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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 10-KSB

(Mark One)

|/x/ | Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended July 31, 2001
|--- | ----------------------------------------------------------------------------------------------------------------------
|/ / | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  to 

Commission File Number: 000-28215

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Interactive Telesis Inc.(Name of small business issuer in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

33-0649915(I.R.S. Employer Identification No.)12636 High Bluff Drive, Suite 200
San Diego, California(Address of principal executive offices)

92130(Zip Code)


|Issuer's telephone number, including area code: |  | Voice 858 523-4000,
Fax 858 523-4001
|----------------------------------------------- |  | ------------------------------------

Copies to:Bruce J. Rushall, Esq.
RUSHALL & McGEEVER
1903 Wright Place, Suite 250
Carlsbad, CA 92008
760 438-6855

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

Title of Each ClassCommon Stock, $0.001 par value

Name of Exchange on Which RegisteredOTC Bulletin Board


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

Check
whether the Issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 pursuant to Item 405 of Regulation S-B is not contained herein, 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. / /

Revenues
for the issuer's most recent fiscal year: $3,330,440

On
September 28, 2001 the aggregate market value of the Common equity held by non-affiliates (based upon the average of bid and asked price as of
September 28, 2001) was $7,708,330.

As
of September 28, 2001 the Issuer has 33,514,480 Outstanding Shares of Common Stock, $0.001 par value.

Transitional
Small Business Disclosure Format (check one): Yes / /  No /x/

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Part I

Item 1. Description of Business

Introduction

Interactive Telesis Inc. (also referred to as the "Company" or "we") is a leading provider of specialized interactive voice response (IVR) services and
in the deployment of automated speech recognition (ASR) technologies and speech-enabled hosting services. Interactive Telesis presents very compelling solutions for companies desiring to leverage the
benefits of speech recognition without the high cost of ownership responsibilities, capital outlay and internal IT staff requirements. We also own a controlling interest in Paragon Voice Systems, a
San Diego based developer and value-added reseller of computer telephony solutions in the emerging technology field of ASR services. Jointly with Paragon, we develop and deploy advanced speech
recognition solutions for corporate customers.

The
Company was formed under the laws of the province of British Columbia on June 19, 1987, and, on September 23, 1996, the Company's jurisdiction of incorporation was
changed to the State of Delaware.

The
Company's principal executive offices are located at 12636 High Bluff Drive, Suite 200, San Diego, California, 92130. Our telephone number is 858-523-4000.
Interactive Telesis' Internet website is located at www.interactivetelesis.com.

General Business

We currently concentrate on IVR/ASR and hosting services, both directly to medium and large corporations, as well as allowing our services to be bundled with
our partners' product offerings. We are not a solution-providerthat is, we do not develop IVR solutions for a fee and then install them at
the customer's site. Rather, we host all applications and provide all of our services through our own software and hardware systems located at our facilities. In some cases, in order to reduce
telecommunication costs, we install our equipment at a customer's location, which we remotely monitor and manage and it remains our property. Our systems consist of industry standard hardware and a
combination of off-the-shelf and proprietary software. The systems are modular and can be scaled to accommodate very large applications.

Principal Products or Services

INVESTORREACH

InvestorREACH is an automated shareholder communication service which allows customer public companies to provide a toll-free
telephone number which they advertise to their investors. Investors calling the number hear a personalized greeting from the customer company, and may select from a menu of options, which may include:



We
also provide mail fulfillment services. We charge a monthly service fee, a per-minute usage fee for voice, fax, and call transfer, and transactional fees for mail
fulfillment services.

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The range of our fees for the services are:

Service Fee

$300 to $500 per monthPer-minute IVR Usage

$0.24 to $0.35 U.S. ($0.39 to $0.65 Canada)Mail Fulfillment

$2.35 - $2.50 fee plus a pass-through on first-class postage.


We
determine the exact fees charged for each contract through negotiations with the customer. Factors we consider when determining fees include the financial and segment strength of
the customer, scope of service, volume of usage and set-up costs.

We
offer InvestorREACH on a month-to-month basis, with no set-up fee, no long-term contract, and no termination fees.

We
currently have 29 InvestorREACH-TM-customers in various industries. Our customers in fiscal year 2001 included Wells Fargo, Nike, Yahoo!, National Fuel Gas,
Aon Corporation and Global Crossing Corporation.

Revenues
for the fiscal year ended July 31, 2001 derived from our largest InvestorREACH customers were as follows:

CUSTOMER

FISCAL YEAR 2001 REVENUENational Fuel Gas

$
13,128AON Corporation

$
19,033Global Crossing

$
25,456Wells Fargo

$
45,445Yahoo!

$
72,697


DIGITAL RECORD AND REPLAY SERVICES

In November, 1997, we began providing digital record and replay services to the teleconference industry. The service allows teleconference providers to
digitally record teleconferences they conduct on behalf of their customers. These calls are then made available for immediate replay by end users using a touch-tone telephone. The system
is 100% automated (except where special editing is requested) and is customer-branded such that end users are not aware the service has been outsourced to us. We invoice the teleconferencing company
monthly, based on per-minute replay usage. We complement the telephonic replay with Internet replay capability, allowing end users to access sound files from a site hosted on behalf of the
teleconference provider or by the customer.

We
currently provide these services to one teleconferencing provider, Global Crossing, as well as directly to other corporate customers for internal use.

We
provide services to Global Crossing pursuant to a contract dated September 15, 1999, as extended on November 7, 2000. These services include digital recording and
automated replay of the customer's teleconference calls originating from its Westminster, Colorado and Canadian operations. Under this contract, payments are due to us for services provided at the
stated rates within 45 days of the date billed. This contract may be terminated at any time upon notice by either party.

AUTOMATED SPEECH RECOGNITION SERVICES

Our current priority is the development and deployment of services using ASR technology and speech-enabled hosting capabilities. ASR technology essentially
allows computers to understand the human
voice and respond to voice commands. Management expects applications based on this technology, as developed, will not only replace current IVR applications but also will dramatically

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expand the market for these applications as they extend beyond those which can be supported by current IVR technology. Our goal is to be a leading edge provider of ASR hosting applications. We believe
a potentially great market exists for these services.

To
pursue this goal, we have acquired a controlling interest in Paragon which is a reseller of speech recognition software and application building blocks for ASR technology as a part
of its integrated solutions for various corporate customers. Management believes its ownership of Paragon enhances our development, integration and support capabilities for ASR applications through
opportunities for joint and symbiotic activities with Paragon. These activities will initially focus on the development and deployment of ASR solutions for our corporate customers. If successful, our
relationship with Paragon should position our Company as one of the premier hosting providers for complex ASR applications.

We
began marketing of our ASR hosting services in late 2000. Our principal strategy for market penetration and acceptance is to concentrate on potential customers who we believe can
best use and benefit from the advantages of ASR hosting capabilities. Under this strategy, we are willing to service these customers on a short term, limited use basis. Our strategy emphasizes the
demonstration of the advantages and cost effectiveness of our ASR hosting services, rather than the immediate generation of revenue or profits. Currently, we are providing and/or have reached an
agreement to provide our ASR-based services to most of our customers on this basis, with the expectation that many of them will expand their use of our ASR services and generate additional
revenues for us in fiscal year 2002.

AUTOMATED SURVEYS

We have developed proprietary software applications, which permit surveys to be conducted via IVR on an automated basis without human intervention. Surveys can
be linear or branching and responses can be multiple choice or voice-recorded. We have registered the service mark TeleSurvey-SM- in conjunction with this service.

Our
initial sales and marketing efforts for these services are focused on the prepaid phone card market in the United States. We have partnered with approximately 17 issuers of
prepaid phone cards to add the survey capability as a value-added option to their prepaid offering, thus enhancing their value proposition to their customers.

The
service involves a user of a prepaid phone card being routed to our IVR system at the time of activation (only) of the prepaid phone card for a
3-5-question survey. At the conclusion of the survey, the customer is returned to the customer's prepaid telecommunication platform to dial their outgoing telephone call.

Upon
securing reselling relationships with these partners, we structured a Channel Partner Program to support the sales and marketing efforts of our partners with a view to increasing
revenue from this sector.

ENHANCED SERVICES

We have developed proprietary software, which provides the following customized IVR functionality:



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We
have created applications, and are continuing to pursue additional opportunities utilizing this functionality, including Third Party Verification (TPV) and contests/sweepstakes
applications.

Sales, Marketing and Customer Service

We have a sales force of six individuals targeting customers in specific industry sectors (e.g., telecommunications, speech technology voice portals, and
managed computer services). Sales strategies include telemarketing, face-to-face meetings, presentations, and providing free demonstrations.

In
speech technology and managed services, the purpose is to leverage the existing sales forces of the partners in selling our services bundled with the partner's offering.

Subsidiaries

We own 56.67% of Paragon Voice Systems, a California corporation. In August 2000, we formed Voconex, (formerly VoiceVault, Inc.), a California
corporation, as our wholly owned subsidiary which is currently inactive.

Competition

The Company is aware of numerous companies in the United States and Canada who have IVR capability. In most instances, these competitors use IVR functionality
to supplement live-agent call center services. The Company does not offer any live-agent services and wherever these services are required as a complement to the Company's IVR
services, the Company out-sources the live-agent services to one of several call centers with which the Company has partnered.

The
IVR industry is dominated by perhaps ten large corporations capable of handling extremely high volume applications which are usually associated with direct response television
advertising. There are also dozens of smaller companies providing IVR service bureau services similar to the business strategy of the Company. In general, the Company finds itself in competition with
large call center competitors that also offer IVR services. The Company is pursuing business with large, national companies, including a majority of the large telephone companies in the United States
and Canada, and, as a result, usually competes against much larger companies.

Business Concentration

A majority of the Company's revenues to date has been generated by record and replay services. One customer accounted for 68% and three customers accounted for
83% of the Company's revenue for the years ended July 31, 2001 and 2000, respectively. All of the Company's contracts are terminable upon notice by either party. Effective July 12, 2000,
AT&T, one of our largest customers, stopped using our record and replay services.

The
Company is anticipating that the majority of its growth in the future will come from customers other than those referenced above; hence, the Company expects ultimately to have a
lesser dependence on these customers.

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Trademark and Copyright Issues

The Company develops all of its proprietary software in house and does not incorporate any third-party software other than
off-the-shelf, commercially available software.

The
Company has applied for the following service marks:



Governmental Regulation

We are not currently subject to direct federal, state, or local regulation in the United States other than regulations applicable to businesses generally or
directly applicable to electronic commerce. However, because the Internet is becoming increasingly popular, it is possible that a number of laws and regulations may be adopted in the United States
with respect to the Internet. These laws may cover issues such as user privacy, freedom of expression, pricing, content and quality of products and services, taxation, advertising, intellectual
property rights and information security. Furthermore, the growth of electronic commerce may prompt calls for more stringent consumer protection laws. Several states have proposed legislation to limit
the use of personal user information gathered online or require online services to establish privacy policies. The Federal Trade Commission has indicated that it may propose legislation on this issue
to Congress in the near future and has initiated action against at least one online service regarding the manner in which personal information was collected from users and provided to third parties.
The adoption of such consumer protection laws could create uncertainty in Internet usage and reduce the demand for all products and services. We do not provide customer information to third parties
and, therefore, do not anticipate any current or proposed legislation relating to online privacy to directly affect our activities to a material extent.

We
are not certain how our business may be affected by the application of existing laws governing issues such as property ownership, copyrights, encryption and other intellectual
property issues, taxation, libel, obscenity and export or import matters. The vast majority of those laws were adopted prior to the advent of the Internet. As a result, they do not contemplate or
address the unique issues of the Internet and related technologies. Changes in laws intended to address such issues could create uncertainty in the Internet marketplace. That uncertainty could reduce
demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs.

In
addition, it is uncertain what impact government regulation may have on telecommunication providers on which our business depends. Future government regulation may have an adverse
affect on our cost of doing business.

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Employees

We currently have nineteen full-time employees. In addition, Paragon Voice Systems has five full-time employees. Six of our employees
are in management; three are in accounting, six are in sales, marketing, customer service, and the remainder are in technical application, support and development. Our success will depend in large
part on our ability to attract and retain skilled and experienced employees. Our employees are not represented by a union. We believe that our relations with our employees is good. We do not currently
have any key-man life insurance on any of our employees, directors, or executive officers.

We
have no written or oral contracts for employment with any of our employees, directors, or executive officers.

Risk Considerations with our Company and Business

The business of the Company involves a number of risks and uncertainties that could cause actual results to differ materially from results projected in any
forward-looking statement in this report. The Company's securities are speculative and investment in the Company's securities involves a high degree of risk and the possibility that the investor will
suffer the loss of the entire amount invested.

RISKS RELATED TO THE COMPANY'S BUSINESS

WE HAVE A HISTORY OF LOSSES AND MAY INCUR LOSSES IN THE FUTURE. We have incurred significant net losses under our current plan of business. Through our fiscal
year ended July 31, 2001, we had an accumulated deficit of $14,547,676. There is no assurance that our revenues will grow or that we will obtain profitability in the future. Our ability to
increase revenue and obtain profitability will be affected by other risks and uncertainties described below, most of which are outside of our control.

