
------------------------------------------------



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


















                                       43
<PAGE>




                    Supplemental information to be furnished
                  With Reports Filed Pursuant to Section 15(d)
                  of the Exchange Act by Non-reporting Issuers

As of March 6,  2001,  no  annual  report  or proxy  material  has been  sent to
security holders.

Proxy material is to be furnished to security  holders  subsequent to the filing
of this annual  report for a  shareholders  meeting to be held no later than May
31, 2001.  ePHONE  intends to furnish  copies of such material to the Commission
when it is sent to security holders.




















                                       44
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

                                                                      Page

Independent Auditor's Report on the Financial Statements              F-2

Balance Sheets                                                        F-3

Statements of Operations                                              F-4

Statements of Cash Flows                                              F-5

Statements of Stockholders' Equity and Comprehensive Income           F-5

Notes to the Financial Statements                                 F-7 - F-16












                                     F-1
<PAGE>

              Report of Independent Certified Public Accountants

To the Board of Directors and
Stockholders of ePHONE Telecom, Inc.

We have  audited  the  accompanying  balance sheets of ePHONE  Telecom,  Inc. (a
development  stage  Company) as of December  31, 2000 and 1999,  and the related
statements of operations,  stockholders'  equity and comprehensive  income,  and
cash  flows  for the years  then  ended and for the  period  from  April 6, 1998
(inception)  to  December  31,  2000.   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of ePHONE  Telecom,  Inc. as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for the years then ended and for the period  from April 6, 1998  (inception)  to
December 31, 2000 in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. As shown in the financial  statements,
the Company has  incurred  losses  since its  inception  including a net loss of
$13,701,100  during  the year  ended  December  31,  2000.  The  Company  has an
accumulated  deficit of $15,319,698 at December 31, 2000.  These factors,  among
others,  as discussed in Note 2 to the financial  statements,  raise substantial
doubt about the Company's ability to continue as a going concern.  The financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

/s/ Grant Thornton, LLP

Vienna, Virginia
February 1, 2001



                                      F-2
<PAGE>


                              ePHONE Telecom, Inc.

                          (A Development Stage Company)

                                 Balance Sheets



<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                       2000           1999
                                                                                   -----------    -----------

<S>                                                                                <C>           <C>
Current Assets:
     Cash and cash equivalents .................................................   $ 1,525,978   $    82,747
     Investment in marketable securities .......................................     2,170,908           --
     Restricted cash ...........................................................       579,435           --
     Advances ..................................................................            --       269,200
     Accounts receivable .......................................................        39,200           --
     Inventory .................................................................       553,218           --
     Other receivables .........................................................        18,893           --
                                                                                   -----------    -----------
          Total Current Assets .................................................     4,887,632       351,947

Property and Equipment, net ....................................................       999,902       125,474

Array Telecom Lease, net                                                             1,663,942           --

Investment in ePHONE Technologies, Inc.                                                185,000           --

Other Assets ...................................................................       102,543           --
                                                                                   -----------    -----------
Total Assets ...................................................................   $ 7,839,019    $   477,421
                                                                                   ===========    ===========

Liabilities and Stockholders' Equity:

Current Liabilities:
     Accounts payable ..........................................................   $   309,258    $   282,899
     Accrued liabilities .......................................................     1,169,244        332,000
     Due to related parties ....................................................          --           91,995
     Customer advances .........................................................        25,853          --
                                                                                   -----------    -----------
          Total Current Liabilities ............................................     1,504,355        706,894
                                                                                   -----------    -----------

Deferred royalty obligation                                                            410,000          --

Stockholders' Equity:
     Common  stock, par  value $0.001
     Authorized: 150,000,000 at December 31, 2000
          increased from 50,000,000 at
          December 31, 1999
     Issued and Outstanding: 17,453,848 at
          December 31, 2000 and 13,170,667
          at December 31, 1999  ................................................        17,454         13,171
     Additional paid in capital ................................................    21,204,687      1,375,954
     Accumulated other comprehensive income ....................................        22,221            --
     Deficit accumulated during the development stage ..........................   (15,319,698)    (1,618,598)
                                                                                   -----------    -----------
          Total Stockholders' Equity (Deficit)..................................     5,924,664       (229,473)

                                                                                   -----------    -----------
Total Liabilities and Stockholders' Equity .....................................   $ 7,839,019    $   477,421
                                                                                   ===========    ===========

</TABLE>





See accompanying notes to financial statements.



                                       F-3
<PAGE>



                              ePHONE Telecom, Inc.

