UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB
(Mark One)
[X]      ANNUAL REPORT UNDER TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

                                       OR

[  ]     TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

                         Commission file number: 0-19031

                                 PC-EPHONE, INC.
                                ----------------
                 (Name of small business issuer in its charter)

             Nevada                                                  98-0197707
     ---------------------------                                 --------------
     (State or other jurisdiction                              (I.R.S. Employer
     of incorporation or organization)                      Identification No.)

        5375 Mira Sorrento Place, Suite 290, San Diego, California 92121
        ----------------------------------------------------------------
          (Address of principal executive offices, including zip code)


                                  858-550-2020
                                  ------------
                (Issuer's telephone number, including area code)

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

                                                        Name of each exchange
        Title of each class                              On which registered
        -------------------                              -------------------
               None                                              None

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

                    Common Stock, $0.001 par value per share
                   -------------------------------------------
                                (Title of Class)



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<PAGE>


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

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

The issuer's revenues for the fiscal year ended December 31, 2001 were $3,984.

The aggregate market value of the Common Stock (12,169,731 shares) held by
non-affiliates, based on the average of the closing sale price ($0.16) of the
Common Stock as of May 1, 2002, was $1,947,157.

The number of shares outstanding of the issuer's Common Stock as of May 1, 2002
was 16,957,174 shares.

Transitional Small Business Disclosure Format (Check one):  Yes        No X
                                                               -----     -----








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<PAGE>




Certain statements in this Annual Report on Form 10-KSB, or the Report, are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about the plans, objectives, expectations and
intentions of PC-EPhone, Inc., a Nevada corporation and its subsidiaries
(collectively referred to in this Report as "we," "us" or "our,") and other
statements contained in this Report that are not historical facts.
Forward-looking statements in this Report or hereafter included in other
publicly available documents filed with the Securities and Exchange Commission,
or the Commission, reports to our shareholders and other publicly available
statements issued or released by us involve known and unknown risks,
uncertainties and other factors which could cause our actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. When used in this Report, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors."
                                     PART I
Item 1.  Description of Business.
         ------------------------

Overview
--------

         We are a convergence technology company with distribution rights to
several products manufactured by third parties, including the "PC-EPhone 1.0,"
our handheld computer products, such as the PC-E PDA and the MIA Pocket PC, and
the flexible keyboard. We were incorporated in the state of Nevada on June 17,
1998, and are the parent company to two wholly owned subsidiaries:
PC-eSolutions, Inc., a Delaware corporation and PC-EPhone Canada Enterprises
Inc., a British Columbia (Canada) corporation.

         We were originally formed to explore and develop oil and gas
properties. On August 18, 2000, we abandoned the oil and gas exploration
business and began to pursue opportunities in the wireless convergent technology
market. On November 6, 2000, we obtained the distribution rights to the
PC-EPhone 1.0 and focused on distributing the PC-EPhone 1.0 in the United States
and Canada.

         In 2001, we adopted a new business plan to develop this company into a
convergence technology company with a broad base of convergence technology
product offerings. On July 1, 2001, we hired David Meltzer, our Chief Executive
Officer, to implement our new business plan.

         Under our new business plan, we intend to market our products to the
following three markets: (i) hardware and accessories; (ii) applications; and
(iii) networks. We are relying on the sales of our hardware, accessories and
software applications integrated into our handheld computer devices to generate
revenues in the near future. We anticipate launching our wireless products and
generating revenues from wireless networks if we receive government approval and
carrier acceptance of our current and future wireless products.

         Although we have made discrete sales of products to our
sub-distributors in the United States and Israel for marketing and testing
purposes, we have not launched distribution of any of our products, as of the
date of this Report. We intend to commence distribution of our products, other
than the PC-EPhone 1.0 and the PC-EPhone 2.0 GSM/GPRS, or the PC-EPhone
Products, upon receipt of at least $3,500,000 dollars in financing, and, in the
case of the PC-EPhone Products, upon receipt of carrier acceptance and
governmental approvals, where applicable. As of the date of this Report, we have
obtained a bridge loan facility up to the amount of $480,000 from Process
Control (Holdings) Limited, a corporation organized under the laws of the
Republic of Ireland, or PCHL. We have also entered into a letter of intent with
PCHL regarding the formation of a joint venture with PCHL. We are also actively
seeking additional sources of financing.

         In anticipation of furthering our business plan as a convergence
technology company, we have developed relationships with network operators and
application providers. We are also in the process of co-developing certain
products with our manufacturing partners.



                                       3
<PAGE>


         We do not manufacture our own products and rely upon independent third
parties to manufacture our products.

Our Products
------------

         Hardware and Accessories
         ------------------------

         The PC-EPhone 1.0. Prior to the implementation of our new business
plan, we obtained the exclusive distribution rights in the United States and
Canada to the "PC-EPhone 1.0" from Cyberbank Corp., or Cyberbank, a
telecommunication and software development company located in Seoul, Korea.
Cyberbank commenced commercial distribution of the PC-EPhone 1.0 in Korea in
June 2001 and in Australia in March 2002. The PC-EPhone 1.0 combines the
capabilities of a handheld personal computer with full Internet access, a
cellular telephone, a Personal Digital Assistant, or PDA, and an organizer in
one device. We believe that the features of the PC-EPhone 1.0 are unmatched by
any other product currently available. The PC-EPhone 1.0 was selected as a
finalist out of approximately 30 entrants for the Best of Comdex Award in the
Wireless/Mobile Product category for the year 2000.