OUR
CURRENT BUSINESS IS DEPENDENT UPON A SMALL NUMBER OF CUSTOMERS WHO ACCOUNT FOR MOST OF OUR REVENUES. Historically, we have relied on a small number of customers for most of our
revenues and earnings.

THE
LOSS OF ONE OR MORE OF THESE CUSTOMERS AND OUR INABILITY TO REPLACE THEM COULD MATERIALLY ADVERSELY AFFECT OUR SHORT-TERM PROFITABILITY. For example, AT&T stopped
using our record and replay services in July 2000. AT&T represented 38% and 47% of our revenues for the years ended July 31, 2000 and 1999, respectively. To date, we have not fully
replaced this customer.

WE
MAY NEED ADDITIONAL FINANCING. If our restructuring plan and business operations do not proceed as currently anticipated, we will need additional capital to fully implement our
business plan through the first half of our fiscal year 2002. We cannot assure you that additional capital will be available when and if we need it; and, if not available, we may not be able to
conduct effectively or even continue our business operations.

OUR
CURRENT BUSINESS DEPENDS ON SKILLED AND EXPERIENCED EMPLOYEES. We have no long-term contracts with our key employees. Competition for skilled and experienced software
programmers and supporting skills in our geographic region is intense and we may not be able to hire or retain key employees as needed. If we are unable to hire, train and manage new skilled and
experienced employees as needed, we would be unable to support our planned growth and future operations.

REVENUES
FROM PORTIONS OF OUR BUSINESS MAY FLUCTUATE THROUGHOUT OUR FISCAL YEAR. For example, our Digital Record & Replay services may be utilized mostly during the quarterly
earnings season, which is typically held by calendar-year companies during the months of January, April, July and October.

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WE RELY SIGNIFICANTLY ON THE SERVICES AND FACILITIES OF THIRD PARTIES. Our operations depend to a significant degree on a number of other third parties, including telecommunication
service providers. We have no effective control over these third parties. From time to time, we could experience temporary interruptions in our telecommunications access. Continuous or prolonged
interruptions in our telecommunications access would have a material adverse affect on our business, financial condition, and results of operations. Our agreements with our telecommunications
providers place certain limits on our ability to obtain damages from the service providers for failure to maintain services to our facilities.

WE
DO NOT BELIEVE SUBSTANTIAL BARRIERS EXIST TO THE ENTRY BY OTHER COMPANIES INTO ONE OR MORE OF THE SERVICES WE PROVIDE. Accordingly, we could, in the future, encounter significant
competition for our services from one or more competitors which have significantly greater technical and/or financial resources than us.

WE
HAVE A LIMITED OPERATING HISTORY. We began our current business in 1994 and remain dependent upon a limited variety of services and small number of significant customers. We intend
to expand our IVR/ASR services and our customer base but there is no assurance that our long-term operating strategies for the sales of our IVR/ASR hosting services in selected markets
will be successful.

WE
DO NOT HAVE COPYRIGHT OR PATENT PROTECTION FOR OUR PROPRIETARY SOFTWARE SYSTEMS. We do not consider our service mark or trade secrets to be material to our financial results and/or
results of operations.

MANY
OF OUR CUSTOMERS HAVE GREATER TECHNICAL AND FINANCIAL RESOURCES THAN WE DO. Should they deem it advisable and economically feasible, our major customers could choose to
internally provide the services they contract us to provide. Accordingly, there is no assurance that in the future one or more of our major customers may not provide internally services which it now
purchases from us.

IF
WE ARE UNABLE TO DEVELOP NEW SERVICES OR EXPAND FEATURES OF EXISTING SERVICES, WE MAY NOT BE ABLE TO EXPAND OUR OPERATIONS. We must continually explore additional areas and
services which we may offer to our customers. Our inability to manage our growth could harm our business. Also, if we are unable to continually improve our ability to deliver services to customers, we
may not be able to accommodate the increasing level of use or expanding needs of our customer base.

OUR
BUSINESS IS SUBJECT TO CHANGES IN THE COMPUTER AND TELECOMMUNICATION INDUSTRIES WHICH ARE OCCURRING AT A RAPID RATE. It is possible that future changes in these industries could
significantly change the demand for our services and/or the means by which we provide our services. Our failure to adapt to such changes could adversely affect our volume or cause our services to
become obsolete.

RISKS RELATED TO AN INVESTMENT IN THE COMPANY'S COMMON STOCK

THERE ARE DILUTIVE EFFECTS FROM OUR OUTSTANDING REPRICING RIGHTS. We issued repricing rights for 905,797 shares of our common stock previously purchased by BH
Capital and Excalibur which require us to issue additional shares to the extent the average market price at the time that these investors sell these shares is less than $3.04 per share. Also,
anti-dilution rights in our agreement relating to these shares entitle BH Capital and Excalibur to receive additional shares of our common stock if, before they sell these shares, we issue
any additional shares at a lower price than the $2.76 per share these investors paid for their shares. The issuance of these additional shares could materially reduce our net income per share, if any,
in future periods and could materially and adversely affect the market price for our common stock. Moreover, the more shares these investors become

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entitled to receive pursuant to their repricing rights or under their anti-dilution rights, the more influence and control they could exert over the Company. Our agreement with BH Capital
and Excalibur limits their ownership of our common stock to no more than 9.9% at any given time.

POTENTIAL
LACK OF LIQUIDITY IN OUR COMMON STOCK DUE TO PENNY STOCK REGULATIONS. Because our common stock trades below $5.00 per share, we are subject to the Securities Enforcement and
Penny Stock Reform Act of 1990 (the "Penny Stock Rules"). The Penny Stock Rules adversely affect the market liquidity for our common stock because broker-dealers trading in Penny Stocks must, among
other things, provide customers with a risk disclosure statement setting forth certain specified information prior to a purchase transaction; disclose to the customer inside bid quotation and outside
offer quotation for this Penny Stock, or, in a principal transaction, the broker-dealer's offer price for the Penny Stock; disclose the aggregate amount of any compensation the broker-dealer receives
in the transaction; disclose the aggregate amount of the cash compensation that any associated person of the broker-dealer, who is a natural person, will receive in connection with the transaction;
deliver to the customer after the transaction certain information concerning determination of the price and market trading activity of the Penny Stock. Also, prior to the transaction, the broker-
dealer must approve the customer's account for transactions in Penny Stocks and receive from the customer a written agreement to the transaction setting forth the identity and quantity of the Penny
Stock to be purchased. Also, under the Penny Stock Rules, broker-dealers must provide monthly account statements to customers which include the above-disclosures regarding penny stock investments.
These requirements make it more difficult administratively for broker-dealers to buy and sell our stock on behalf of their customers. Consequently, the Penny Stock Rules affect the ability of our
shareholders to sell the Company's shares in the secondary market.

WE
EXPECT THE TRADING PRICE OF OUR STOCK TO REMAIN HIGHLY VOLATILE. The trading price for our stock has in the past fluctuated significantly and is expected to continue to fluctuate
primarily because of the number of shares outstanding, the low trading price of the stock, developments in our business, including announcements of technological innovations, fluctuations in customer
orders, customer cancellations, the introduction of new products by our competitors, service problems and/or quarterly variations in the actual or anticipated results of our operations. Also, the
over-the-counter market in which our stock trades has historically experienced extreme price and volume volatility, which has particularly affected market prices of technology
company stock. This volatility has often been unrelated to the operating performance of the companies. Broad market volatility may adversely affect the market and price of our stock.

THERE
ARE POTENTIAL DILUTIVE EFFECTS FROM OUR OUTSTANDING CONVERTIBLE LOAN. Our common stock issued to Hambrecht & Quist Guaranty Finance, LLC ("H&QGF") by reason of its
conversion of its convertible loan, as well as common stock we may issue a result of the payment of interest and principal-in-kind payments on the convertible loan, could have
a dilutive impact on our stockholders with the same potential results as shares issued by reason of the repricing rights and anti-dilution provisions discussed above.

SHORT
SELLING BY THE HOLDERS OF OUR REPRICING RIGHTS MIGHT NEGATIVELY AFFECT OUR STOCK PRICE. Each of the investors holding the repricing rights has agreed that until such time that
it no longer owns any unexercised repricing rights, they will not sell short, directly or indirectly through any affiliate, any shares of our common stock, except during the ten trading days preceding
any exercise date with respect to the exercise of repricing rights by the investors. Although the circumstances under which these investors can effect short sales of our common stock are limited, any
such sales made by these investors or by other parties could, if done in sufficient quantities, significantly depress the trading price of our common stock. Moreover, given the relatively low trading
volume for our common stock, a short sale of a relatively small block of shares could have significantly more impact than such a sale would have on a more established public company with a higher
trading volume. As a result, our net income per share could be materially decreased, or net loss

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per share materially decreased, in future periods and the market price of our common stock could be materially and adversely affected.

SOME
OF THE PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT A CHANGE IN CONTROL OF THE COMPANY. Some of the provisions of our Certificate of Incorporation, our
bylaws and the Delaware General Corporation Law could make it more difficult for a party to acquire us, even if a change in control would be beneficial to our stockholders. See "Description of Capital
Stock" for more information on our charter provisions and the Delaware General Corporation Law. These provisions include:



WE
DO NOT PAY DIVIDENDS ON OUR COMMON STOCK AND HAVE NO PLANS TO DO SO. We intend to retain any earnings to finance growth and development of our business and do not anticipate paying
cash dividends in the foreseeable future. Accordingly, our shareholders will need to look for appreciation in the market price of our stock, if any, for a return on their investment.

OUR
MANAGEMENT HAS BROAD DISCRETION OVER ESTABLISHING AND IMPLEMENTING OUR OPERATIONAL STRATEGIES AND GOALS. Our management may devise, modify, abandon or implement operating
strategies at any time within their discretion without a vote of our shareholders. Accordingly, investors must depend on our management's experience and judgment in making critical decisions affecting
our business and operating results.

Additional Information

The Company is an electronic filer with the Securities and Exchange Commission (SEC). The SEC maintains an EDGAR
website, www.sec.gov that contains reports, proxy and information statements, and other information regarding the Company's filings. In
addition the Company's website, www.intelesis.com provides access to the SEC filings under the Investor Relations section. The public may
read and copy any materials we file with the SEC at the SEC's Public Reference Room. To obtain information on the operation of the Public Reference Room call the SEC at 1-800-SEC-0330.

Item 2. Description of Property

We lease our principal executive offices, which consist of approximately 13,686 square feet. This facility is leased on a long-term lease (see
leases). On May 25, 2001 we subleased our entire 13,686 square foot facility to Packet Machine, Inc. at the same rental rate we pay under our lease for that space. Concurrently, we
subleased back from Packet Machine, Inc. approximately 7,000 square feet of that space. We also lease 1,500 square feet of computer facility space at 10180 Telesis Court, San Diego, California.

In
addition, we leased approximately 5,063 square feet of office space at our former executive offices at 535 Encinitas Blvd., Suite 116, Encinitas, California 92024. This lease
expired in August 2001. We subleased these facilities to Cardio-Now on a sub-lease which expired in August 2001.

The
executive offices for Paragon Voice Systems are co-located with Interactive Telesis Inc. at 12636 High Bluff Drive, Suite 200, San Diego, California 92130.
Paragon's telephone number is 858-259-0071. Paragon's Internet website is located at www.paravoice.com.

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Item 3. Legal Proceedings

We resolved without admission of liability a lawsuit brought against us in fiscal 1999 in the Superior Court of Los Angeles, California, by a former consultant
claiming compensatory and punitive damages in excess of $2,000,000 for, among other things, alleged wrongful termination and breach of contract. On January 7, 2001, we settled this litigation
by agreeing to a non-cash payment of $550,000 in common stock as follows: One payment of $150,000 issued at settlement(277,776 restricted shares),five payments of $30,000 on
January 8, 2001 and on the first day of each succeeding four (4) months and eight quarterly increments of $31,250 each, commencing July 1, 2001. The payments are to be made in the
Company's common stock valued at the market price on the date of issuance. We will not pay any cash in settlement of this litigation.

We
have also resolved by private mediation before Hon. Herbert Hoffman, Retired, a claim brought by a former consultant/officer, alleging breach of contract regarding the issuance of
certain options under the 1996 Plan. On December 1, 2000, we resolved this claim (pre-litigation) by agreement to pay for the former consultant/officer's exercise of his options as
they became vested to purchase 100,000 shares of the Company's common stock at a price of $0.35 per share, 50,000 shares of common stock at $0.78 per share and an additional $25,000 in five equal
quarterly installments of $5,000, commencing December 31, 2000.

The
Company is a defendant in a lawsuit brought by a vendor claiming that the Company is in breach of three (3) of its equipment leases. Damages of approximately $188,000 have
been filed against the Company. Management is unable to determine the likelihood of the outcome and has included such amounts in its restructuring reserve.

Item 4. Submission of Matters to a Vote of Stockholders

Not applicable

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Our Stock Trading Symbol is: "TSIS"

Our
Common Stock is traded on the OTC Bulletin Board.