                          (A Development Stage Company)

                            Statements of Operations


<TABLE>
<CAPTION>
                                            Years Ended           April 6,1998
                                            December 31,         (inception) to
                                         2000         1999     December 31, 2000
                                      ----------    --------   -----------------
<S>                                 <C>             <C>             <C>
Net revenues .....................  $    589,823    $       --      $    589,823


Operating expenses

   Cost of revenues ..............       411,550            --           411,550

   Sales and marketing ...........     1,852,970         218,888       2,072,848

   General and administrative.....     4,786,660         969,341       5,774,255

   General and administrative -
      non-cash compensation            7,433,445         403,125       7,836,570
                                    ------------    ------------    ------------

Total operating expenses              14,484,625       1,591,354      16,095,223
                                   -------------   -------------   -------------
Loss from operations..............  (13,894,802)     (1,591,354)    (15,505,400)

Interest and other (income), net       (193,702)           --          (193,702)
                                   -------------   -------------   -------------

Net Loss ......................... $(13,701,100)   $ (1,591,354)   $(15,311,698)
                                   =============   =============   =============
Loss per share -(basic and diluted)$       (.94)   $       (.14)
                                   =============   =============
Weighted average number of common
shares outstanding................   14,573,105      11,027,473
                                   =============   =============
</TABLE>

See accompanying notes to financial statements.


                                       F-4
<PAGE>

                              ePHONE Telecom, Inc.

                          (A Development Stage Company)

                            Statements of Cash Flows




<TABLE>
<CAPTION>

                                                                                             April 6, 1998
                                                                        Years Ended         (Inception) to
                                                                         December 31,      December 31, 2000
                                                                -------------------------  -----------------
                                                                    2000           1999
                                                                    ----           ----
<S>                                                            <C>           <C>            <C>
Cash Flows from Operating Activities:


Net loss ....................................................  $(13,701,100) $(1,591,354)   $ (15,311,698)
Adjustments to reconcile net loss to net cash flows from
operating activities:

     Depreciation and Amortization...........................       665,195       31,530          697,267
     Stock issued for services rendered .....................     4,569,279           --        4,570,279
     Stock option benefits charged to operations ............     2,864,166      402,125        3,266,291
     Deferred royalty expense                                       410,000           --          410,000
     Changes in operating assets and liabilities:
        Accounts receivable and other receivables                   (58,093)           --         (58,093)
        Inventory................................                  (553,218)           --        (553,218)
        Other assets.................                               166,657     (269,200)        (102,543)
        Accounts payable ........................                    26,360      271,826          309,259
        Accrued liabilities .....................                   837,244      332,000        1,169,244
        Due to related parties .....................                (91,995)      79,949               --
        Customer deposits........................                    25,853            --          25,853
                                                                -----------    -----------    -----------
Net cash flows used in operating activities .................    (4,839,652)    (743,124)      (5,582,776)
                                                                ===========    ===========    ===========

Cash flow from investing activities:

     Purchase of fixed assets ...............................      (999,977)     (152,129)     (1,157,523)
     Purchase of Array telecom license ......................    (2,218,589)          --       (2,218,589)
     Purchase of investments.................................    (2,798,687)          --       (2,798,687)
     Redemption of marketable securities                            650,000           --          650,000
     Deposit to restricted cash, net......................         (579,435)          --         (579,435)
     Investment in ePHONE Technologies, Inc...........             (170,000)          --         (170,000)
                                                                -----------    -----------    -----------
Net cash flows used in investing activities .................    (6,116,688)     (152,129)     (6,268,817)
                                                                ===========    ===========    ===========
Cash flow from financing activities:

     Proceeds from issuance of common stock .................       250,000      978,000        1,228,000
     Proceeds from issuance of special warrants, net ........    12,149,571           --       12,149,571)
                                                                -----------    -----------    -----------
Net cash flows provided by financing activities .............    12,399,571       978,000      13,377,571
                                                                ===========    ===========    ===========

Net increase in cash and cash ...............................     1,443,231        82,747       1,525,978
     equivalents

Cash and cash equivalents, beginning of period ..............        82,747           --             --
                                                                -----------    -----------    -----------
Cash and cash equivalents, end of period ....................   $ 1,525,978    $   82,747     $ 1,525,978
                                                                ===========    ===========    ===========

</TABLE>


See accompanying notes to financial statements.



                                      F-5
<PAGE>

                              ePHONE Telecom, Inc.