         The PC-EPhone 1.0 runs on the Windows CE 3.0 operating system. Unlike
competing products that operate on the Palm operating system, the PC-EPhone 1.0
retains near-full functionality of a lap top computer and is able to run
applications, such as Microsoft Word, Outlook, PowerPoint, Excel and Internet
Explorer. The PC-EPhone 1.0 includes a four-inch (as measured diagonally)
rectangular Liquid Crystal Display, or LCD, screen that supports 256 colors,
with a resolution of 640 by 480 pixels. Our competitors typically have narrower
screens that support fewer colors, with a resolution of 240 by 320 pixels. The
PC-EPhone 1.0 is also equipped with a dual mode chipset that enables it to
access Code Division Multiple Access, or CDMA, cellular networks operating on
the 800 Megahertz, or MHz, digital frequency, as well as analog networks.
Digital wireless systems generally operate at either 800-900 MHz (generally
referred to as cellular) or 1800-1900 MHz (generally referred to as Personal
Communications Service, or PCS). Other specifications include Intel's 206 MHz
Reduced Instruction Set Computer, or RISC, central processing unit, 32 Megabytes
of flash memory, 32 Megabytes of Random Access Memory, or RAM, a battery life of
approximately 60 hours of stand-by time, 6 hours of talk-time, and 4 hours of
PDA time.

         The PC-EPhone 1.0 operates on the CDMA protocol. The PC-EPhone 1.0 is
equipped with an integrated Compact Flash, or CF, expansion slot that allows
users to extend the functionality of the device with a wide range of CF-based
accessories, such as Wireless Local Area Network, or WLAN, cards, Global
Positioning Satellite, or GPS, cards and IBM Microdrive(TM) memory cards.
Additionally, the PC-EPhone 1.0 includes a standard Infrared Data Association,
or IrDA, communication port.

         Before the PC-EPhone 1.0 or any other iterations of the PC-EPhone with
wireless capabilities can be marketed and sold in the North American market, the
Federal Communications Commission, or the FCC, and Industry Canada must approve
of the devices for sale and the wireless carriers for those markets must approve
the devices for use on their networks. Cyberbank obtained FCC approval for the
PC-EPhone 1.0 on April 27, 2001, in approximately 24 weeks from the date of
application, and Industry Canada approval for the PC-EPhone 1.0 on May 3, 2001.
We anticipate that the time required for the FCC approval process will be
reduced as Cyberbank and we become more experienced with the approval process
and the FCC becomes more familiar with our products and us. We believe that
obtaining FCC approval for other iterations of our PC-EPhone Products will
require approximately 12-16 weeks. Once FCC approval is obtained, approval from
Industry Canada can normally be obtained within 1-2 weeks thereafter.

         The geographic territory covered and timing and details of the carrier
acceptance process vary by carrier. We believe that the carrier acceptance
process may be completed in as little as 50 days under ideal circumstances. Some
carriers may require additional certifications by industry groups such as the
Cellular Telecommunications Internet Association, or CTIA, as part of their
approval process. We believe that obtaining CTIA approval may require
approximately 8 weeks. While the applicant may apply for CTIA approval
simultaneously with presenting its product for carrier acceptance, the inclusion
of a CTIA or other industry approvals may extend the carrier acceptance process.
We anticipate that the time required for the carrier approval process can be
reduced as Cyberbank and we become more experienced with the process and the
carrier becomes more familiar with our products and us.



                                       4
<PAGE>



         Cyberbank submitted an application to a wireless carrier to obtain
wireless access for the PC-EPhone 1.0 on such carrier's networks in September
2001. Cyberbank is still proceeding with the acceptance process. Cyberbank may
elect not to proceed with its application for carrier acceptance of the
PC-EPhone 1.0 depending upon the cost of finishing development of the PC-EPhone
2.0 GSM/GPRS, the amount of financing that we will be able to obtain and on
general market conditions. If Cyberbank and we elect to proceed with the carrier
acceptance process and receive adequate financing in the near future, we believe
that the carrier acceptance process will be completed and the PC-EPhone 1.0 will
be launched by October 31, 2002. In any event, if the PC-EPhone 1.0 is not
launched by October 31, 2002, we anticipate abandoning the launch of the
PC-EPhone 1.0 and proceeding with the PC-EPhone 2.0 GSM/GPRS, a more advanced
version of the PC-EPhone 1.0 that is currently under development.

         PC-E PDA. The PC-E PDA is a handheld computer device that is virtually
identical to the PC-EPhone, except that it does not have built-in wireless
connectivity. Users of the PC-E PDA will be able to obtain wireless connectivity
through various CF accessory cards that have been accepted by wireless carriers.
CF cards that have been accepted by wireless carriers are readily available in
the market. The PC-E PDA is offered as a lower priced option to the PC-EPhone.

         MIA Pocket PC. The MIA PD-600C is a handheld computer device that is
based on the Microsoft Pocket PC operating system. The MIA uses a Personal
Computer Memory Card International Association, or PCMCIA, slot, which replaces
the expansion pack. An expansion pack consists of additional input and output
slots into which additional accessories may be plugged. As a result, the MIA
PD-600C is less expensive and lighter. The Pocket PC operating system includes
Microsoft Word, Pocket Outlook, Excel, Internet Explorer and Windows Media
Player. The device also includes Intel's 206 MHz Strong Arm central processing
unit, 64 Megabytes of flash memory, 32 Megabytes of Read Only Memory, or ROM, a
Lithium Ion Battery, a back-up battery and a serial-to-Universal Serial Bus, or
USB PC Link. As of the date of this Report, we have sold MIA's to Calanit, our
distributor in Israel, for marketing and testing purposes.