On
October 8, 1996, the Company's shares were posted for trading on the OTC Bulletin Board. Effective October 4,1996, the Company conducted a
one-for-seven share consolidation and commenced trading under the ticker symbol "TSIS".

At
September 28, 2001, we had approximately 760 shareholders of record.

We
have not declared a dividend on our common stock and we do not expect to declare a cash dividend on our common stock in the near future.

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Stock Prices

The following table shows the high, low and average closing sales prices per share of our common stock as reported for the OTC Bulletin Board Market for each
fiscal quarter since the calendar quarter ending October 31, 1999.

|                 |                                        | High |   | Low  |  | Close |      | Average Trading
Volume per
Quarter
|---------------- | -------------------------------------- | ---- | - | ---- |  | ----- | ---- | ----------------------------------
|FISCAL YEAR 2001 |                                        |      |   |      |  |       |      |                                   
|                 | First Quarter (8/1/2000 - 10/31/2000)  |      | $ | 1.59 |  | $     | 0.93 |                                   
|                 | Second Quarter (11/1/2000 - 1/31/2001) |      | $ | 1.31 |  | $     | 0.34 |                                   
|                 | Third Quarter (2/1/2001 - 4/30/2001)   |      | $ | 0.61 |  | $     | 0.34 |                                   
|                 | Fourth Quarter (5/1/01 - 7/31/01)      |      | $ | 0.36 |  | $     | 0.23 |                                   
|FISCAL YEAR 2000 |                                        |      |   |      |  |       |      |                                   
|                 | First Quarter (8/1/99 - 10/31/99)      |      | $ | 0.39 |  | $     | 0.31 |                                   
|                 | Second Quarter (11/1/99 - 1/31/00)     |      | $ | 3.69 |  | $     | 0.27 |                                   
|                 | Third Quarter (2/1/00 - 4/30/00)       |      | $ | 5.06 |  | $     | 1.50 |                                   
|                 | Fourth Quarter (5/1/00 - 7/31/00)      |      | $ | 3.00 |  | $     | 2.19 |                                   

---

The
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.

Recent sales of unregistered securities.

The
Company made the following changes in Securities after July 31, 2001:

On
August 31, 2001, the Company sold to Charles Delle Donne for $125,000, 62,500 shares of series C, Preferred Stock for a purchase price of $2.00 per share and a warrant to purchase
18,750 shares of Series C Preferred Stock for a price of $2.20 per share.

On
October 15, 2001, the Company sold to Charles Delle Donne for $175,000, 87,500 shares of series C, Preferred Stock for a purchase price of $2.00 per share and a warrant to purchase
77,750 shares of Series C Preferred Stock for a price of $2.20 per share.

The
series C, Preferred Stock is convertible at the rate of one share of series C Preferred Stock to ten shares of Common Stock.

The
Company agreed to file, at its expense, a registration statement covering the resale of the common stock issuable in connection with the Series C Preferred Stock. For both
issuances, the Company relies on the exemption from registration under the 1933 Act contained in Regulations and Rule 4(2) thereof. No commissions or finders' fees were paid in connection with these
sales.

12

---

Item 6A. Selected Financial Data

Interactive Telesis, Inc. and Subsidiary
(in thousands of dollars except per share amount)

|                                              |  | 2001   |   | 2000(a) |   | 1999  |  | 1998  |  
|--------------------------------------------- |  | ------ | - | ------- | - | ----- |  | ----- | -
|Net Sales                                     |  | 3,330  |   | 4,832   |   | 3,022 |  | 1,102 |  
|Income (loss) from continuing operations      |  | (6,080 | ) | (132    | ) | 322   |  | (677  | )
|Income (loss) per share-continuing operations |  | (0.19  | ) | 0.00    |   | 0.01  |  | (0.03 | )
|Total Assets                                  |  | 2,324  |   | 5,249   |   | 1,943 |  | 1,160 |  
|Long term debt                                |  | 1,592  |   | 551     |   | 292   |  | 76    |  

---

13

---



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

INTRODUCTION

Business

Interactive Telesis Inc. (also referred to as the "Company" or "we") is a leading provider of specialized interactive voice response (IVR) services and
in the deployment of automated speech recognition (ASR) technologies and speech-enabled hosting services. Interactive Telesis presents very compelling solutions for companies desiring to leverage the
benefits of speech recognition without the high cost of ownership responsibilities, capital outlay and internal IT staff requirements. We also own a controlling interest in Paragon Voice Systems, a
San Diego based developer and value-added reseller of computer telephony solutions in the emerging technology field of ASR services. Jointly with Paragon, we develop and deploy advanced speech
recognition solutions for corporate customers.

RESULTS OF OPERATIONS

The development and deployment of services using leading edge speech recognition technologies has been our principal emphasis for fiscal year 2001. During the
first six months of fiscal year 2001, previous management expended significant amounts to expand our employee and technological resources in anticipation of customer demand for these services.
However, due to uncertainties arising from the slowdown of the U.S. economy, most of our targeted customers for these services have delayed or deferred their decisions to upgrade their interactive
voice response and hosting services. As a result, the revenue-generating contracts we anticipated to arise during the fiscal year 2001 failed to materialize.

The
new management team expects some modest revenue generating contracts will be signed during the next two fiscal quarters of 2002. The discussion below emphasizes the increase in
our costs and
expenses as compared to the same periods last year. During the fiscal quarter ended January 31, 2001, and subsequent thereto, we have taken significant action to reduce and contain our
operating costs and expenses.

The
Company is restructuring its operations and has revised its strategic plan in order to become cash flow positive and achieve profitability in fiscal year 2002. The Company has
identified costs associated with the restructuring during the fiscal year ended July 31, 2001. The cost of the these items is approximately $1,267,000 or 14.5% of the total costs and expenses
of the twelve month period ended July 31, 2001. The discussion below further explains these restructuring costs.

During
the fourth quarter of the year ended July 31, 2001, the Company reviewed the $453,555 remaining value of goodwill relating to the acquisition of the majority ownership
of Paragon and determined the full carrying amount of the goodwill to be impaired.

On
a consolidated basis, the Company generated revenue of $3,330,440 and a net loss of $6,079,627 for the year ended July 31, 2001 versus revenue of $4,832,094 and a net loss
of $132,221 for the year ended July 31, 2000. The revenue decrease of $1,501,654 was due primarily to the loss of a major customer, AT&T of Digital Record & Replay services.

Basic
earnings per share were $(0.19) for the year ended July 31, 2001 as compared to $0.00 per share for the year ended July 31, 2000.

14

---

Cost of Revenue and Major Expenses

Fiscal 2001 versus 2000

The Company is restructuring its operations and has revised its strategic plan in order to become cash flow positive and achieve profitability in fiscal year
2002.

Cost
of Revenue consists of the expenses associated with providing the telecommunication services based on usage, systems for DS-3's,T-1's, and local loop
charges. The cost of revenues for fiscal year 2001 was 26% of revenue compared to 14% of revenue for fiscal year 2000. The increase of $192,519 for the current fiscal year is mainly due to increased
telecommunication costs associated with the cost of establishing services at Internet Data Centers.

Salaries
and wages increased 42% from fiscal 2000 to fiscal 2001. The increase of $941,015 for the current fiscal year is mainly due to additional staff and associated costs incurred
to provide the Information Technology and Professional Services departments skills and experience needed to meet and support the requirements of anticipated new customers. These new customers did not
materialize as anticipated. As a result of this management has reduced staff levels from 58 at the end of the first quarter to 25 at July 31, 2001.

General
and administrative expense increased 49% from fiscal 2000 to fiscal 2001. The increase of $619,462 for the current fiscal year is mainly due to the additional costs incurred
to provide the leased facilities and infrastructure necessary to meet and support the requirements of anticipated new customers in fiscal year 2001. These new customers did not materialize as
anticipated. As a result of this management has reduced and or contained costs by reducing leased facilities, recruiting, training and consulting fees.

Sales
and marketing expenses decreased during the fiscal year 2001 by 8%. The decrease of $32,634 for the current fiscal year is a result of the cost reduction and containment
measures put in place by management at the end of second quarter and subsequent thereto.

Depreciation
and amortization increased 59% from fiscal 2000 to fiscal 2001. The increase of $252,684 for the current fiscal year is result of adding computer and related equipment
and amortization of goodwill recorded on the purchase of Paragon Voice Systems of $93,840. The increase in the Company's net property and equipment of approximately $262,496 was financed by way of
capital leases secured by the equipment and personally guaranteed by the Company's previous CEO and additional capital expenditures made by the Company.

Restructuring
costs, the Company has revised its strategic plan in order to become cash flow positive and achieve profitability in fiscal year 2002. Based on the current operations of
the Company and the Company's revision of its future business plan management has identified costs during the fiscal year of approximately $1,267,000. This amount represent costs associated with
employee severance cost of $53,000, idle telecommunication services cost of $272,000, idle facilities cost of $148,000, the voluntary surrender of idle leased equipment cost of $629,000, and costs
associated with the depreciation of $122,000 and financing of $43,000 of this idle equipment.

Management
is continuing to negotiate with several of its vendors in order to revise its contractual obligations in anticipation of further reducing operating costs in the future by
decreasing and eliminating unnecessary services or commitments.

During
the fourth quarter of the year ended July 31, 2001, the Company reviewed the $453,555 remaining value of goodwill relating to the acquisition of Paragon. Based on the
current operating plans as determined in the fourth quarter and the Company's revision of its future business plan, management determined the full carrying amount of the goodwill to be impaired.

15

---

Legal settlement costs for the year ended July 31, 2001 of $672,000 represents the settlement of two claims. 1.) A former consultant claiming compensatory and punitive damages
in excess of $2,000,000 for, among other things, alleged wrongful termination and breach of contract. On January 7, 2001, the Company settled this litigation by agreeing to a
non-cash payment of $550,000 in common stock. 2.) A claim brought by a former consultant/officer, alleging breach of contract regarding the issuance of certain options under the 1996 Plan.
On December 1, 2000, the Company resolved this claim (pre-litigation) by its agreement to pay for the former consultant/officer's exercise of his options as they became vested to
purchase 100,000 shares of the Company's common stock at a price of $0.35 per share, 50,000 shares of common stock at $0.78 per share and an additional $25,000 in five equal quarterly installments of
$5,000, commencing December 31, 2000.

Income
taxes have not been provided for in the accompanying financial statements due to the net operating loss carry forwards generated in prior years that are available for
carry-forward against current and future year(s) income.

Cost of Revenue and Major Expenses

Fiscal 2000 versus 1999

Cost of Revenue consists of the expenses associated with providing the Tele-communication services based on usage, systems for T-1's,
and local loop charges. These costs are a mix of both variable and fixed costs. The cost of revenues for fiscal year 2000 was 8% of revenue (excluding pass-thru revenue and expense of
transport costs) compared to 7% of revenue for fiscal year 1999. Transport revenues and costs were a temporary accommodation for a large customer and have been discontinued. The increase of $437,054
for the current fiscal year is made up of three parts: (1) increased costs as a result of increased usage $97,096, (2) Paragon costs $49,810 and (3) transport costs $290,148.
Transport costs are pass-thru costs on which the company does not generate any profit but passes its costs onto the customer without markup.

Salaries
and wages increased 91% from fiscal 1999 to fiscal 2000 as a result of adding eighteen full-time employees (a 100% increase in staff) during fiscal year 2000 and
an additional eight people associated with the acquisition of Paragon Voice Systems. The increase in staff was necessary to provide the Information Technology and Systems Department with the skills
and experience needed to meet and support the requirements of the customers which enabled the Company's growth in revenue and the planned expansion into the voice hosting services business.

Sales
and marketing expenses increased during the fiscal year 2000 by 50% from $266,626 in fiscal year 1999 to $401,050 in fiscal year 2000, as a result of adding staff, the addition
of Paragon Voice Systems and increased travel expenditures to promote the growth and development of the business.

Depreciation
and amortization increased 142% during the period as a result of adding computer and related equipment and amortization of goodwill recorded on the purchase of Paragon
Voice Systems of $78,195. The increase in the Company's property and equipment of approximately $915,000 was financed by way of 70% capital leases secured by the equipment and personally guaranteed by
the Company's CEO and 30% capital expenditures made by the Company. Management is not aware of any trends or events that are expected to have a material impact on the Company's revenue or income from
continuing operations, other than those discussed under Item 1. Risks Considerations with our Company regarding the loss of AT&T, one of our largest record and replay customers. Upon successfully
securing additional long-term contracts, the Company will be required to increase the size of its IVR systems to support the additional growth. Equipment purchases will be financed through
a combination of cash on hand and capital leases on the equipment purchased.

16

---

Litigation contingency expense for the year ended July 31, 2000 of $117,000 represents the settlement, over the previously provided for amounts, of the Madison case for 100,000
shares of our common stock.

Income
taxes have not been provided for in the accompanying financial statements due to the net operating loss carry forwards generated in prior years that are available for
carry-forward against current and future year(s) income.

Liquidity and Capital Resources

Net working capital decreased to $(1,446,180) at July 31, 2001. The decrease is a result of negative operating results and negative cash flows from
operating activities for the twelve-month period ended July 31, 2001.