                          (A Development Stage Company)

           Statements of Stockholders' Equity and Comprehensive Income
<TABLE>
<CAPTION>
                                                                           Deficit
                                                        Accumulated      Accumulated
                                 Common Shares           Additional         Other           During
                                                          Paid-In       Comprehensive     Development
                             Shares        Amount         Capital          Income           Stage          Total
                           ----------   -----------     -----------     -------------    ------------   -------------

<S>                         <C>            <C>           <C>              <C>             <C>           <C>
April 6, 1998 (inception)

Common Stock Issued
   for Services             1,000,000      $  1,000      $     --         $     --        $      --       $    1,000

Net loss                                                                                     (19,244)        (19,244)
                            ---------    -----------      -----------      --------       ------------    ------------
Balance,
   December 31, 1998        1,000,000      $  1,000      $     --         $     --        $  (19,244)     $  (18,244)

Common stock
   issued for cash          3,000,000         3,000          97,000                                          100,000

Stock dividend              8,000,000         8,000                                           (8,000)              0

Stock options
  issued in exchange
  for services                                              402,125                                          402,125

Common stock issued        1,170,667         1,171          876,829                                          878,000
   for cash

Net loss                                                                                  (1,591,354)     (1,591,354)
                           ----------   -----------     -----------     --------------    ------------   -------------
Balance,
   December 31, 1999       13,170,667   $    13,171     $ 1,375,954       $   --         $(1,618,598)    $  (229,473)

Common stock issued
   for cash                    179,333          179         134,321                                          134,500

Exercise of stock
   purchase warrants            92,400           92         115,408                                          115,500

Sale of
   special warrants
   for cash, net                                         12,149,571                                       12,149,571

Stock and warrants issued
   in exchange for
   services                 4,011,448         4,012       4,565,267                                        4,569,279

Employee stock options                                    2,864,166                                        2,864,166

Net loss                                                                                  (13,701,100)   (13,701,100)

Change in unrealized gain                                                    22,221                           22,221
                                                                                                        ------------
Total comprehensive
  loss                                                                                                   (13,678,879)
                          -----------    ------------   -----------        --------       ------------  ------------
Balance,
   December 31, 2000      17,453,848       $ 17,454     $21,204,687        $ 22,221      $(15,319,698)  $  5,924,664
                          ===========    ============   ===========        ========       ===========   ============
</TABLE>


See accompanying notes to financial statements.


                                      F-6
<PAGE>

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

NATURE OF OPERATIONS

ePHONE  Telecom,  Inc. 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".

The Company's 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"),
the Company plans to develop the capacity to provide voice and fax  transmission
and other telephony features at high quality and low cost.

BASIS OF PRESENTATION

The Company is a development  stage company as defined in Statement of Financial
Accounting  Standard  ("SFAS") No. 7,  "Accounting  and Reporting by Development
Stage Enterprises" and, since its  incorporation,  has engaged in organizational
activities and in the development of its VoIP technology.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  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.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid  investments  purchased with an original
maturity of three months or less to be cash equivalents.

SUPPLEMENTAL CASH FLOW INFORMATION

For the years ended December 31, 2000 and 1999, the Company paid no income taxes
or interest.

INVENTORY

Inventory consists primarily of component parts held for resale and is stated at
the lower of cost, utilizing the weighted average method, or market.

PROPERTY AND EQUIPMENT

Property  and  equipment  are  stated  at cost  and are  depreciated  using  the
straight-line method over the estimated useful lives of the assets,  generally 5
to 7 years. Routine repairs and maintenance are expensed as incurred.

INVESTMENT IN EPHONE TECHNOLOGIES, INC.

The  Company's  investment  in 20% of the  outstanding  common  stock of  ePHONE
Technologies,  Inc.  (ePHONE Tech) is accounted  for using the cost method.  The
Company does not exercise significant  influence over ePHONE Tech's operating or
financial activities.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company  reviews its  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 the
amount of the assets exceeds the fair value of the assets.  To date,  management
believes no  impairment  of any assets has  occurred  with the  exception of the
Company's investment in ePHONE Technologies, Inc. as described in Note 7.




                                      F-7
<PAGE>

REVENUE RECOGNITION

Product sales are recognized upon shipment. Typical terms of sale do not provide
the customer with the right of return except for defective  products,  which are
covered by the warranty of the original equipment manufacturer. The Company also
generates revenues from product licenses and services.  Product license revenues
are generally  recognized  upon product  shipment  provided that no  significant
post-delivery  obligations  exist and  payment is due  within one year.  Advance
payments of product licenses and services are reported as unearned revenue until
all conditions for revenue recognition are met.

STOCK-BASED COMPENSATION

The Company  accounts 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 complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB
No. 25, compensation expense is based on the difference,  if any, on the date of
the grant, between the fair value of the Company's stock and the exercise price.

The Company accounts 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.

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 than likely than not be realized.