         Accessories. We provide the following accessories that enhance our
product line: (i) a portable car charger that doubles as a 9-volt backup battery
for Pocket PC devices; (ii) an AC/DC converter that, when plugged into a car
lighter, provides a 110-volt outlet; (iii) a wireless plug-and-play mouse that
requires no software; (iv) a digital camera; and (v) a flexible keyboard that
can be rolled up and carried in a pocket. We believe that these accessories are
suitable for original equipment manufacturers, or OEM, customers or private
label and development opportunities.

         Products in Development
         -----------------------

         We are in the process of developing the following products with our
manufacturing partners:

         Flexible Keyboard II. In conjunction with Seoul Systems Co., Ltd., a
Korean corporation, or SSC, we are working with a small developer to develop a
flexible keyboard that will approach the size of a standard laptop keyboard. We
are approaching the completion of the product design phase and anticipate
finishing a prototype of the product by June 30, 2002. Due to the similarity of
the flexible keyboard II to the current model, we anticipate introducing the
finished product by September 30, 2002. SSC and we have orally agreed that the
intellectual property rights to this flexible keyboard will be jointly owned by
SSC and us.

         PC-EPhone 2.0 GSM/GPRS and other PC-EPhone Products. Cyberbank and we
are finalizing negotiations to develop an advanced mobile data and
communications device to be known as the PC-EPhone 2.0 GSM/GPRS, that will be
based on the design of the PC-EPhone 1.0 and will incorporate the Global
Standard for Mobile/General Packet Radio Signal, or GSM/GPRS wireless standard.
Cyberbank and we are in the final phases of product design and anticipate
finishing a prototype of the PC-EPhone 2.0 GSM/GPRS by September 30, 2002. We
anticipate funding development of the device upon receipt of $1,000,000 in
financing. The PC-EPhone 2.0 GSM/GPRS has not been approved for sale by any
government agency and has not been presented for acceptance by the carriers. We
anticipate initiating the governmental approval process for the PC-EPhone 2.0
GSM/GPRS by December 31, 2002. If we obtain governmental approval, we intend to
begin the process of obtaining carrier acceptance for the PC-EPhone 2.0 GSM/GPRS
thereafter.



                                       5
<PAGE>


         We believe that the features of the PC-EPhone 2.0 GSM/GPRS are
unmatched by any other product currently available. A beta (test) unit of the
PC-EPhone 2.0 incorporating the CDMA wireless standard was selected as a
finalist for the Best of Comdex Award in the Mobile/Handheld System Product
category for the year 2001. The PC-EPhone 2.0 GSM/GPRS is a two point five
generation, or 2.5G, device that is expected to operate on the CDMA and GSM/GPRS
protocols. 2.5G and third generation, or 3G, devices are able to handle
high-speed data transmissions of up to 144 Kpbs or more in addition to increased
voice capacities. The PC-EPhone 2.0 GSM/GPRS is expected to run on the Window
CE.NET operating system and be equipped with a GSM Subscriber Identification
Module, or SIM, card. The SIM card is a smart card that allows a GSM cell phone
to make and receive calls. The SIM card identifies the user to the network and
contains a microprocessor chip, which stores unique information about the user's
billing account. We believe that the SIM card is the key to accessing the
international cell phone network for devices incorporating the GSM wireless
standard.

         Cyberbank and we may elect to develop a version of the PC-EPhone 2.0
that is expected operate on the CDMA protocol and that uses a tri-mode chipset.
A tri-mode chipset will enable the device to access 800 MHz, 1900 MHz and analog
CDMA networks. We anticipate that this version of the PC-Phone 2.0 would use the
Windows CE.NET operating system. The PC-EPhone 1.0 operates on a dual mode
chipset that has access to a more limited range of bandwidths. As such, there is
a risk that the PC-EPhone 1.0 may not be as attractive to the major wireless
carriers.

         Cyberbank has also begun development of a Pocket PC device that
utilizes the Windows Pocket PC operating system. We expect to develop future
versions of the PC-EPhone jointly with Cyberbank that would operate on the
General Packet Radio Service, or GPRS, protocols and include other forms of
wireless technology standards, including 3G technologies that operate on the
CDMA protocol.

         Industrial PDA. In conjunction with SSC, we anticipate developing a
line of industrial PDAs that will allow the mobile consumer to become more
efficient and productive. The industrial PDA will be designed to withstand
5-foot drop tests, leverage biometric fingerprint access recognition and have a
bar code scanner. We anticipate beginning the development process and acquiring
the intellectual property rights to the industrial PDA as funding permits.

         Networks
         --------

         Wireless network operators, or carriers, often jointly market wireless
devices with the device manufacturer or its distributors. As part of the
co-marketing strategy, carriers may pay the manufacturer or its distributor
subsidies for each device purchased by the end-user that is activated on a
billing plan of such carrier. If we obtain carrier acceptance of our wireless
devices, we expect to receive activation subsidies from such carrier(s) as our
products are activated for use on the applicable wireless networks. We believe
that the level of subsidy will vary by carrier and the qualifying service rate
plan selected by the end-user. We also expect the amount of our subsidies to
vary based on whether: (i) we make a direct sale of a device packaged with a
rate plan and perform the activation; or (ii) we sell to a channel partner, who
then performs the activation.

         We also intend to explore business opportunities in the WLAN markets as
soon as we obtain sufficient financing. WLAN technology allows individual
computers or devices to access local area networks wirelessly. We believe that
our products can be integrated into WLAN settings. Initially, we intend to use
802.11 access points and other readily available hardware with our devices to
obtain this wireless capacity. In the future, we anticipate co-developing such
products to enable us to provide complete network solutions to our customers.