Based
on the current contract negotiations and cost reductions and Company-wide restructuring, management believes the Company will generate sufficient revenues and cash
flows from operations and obtain funding from other sources to meet its current obligations during the year ending July 31, 2002. To the extent such revenues are not realized, management
believes it has the ability to raise additional capital to cover its current obligations until the Company can achieve sufficient revenues and cash flows.

Forward-Looking Statements

Certain information set forth herein (other than historical data and information) may constitute forward-looking statements regarding events and trends which
may affect the Company's future operating results and financial trends which may affect the Company's future operating results and financial position. The words "believe," "endeavor," "expect,"
"anticipate," "estimate," "intends," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions,
including, without limitation, the risks and uncertainties concerning technological changes, increased competition, and general economic conditions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. The Company cautions potential investors not to place
undue reliance on any such forward-looking statements, all of which speak only as of the date of this Annual Report on Form 10K-SB. It is not possible to foresee or identify all
such factors. The Company disclaims any intention, commitment or obligation to revise or update any forward-looking statement, or to disclose any facts, events or circumstances that occur after the
date hereof, which may affect the accuracy of any forward-looking statement.

Future Expectations

For the fiscal year ending July 31, 2002, the Company is projecting revenue increases, with a corresponding increase in net income from operations
(before tax). Achieving growth in both revenues and net operating income will be contingent upon the Company securing additional contracts with existing customers as well as long-term,
high-margin contracts with new customers, and there is no certainty that these objectives will be achieved.

The
Company's telecommunication costs at the end of our fiscal year 2001 have been reduced as a result of our cost containment and restructuring efforts.

As
of July 31, 2001, Interactive has net operating loss carry-forwards for both federal and state income tax purposes. Federal and state net operating loss carry-forwards
totaling approximately $6,100,000 and $5,500,000, respectively, as of July 31, 2001, begin to expire in 2011. Paragon has federal and state net operating loss carry-forwards totaling
approximately $1,300,000 and $1,200,000 respectively as of July 31, 2001, which begin to expire in 2010 and 2001 respectively. Since Paragon

17

---

does not file a consolidated federal income tax return with Interactive, its operating loss carry-forwards are available to Paragon only and are limited. The amount of Paragon's annual taxable
income which can be offset by the net operating loss carry-forwards will be limited to approximately $127,000. To the extent that the Company is able to achieve net operating income in the future, the
tax loss carry-forwards will have a significant, positive effect on the Company's after-tax income.

Item 7. Financial Statements and Supplementary Data

The response to this Item is submitted in Item 13(a) of this report and is incorporated herein by reference.

Item 8. Changes in and Disagreements with Accountants

None

PART III

Item 9. Directors and Executive Officers

The following table sets forth information about our directors and executive Officers as of the date filed.

|NAME                       |  | AGE |  | POSITION                                                        
|-------------------------- |  | --- |  | ----------------------------------------------------------------
|Charles Delle Donne        |  | 58  |  | Director appointed September 24, 2001                           
|Willard Lee McVey (1 & 2)  |  | 54  |  | Director appointed October 27, 2000                             
|Cindy J. Mersky            |  | 43  |  | Director appointed April 16, 2001                               
|Kenneth G. Ravazzolo       |  | 46  |  | President and CEO Paragon Voice Systems                         
|Lisa J. Redman             |  | 48  |  | Chief Financial Officer & Secretary appointed September 4, 2001 
|Andrew Schacther           |  | 33  |  | Director appointed April 16, 2001                               
|Albert L. Staerkel (1 & 2) |  | 49  |  | Chairman, President, CEO, & Director appointed November 15, 2000

---

Mr. Delle
Donne was appointed a Director on September 24, 2001. Prior to his retirement in 1999, Mr. Delle Donne served as senior vice president and regional
manager of Fidelity Investments since 1980 where he was responsible for business development in the Western region. In addition, he was a senior vice president for Bradford Trust Company from 1972 to
1979. Prior to that, Mr. Delle Donne was a vice president of Citicorp from 1961-1971. Mr. Delle Donne is a current member of the Board of Directors of Fidelity Management
Trust Company of California, Metalast International, Inc. and Total Personal Services, Inc. Mr. Delle Donne holds a B.S. degree from St. Peter's College in New Jersey and
completed graduate studies at UCLA Graduate School of Management in 1979.

Mr. McVey
is currently a consultant specializing in Electrical Engineering providing consulting services to power utilities and large industrial firms. Prior to consulting
Mr. McVey was an Electrical Engineer(1998-2000) and the Electrical Utility Systems Manager (1990-1997) at Lawrence Livermore National Laboratory. Mr. McVey
received a BSEE from California State University at Fresno and an MSEE from the University of Santa Clara.

Ms. Mersky
serves as Senior Director, Client Services for the The Synapse Group, of Burlington, Ontario. Prior to joining the The Synapse Group in 1991, Ms. Mersky had
served as project manager at

18

---

Science and Medicine Canada since 1988. Ms. Mersky holds a Bsc.AAM degree from the University of Toronto and a degree in visual communications from the Alberta College of Art.

Mr. Ravazzolo
has been the President and CEO of Paragon Voice Systems since 1991, a subsidiary of Interactive Telesis Inc. Mr. Ravazzolo was Marketing Manager, at
Simpact Associates from 1990-1991. Prior to joining Simpact Associates, Mr. Ravazzolo was Vice President, Industry Marketing at Data Acquisition from 1974-1990.

Ms. Redman
joined the Company as Director of Finance on July 9, 2001 and on September 4, 2001 was appointed Chief Financial Officer and Secretary. Prior to
joining the Company, Ms. Redman had served as Director of Finance and Senior Client Service Executive for Alitum, Inc., a San Diego based consulting company, which she had joined in
December 1999. Prior to that, Ms. Redman had served as Vice President and Controller for IndyMac, Inc.-Manufactured Housing Division, a Pasadena mortgage banking firm. Prior to joining
IndyMac in April 1999, she served as controller and treasurer for Pacific Basin Foods, Inc. a San Diego based food distribution company, she first joined in December 1997. Prior
to that, Ms. Redman served as the Accounting Manager at AirTouch Cellular. Ms. Redman holds a BS in Business Administration and Accounting from San Diego State University and is a
certified public accountant in the state of California.

Mr. Schachter
is currently a Director and was acting CEO of the Company pending the Company's hiring a permanent employee to fill that position. Until 2000, he served as
President of Think Interactive, a business and brand strategy consulting company he founded in 1997. After that company merged with U.S. Interactive in 2000, Mr. Schachter continued his
consulting duties at U.S. Interactive for a 6-month transition period. Prior to founding Think Interactive, Mr. Schachter worked for Chiat/Day Advertising. Mr.Schachter received his
BA and MBA from York University, Toronto, Ontario, Canada.

Mr. Staerkel
was appointed President and CEO on October 11, 2001 and Chairman on September 24, 2001. Mr. Staerkel currently serves as Director for
SL3D, Inc., a privately held technology company in Boulder, Colorado. Prior to this position, he served as a financial advisor for Morgan Stanley Dean Witter from 1998-2000, and as
a financial consultant for Merrill Lynch from 1991-1998. In addition,
Mr. Staerkel served as a Captain in the military intelligence branch of the United States Army. Mr.Staerkel is an advisory Board member for Asia.net, a network of families, organizations, and
individuals with extensive business interests in Asia. Mr. Staerkel holds a B.S. degree from the United States Military Academy in West Point, New York and completed graduate studies in
business from the University of Houston and the University of Texas.

Each
Director holds office until his successor is elected and qualified or until his earlier resignation in the manner provided in the bylaws of the Company.

The
Board of Directors has established an Audit Committee, consisting of Messrs. Staerkel and McVey, and a Compensation Committee, consisting of Messrs. Staerkel and
McVey. The Audit Committee reviews the Company's independent auditors, the scope and timing of the audit services, and other services they are asked to perform, the Auditors' Report on the Company's
financial statements following completion of the audit, and the Company's policies and procedures, with respect to internal accounting and financial controls. In addition, the Audit Committee makes
annual recommendations to the Board of Directors for the appointment of independent auditors for the ensuing year. The Compensation Committee reviews and recommends to the Board of Directors the
compensation and benefits of all officers of the Company and reviews general policy matters relating to compensation and benefits of employees of the Company.

19

---



COMPENSATION OF NON-EMPLOYEE DIRECTORS

The Company has the following arrangement by which non-employee directors are compensated:



We
grant stock options to purchase 25,000 shares of the Company annually to each director of the Company under the 1996 Stock Option Plan, to a maximum of 150,000 shares. The options
are granted immediately after the Annual General Meeting with an exercise price equal to the market price at the time of granting. The options vest at the end of the fiscal year they are granted.

Previously
the following directors were granted options on 1/26/01 to purchase securities as follows:

NUMBER
OF SHARES

EXERCISE PRICELee McVey

25,000

72 centsKen Ravazzolo

25,000

72 centsAl Starekel

25,000

72 cents


The
Company has granted stock options to directors to assist the Company in compensating, attracting, retaining, and motivating the directors of the Company and to closely align the
personal interests of the directors with those of the shareholders.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Under Section 16(a) of the Securities Exchange Act of 1934, as amended the Company's directors, executive officers, and any persons holding more than
10% of the Company's Common Stock are required to report their initial ownership of the Company's Common Stock and any subsequent changes in that ownership to the SEC. Specific due dates for these
reports have been established and the Company is required to identify in this report those persons who failed to timely file these reports. The Company believes that during the fiscal year 2001, all
filing requirements under Section 16(a) were satisfied.

Item 10. Executive Compensation

The following table sets forth all annual and long-term compensation for services in all capacities to the Company for the last three fiscal years
in respect of each of the individuals who were, as at July 31, 2001, the Chief Executive Officer and the other four most highly compensated executive officers of the Company (collectively "the
Named Executive Officers"), including any individual who would have qualified as a Named Executive Officer but for the fact that individual was not serving as such an Officer at the end of the most
recently completed financial year. The Company has one Named Executive Officer.

20

---

SUMMARY COMPENSATION TABLE

|                                                                    |  |      |  |   |         |  |   |        |   |   |        | LONG-TERM
COMPENSATION
|------------------------------------------------------------------- |  | ---- |  | - | ------- |  | - | ------ | - | - | ------ | ----------------------
|
|
|
|Donald Cameron
President/CEO (until 4/16/01)                        |  | 2001 |  | $ | 137,500 |  | $ | 15,221 | * | $ | 12,294 |                       
|Donald Cameron
President/CEO                                        |  | 2000 |  | $ | 150,000 |  |   |        |   | $ | 15,697 |                       
|Donald Cameron
President/CEO                                        |  | 1999 |  | $ | 120,000 |  | $ | 36,250 | * |   |       |                       
|Donald Cameron
President/CEO                                        |  | 1998 |  | $ | 108,300 |  |   |       |   |   |       |                       
|Kenneth M. Gotthelf(1)
Vice President of Sales & Strategic Alliance |  | 2001 |  | $ | 64,377  |  |   |       |   |   |       |                       
|Douglas T. Luke(1)
Vice President of Technology                     |  | 2001 |  | $ | 70,382  |  |   |       |   | $ | 1,066  |                       
|Larry Ohl(1)
Vice President of Engineering & Operations             |  | 2001 |  | $ | 65,962  |  |   |       |   |   |       |                       
|Kenneth G. Ravazzolo
President/CEO of Paragon Voice Systems         |  | 2001 |  | $ | 108,000 |  |   |       |   |   |       |                       
|Andrew Schachter
President/CEO (until 10/11/01)                     |  | 2001 |  | $ | 71,026  |  |   |       |   |   |       |                       
|David J. Webb(1)
Chief Operating Officer                            |  | 2001 |  | $ | 94,000  |  |   |       |   | $ | 1,345  |                       
|David J. Webb
Chief Operating Officer                               |  | 2000 |  | $ | 120,000 |  |   |       |   |   |       |                       

---

The Company's executive bonuses are determined by the Compensation Committee of the Board of Directors. Annual bonuses are determined by the
Compensation Committee based on the executive's performance against the annual objectives and goals of the Company set by the Committee. A member of the Committee excuses himself from voting on his
own bonus compensation amounts.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of the shares of Common Stock as of September 28, 2001, by
(i) each person who is known by the Company to be the beneficial owner of more than five percent (5%) of the issued and outstanding shares of Common

21

---

Stock, (ii) each of the Company's directors and executive officers, and (iii) all directors and executive officers as a group.