NET LOSS PER SHARE

The Company  reports  basic and diluted loss per share.  Basic loss per share is
computed by dividing  net loss by the  weighted  average  number of  outstanding
shares of common stock.  Diluted  earnings per share is computed by dividing net
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, 2000 and 1999, options and warrants to purchase
9,654,377 and 4,490,667 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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities".  This  Statement  requires  companies to recognize all
derivatives as either assets or liabilities,  with the  instruments  measured at
fair value. The accounting for changes in fair value and gains or losses depends
on the  intended  use of the  derivative  and  its  resulting  designation.  The
statement was  originally  effective for fiscal years  beginning  after June 15,
1999. In July 1999, FASB delayed  implementation  of this standard for one year,
to June 30, 2000.  The Company will adopt SFAS 133 in the first quarter of 2001.
The Company believes that the  implementation of SFAS 133 will have no effect on
its financial statements.

                                      F-8
<PAGE>

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin  No.  101,  "Revenue  Recognition  in  Financial  Statements".  The SAB
expresses the SEC's views on applying generally accepted  accounting  principles
to revenue recognition in financial statements. The Company's application of the
SAB did not have a material impact on its financial statements, however, certain
SEC staff  interpretations  of the SAB have not been  published  and may have an
effect on the  applicability  of the SAB in relation to the Company's  financial
statements.

In  March  2000,   the  Financial   Accounting   Standards   Board  issued  FASB
Interpretation  No. 44,  "Accounting  for Certain  Transactions  Involving Stock
Compensation,  an  Interpretation  of APB Opinion No. 25". With the exception of
certain  provisions that required earlier  application,  this  interpretation is
effective for all  applicable  transactions  beginning July 1, 2000. The Company
adopted FIN 44 during the quarter ended  September 30, 2000. The adoption of the
Interpretation  did not have a significant  impact on the  Company's  results of
operations or its financial position.
RECLASSIFICATIONS

Certain 1999 balances and disclosures have been reclassified to conform to
the 2000 presentation

NOTE 2 - GOING CONCERN MATTERS

The  accompanying  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.  As  shown  in the  financial
statements  the Company  has  incurred  losses  since its  inception  and has an
accumulated deficit of $15,319,698 at December 31, 2000.

The Company's  continuation  as a going concern is dependent upon its ability to
raise additional financing to successfully develop and introduce its products to
market.  These factors among others may indicate that the Company will be unable
to continue as a going  concern.  The  Company is actively  pursuing  additional
equity  financing  to provide the  necessary  funds for  working  capital and to
obtain the necessary funds for planned acquisitions and strategic partnerships.

The  financial  statements  do  not  include  any  adjustments  relating  to the
recoverability  and  classification  of assets  and  liabilities  that  might be
necessary should the Company be unable to continue as a going concern.

NOTE 3 - RELATED PARTY TRANSACTIONS

For the years ended 2000 and 1999, the Company  incurred  $140,000 and $383,000,
respectively,  for  management  services  provided by companies in which certain
directors have a controlling interest.

For the years ended 2000 and 1999,  the Company paid  consulting  fees of $0 and
$117,000, respectively, to certain directors of the Company.

For the year ended 2000,  $56,000 of sales was to a Company in which  certain of
the Company's directors have a controlling interest.

NOTE 4 - MARKETABLE INVESTMENTS

At December 31, 2000, the Company's available-for -sale investments consisted of
debt instruments  issued by federal and state government  agencies.  Contractual
maturities of  available-for-sale  debt  securities at December 31, 2000 were as
follows:

                                                Market    Unrealized
                                   Cost         Value    Gain (Loss)
                                ----------   ----------   ---------
Mature within one year          $1,557,131   $1,588,929   $ 31,798
Mature in one to five years        591,556      581,979     (9,577)
                                ----------   ----------   ---------
Total available-
for-sale securities             $2,148,687   $2,170,908   $ 22,221
                                ==========   ==========   =========

                                      F-9
<PAGE>

During the year ended  December  31,  2000,  the  Company  redeemed  $650,000 of
available-for-sale debt securities.


NOTE 5 - PROPERTY AND EQUIPMENT

At  December  31,  2000  and  1999,  property  and  equipment  consisted  of the
following:

                               December 31,  December 31,
                                    2000         1999
                                 ---------    ---------

Computer equipment ...........   $119,739    $   19,820
Furniture and fixtures .......    535,143           --
Telecommunications equipment .    106,863       137,726
Other equipment                   380,777           --
                                 ---------    ---------

                                1,142,522       157,546
Less: accumulated depreciation   (142,620)      (32,072)
                                 ---------    ---------

Property and equipment, net...  $ 999,902    $  125,474
                                 =========    =========