         Applications
         ------------

         We intend to market our products to, and through, channel partners,
including software and other application providers by: (i) offering to integrate
software or other products of application providers into our products; or (ii)
providing "bundled" offerings by including application software with our




                                       6
<PAGE>



products. We intend to load free-trial applications developed by various
application providers onto our devices. When a licensed version of the loaded
software product is purchased by our customer, such as an enterprise IT manager
or end user, as a result of the free-trial package, we intend to obtain a
portion of the revenue generated from such sale. We anticipate that our portion
of this revenue stream to vary by application and by provider. We also intend to
include software packages with our products and anticipate deriving revenue from
these software providers.

         We believe that as our customers use our products, they will introduce
our products to their own customers, or create a "viral marketing" effect. We
intend to develop incentive programs to encourage this viral marketing effect
among our application channel partners, hardware customers and end-users.

         On September 12, 2001, we entered into a non-exclusive marketing
agreement with Pumatech, Inc., or Pumatech, a leading developer of
synchronization software, to promote the products of Pumatech in connection with
the PC-EPhone. We intend to place Pumatech's synching application on our
products. Synchronization software allows users of handheld devices to
"synchronize" the data on the handheld device with the data stored on the
desktop device. In addition to pre-loading Pumatech's application on the
PC-EPhone Products, we intend to market those PC-EPhone Products to Pumatech for
use by its sales force. We anticipate that Pumatech's sales force would, in
turn, resell these PC-EPhone Products. We expect to receive 15% of the revenue
realized by sales of their software that is packaged with any of our devices.

         Finally, we are evaluating the feasibility of developing and obtaining
rights to our own software applications. We believe that by developing or
obtaining the rights to software applications, we will be able to increase sales
of our handheld products and generate an additional source of revenue. We intend
to focus on developing or obtaining rights to collaborative voice and data
applications for handheld mobile computing devices and software packages that
enable these handheld mobile computing devices to act as wireless telephones. We
anticipate discussing the acquisition of rights to certain software applications
from SSC if we receive sufficient funding.

Our Joint Venture Agreement with Process Control (Holdings) Limited
-------------------------------------------------------------------

         On March 27, 2002, we entered into an agreement with PCHL whereby we
would agree to form a joint venture with PCHL's wholly owned subsidiary,
Whitelite Communications Ltd., a corporation organized under the laws of the
Republic of Ireland, or WCL. PCHL is a telecommunications, electrical design and
distribution company based in Ireland. If formed, the joint venture entity would
distribute our products on a worldwide basis, subject to certain exclusions
described below. We would own 15% of the joint venture entity. The remaining 85%
would be owned by PCHL.

         Upon formation of the joint venture, we would agree to contribute all
of our rights and obligations under any future distribution agreements that we
enter into with Cyberbank or SSC for the territories of Europe, the Middle East,
Africa and China. For a six-month period following the formation of the joint
venture, PCHL would have an option to convert all of its interest in the joint
venture into a fully diluted 65% of our issued and outstanding common stock, or
Common Stock, at the time of conversion. Upon conversion, PCHL would be entitled
to appoint 4 of the 7 members on our board of directors and WCL and the joint
venture entity would become our wholly owned subsidiary. Either party would be
able to terminate this agreement upon written notice at any time prior to
entering into definitive agreements.

         In connection with our agreement with PCHL, PCHL placed an order with
SSC for 35,000 units of a flexible keyboard for distribution in the territories
of Europe, China, the Middle East and Africa. PCHL also posted a letter of
credit in the amount of US $673,450 on March 5, 2002, in connection with this
purchase. If the joint venture is formed, the keyboards and the proceeds from
the sale of the keyboards will be contributed to the joint venture entity. If
the joint venture is not formed, PCHL will retain possession of the flexible
keyboards and be entitled to distribute them in the territories of Europe,
China, the Middle East and Africa. We believe that PCHL will accept delivery of
the keyboards in May 2002.

         On April 8, 2002, we entered into a bridge loan facility with PCHL to
provide us with loans of up to the maximum principal amount of US $480,000,
payable by PCHL in monthly increments of US $160,000 during the period from



                                       7
<PAGE>



April to June 2002. The promissory note accrues interest at a rate of 7% per
annum, secured by a lien on our assets and is convertible into shares of our
Common Stock only upon the occurrence and continuance of an event of default.
The shares issuable under the promissory note are subject to certain demand and
piggyback registration rights. The note matures 90 days after termination of our
letter of intent with PCHL, or the date that the parties execute and deliver
definitive agreements regarding the described joint venture transaction,
whichever occurs earlier. As of the date of this Report, we have received US
$160,332 under the bridge loan facility.

         PCHL and we have entered into a letter of intent with SSC whereby SSC
has agreed to grant to our proposed joint venture entity the exclusive,
worldwide distribution rights to certain products manufactured or developed by
SSC that enhance or expand our current product offerings. PCHL and we have also
entered into a letter of intent with Cyberbank whereby Cyberbank has agreed to
grant to our proposed joint venture entity the exclusive, worldwide (excluding
Australia, Korea and Japan) distribution rights to the PC-EPhone PDA and the
PC-EPhone 2.0 GSM/GPRS GSM/GPRS.

Principal Distribution Arrangements
-----------------------------------

         We have obtained the right to distribute the PC-EPhone 1.0 and the PC-E
PDA from Cyberbank. We have entered into a letter of intent with Cyberbank to
distribute the PC-EPhone 2.0 GSM/GPRS and certain other related products through
our proposed joint venture with PCHL. The remaining products that we currently
have the right to distribute are licensed from SSC.