NAME AND

NUMBER OF
SHARES OWNED OR
FULLY VESTED

PERCENTAGE
OWNED OR
FULLY VESTEDWilliam R. Adams(1)(2)

102,125

0.30
%Donald E. Cameron(1)(3)

514,544

1.52
%Charles Delle Donne(1)

550,000

1.64
%Willard Lee McVey(1)(4)

1,163,000

3.47
%Kenneth Ravazzolo(1)(4)

25,000

0.07
%Lisa J. Redman(1)(5)

35,000

0.10
%Andrew Schachter(1)

1,000

0.0
%Albert L. Staerkel(1)(4)

289,150

0.86
%David Webb(1)(6)

250,000

0.74
%All directors and officers as a group (nine)

2,929,819

8.52
%


---

Item 12. Certain Relationships and Related Transactions

None

PART IV

Item 13. Exhibits, Financial Statements, Reports on Form 8-K





22

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Signatures

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

|Dated October 26, 2001 |  | Interactive Telesis Inc.
|---------------------- |  | ------------------------
|                       |  | By:                     

23

---

Index to ExhibitsItem 14 (a) (2)

|Exhibit |  | Description                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------
|3.1     |  | Province of British Columbia, Company Act, Certificate of Incorporation, Butter Rock Resources(1)                              
|3.2     |  | Company Act, Memorandum, Butter Rock Resources(1)                                                                              
|3.3     |  | Articles of Incorporation, Interactive Telesis1992(1)                                                                         
|3.4     |  | Certificate of Incorporation of the CompanyDelaware(1)                                                                        
|3.5     |  | Certificate of Amendment of Certificate of Incorporation of the CompanyDelaware(1)                                            
|3.6     |  | Bylaws of the Company(1)                                                                                                       
|3.7     |  | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock(4)                                 
|3.8     |  | Certificate of Amendment of Certificate of Incorporation(4)                                                                    
|3.9     |  | Certificate of Amendment of Certificate of Designations, Preferences and Right of Series A Convertible Preferred Stock.(4)     
|3.10    |  | Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock.(4)                                
|3.11    |  | Certificate of Correction.(4)                                                                                                  
|3.12    |  | Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock.(5)                                
|10.1    |  | ITI Stock Option Plan (1996)(1)                                                                                                
|10.2    |  | Lease Agreement between the Company and North Coast Business Park, dated Feb. 15, 1995, with amendments dated April 30, 1999(1)
|10.3    |  | Lease Agreement between the Company and U.S. Net Solutions, inc., dated Feb. 22, 1999(1)                                       
|10.4    |  | Sublease Agreement between the Company and The Townsend Agency, dated Aug. 13, 1999(1)                                         
|10.5    |  | Balboa Capital Corporate Equipment Lease Agreement(1)                                                                          
|10.6    |  | Balboa Capital Corporate Equipment Lease Agreement(1)                                                                          
|10.7    |  | Toshiba Corporate Equipment Lease Agreement(1)                                                                                 
|10.8    |  | Westover Financial Corporate Equipment Lease Agreement(1)                                                                      
|10.9    |  | Westover Financial Corporate Equipment Lease Agreement(1)                                                                      
|10.10   |  | Ford Financial Services Corporate Equipment Lease Agreement(1)                                                                 
|10.11   |  | Ford Financial Services Corporate Equipment Lease Agreement(1)                                                                 
|10.12   |  | Imperial Business Credit Corporate Equipment Lease Agreement(1)                                                                
|10.13   |  | Media Capital, LLC Corporate Equipment Lease Agreement(1)                                                                      
|10.14   |  | Dell Financial Services Corporate Equipment Lease Agreement(1)                                                                 
|10.15   |  | Imperial Business Credit Corporate Equipment Lease Agreement(1)                                                                
|10.16   |  | First Sierra Financial Corporate Equipment Lease Agreement(1)                                                                  
|10.17   |  | United Capital Leasing Corporate Equipment Lease Agreement(1)                                                                  
|10.18   |  | ADVANTA Business Service Corporate Equipment Lease Agreement(1)                                                                

24

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|10.19 |  | Ford Financial Services Corporate Equipment Lease Agreement(1)           
|----- |  | -------------------------------------------------------------------------
|10.20 |  | ADVANTA Bank Corporation Corporate Equipment Lease Agreement(1)          
|10.21 |  | Financial Pacific Leasing Corporate Equipment Lease Agreement(1)         
|10.22 |  | Securities Purchase Agreement dated June 12, 2000(2)                     
|10.23 |  | Registration Rights Agreement dated June 12, 2000.(2)                    
|10.24 |  | Warrant Agreement with BH Capital.(2)                                    
|10.25 |  | Warrant Agreement with Excalibur.(2)                                     
|10.26 |  | Amendment No. 1 to Securities Purchase Agreement.(2)                     
|10.27 |  | Amendment No. 1 to Registration Rights Agreement.(2)                     
|10.28 |  | I&G Highbluff, Inc. Lease dated April 25, 2000.(2)                       
|10.29 |  | North Cost Business Park Sublease dated 5/31/00.(3)                      
|10.30 |  | Bank of the West Equipment Lease dated 9/7/99.(3)                        
|10.31 |  | Affinity Funding.com Equipment Lease dated 5/23/00.(3)                   
|10.32 |  | Textron Financial Equipment Lease dated 5/18/00.(3)                      
|10.33 |  | Santa Barbara Bank & Trust Commercial Lease Agreement dated 4/26/00.(3)  
|10.34 |  | GE Capital Equipment Lease dated 4/26/00.(3)                             
|10.35 |  | GE Capital Equipment Lease dated 4/24/00.(3)                             
|10.36 |  | GE Capital Equipment Lease dated 5/10/00.(3)                             
|10.37 |  | Advanta Leasing Services Equipment Lease dated 6/22/00.(3)               
|10.38 |  | Landmark Financial Corporation Equipment Lease dated 7/10/00.(3)         
|10.39 |  | United Capital Equipment Lease dated 6/30/00.(3)                         
|10.40 |  | Santa Barbara Bank & Trust Equipment Lease dated 7/14/00.(3)             
|10.41 |  | Centerpoint Financial Equipment Lease dated 8/28/00.(3)                  
|10.42 |  | Ford Financial Services, Inc. Equipment Lease Agreement(4)               
|10.43 |  | Information Leasing Corp Equipment Lease Agreement(4)                    
|10.44 |  | Irwin Business Finance Equipment Lease Agreement(4)                      
|10.45 |  | Taycor, LLC Equipment Lease Agreement(4)                                 
|10.46 |  | Amembal Capital Corporation Equipment Lease Agreement(4)                 
|10.47 |  | Amembal Capital Corporation Equipment Lease Agreement(4)                 
|10.48 |  | Amembal Capital Corporation Equipment Lease Agreement(4)                 
|10.49 |  | Landmark Financial Corporation Equipment and Furniture Lease Agreement(4)
|10.50 |  | Media Capital Associates, LLC Equipment Lease Agreement(4)               
|10.51 |  | Landmark Financial Corporation Equipment Lease Agreement(4)              

25

---

|10.52 |  | Hambrecht & Quist Guaranty Finance, LLC Loan and Security Agreement with Schedule(4)
|----- |  | ------------------------------------------------------------------------------------
|10.53 |  | Hambrecht & Quist Guaranty Finance, LLC Intellectual Property Security Agreement(4) 
|10.54 |  | Hambrecht & Quist Guaranty Finance, LLC Equity Line of Credit Agreement(4)          
|10.55 |  | Hambrecht & Quist Guaranty Finance, LLC Warrant Agreement with form of Warrant(4)   
|10.56 |  | Hambrecht & Quist Guaranty Finance, LLC Registration Rights Agreement(4)            
|10.57 |  | First Amendment to H&QGF Loan and Security Agreement.(4)                            
|10.58 |  | First Amendment to Schedule to H&QGF Loan and Security Agreement.(4)                
|10.59 |  | First Amendment to H&QGF Equity Line of Credit Agreement.(4)                        
|10.60 |  | Reissued H&QGF Warrant.(4)                                                          
|10.61 |  | Assignment of Voting Rights.(4)                                                     
|10.62 |  | Amendment No. 2 to Securities Purchase Agreement.(4)                                
|10.63 |  | Series B Preferred Stock Purchase Warrant.(4)                                       
|10.64 |  | Series B Preferred Stock and Warrants Purchase Agreement.(4)                        
|10.65 |  | Registration Rights Agreement(4).                                                   
|10.66 |  | Second Amendment to Loan and Security Agreement.(4)                                 
|10.67 |  | Series B Preferred Stock Purchase Warrant.(4)                                       
|10.68 |  | Series B Preferred Stock and Warrants Purchase Agreement.(4)                        
|10.69 |  | Registration Rights Agreement.(4)                                                   
|10.70 |  | Third Amendment to Loan and Security Agreement.(4)                                  

---

26

---



INTERACTIVE TELESIS, INC. AND SUBSIDIARIES    TABLE OF CONTENTS

|INDEPENDENT AUDITORS' REPORT               |                                                                      | F-2
|------------------------------------------ | -------------------------------------------------------------------- | ---
|CONSOLIDATED FINANCIAL STATEMENTS          |                                                                      |    
|                                           | Consolidated Balance Sheets                                          |    
|                                           | Consolidated Statements of Operations                                |    
|                                           | Consolidated Statements of Changes in Shareholders' (Deficit)/Equity |    
|                                           | Consolidated Statements of Cash Flows                                |    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |                                                                      | F-7

F1

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors
Interactive Telesis, Inc. and Subsidiaries
Del Mar, California

We
have audited the consolidated balance sheets of Interactive Telesis, Inc. and Subsidiaries (the "Company") as of July 31, 2001 and 2000, and the consolidated statements of operations,
changes in shareholders' (deficit)/equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interactive Telesis, Inc. and Subsidiaries as of
July 31, 2001 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of
America.

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered
recurring losses from operations and has limited capital resources. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

|San Diego, California |  | PANNELL KERR FORSTER        
|--------------------- |  | ----------------------------
|September 19, 2001    |  | Certified Public Accountants
|                      |  | A Professional Corporation  

F2

---



INTERACTIVE TELESIS, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        July 31, 2001 and 2000

|                                               |                                                                                                                                                               | 2001                                                              |           | 2000        |    
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------- | ----------- | ---
|ASSETS                                         |                                                                                                                                                               |                                                                   |           |             |    
|Current assets:                                |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Cash and cash equivalents                                                                                                                                     |                                                                   | $         | 103,917     |    
|                                               | Accounts receivable, net of allowance for doubtful accounts of $34,452 and $1,980 for 2001 and 2000, respectively                                             |                                                                   |           | 365,389     |    
|                                               | Inventory                                                                                                                                                     |                                                                   |           | 37,707      |    
|                                               | Deposits                                                                                                                                                      |                                                                   |           | 48,013      |    
|                                               | Prepaid expenses                                                                                                                                              |                                                                   |           | 189,808     |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Total current assets                                                                                                                                          |                                                                   |           | 744,834     |    
|Property and equipment, net                    |                                                                                                                                                               |                                                                   | 1,548,276 |             |    
|Deferred costs                                 |                                                                                                                                                               |                                                                   | 31,111    |             |    
|Intangible asset, net (Note 3)                 |                                                                                                                                                               |                                                                   |          |             |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Total assets                                                                                                                                                  |                                                                   | $         | 2,324,221   |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|LIABILITIES AND SHAREHOLDERS' (DEFICIT)/EQUITY |                                                                                                                                                               |                                                                   |           |             |    
|Current liabilities:                           |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Accounts payable                                                                                                                                              |                                                                   | $         | 559,874     |    
|                                               | Accrued expenses and other liabilities                                                                                                                        |                                                                   |           | 458,996     |    
|                                               | Note payable to related party (Note 5)                                                                                                                        |                                                                   |           | 8,000       |    
|                                               | Deferred revenue                                                                                                                                              |                                                                   |           |            |    
|                                               | Current portion of legal settlement (Note 8)                                                                                                                  |                                                                   |           | 177,500     |    
|                                               | Current portion of note payable                                                                                                                               |                                                                   |           |            |    
|                                               | Current portion of capital lease obligations                                                                                                                  |                                                                   |           | 469,644     |    
|                                               | Restructuring reserve (Note 7)                                                                                                                                |                                                                   |           | 517,000     |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Total current liabilities                                                                                                                                     |                                                                   |           | 2,191,014   |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|Long-term obligations:                         |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Note payable, net of current portion                                                                                                                          |                                                                   |           | 1,150,000   |    
|                                               | Legal settlement, net of current portion (Note 8)                                                                                                             |                                                                   |           | 93,750      |    
|                                               | Capital lease obligations, net of current portion                                                                                                             |                                                                   |           | 348,207     |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Total long-term obligations                                                                                                                                   |                                                                   |           | 1,591,957   |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Total liabilities                                                                                                                                             |                                                                   |           | 3,782,971   |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|Commitments and contingencies (Note 8)         |                                                                                                                                                               |                                                                   |           |             |    
|Minority interest in net assets of subsidiary  |                                                                                                                                                               |                                                                   |          |             |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|Shareholders' (deficit)/equity:                |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Preferred stock, $.001 par value, 25,000,000 shares authorized and issued in series as follows:                                                               |                                                                   |           |             |    
|                                               |                                                                                                                                                               | Series A stock, no shares issued and outstanding                  |           |             |   
|                                               |                                                                                                                                                               | Series B convertible stock, 100,000 shares issued and outstanding |           |             | 100
|                                               | Common stock, $.001 par value, 100,000,000 shares authorized; 33,177,290 and 31,764,486 shares issued and outstanding at July 31, 2001 and 2000, respectively |                                                                   |           | 33,177      |    
|                                               | Warrants                                                                                                                                                      |                                                                   |           | 269,589     |    
|                                               | Additional paid in capital                                                                                                                                    |                                                                   |           | 12,786,060  |    
|                                               | Accumulated deficit                                                                                                                                           |                                                                   |           | (14,547,676 | )  
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Total shareholders' (deficit)/equity                                                                                                                          |                                                                   |           | (1,458,750  | )  
|                                               |                                                                                                                                                               |                                                                   |           |             |    
|                                               | Total liabilities and shareholders' (deficit)/equity                                                                                                          |                                                                   | $         | 2,324,221   |    
|                                               |                                                                                                                                                               |                                                                   |           |             |    