NOTE 6 - ARRAY TELECOM LICENSE

On March 31, 2000, the Company entered into a Strategic Alliance Agreement and a
License  Agreement  with  Comdial  Corporation  ("Comdial")  and  Array  Telecom
Corporation  ("Array  Telecom"),  a  wholly  owned  subsidiary  of  Comdial.  In
connection  with the  Agreement  and the  License,  the Company  made an initial
payment to Comdial of $2,650,000. As part of the Agreement, the Company received
the fixed assets of Array Telecom,  with a book value of approximately  $431,000
and assumed the lease of Array Telecom's Herndon, Virginia facility. The License
grants the Company an  exclusive  license for all Voice over  Internet  Protocol
(VoIP)  technology that has been developed by Array Telecom for a period of five
years. The difference between the amount paid to Comdial and the amount recorded
as fixed assets  totaled  $2,219,000,  and  represents the value of the licensed
technology  and is recorded as an  intangible  asset.  Periodically,  management
evaluates  the  estimated  useful life of this  intangible  asset and  considers
planned  enhancements and  modifications,  technological  obsolescence and other
factors.  During December 2000,  Management determined that the estimated useful
life of the licensed technology was not 5 years and shortened the useful life to
3 years.  This resulted in an increase in  amortization  expense of $224,000 for
the year ended December 31, 2000.  Accumulated  amortization totaled $555,000 at
December 31, 2000.

The License Agreement  requires the Company to pay an additional  $2,180,000 for
the VoIP  technology  over 5 years with minimum  payments of $180,000 due in the
first  year and  $500,000  in each of the next four  years.  Additional  royalty
payments  will be payable to the extent that 2% of gross sales as defined in the
Agreement exceed minimum  payments for the VoIP  technology.  In connection with
shortening  the useful life of the  licensed  technology,  the Company  recorded
additional  royalty  fees of $410,000 as a long-term  liability  at December 31,
2000. As part of the  arrangement,  the Company also agreed to pay an additional
amount of $350,000 to employees of Array  Telecom as  compensation  for benefits
forfeited by them as a result of the creation of the  Strategic  Alliance.  This
amount is included as general and  administrative  expenses in the  statement of
operations for the year ended December 31, 2000.

                                      F-10
<PAGE>

The following is a schedule of future minimum payments:

                                        Facility     Royalty
                                         Lease      Payments      Total
       Year Ending December 31,        ---------    ----------  ---------
                  2001                   173,790     420,000     593,790
                  2002                   179,004     500,000     679,004
                  2003                   184,374     500,000     684,374
                  2004                    62,061     500,000     562,061
                  2005                     --        125,000     125,000
                                       ---------    ---------    --------
       Total future minimum
         payments                      $ 599,229    2,045,000   2,644,229
                                       =========    =========   =========


NOTE 7 - TRANSACTIONS WITH AND INVESTMENT IN EPHONE TECHNOLOGIES, INC.

On December 1, 2000, in connection  with the  termination  of certain  executive
officers of the  Company,  the Company  entered  into a Support and  Development
Agreement with ePHONE  Technologies,  Inc (ePHONE Tech), a company formed by the
terminated  executive  officers in December 2000.  ePHONE Tech will,  under this
Agreement,  provide the Company with internet  telephony  technology support and
development  services at an hourly rate plus  reimbursements for certain support
services, as defined in the agreement. The term of the agreement is one year and
may be renewed for consecutive  one-year terms. No services were provided to the
Company during the year ended December 31, 2000 under this agreement.

As provided for in the agreement, the Company purchased a 20% equity interest in
ePHONE Tech. Since the agreement  contained a provision  allowing ePHONE Tech to
repurchase the Company's  equity  interest for $185,000 at any time prior to the
third  Anniversary  (PE) of the  agreement,  the  Company  recorded  its  equity
investment  (PE) in  ePHONE  Tech at  $185,000.  The  remaining  portion  of the
$880,000 (which  consisted of $865,000 (PE) in cash and $15,000 in equipment) or
$695,000,  the Company incurred (PE) in connection with the termination of these
executive  officers is included  in general and  administrative  expense for the
year ended December 31, 2000.

NOTE 8 - ACCRUED LIABILITIES

Accrued expenses consist of the following:
                                                           DECEMBER 31,
                                                     -------------------------
                                                        2000            1999
                                                     ----------       --------

Accrued vacation             ...................... $    15,412       $     --
Redeemable special warrants........................     579,435             --
Accrued legal fees                                      212,000             --
Other..............................................     362,397        332,000
                                                     ----------       --------
                                                    $ 1,169,244       $332,000
                                                     ==========       ========

Certain  special  warrant  holders  have the right to redeem a portion  of their
original  investment,  as described in Note 9.  Management  believes  that these
special  warrant  holders will  exercise  this right and has  accounted for this
amount as an accrued liability.