         Distribution Agreement with Cyberbank
         -------------------------------------

         On November 6, 2000, Cyberbank granted to us the exclusive right to
market, distribute and sell the PC-EPhone 1.0 in the United States and Canada
and a right of first refusal to acquire the marketing, distribution and sales
rights for (a) any future products on an exclusive basis within the United
States and Canada; and (b) future products on a non-exclusive basis for the
remaining countries worldwide on terms mutually agreeable to the parties. Our
distribution rights terminate on December 31, 2007, unless extended by mutual
agreements, or earlier terminated in accordance with the terms of the
distribution agreement. In consideration for such distribution rights, we issued
to Cyberbank 3,500,000 shares of our Common Stock and granted warrants to
purchase up to 2,500,000 shares of Common Stock at a purchase price of $3.20 per
share. On December 31, 2001, Cyberbank allowed its warrants to expire without
exercise. The distribution agreement entitled Cyberbank to appoint nominees to
our Board of Directors representing a minimum of 40% of such Board of Directors
during the term of this agreement. If Cyberbank's nominees constitute less than
40% of our Board of Directors, other than by reason of resignation of
Cyberbank's nominees or the failure of Cyberbank to provide nominees, for
continuous period of more than 60 days, then Cyberbank will be entitled to
terminate this Agreement. As of the date of this Report, Cyberbank designees
comprise 2 of our 4 directors.

         We have agreed to purchase an annual minimum of 500,000 units of the
PC-EPhone 1.0. Additionally, we have agreed to place two binding purchase orders
for a total of $25,300,000, to be paid with cash of $2,000,000 on May 21, 2001,
and letters of credit totaling $23,300,000. We have not made the $2,000,000
payment.

         We are currently in discussions with Cyberbank regarding the status of
this agreement. In connection with the resolution of this agreement, we
anticipate that we would terminate our agreement with Cyberbank and, through our
proposed joint venture, enter into a new distribution agreement with Cyberbank
to obtain worldwide (excluding Korea, Japan and Australia) distribution rights
to the PC-EPhone 2.0 GSM/GPRS, its various iterations and certain other
products. We anticipate that such new distribution agreement will supersede our
current distribution agreement with Cyberbank. We are in the process of
negotiating this new distribution agreement with Cyberbank and anticipate
obtaining worldwide distribution rights to the PC-EPhone 2.0 GSM/GPRS, its
various iterations and certain other products by September 30, 2002.




                                       8
<PAGE>



         Agreements with Aidiicom and SSC
         --------------------------------

         In 2001, we entered into a joint venture agreement with Aidiicom
Technologies Ltd., a British Columbia (Canada) corporation, or Aidiicom, an
affiliate of Carlos Lau, a principal shareholder, which provides us with: (i)
the exclusive right to market, distribute and sell the AIDII Pocket PC and any
future products and related accessories within North America; and (ii) the
non-exclusive right to market, distribute and sell such products worldwide.
Aidiicom distributes its products through a distribution and co-development
agreement with SSC. Aidiicom is entitled to assign all of its rights and
obligations under this agreement to us or any of our affiliated entities. We
have the exclusive right to modify and develop the technology licensed by
Aidiicom from SSC for exploitation in North America and to private label such
products and the accessories. Any future products that are jointly developed by
Aidiicom and us will be jointly owned by both parties. We are required to make
certain minimum purchases of Aidiicom products. Our agreement with Aidiicom
terminates on the earlier to occur of: (a) June 30, 2004; (b) the day on which
this agreement is terminated in accordance with its provisions; or (c) the day
on which Aidiicom's primary distribution agreement is terminated, unless
extended by mutual agreement. As of the date of this Report, we have not
satisfied our minimum purchase requirements.

         We are in the process of negotiating a resolution of the issues related
to our distribution agreement with Aidiicom. In connection with the resolution
of that agreement, we anticipate that we would terminate our agreement with
Aidiicom and, through our proposed joint venture, enter into a separate
distribution agreement directly with SSC to obtain worldwide distribution rights
to certain of their products. We are in the process of negotiating a new
distribution agreement with SSC to obtain worldwide distribution rights to
certain of SSC's products through our proposed joint venture. We anticipate
obtaining worldwide distribution rights to the SSC Products by September 30,
2002.

         We are also party to a separate oral agreement with SSC to develop the
flexible keyboard II. The intellectual property underlying the keyboard will be
jointly owned by SSC and us. We intend to enter into a written agreement with
SSC to memorialize the terms of our oral agreement.

Manufacturing, Supplies, Product Development and Co-Development of New
Technology
----------------------------------------------------------------------

         Manufacturing and Supplies
         --------------------------

         Third parties for whom we act as distributors or their contract
manufacturers in Korea manufacture our products on a purchase order basis. Our
manufacturers procure components and manufacture, assemble and test our finished
products. Our manufacturers purchase the components that make up our products
from various large vendors. These components are generally readily available
from multiple sources. Sole or single source suppliers, for which alternative
sources have not been readily available in sufficient quantities or at an
attractive cost, also supply some of our components. For example, Cyberbank is
the sole supplier of the middleware software that integrates the Windows
operating system of the PC-EPhone Products with the cellular telephone system.