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

F3

---



INTERACTIVE TELESIS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        For the years ended July 31, 2001 and 2000

|                                                             |                                                                                      | 2001 |            | 2000      |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ---- | ---------- | --------- | -
|Revenues                                                     |                                                                                      | $    | 3,330,440  |           | $
|Costs and expenses:                                          |                                                                                      |      |            |           |  
|                                                             | Cost of revenues (exclusive of depreciation and amortization shown separately below) |      |            | 851,079   |  
|                                                             | Salaries and wages                                                                   |      |            | 3,202,232 |  
|                                                             | General and administrative                                                           |      |            | 1,894,880 |  
|                                                             | Sales and marketing                                                                  |      |            | 368,416   |  
|                                                             | Depreciation and amortization                                                        |      |            | 681,056   |  
|                                                             | Restructuring costs (Note 7)                                                         |      |            | 1,266,523 |  
|                                                             | Impairment of goodwill (Note 3)                                                      |      |            | 453,555   |  
|                                                             |                                                                                      |      |            |           |  
|                                                             | Total costs and expenses                                                             |      |            | 8,717,741 |  
|                                                             |                                                                                      |      |            |           |  
|Operating loss                                               |                                                                                      |      | (5,387,301 | )         |  
|Other expenses:                                              |                                                                                      |      |            |           |  
|                                                             | Interest expense                                                                     |      |            | 227,873   |  
|                                                             | Legal settlement costs (Note 8)                                                      |      |            | 672,000   |  
|                                                             |                                                                                      |      |            |           |  
|                                                             | Total other expenses                                                                 |      |            | 899,873   |  
|                                                             |                                                                                      |      |            |           |  
|Loss before income taxes and minority interest in subsidiary |                                                                                      |      | (6,287,174 | )         |  
|Minority interest in net loss of subsidiary                  |                                                                                      |      | 207,547    |           |  
|                                                             |                                                                                      |      |            |           |  
|Loss before income taxes                                     |                                                                                      |      | (6,079,627 | )         |  
|Provision for income taxes                                   |                                                                                      |      |           |           |  
|                                                             |                                                                                      |      |            |           |  
|Net loss                                                     |                                                                                      | $    | (6,079,627 | )         | $
|                                                             |                                                                                      |      |            |           |  
|Basic net loss per share                                     |                                                                                      | $    | (0.19      | )         | $
|                                                             |                                                                                      |      |            |           |  
|Shares used to compute basic net loss per share              |                                                                                      |      | 32,436,971 |           |  
|                                                             |                                                                                      |      |            |           |  
|Diluted net loss per share                                   |                                                                                      | $    | (0.19      | )         | $
|                                                             |                                                                                      |      |            |           |  
|Shares used to compute diluted net loss per share            |                                                                                      |      | 32,436,971 |           |  
|                                                             |                                                                                      |      |            |           |  

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

F4

---



INTERACTIVE TELESIS, INC. AND SUBSIDIARIES        STATEMENTS OF CHANGES IN SHAREHOLDERS' (DEFICIT)/EQUITY        For the years ended July 31, 2001 and 2000

|                                                                                            |  | Preferred Stock (Series B) |  |   |     |  |            |  |   |        |  |   |         |  |  
|------------------------------------------------------------------------------------------- |  | -------------------------- |  | - | --- |  | ---------- |  | - | ------ |  | - | ------- |  | -
|
|
|
|Balance, July 31, 1999                                                                      |  |                           |  | $ |    |  | 30,599,888 |  | $ | 30,600 |  | $ | 162,960 |  | $
|Issue of common stock for cash, net of issuance costs (Note 9)                              |  |                           |  |   |    |  | 905,798    |  |   | 906    |  |   | 66,914  |  |  
|Issue of common stock for legal settlement (Note 8)                                         |  |                           |  |   |    |  | 100,000    |  |   | 100    |  |   |        |  |  
|Issue of common stock and options to directors, consultants, employees and former employees |  |                           |  |   |    |  | 158,800    |  |   | 159    |  |   |        |  |  
|Net loss                                                                                    |  |                           |  |   |    |  |           |  |   |       |  |   |        |  |  
|                                                                                            |  |                            |  |   |     |  |            |  |   |        |  |   |         |  |  
|Balance, July 31, 2000                                                                      |  |                           |  |   |    |  | 31,764,486 |  |   | 31,765 |  |   | 229,874 |  |  
|Issue of preferred stock for cash, net of issuance costs (Note 9)                           |  | 100,000                    |  |   | 100 |  | 75,000     |  |   | 75     |  |   | 35,768  |  |  
|Issue of common stock for legal settlement (Note 8)                                         |  |                           |  |   |    |  | 806,137    |  |   | 806    |  |   |        |  |  
|Issue of common stock and options to directors, consultants, employees and former employees |  |                           |  |   |    |  | 45,643     |  |   | 45     |  |   |        |  |  
|Additional shares issued pursuant to a repricing feature in a previous issuance (Note 9)    |  |                           |  |   |    |  | 486,024    |  |   | 486    |  |   |        |  |  
|Warrants issued to a lender (Note 9)                                                        |  |                           |  |   |    |  |           |  |   |       |  |   | 3,947   |  |  
|Net loss                                                                                    |  |                           |  |   |    |  |           |  |   |       |  |   |        |  |  
|                                                                                            |  |                            |  |   |     |  |            |  |   |        |  |   |         |  |  
|Balance, July 31, 2001                                                                      |  | 100,000                    |  | $ | 100 |  | 33,177,290 |  | $ | 33,177 |  | $ | 269,589 |  | $
|                                                                                            |  |                            |  |   |     |  |            |  |   |        |  |   |         |  |  

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

F5

---



INTERACTIVE TELESIS, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the years ended July 31, 2001 and 2000

|                                                                       |                                                                                                                                                         | 2001                                                      |            | 2000       |         
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------- | ---------- | --------
|Cash flows from operating activities:                                  |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Net loss                                                                                                                                                |                                                           | $          | (6,079,627 | )       
|                                                                       | Adjustments to reconcile net loss to net cash (used in) provided by operating activities:                                                               |                                                           |            |            |         
|                                                                       |                                                                                                                                                         | Bad debts                                                 |            |            | 37,000  
|                                                                       |                                                                                                                                                         | Depreciation and amortization                             |            |            | 802,583 
|                                                                       |                                                                                                                                                         | Interest on capital leases and long-term debt             |            |            | 251,724 
|                                                                       |                                                                                                                                                         | Minority interest                                         |            |            | (207,547
|                                                                       |                                                                                                                                                         | Impairment of goodwill                                    |            |            | 453,555 
|                                                                       |                                                                                                                                                         | Issuance of common stock and stock options to consultants |            |            |        
|                                                                       |                                                                                                                                                         | Litigation settlement/contingency                         |            |            | 672,000 
|                                                                       | Changes in operating assets and liabilities, net of business acquired:                                                                                  |                                                           |            |            |         
|                                                                       |                                                                                                                                                         | (Increase) decrease in accounts receivable                |            |            | (69,581 
|                                                                       |                                                                                                                                                         | Increase in inventory                                     |            |            | (32,072 
|                                                                       |                                                                                                                                                         | Increase in prepaid expenses and deposits                 |            |            | (85,623 
|                                                                       |                                                                                                                                                         | Increase in accounts payable and accrued liabilities      |            |            | 768,353 
|                                                                       |                                                                                                                                                         | Increase in restructuring reserve                         |            |            | 517,000 
|                                                                       |                                                                                                                                                         | Decrease in on legal settlement                           |            |            | (38,000 
|                                                                       |                                                                                                                                                         | (Decrease) increase in deferred revenue                   |            |            | (8,354  
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Net cash flows (used in) provided by operating activities                                                                                               |                                                           |            | (3,018,589 | )       
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|Cash flows from investing activities:                                  |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Minority interest                                                                                                                                       |                                                           |            |           |         
|                                                                       | Business acquisition, net of cash acquired                                                                                                              |                                                           |            |           |         
|                                                                       | Purchase of property and equipment                                                                                                                      |                                                           |            | (400,529   | )       
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Net cash flows used in investing activities                                                                                                             |                                                           |            | (400,529   | )       
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|Cash flows from financing activities:                                  |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Borrowings on note payable                                                                                                                              |                                                           |            | (160,000   | )       
|                                                                       | Repayments on borrowings on note payable                                                                                                                |                                                           |            | 1,150,000  |         
|                                                                       | Repayments on borrowings from shareholder                                                                                                               |                                                           |            | (23,000    | )       
|                                                                       | Deferred costs on issuance of debt                                                                                                                      |                                                           |            | (40,000    | )       
|                                                                       | Proceeds on issuance of warrants                                                                                                                        |                                                           |            | 39,715     |         
|                                                                       | Proceeds on issuance of stock                                                                                                                           |                                                           |            | 396,338    |         
|                                                                       | Repayments on capital leases                                                                                                                            |                                                           |            | (765,069   | )       
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Net cash flows provided by financing activities                                                                                                         |                                                           |            | 597,984    |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|Net (decrease) increase in cash and cash equivalents                   |                                                                                                                                                         |                                                           | (2,821,134 | )          |         
|Cash and cash equivalents at beginning of year                         |                                                                                                                                                         |                                                           | 2,925,051  |            |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|Cash and cash equivalents at end of year                               |                                                                                                                                                         | $                                                         | 103,917    |            | $       
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                     |                                                                                                                                                         |                                                           |            |            |         
|Cash paid during the period for:                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Interest                                                                                                                                                |                                                           | $          | 270,333    |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Income taxes                                                                                                                                            |                                                           | $          |           |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|Supplemental disclosure of noncash investing and financing activities: |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Purchase of property and equipment on capital leases                                                                                                    |                                                           | $          | 1,320,208  |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Voluntary surrender of property and equipment on capital leases                                                                                         |                                                           | $          | 646,477    |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Restructuring charge attributable to the excess of the net book value of property and equipment over the remaining voluntary surrendered capital leases |                                                           | $          | 111,909    |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         
|                                                                       | Issuance of common shares for litigation settlement                                                                                                     |                                                           | $          | 362,750    |         
|                                                                       |                                                                                                                                                         |                                                           |            |            |         

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

F6

---



INTERACTIVE TELESIS, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        For the years ended July 31, 2001 and 2000

NOTE 1ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Interactive Telesis, Inc. ("Interactive") was incorporated under the laws of the Province of British Columbia, Canada, on June 19, 1987, and on
September 23, 1996, the Company's jurisdiction of incorporation was changed to the state of Delaware. It is in the business of developing and marketing customized interactive voice response as
well as voice hosting and integration services to customers primarily located in the United States.

Consolidation

On December 17, 1999 Interactive acquired majority ownership of Paragon Voice Systems ("Paragon"), collectively known as the "Company." Paragon is in
the business of developing and installing computer telephony solutions incorporating automated speech recognition systems. The Company has used the purchase method to record this transaction at
historical cost. The purchase price of the subsidiary was $1.2 million which allowed Interactive to control 56.67%. In August 2000, the Company formed VoiceVault, Inc. a wholly
owned California corporation, which is currently inactive. All significant intercompany accounts and transactions have been eliminated at consolidation. See Note 12 for pro-forma
financial information.

Financial Instruments

The carrying amounts reported in the balance sheets for cash, accounts receivable, prepaid expenses and deposits, accounts payable, accrued liabilities, and
deferred revenue approximate fair value due to the immediate short-term maturity of these financial instruments.

The
fair value of the Company's capital lease obligations and notes payable approximates the carrying amounts based on the current rates offered to the Company for debt of the same
remaining maturities with similar collateral requirements.

Cash and Cash Equivalents

The Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and certificates of deposit and money market funds
purchased with an original maturity of three months or less to be cash equivalents.

Prepaid Expenses

Included in prepaid expenses are amounts paid to various companies in the ordinary course of business as well as the advance final payments of certain capital
leases.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is calculated on a declining balance basis over the estimated useful lives of the depreciable assets
which range from three to five years.

Revenue Recognition

In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," which summarized the SEC staff's views
regarding the recognition and reporting of revenues in certain transactions. The implementation of SAB No. 101 does not require the Company to change the method by which it recognizes revenues.
Revenues are recognized principally as services are

F7

---

provided to customers. Amounts billed in advance are recorded as current or long-term deferred revenue on the balance sheet, with current deferred revenue reflecting services expected to
be provided within the next twelve months. During the years ended July 31, 2001 and 2000 the Company recorded $0- and $8,354 of current deferred revenue, respectively.