The Company is involved in  arbitration,  resulting from the  termination of its
former President and Chief Operating  Officer,  Mr. Charles Yang. A breakdown in
the relationship between Mr. Yang and the Company developed in early 2000 and he
ceased  providing any services to the Company on January 31, 2000.  Mr. Yang was
formally  terminated on March 9, 2000.  Mr. Yang is claiming that he is entitled
to 1,500,000 common shares and 500,000 options to purchase common stock at $0.50
per share.  During 1999, the Company  accrued a liability  totaling  $300,000 in
connection with a settlement  offer made to Mr. Yang to resolve this matter.  To
date Mr. Yang has not accepted or rejected this  settlement  offer and the claim
is scheduled for arbitration in California  during June 2001. Based on review of
the facts and circumstances,  management has provided for what is believed to be
a  reasonable  estimate at exposure to loss  associated  with this claim.  While
acknowledging  the uncertainties of arbitration,  management  believes that this
matter will be  resolved  without  material  effect to the  Company's  financial
position or results of operations.

                                      F-11
<PAGE>

NOTE 9 - STOCKHOLDERS' EQUITY

COMMON STOCK

Beginning in November 1999 and ending in February 2000, the Company 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. Each "unit"  consisted of one
share of our common  stock and one warrant to purchase  an  additional  share of
common stock at $1.25. These investors currently hold 1,350,000 shares of common
stock and are  entitled to receive up to  1,350,000  shares of common stock upon
exercise of the  warrants.  During the year ended  December 31, 2000,  investors
exercised  warrants for the purchase of 92,400  shares of the  Company's  common
stock.  The Company  received  $134,500  and  $878,000 for the sale of the units
during  2000 and  1999,  respectively,  and  $115,500  for the  exercise  of the
warrants in 2000.

During May 2000,  the Company  issued 345,000 shares of stock to a consultant as
further described under non-employee stock compensation.

On July  12,  2000,  the  Company's  Board  of  Directors  voted  to  rescind  a
performance  share  plan  previously  adopted  in 1999  pursuant  to which up to
15,000,000  shares  of  Company  common  stock  would  have been  issued  for no
additional  consideration if ePHONE were to meet certain performance  objectives
by the end of fiscal year 2002. The performance share plan was rescinded because
of changes in the Company's  business plan since the adoption of the performance
share plan.  Concurrently  with rescinding the performance share plan, the Board
of  Directors  agreed  to  grant  for no  additional  consideration  a total  of
3,666,448  shares of Company common stock in  consideration  to four individuals
who are former  executive  officers of, or consultants to, ePHONE who would have
been  eligible to receive  shares of common  stock under the  performance  share
plan. The  stockholders  of ePHONE  approved the issuance of these shares and an
amendment to its Articles of Incorporation,  increasing the number of authorized
shares of common stock from  50,000,000 to  150,000,000 at the Annual Meeting of
Stockholders  on August 23,  2000.  The shares of common  stock were  granted in
consideration  for services  rendered to the Company  during the period from the
fourth quarter of 1998 through the first quarter of 2000. The Company recorded a
$3,700,000 charge related to the granting of these shares of common stock.

SPECIAL WARRANTS

In early  2000  the  Company  sold a total of  13,780,837  special  warrants  to
investors  outside of the  United  States  pursuant  to  Regulation  S under the
Securities Act of 1933, as amended  (referred to herein as the Securities  Act).
Each special  warrant was  purchased  for $1.10,  and each special  warrant when
exercised  entitles  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
expire on March 31, 2002.

In connection with the sale of special  warrants  described  above,  the Company
granted  GroomeCapital.com,  Inc.,  which served as its agent in the sale of the
special  warrants,  warrants to purchase 889,251 shares of common stock at $1.10
per share and 250,000  options to purchase  shares of common  stock at $0.60 per
share. The warrants and options expire on March 31, 2002.

The special warrant  agreements  contain certain penalties to the Company in the
event that the Company does 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.  The Company failed to meet these  deadlines,  and
consequently; each special warrant holder is 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 has the right to receive an
additional  10% of their  original  investment  in shares of common stock of the
Company  upon the  exercise of the special  warrants.  As of December  31, 2000,
certain special warrant holders  exercised  their  Redemption  Rights,  with the
Company returning  $1,315,430 to these investors.  Management  believes that the
remaining  special warrant holders will exercise their Redemption Right and that
the Company will have to return an additional  $579,435,  which is accounted for
as restricted cash at December 31, 2000.  Accordingly,  the Company has recorded
this  amount  as an  accrued  liability  in the  accompanying  balance  sheet at
December 31, 2000.