         Product Development and Co-Development of New Technology
         --------------------------------------------------------

         We hope to expand our current product offering by: (i) obtaining
marketing rights to additional products; (ii) co-developing with our
manufacturing partners new products based on the technologies of our
manufacturing partners; or (iii) developing new products. Currently, as
developers of the products, Cyberbank and SSC, our manufacturing partners, have
borne the majority of the costs associated with product development. Cyberbank
and SSC look to us primarily to: (i) contribute funds to finish development of
the PC-EPhone 2.0 GSM/GPRS and other iterations of the PC-Phone Products, where
necessary; and (ii) distribute the finished product in the approved territories.
In the instance where we have incurred research and development costs, such as
in connection with the development of the flexible keyboard II, we have also
obtained joint ownership of the relevant intellectual property. We hope to
continue to enlist the participation of our manufacturing partners in product
development to benefit from their expertise and to defray the costs associated
with product development.

         We hope to assemble a multi-disciplinary team of software architects,
electrical engineers, mechanical engineers, radio specialists, quality



                                       9
<PAGE>


engineers, manufacturing process engineers, user interface design specialists or
other professionals in order to develop our own products. We intend to subject
the completed product to our quality assurance program where it must meet
certain quality benchmarks and manufacturing guidelines before it will be
released into production. Where necessary, we intend to provide feedback to our
manufacturing and engineering organizations and our outsource manufacturing and
materials partners to enable them to correct any defects or make any
improvements that may be discovered. We anticipate relying on the expertise and
experience of our manufacturing partners throughout the product development
process.

Sales and Marketing
-------------------

         If we secure sufficient funding, and with respect to the PC-EPhone
Products, obtain carrier and government acceptance, we anticipate launching the
distribution of our products in the United States and Canada shortly thereafter.
We anticipate distributing our products through three primary channels: (i)
master distributors; (ii) manufacturer's representative organizations, or MRO's;
and (iii) our own internal sales force. With time, we intend to expand our reach
globally, whether through our joint venture, or otherwise.

         Master Distributors
         -------------------

         Master distributors are distributors who agree to: (i) purchase our
products for subsequent distribution to retailers and other resellers including
large volume retailers and value-added resellers (third parties that customize
products and resell them under their own label); and (ii) provide a variety of
additional services, including logistics, inventory management, and fulfillment,
and/or customer and product support functions such as call center operations,
technical support and reverse logistics (warranty and repair issues) and other
services. In selecting our master distributors, we examine the scope of the
master distributor's access to customers and its relationships with authorized
agent groups for wireless network operators. Through our master distributors, we
hope to obtain wide and rapid exposure for our convergence products and
accessories among customers in both the enterprise and consumer markets.

         On October 11, 2001, we entered into a one-year distribution agreement
with Calanit Cellular Center Ltd., or Calanit, subject to annual renewals.
Calanit has agreed to distribute all computer products produced or offered by us
on a non-exclusive basis in Israel. Calanit also has agreed to provide all
customer assistance and technical assistance arising from sales of these
products in Israel. As of the date of this Report, Calanit has purchased 20 MIA
Pocket PC devices.

         On October 10, 2001, we entered into an agreement with Infosonics
Corporation, or Infosonics, pursuant to which Infosonics agreed to serve as our
non-exclusive master distributor of all computer products produced or offered by
us in the United States for one year, subject to annual renewals. In addition to
obtaining access to Infosonics' customer outlets, Infosonics agreed to provide
certain fulfillment services during the term of the agreement. Infosonics was
also granted an advertising allowance equal to 3% of the product invoice for
advertisements featuring the PC-EPhone Products and certain related products.
Infosonics is not required to make any minimum purchase requirements. As of the
date of this Report, Infosonics has placed a conditional purchase order for
5,000 units of the PC-EPhone 1.0 or 2.0, conditioned upon receipt of carrier
acceptance.

         Manufacturer's Representative Organizations
         ------------------------------------------

         MROs are outside sales organizations with independent access to
customer outlets in various geographic regions. MROs negotiate the sale of our
products and receive commissions from actual sales made. Currently, we have
contracted with several MROs, including AB&T, Inc., one of the leading MROs, to
sell our PC-EPhone Products and other products. We believe that using MROs will
allow us to expand our sales reach without incurring up-front investment
typically required to develop an extensive in-house sales team. Additionally, we
will be able to access experienced sales professionals and their existing
customer relationships. We anticipate that designated master distributors will
fulfill orders originating from MROs.



                                       10
<PAGE>



         Internal Sales Structure
         ------------------------

         We hope to develop an internal sales force to focus on immediate market
opportunities in the enterprise market. We believe that immediate market
opportunities exist in the healthcare, financial services, field-force
automation, government and higher education sectors. We believe that
transactions in these sectors can be priced at or near published Suggested
Retail Prices, or SRP. As such, we believe that deals originating from our
internal sales will provide our highest margins. We anticipate that sales made
to or through our master distributors and MROs will be completed at discounts to
the SRP.

         Our internal sales group will also be charged with establishing direct
distribution agreements with CDMA network operators. It is common practice for
major networks operators work with vendors, such as carrier retail stores, to
develop joint marketing strategies. We believe that carrier retail stores will
offer the most immediate access to many end users of wireless communications
products. As such, we anticipate that developing distribution relationships
directly with major carriers may result in significant wholesale orders for our
products.

         We hope to minimize channel conflict by directing distribution
arrangements to channels that we believe will be best suited to serve and
support specific customer requirements. If our internal sales group develops
leads in the reseller market, we intend to refer those leads to our MROs. We
believe that MROs possess the expertise necessary to service the needs of major
resellers, including national and regional retail chains, value-added resellers,
or VARs and select enterprises. Once the lead is referred to the MRO, our
internal sales force will focus on ensuring that total solutions to the
enterprise market are provided.