The
Company recognizes software license fee revenue in accordance with the provisions of Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended by
SOP 98-9, "Software Revenue Recognition, With Respect to Certain Transactions." Software license fees represent revenues related to licenses for software delivered to customers for
in-house applications. Revenues from single-element software license agreements are recognized upon shipment of the software. Revenues from software arrangements involving multiple
elements are allocated to the individual elements based on their relative fair values. If services are considered essential to the functionality of the software products, both the software product
revenue and service revenue are recognized using the percentage of completion method in accordance with the provisions of SOP 81-1, "Accounting for performance of construction type and
certain production type contracts." Contract revenues are recognized based on labor hours incurred to date compared to total estimated labor hours for the contract. Contract costs include all direct
labor, direct material and indirect costs related to contract performance. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are recorded in the period in which such losses become probable based on the current contract estimates. Hosting fees represent revenues from post-contract customer support
services where the Company's software is resident on a company server and are recognized ratably over the hosting period. Record and replay as well as other revenues are generated by monthly and/or
per-minute usage fees based on contracts entered into by the Company.

Concentration Risk

A majority of the Company's revenues are generated by record and replay services. If the demand for this service decreased or if the Company's ability to
continue to provide this service was impaired, the Company's revenue source would be impacted.

For
the year ended July 31, 2001, the Company had one customer which accounted for 68% of the Company's revenue and represented 69% of the Company's accounts receivable at
July 31, 2001. Three customers accounted for 83% of the Company's revenue for the year ended July 31, 2000 and represented 66% of accounts receivable at July 31, 2000.

The
Company maintains its primary checking and savings accounts at one financial institution located in California. Accounts at this bank are insured by the Federal Deposit Insurance
Corporation (FDIC)
up to $100,000. At July 31, 2001 and 2000, the Company's uninsured cash balances totaled $0- and $2,725,051, respectively. The Company has not experienced any losses in
such accounts and management believes it places its cash on deposit with financial institutions which are financially stable.

Stock Based Compensation

In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation." This statement encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments based on a
fair-value method of accounting.

F8

---

Companies that do not choose to adopt the expense recognition rules of SFAS No. 123 will continue to apply the existing accounting rules contained in Accounting Principles
Board Opinion (APB) No. 25, but are required to provide pro forma disclosures of the compensation expense determined under the fair-value provisions of SFAS No. 123. APB
No. 25 requires no recognition of compensation expense for most of the stock-based compensation arrangements provided by the Company, namely, broad-based employee stock purchase plans and
option grants where the exercise price is equal to the market price at the date of the grant.

The
Company has adopted the disclosure provisions of SFAS No. 123 effective August 1, 1997. The Company has opted to follow the accounting provisions of APB
No. 25 for stock-based compensation and to furnish the pro forma disclosures required under SFAS No. 123 (See Note 9).

Long-Lived Assets

In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of the impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted SFAS No. 121 effective August 1, 1997 (See Note 3).

Advertising

The Company charges the cost of advertising to expense as incurred. Advertising costs for the years ended July 31, 2001 and 2000, were approximately
$26,000 and $37,500, respectively.

Inventory

The Company's inventory consists of computer equipment for sale to customers as part of the installation of its computer telephony solutions. Inventory is
stated at the lower of cost (determined on a first-in, first-out basis) or market.

Deferred Costs

The costs of obtaining debt financing have been capitalized and are being amortized on the straight-line method over the term of the related
agreement. Amortization of deferred financing costs is included in depreciation and amortization in the accompanying consolidated financial statement.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of
existing assets and liabilities. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized.

F9

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Net Income (Loss) Per Share

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share", which specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock. SFAS No. 128 supercedes the provisions of APB No. 15, and requires the presentation of basic earnings per share and
diluted earnings per share. The Company has adopted the provisions of SFAS No. 128 effective August 1, 1997.

Basic
net income (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the reported
periods. Diluted net income (loss) per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised. During the years ended
July 31, 2001 and 2000, outstanding options and warrants to purchase 2,202,657 and 2,127,521 common shares, respectively, were anti-dilutive and have been excluded from the weighted
average share computation.

Reclassifications

Certain prior year Balance Sheet amounts have been reclassified to conform to the current year's presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Management's Plans for Future Operations and Financing

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. However, the Company has experienced
cumulative losses for the past two years of approximately $6,200,000 which have increased the accumulated deficit to approximately $14,547,000 and reduced net shareholders' equity to a deficit of
approximately $1,458,000 as of July 31, 2001. At present, the Company's working capital may not be sufficient to meet the Company's objectives as structured. Although these conditions indicate
that the Company may be unable to continue as a going concern, current management did anticipate that it would incur losses due to a the slowdown in economic conditions and has taken steps towards
cost reduction. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Based
on current contract negotiations and cost reductions and Company-wide restructuring, management believes the Company will generate sufficient revenues and cash flows
from operations
and obtain funding from other sources to meet its current obligations during the year ending July 31, 2002. To the extent such revenues are not realized, management believes it has the ability
to raise additional capital to cover its current obligations until sufficient revenues and cash flows can be achieved by the Company.

F10

---

NOTE 2PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of July 31, 2001 and 2000:

2001

2000Computer and related equipment

$
2,336,072

$
1,815,230Office furniture and fixtures


271,493


97,661Motor vehicle


42,072


42,0722,649,637


1,954,963Less: Accumulated depreciation


(1,101,361
)

(669,183
)Net property and equipment

$
1,548,276

$
1,285,780


NOTE 3INTANGIBLE ASSET

As a result of the acquisition of Paragon, on December 17, 1999 the Company recorded goodwill in the amount of $625,590 and elected to amortize this
amount on a straight line basis over 5 years. For the years ended July 31, 2001 and 2000, amortization expense was $93,840 and $78,195, respectively. During the fourth quarter of the
year ended July 31, 2001, the Company determined the full carrying amount of the goodwill to be impaired.

Intangible
asset consists of the following as of July 31, 2001 and 2000:

2001

2000Goodwill, at cost

$
625,590

$
625,590Less accumulated amortization


(172,035
)

(78,195
)Less impairment


(453,555
)

Intangible asset, net

$


$
547,395


NOTE 4NOTE PAYABLE

During the year ended July 31, 2001, the Company entered into a $1,150,000 loan agreement which is convertible into the Company's Series A
Preferred Shares (see Note 9). The loan matures in November 2003 and bears interest at 7.5% per annum. The loan repayments begin in August 2002 and are payable in quarterly
installments of $191,667 until maturity.

The
aggregate maturities of the long-term debt as of July 31, 2001, are as follows:

Year Ending July 31,

Amount2002

$
2003


766,6682004


383,332$
1,150,000


During
the year ended July 31, 2000, Paragon consolidated its trade payables into one note payable in the amount of $160,000, maturing on June 5, 2007 and bearing
interest at 12.25% per annum. This note was fully paid off during the year ended July 31, 2001.

F11

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NOTE 5RELATED PARTY TRANSACTIONS

Amount due to a shareholder of the subsidiary consists of the following as of July 31:

2001

2000Unsecured loan from the CEO of Paragon bearing interest at 6% per annum and payable on demand.

$
8,000

$
31,000


NOTE 6CAPITAL LEASE OBLIGATIONS

Capital lease obligations consist of the following as of July 31:

2001

2000Capital lease obligations, bearing interest at rates of up to 16%, with interest and principal payable in monthly installments of approximately $49,900. The capital lease obligations are secured by the computer and
related equipment, and by personal guarantees of the previous CEO. The capital lease obligations are due at various dates between October 2001 and November 2003.

$
817,851

$
769,374Less: Current portion


(469,644
)

(364,454
)Capital lease obligation, long-term

$
348,207

$
404,920


Aggregate
maturities of capital lease obligations as of July 31, 2001, are as follows:

Year Ending July 31,

Amount2002

$
577,2222003


408,5632004


31,284Total minimum lease payments


1,017,069Less: Amount representing interest


(199,218
)$
817,851


Capitalized
leases included in property and equipment amounted to approximately $1,489,000 and $1,263,000 before accumulated amortization of $550,000 and $316,000 as of
July 31, 2001 and 2000, respectively. Included in depreciation and amortization expense is amortization of capital lease assets in the amounts of approximately $234,000 and $151,000 for the
years ended July 31, 2001 and 2000, respectively.

NOTE 7RESTRUCTURING

In connection with the declining sales and market conditions, the Company recorded certain reserves associated with the restructuring of its existing business.

At
July 31, 2001, the Company has a reserve for restructuring of $517,000 associated with the planned abandonment of certain capital leases. These leases bear interest at rates
of up to 16% and are due at various dates between December 2001 and November 2003. These leases are secured by the computers and related equipment originally leased. The Company has
chosen to return the computers and related equipment to the lessors and believes that the amount of reserve taken will adequately

F12

---

cover any costs associated with the voluntary surrender of assets. The Company has recorded a restructuring charge of approximately $629,000 relating to the planned surrender of these leased assets.

A
charge of approximately $638,000 for restructuring and exit costs was recorded as part of the Company's initiative to reduce costs by approximately $1.5 million by the end of
2002. The restructuring and exit plans primarily focus on the maximization of synergies through headcount reductions, in general expenditures and network operations.

Included
in the exit costs was $53,000 of cash termination benefits associated with the separation of 22 employees as part of the Company's involuntary termination plans. All but one
of the affected employees have left their positions as of July 31, 2001. Termination benefits of $53,000 were paid during the year ended July 31, 2001 and $0- is
expected to be paid in the first quarter of 2002. Also included in the exit costs was $122,000 and $43,000 of deprecation and interest expense, respectively, associated with the aforementioned
voluntary surrender of assets. The restructuring charge included approximately $398,000 of idle telecommunication and facility costs and $22,000 of lease cancellation penalties. This cash outlay was
funded primarily through cash from operations.

F13

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NOTE 8COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its facilities and other equipment under non-cancelable operating leases that expire at various dates through July 2005.
Minimum future obligations under these leases are as follows:

Year Ending July 31,

Rental
Obligation

Sub-Lease
Income

Net2002

$
583,018

$
408,404

$
174,6142003


448,582


430,288


18,2942004


443,786


440,142


3,6442005


449,995


449,995


Total minimum lease payments

$
1,925,381

$
1,728,829

$
196,552


Rent
expense, net of sublease income, under the non-cancelable operating leases was $516,380 and $158,676 for the years ended July 31, 2001 and 2000.

Litigation

The Company has resolved a claim brought by a former officer and consultant alleging breach of contract regarding the issuance of certain options that the
Company made under the 1996 Plan. As part of the settlement the Company has agreed to pay the former employee 100,000 options to purchase shares of common stock at $0.35 per share, 50,000 shares of
common stock at $0.78 per share and an additional $25,000 in five equal quarterly installments of $5,000. As a result, the Company recorded a settlement expense in the amount of $99,000. As of
July 31, 2001, the Company has provided a liability in the accompanying consolidated financial statements for the remaining cash and stock payments amounting to $52,500.

The
Company has resolved a lawsuit brought by a former consultant alleging wrongful termination and breach of contract. During the year ended July 31, 2001, the Company settled
the lawsuit by agreeing to pay the former consultant $400,000 in free trading common stock in five payments of $30,000 and eight payments of $31,250. For the year ended July 31, 2001, the
Company has issued 756,137 shares of common stock associated with the payment schedule. In addition to the free trading shares, the Company also issued 277,776 shares of restricted common stock valued
at $150,000. Accordingly a liability has been provided for in the accompanying consolidated financial statements for the remaining payments amounting to $218,750. The Company has incurred $23,000 in
additional legal costs associated with this lawsuit.

The
Company is a defendant in a lawsuit brought by vendor claiming that the Company is in breach of three (3) of its equipment leases. Damages of approximately $188,000 have
been filed against the Company. Management is unable to determine the likelihood of the outcome and has included such amounts in its restructuring reserve.

The
Company was a defendant in a lawsuit brought by an individual claiming that the Company and other defendants made misrepresentations in the sale of shares of the Company's common
stock. A provision of $80,000 for the litigation settlement was provided for in the fiscal 1999 financial statements. During the year ended July 31, 2000, final settlement was reached for
100,000 shares of common stock valued at $1.97 each. The additional $117,000 in litigation expense is included in the consolidated statement of operations for the year ended July 31, 2000.

F14

---

Other

The Company is in the process of disputing approximately $145,000 in invoices from a vendor. Based on its contentions that the amount represents overbillings,
management of the Company has not recorded the amounts in the consolidated financial statements and is uncertain of the eventual outcome of this matter.

The
Company is involved in a contractual dispute with a previous vendor. Certain performance issues have arisen on the part of both parties and no lawsuits have been filed. The
Company's management and counsel believe they are in a strong position and do not anticipate any further liability.

No
contingent liability has been provided for in the accompanying consolidated financial statements that relates to the Company's 1997 stock repurchase program, as discussed in
Note 9.

The
Company is involved in other legal and insurance matters arising in the normal course of business. The amount of the claims is not considered to be material in relation to the
financial statements of the Company.