                                      F-12
<PAGE>

Should the special warrant holders all exercise their Redemption  Rights,  which
management believes will be the case, the Company will return to these investors
a total of  $1,894,865.  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  Company  common  stock  equal to 10% of the
special warrant holders  initial  investment,  the Company will issue a total of
13,436,316  shares of common stock and stock purchase  warrants for the purchase
of up to 13,436,316  shares of Company common stock for $1.60 per share to these
investors. Proceeds from the Special Warrant offering totaled $12,149,571 net of
$1,114,485  in  offering  costs and  $1,894,865  returned  and to be returned to
shareholders upon the exercise of their Redemption Right.

NON-EMPLOYEE STOCK COMPENSATION ISSUED IN EXHANGE FOR SERVICES RECEIVED

In addition to warrants to  purchase  shares of the  Company's  common  stock to
GroomeCapital.com as described under Special Warrants, the Company granted stock
options and warrants to purchase common stock as detailed below.

During 1999, the Company granted  1,250,000  options to purchase common stock at
$.50 per share to consultants.  The company recorded $402,125 in expense,  which
was equal to the fair value of the options at the date of grant.

As partial  consideration  for services  rendered  under a consulting  agreement
entered  into on May 24,  2000,  for a detailed  analysis of  Internet  Protocol
development and market  opportunities  in various major  countries,  the Company
granted Sobois-Livert Investment Corporation warrants to purchase 250,000 shares
of common  stock at $0.60 per share and,  as agreed to, upon  completion  of the
consulting  engagement and delivery of certain reports,  additional  warrants to
purchase  488,833  shares  of  common  stock at $1.10  per  share.  Both sets of
warrants  expire  on May 24,  2002.  The fair  value of these  warrants  totaled
$299,000 and has been  recorded by the Company as non-cash  compensation  during
the year ended December 31, 2000.

On May 9, 2000, the Company  granted  345,000 shares of common stock to Cornwall
Management  Ltd.  as  partial   consideration  for  services  rendered  under  a
consulting  agreement.  The fair value of the shares  totaled  $604,000  and was
recorded  as a non-cash  compensation  expense for the year ended  December  31,
2000.

The following table summarizes  information for  non-employee  stock options and
stock purchase  warrants  granted for services,  and in connection  with private
placements done by the Company:



                                 FISCAL 2000                 FISCAL 1999
                          -------------------------   -------------------------
                                        WEIGHTED                    WEIGHTED
                           NUMBER     AVERAGE PRICE    NUMBER     AVERAGE PRICE
                          OF SHARES     PER SHARE     OF SHARES     PER SHARE
                          ---------   -------------   ---------   -------------

Beginning balance.......  2,420,667       $0.86              --          --
Granted.................  2,057,417       $0.99       2,420,667       $0.86
Exercised...............    (92,400)      $1.25              --          --
Cancelled...............         --                          --          --
                          ---------       -----       ---------       -----
Ending balance..........  4,385,684       $0.91       2,240,667       $0.86
                          =========       =====       =========       =====

                                      F-13
<PAGE>

EMPLOYEE STOCK COMPENSATION

During 1999, the Company granted  2,250,000  options to purchase common stock at
$.50 per share to certain directors and officers of the Company.

On May 5, 2000, the 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 of the Company,  and who the Board  determines will be officers or key
employees  upon  commencement  of  employment,  and  consultants  or independent
contractors of the Company who are determined to render 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.

During 2000, the Company granted  1,500,000 stock options to two officers of the
Company,  which vested on the grant date with the  exercise  price less than the
market  price at grant date.  In  accordance  with APB 25, the Company  recorded
compensation  expense  totaling   $2,865,000.   These  two  officers  terminated
employment  with the  Company  in  December  2000 and a total  of  6,747,307  in
accumulated  stock option  awards were canceled as provided for in the officers'
Separation Agreements.

In connection with the termination of these two officers,  all other outstanding
unvested stock options became  immediately vested pursuant to a provision in the
Plan.

The following table summarizes information on the Company's stock options:



                                  FISCAL 2000                 FISCAL 1999
                           -------------------------   -------------------------
                                         WEIGHTED                    WEIGHTED
                            NUMBER     AVERAGE PRICE    NUMBER     AVERAGE PRICE
                           OF SHARES     PER SHARE     OF SHARES     PER SHARE
                           ---------   -------------   ---------   -------------

Beginning balance........  2,250,000       $0.50              --          --
Granted..................  9,776,000       $0.70       2,250,000       $0.50
Exercised................         --          --              --          --
Cancelled................ (6,757,307)      $0.56              --          --
                           ---------       -----       ---------       -----
Ending balance...........  5,268,693       $0.81       2,250,000       $0.50
                           =========       =====       =========       =====

The  following  table  summarizes  information  about  stock  options  issued to
employees, outstanding at December 31, 2000:



<TABLE>
<CAPTION>
                  OPTIONS OUTSTANDING
             ------------------------------                           OPTIONS EXERCISABLE
 RANGE OF                  WEIGHTED-AVERAGE                      ------------------------------
 EXERCISE      NUMBER         REMAINING       WEIGHTED-AVERAGE     NUMBER      WEIGHTED-AVERAGE
  PRICES     OUTSTANDING   CONTRACTUAL LIFE    EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
-----------  -----------   ----------------   ----------------   -----------   ----------------

<S>           <C>               <C>                <C>            <C>               <C>
$0.50-$1.09   5,172,693         9 years            $0.80          5,172,693         $0.80
$1.19-$1.59      96,000        10 years            $1.41             96,000         $1.41
              ---------        --------            -----          ---------         -----
              5,268,693         9 years            $0.81          5,268,963         $0.81
              =========        ========            =====          =========         =====
</TABLE>

                                      F-14
<PAGE>


Had compensation expense for the Company's plan been determined based on
the fair value at the grant date for plan awards consistent with the provisions
of SFAS No. 123, the Company's net loss and net loss per common and common
equivalent shares outstanding would have been the pro forma amounts indicated
below:



                                                YEAR ENDED DECEMBER 31,
                                             ------------------------------
                                                 2000              1999
                                             ------------      ------------

Net loss -- as reported....................  $(13,701,100)      $(1,591,354)
Net loss -- pro forma......................  $(16,649,035)      $(2,315,179)
Net loss per share -- as reported..........  $      (0.94)     $      (0.14)
Net loss per share -- pro forma............  $      (1.14)     $      (0.21)

The  weighted-average  fair  values of each option at the date of grant for 2000
and 1999 was $1.04 and $0.32,  respectively,  and were  estimated on the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
weighted-average  assumptions  used in 2000  and  1999:  dividend  yield  of 0%;
expected volatility of 150% in 2000 and 98% in 1999;  risk-free interest rate of
5.00% in 2000 and 5.64% in 1999; and expected lives of 3 years.


NOTE 10 - INCOME TAXES

No  provision  for US federal or state  income  taxes have been  recorded in any
period, as the Company has incurred operating losses since its inception.

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
Company's deferred tax assets for federal and state income taxes are as follows:


                                                YEAR ENDED DECEMBER 31,
                                              -------------------------
                                                  2000           1999
                                              ------------   ----------

Net operating loss carryforwards............  $ 3,647,000    $ 464,000
Excess of book over tax Array Telecom
   license amortization.....................      171,000           --
Non-cash compensation.......................      508,000      157,000
Deferred royalty obligation                       160,000           --
Other                                               8,000           --
Less valuation allowance....................   (4,494,000)    (621,000)
                                              ------------   ----------
Net deferred tax asset......................           --           --
                                              ============   ==========


Realization  of deferred tax assets is dependent upon future  earnings,  if any.
The Company has  recorded a full  valuation  allowance  against its deferred tax
assets  since  management  believes  it is more likely than not that these asset
will not be  realized.  No income tax benefit has been  recorded for all periods
presented because of the valuation allowance.

At December 31, 2000, the Company has available,  for U.S.  income tax purposes,
net operating loss carryforwards of approximately $9,351,000,  which can be used
to offset future taxable income through 2019. There can be no assurance that the
Company  will realize the benefit of the net  operating  loss  carryforward.  In
addition,  the Company's  utilization of its 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.

NOTE 11 SIGNIFICANT CUSTOMER

For the  year  ended  December  31,  2000,  90% and 97% of  sales  and  accounts
receivable were to/from one customer.

                                      F-15
<PAGE>


NOTE 12 SUBSEQUENT EVENT

On January  19,  2001,  the Company  entered  into a  Marketing  and  Networking
Services  Agreement  with  Innofone.com   (INNF-a  company  listed  in  National
Quotation Bureau "pink sheets").  This Agreement allows for the two companies to
start cooperating in enhancing the Company's voice over Internet Protocol (VoIP)
network with termination  traffic resulting from Innofone's  marketing programs.
In addition,  the Company and  Innofone.com  will pursue new marketing  programs
including personal computer to phone voice services,  packaging calling cards in
Innofone's  fulfillment  kits and other new products and  services.  The Company
paid  Innofone.com a set-up fee totaling  $500,000.  Innofone.com  has agreed to
repay this amount to the Company  within 90 days of the agreement  date. If such
amount is not repaid,  the Company  may, at its option,  convert the amount into
shares of  Innofone's  common stock at $0.25 per share and a warrant to purchase
an additional share at $0.75 per share. The Agreement expires December 31, 2010.













                                      F-16