Customer Service and Sales and Technical Support
------------------------------------------------

         We do not currently provide customer service and sales and technical
support. Once distribution of our products is launched, we intend to offer
product support through our Website, in the form of Frequently Asked Questions,
or FAQs, and to provide customer service and sales support via the Internet and
through a call center. Initially, we intend to provide sales and customer
service through a call center. Once we attain a supportable sales volume, we
intend to phase in web-based and telephone-based customer service and sales
programs that will enable customers to purchase products by telephone and
through the Internet, and to access information to their specific accounts,
including order status, balances and account history. The URL to our Website, a
local toll number and a toll-free number will be printed on a warranty card that
will be included with each of our products.

         Call Center
         -----------

         If we reach a supportable sales volume, we intend to establish, or
obtain access to, a call center to enable our customers and partners to obtain
telephonic product and technical support through a local toll number and a
toll-free number. Initially, we anticipate providing this service through an
internal sales force in conjunction with third party contractors. We intend to
outsource the call center aspect of our customer services, after the web-based
solution is implemented. We hope to outsource these functions to the same third
party that will handle our call center technical support services to achieve
economies of scale and to enable us to allocate our resources to product design
and development. As our web-based customer service functions are implemented, we
hope to integrate our telephone-based customer support functions with those on
the Web. Currently, call centers costs are based on time spent directly with
customers. As we increase our product offerings and the volume of units sold, we
hope to establish a fixed cost structure with the call centers or hire permanent
support personnel.

         During the initial stages of product introduction, we anticipate that
calls will last longer than calls made during the later stages in the product
cycle. In the beginning, our customer service representatives may require more
time to become familiar with our products, accurately recognize a problem,
assess the availability of a solution, and determine whether to continue
telephone support or issue a return for maintenance authorization, or RMA. As
our representatives become more familiar with our products, we expect the
average time of each support call to decrease.



                                       11
<PAGE>


         In certain instances, we anticipate that our products will require
actual testing and servicing and may need to be replaced with new or refurbished
units. We anticipate that the process of replacing or repairing a device will be
as follows:

         o        Call center technicians issue an RMA.
         o        Customer ships the device, as instructed, to the
                  testing/repair center.
         o        The device is tested within 24 hours of receipt by the testing
                  center to confirm, the actual nature of the problem.
         o        If the problem is identified, a determination is made as to
                  whether or not it is covered by warranty. We do not provide
                  express warranties with respect to the products that we
                  currently distribute. Rather, these warranties are provided by
                  the manufacturers of those products.
         o        If a warranty covers the problem, a determination is made as
                  to whether the device should be: (i) repaired and returned
                  directly to the customer; or (ii) replaced with a Field
                  Replacement Unit, or FRU. Once we determine to issue an FRU,
                  we obtain a credit card number from our customers to enable us
                  to take delivery of an FRU prior to returning a defective
                  device described in the RMA.
         o        As defective devices are replaced with FRUs, periodically
                  (i.e. weekly, bi-weekly or monthly), defective devices will be
                  returned in bulk to the facility specified by the applicable
                  device manufacturer for repair (or scrap for parts if repair
                  is not an option).
         o        Repaired devices are returned to service as FRUs.
                  Manufacturers will agree to provide us with the initial FRUs
                  based on a percentage of orders placed by us.

         The customer service representative will issue an RMA when he believes
that the problem is beyond the ability of the customer to troubleshoot. Due to
the complexity of our products, we anticipate many of the returned devices
(including those accompanied by an RMA, as well as those returned by customers
on their own) to eventually have "No Trouble Found," or NTF. As such, we intend
to charge the customer for inbound shipping costs if the device is subsequently
determined to be NTF. To reduce the costs associated with a high NTF rate, we
intend to direct our customers, with the assistance of a telephone service
representative, to reset a problem device to the original factory settings prior
to issuing an RMA.

         We intend to test all returned devices within a short period following
receipt. This will allow us to promptly return NTF devices (and bill the costs
of shipment) to our customers rather than depleting our FRU stock. With the
assistance of our product manufacturers, we intend to establish policies and
procedures for testing hardware and software, which procedures may include
proprietary diagnostics applications required by each respective manufacturer.
Where applicable, the cost for any new systems that must be procured by our
third-party service provider will be passed through to the manufacturer.

         We do not intend to repair products that we distribute. We anticipate
that repairs will be performed by the manufacturers or their contractors.

         Support Through The Website
         ---------------------------

         Currently we do not provide customer service and sales support on our
Website. As of the date of this Report, our Website contains a list of FAQs and
responses to those FAQs. We hope to include a search engine in our Website to
allow visitors to search for specific items related to their areas of
interest/trouble by key word. If a visitor is not able to locate the desired
information in the FAQs (and later, through the knowledge base), the visitor
will be able to contact a customer service representative through an email link
included in the Website. We hope to respond to a customer's email contact on the
same day of receipt. After a minimum of 3 cycles of e-mail exchanges between the
user and the customer service representative, the representative will be
instructed to direct the customer to contact a support technician directly by
telephone.

         Once we attain a supportable sales volume, we intend to phase in a
web-based customer service program that will enable customers to access their
account online. Initially, we hope to expand the FAQs on an ongoing basis by
building a knowledge base for our Website. We intend to review and sort
transcripts of e-mail exchanges between our Website users and our customer
service representatives. Recurring topics and questions will be addressed in the
FAQs. As the FAQ section and/or knowledge base grows, we hope to decrease the
number of visitors to the Website requiring live, human assistance, thereby
reducing a variable cost in the customer service process. We hope to increase
the utility of the knowledge base by refining the search functions engineered
into the Website. Over time, we also intend to develop a dynamic knowledge base
to improve our ability to provide important information and resolve support
issues as they arise. We eventually hope to establish a program that will allow
customers to place orders and check order status, balances and account history
online.