NOTE 9SHAREHOLDERS' (DEFECIT)/EQUITY

Preferred stock

During the year ended July 31, 2001, the Company authorized 25,000,000 shares of convertible preferred stock in multiple series and with a par value of
$0.001 per share. The shares are convertible into the Company's common stock at various conversion rates at the option of the Company. The holders of the preferred stock have full voting rights and
are entitled to one vote for each share, the same as for common shares. The holders of the preferred stock are entitled to receive an annual dividend equal to 7.5% of the initial issuance price of the
preferred stock, compounded and paid monthly. Dividends are payable in each preferred stock series based on 83% of the common stocks closing price on the dividend payment date and according to each
series conversion rate into common stock. The Company has authorized Series A and Series B Preferred shares. Series A Preferred shares convert into common stock on a
1-to-1 basis. Series B Preferred shares convert into common stock on a 10-to-1 basis. As of July 31, 2001, no Series A Preferred
shares have been issued or outstanding and 100,000 Series B Preferred shares are issued and outstanding.

Stock and warrant issuances

In June 2000, the Company entered into a Securities Purchase Agreement (the "Agreement") with two institutional investors (the "investors") for the sale
of up to $4.5 million of its common stock. Under the terms of the Agreement, on the date of each issuance of common stock (the "closing date"), the investors will also receive warrants (the
"warrants") entitling them to purchase shares of the Company's common stock in an amount equal to 15% of the shares issued for cash at an exercise price which is the lower of 110% of: the market price
of the Company's common stock on the closing date, or the average of the market price for the 5 trading days immediately preceding 181 days thereafter (the "warrants"). The warrants expire
three years from the closing date. All of the warrants are outstanding as of July 31, 2001.

During
the year ended July 31, 2000, pursuant to the Agreement, the Company issued 905,798 shares of its common stock for net proceeds of $2,267,234, net of cash issuance costs
$232,766, and 135,870 warrants at an exercise price which is the lower of: $3.03 per share, or the average of the market price for the 5 trading days immediately preceding 181 days thereafter.
The warrants are valued

F15

---

at $0.36 per share and expire in June 2003 and are all outstanding as of July 31, 2000. In accordance with the Agreement, the Company issued 50,000 share purchase warrants as part of the
non-cash issuance costs. The warrants entitle the holders to purchase 50,000 shares of common stock at $3.31 per share, and expire in June 2003. All of the warrants are outstanding
as of July 31, 2001.

The
Agreement calls for the two subsequent common stock issuances of one million dollars each approximately 90 days and 180 days subsequent to July 31, 2000, at
the market price of the Company's common stock on each of these respective dates. These issuances were later withdrawn during the year ended July 31, 2001.

In
January 1997, the Company issued 407,401 share purchase warrants to the CEO in connection with the settlement of a debt. The warrants entitle the director to purchase
407,401 shares of common stock at $0.40 per share, and expire in November 2001. All of the warrants are outstanding as of July 31, 2001.

In
November 2000, the Company issued 394,737 share purchase warrants for $3,947 to a lender in connection with the issuance of a note payable as described in Note 1 and
Note 4. The warrants entitle the lender to purchase 394,737 shares of Series A Preferred stock at $0.75 per share and expire in November 2007. All of the warrants are outstanding
as of July 31, 2001.

In
April 2001, the Company issued 50,000 shares of Series B Preferred shares at $5.00 per share and 15,000 share purchase warrants valued at $1.15 as part of the
Agreement to two parties in equal amounts. The warrants which entitle each party to purchase 7,500 shares of Series B Preferred stock at $5.50 per share, and expire in April 2004. All of
the warrants are outstanding as of July 31, 2001.

In
May 2001, the Company issued 50,000 shares of Series B Preferred shares at $5.00 per share and 15,000 share purchase warrants valued at $1.15 as part of the Agreement
to two parties in equal amounts. The warrants which entitle each party to purchase 7,500 shares of Series B Preferred stock at $5.50 per share, and expire in May 2004. All of the
warrants are outstanding as of July 31, 2001.

Also,
in both April 2001 and May 2001, the Company issued a total of 37,500 shares of common stock and 10,000 share purchase warrants valued at $0.12 as part of a
finders fee to two unrelated parties in equal amounts. The warrants entitle each party to purchase 5,000 shares of common stock at $0.60 per share, and expire in April and May 2004,
respectively. All of the warrants are outstanding as of July 31, 2001.

In
accordance with the terms of the Agreement, the Company issued 486,024 common shares to an investor as part of its repricing feature during the year ended July 31, 2001 as
part of a previous issuance and as a result in the Company's stock price.

Stock option plans

In October 1996, the Company adopted a non-qualified stock option plan (the "Plan") under which options to purchase up to 1,485,000,
subsequently amended to 3,335,000 and then to 4,835,000, shares of common stock may be granted to directors, officers or employees of the Company, as well as to consultants and other service providers
of the Company. The Plan provides for grants of options with a term of up to 10 years.

Pursuant
to the Plan, the Company granted options to purchase 587,250 and 1,947,000 shares of common stock for the years ended July 31, 2001 and 2000, respectively.

The
Company has elected to account for grants under its Plan following APB No. 25 and related interpretations. Accordingly, compensation costs of $0-
and $4,000 have been recognized for options

F16

---

granted to employees during the years ended July 31, 2001 and 2000, respectively. Under SFAS No.123, the fair value of each option granted during the years ended July 31, 2001 and 2000,
was estimated on the measurement date utilizing the then current fair value of the underlying shares, as estimated by management, less the exercise price discounted over the average expected life of
the options, with an average risk free interest rate of between 5.3% and 6.0%, price volatility of between 0.53 and 1.67, and no dividends.

Had
compensation cost for all awards been determined based on the fair value method as prescribed by SFAS No.123, reported net loss and net loss per share would have been as follows:

July 31, 2001

July 31, 2000Net loss:As reported

$
(6,079,627
)
$
(132,221
)Pro forma

$
(6,265,860
)
$
(480,314
)Basic net loss per share:As reported

$
(0.19
)
$
0.00Pro forma

$
(0.19
)
$
(0.02
)Diluted net loss per share:As reported

$
(0.19
)
$
0.00Pro forma

$
(0.19
)
$
(0.02
)


A
summary of the activity of the stock options for the years ended July 31, 2001 and 2000 are as follows:

Year ended
July 31, 2001

Year ended
July 31, 2000Shares

Weighted
Average
Exercise
Price

Shares

Weighted
Average
Exercise
PriceOutstanding at beginning of period

2,687,250

$
0.53

940,000

$
0.38Granted

587,250


1.34

1,947,000


0.69Exercised

(208,000
)

0.39

(96,750
)

0.30Forfeited

(1,113,750
)

1.23

(103,000
)

2.29Expired









Outstanding at end of period

1,952,750

$
0.39

2,687,250

$
0.53Exercisable at end of period

1,518,000

$
0.41

1,534,250

$
0.36Weighted-average fair value of options granted during the period



$
1.34



$
0.63Weighted-average remaining contractual life of options outstanding at end of period




8.0 years




8.8 years


F17

---

NOTE 10INCOME TAXES

Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. The tax effect of temporary differences consisted of the following as of July 31:

2001

2000Deferred tax assets:Net operating loss carryforwards

$
2,977,600

$
906,200Other


23,400


10,200Gross deferred tax assets


3,001,000


916,400Less: Valuation allowance


(2,715,400
)

(796,600
)Net deferred tax assets


285,600


119,800Deferred tax liabilities:Property and equipment





(61,100
)Cash basis accounting for tax purposes


(285,600
)

(58,700
)Net deferred tax liabilities


(285,600
)

(119,800
)Net deferred tax

$


$



Realization
of deferred tax assets is dependant upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be
available to reduce taxable income. As the achievement of required future taxable income is uncertain, the Company recorded a valuation allowance. The valuation allowance increased by $1,918,800 and
$182,600 from 2000 and 1999, respectively. Of the valuation allowance increase from 2000, $148,000 is due to Paragon's valuation allowance being recorded on the books.

As
of July 31, 2001, Interactive has net operating loss carryforwards for both federal and state income tax purposes. Federal and state net operating loss carryforwards
totaling approximately $6,100,000 and $5,500,000, respectively, as of July 31, 2001, begin to expire in 2011. Paragon has federal and state net operating loss carryforwards totaling
approximately $1,300,000 and $1,200,000, respectively as of July 31, 2001, which begin to expire in 2010 and 2001, respectively. Since Paragon does not file a consolidated federal income
tax return with Interactive, its operating loss carryforwards are available to Paragon only and are limited. The amount of Paragon's annual taxable income which can be offset by the net operating loss
carryforwards will be limited to approximately $127,000.

Under
federal and state laws, the availability of operating loss carryforwards are limited in the event of a cumulative change in the Company's ownership resulting in a change in
control. The Company has not performed an analysis to determine if such a change has taken place, however, management does not believe such a change has taken place.

A
reconciliation of the effective tax rates with the federal statutory rate is as follows as of July 31:

2001

2000Income tax expense (benefit) at 35% statutory rate

$
(2,127,900
)
$
(46,300
)Change in valuation allowance


1,918,800


182,600Change in valuation allowance attributable to Paragon


(148,000
)

(130,500
)Nondeductible expenses


560,500


37,200State income taxes, net


(352,600
)

(7,700
)Other


149,200


(35,300
)$


$



F18

---

NOTE 11SUBSEQUENT EVENTS

Subsequent
to the year ended July 31, 2001, the Company authorized the formation of convertible Series C Preferred shares. These shares have all the rights of common
shares and Series A and B Preferred shares and are subordinate to the aforementioned shares. The shares are convertible into common shares on a 10-to-1 basis. Subsequent
to year end and as part of additional funding, there were 62,500 shares of Series C Preferred Stock issued, at $2.00 per share, and 18,750 warrants valued at $0.46. The warrants entitle the
holder to purchase 18,750 shares of Series C Preferred Stock at $2.20 per share.

In
August 2001, the Company authorized the issuance of 650,250 options to its employees.

NOTE 12PRO-FORMA FINANCIAL INFORMATION

The following unaudited pro forma consolidated statements of operations are presented as if the acquisition of Paragon had been made at the beginning of the
period presented. The pro forma consolidated statement of operations include adjustments to give effect to amortization of goodwill and the elimination of inter-company amounts. The unaudited pro
forma information is not necessarily

F19

---

indicative of the results of operations that would have occurred had the purchase been made at the beginning of the periods presented or the future results of the combined operations.

|                                                                      |                               | Interactive
Telesis, Inc.
For the year
ended
July 31, 2000 |            | Paragon
Voice
Systems
For the year
ended
July 31, 2000 |   | Pro Forma
Adjustments |         | Pro Forma
For the year
ended
July 31, 2000 |         
|--------------------------------------------------------------------- | ----------------------------- | ---------------------------------------------------------- | ---------- | ------------------------------------------------------ | - | --------------------- | ------- | ------------------------------------------ | --------
|
|Revenues                                                              |                               | $                                                          | 4,787,265  |                                                        | $ | 184,011               |         | $                                          | (58,740 
|Costs and expenses:                                                   |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|                                                                      | Cost of revenues              |                                                            |            | 628,326                                                |   |                       | 114,938 |                                            |         
|                                                                      | Salaries and wages            |                                                            |            | 1,902,119                                              |   |                       | 404,031 |                                            |         
|                                                                      | General and administrative    |                                                            |            | 1,155,343                                              |   |                       | 168,374 |                                            |         
|                                                                      | Sales and marketing           |                                                            |            | 346,425                                                |   |                       | 38,801  |                                            |         
|                                                                      | Depreciation and amortization |                                                            |            | 335,860                                                |   |                       | 14,317  |                                            |         
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|                                                                      | Total costs and expenses      |                                                            |            | 4,368,073                                              |   |                       | 740,461 |                                            |         
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|Operating income (loss)                                               |                               |                                                            | 419,192    |                                                        |   | (556,450              | )       |                                            | (125,112
|Other expenses:                                                       |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|                                                                      | Interest expense              |                                                            |            | 53,215                                                 |   |                       | 4,823   |                                            |         
|                                                                      | Legal settlement costs        |                                                            |            | 117,000                                                |   |                       |        |                                            |         
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|                                                                      | Total other expenses          |                                                            |            | 170,215                                                |   |                       | 4,823   |                                            |         
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|Income (loss) before income taxes and minority interest in subsidiary |                               |                                                            | 248,977    |                                                        |   | (561,273              | )       |                                            | (125,112
|Minority interest net loss of subsidiary                              |                               |                                                            |           |                                                        |   |                      |         |                                            | 243,218 
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|Income (loss) before income taxes                                     |                               |                                                            | 248,977    |                                                        |   | (561,273              | )       |                                            | 118,106 
|Income taxes                                                          |                               |                                                            |           |                                                        |   |                      |         |                                            |        
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|Net income (loss)                                                     |                               | $                                                          | 248,977    |                                                        | $ | (561,273              | )       | $                                          | 118,106 
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|Basic net income (loss) per share                                     |                               | $                                                          | 0.01       |                                                        |   |                       |         |                                            |         
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         
|Shares used to compute basic and diluted net income (loss) per share  |                               |                                                            | 30,885,571 |                                                        |   |                       |         |                                            |         
|                                                                      |                               |                                                            |            |                                                        |   |                       |         |                                            |         

F20

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