                                       12
<PAGE>



Competition
-----------

         We believe that the principal competitive factors affecting the market
for handheld computers and wireless communicators are design, performance,
expandability, price, brand and carrier acceptance. Factors that we believe will
become increasingly important include wireless connectivity, email and instant
messaging capabilities and voice integration. We are in the process of obtaining
carrier acceptance from a single carrier covering the territory of the United
States. We believe that we compete favorably compared to many of our current
competitors with respect to some or all of these factors.

         The market for handheld computer products and wireless communicators is
highly competitive, and we expect competition to increase in the future. Some of
our competitors or potential competitors have significantly greater financial,
technical and marketing resources than we do. These competitors may be able to
respond more rapidly to new or emerging technologies or changes in customer
requirements than we can. They also may devote greater resources to the
development, promotion and sale of their products than we do. Our competitors
may have already obtained acceptance from one or more carriers for their
products, may be more advanced in the acceptance process or may have obtained
acceptance from carriers that cover larger territories.

         Our products compete with a variety of handheld devices, including
keyboard-based devices, sub-notebook computers, smart phones and two-way pagers.
Our principal competitors include:

         o        Palm and Palm OS operating system licensees, including
                  Handspring, Acer, Handera, Sony and Symbol;
         o        Other licensees of the Microsoft's PocketPC operating system
                  for handheld devices such as Casio, Compaq and
                  Hewlett-Packard;
         o        Licensees of Symbian EPOCH operating system for wireless
                  communication devices such as Panasonic and Siemens;
         o        Smart phone manufacturers such as Ericsson, Kyocera, Motorola,
                  Nokia and Samsung;
         o        Research In Motion Limited, a leading provider of wireless
                  email, instant messaging and Internet connectivity; and
         o        A variety of start-up companies looking to compete in our
                  current and future markets.


         We expect our competitors to continue to improve the performance of
their current products and to introduce new products, services and technologies.
Successful new product introductions or enhancements by our competitors could
reduce sales and market acceptance of our products, cause intense price
competition resulting in reduced gross margins and loss of market share. To be
competitive, we must continue to invest significant resources in research and
development as well as sales and marketing. We cannot be sure that we will have
sufficient resources to make these investments or that we will be able to make
the technological advances necessary to be competitive.

Proprietary Technologies
------------------------

         We do not have any patents or pending patent applications with respect
to any of our products. However, we distribute products manufactured by others,
including the PC-EPhone Products, which are the subject of international
patents. Our manufacturing partners have not obtained patents in the United
States or Canada for the products that we intend to distribute in the United
States and Canada.



                                       13
<PAGE>



         We intend to protect our proprietary rights from unauthorized use by
third parties to the extent that our proprietary rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. Patents and
other proprietary rights are an essential element of our business. We also rely
on trade secrets, employee and third-party nondisclosure agreements and other
protective measures to protect our intellectual property rights pertaining to
our products and technology.

Insurance
---------

         We intend to obtain property and general liability insurance and other
insurance coverage in amounts deemed adequate and affordable by management in
the future. There can be no assurance that any future claims will not exceed
applicable insurance coverage. Furthermore, no assurance can be given that
liability insurance will be available at a reasonable cost or that we will be
able to maintain adequate levels of liability insurance in the future.

Employees
---------

         As of May 1, 2002, we had eight (8) full-time employees, which
consisted of one (1) executive officer, two (2) operations personnel, two (2)
sales and marketing personnel, two (2) business development personnel and one
(1) administrative personnel. In addition, we engaged two (2) full time
consultants who serve as our executive officers. We intend to hire additional
personnel as the development of our business makes such action appropriate. The
loss of the services of key employees including David C. Meltzer, our Chief
Executive Officer and President, could have a material adverse effect on our
business. Since there is intense competition for qualified personnel
knowledgeable of our industry, no assurances can be given that we will be
successful in retaining and recruiting needed personnel.

         Our employees are not represented by a labor union and are not covered
by a collective bargaining agreement. We believe that we have good relations
with our employees.

                                  RISK FACTORS

Risks Related to Our Business
-----------------------------

         We have a history of operating losses that are likely to continue in
the future. Our auditors have included an explanatory paragraph in their
Independent Auditor's Report included in our audited financial statements,
included elsewhere in this Report for the years ended December 31, 2001 and 2000
to the effect that our losses from operations for the year ended December 31,
2001, and the working capital deficit and the accumulated deficit at December
31, 2001 raise substantial doubt about our ability to continue as a going
concern. We have incurred significant losses in the last two years. As of
December 31, 2001, our accumulated deficit was $4,916,887. We expect to incur
continuing losses because we plan to spend available resources on research and
development of new products and marketing new and existing products. We cannot
assure you that we will market any products successfully, operate profitably in
the future, or that we will not require significant additional financing in
order to accomplish our business plan.

         We will need additional capital. We have historically financed our
operations through working capital provided from loans and the private placement
of equity and debt securities. In 2001, we raised the gross amount of
approximately $757,500 through private placements of debt and equity securities
and $765,087 through advances payables, $232,500 of which were eventually
converted into convertible subordinated debentures. The net proceeds of these
financings, together with our existing financial resources, the proceeds of our
loan from PCHL and any revenues from our sales, distribution, licensing and
manufacturing relationships, should be sufficient to meet our operating and
capital requirements through July 2002. We intend to seek additional financing
or business partners who will be able to provide us with the financing necessary
to continue operations of our business. We anticipate that we will need to
obtain $3,500,000 in order to launch the commercial distribution of our
products. Our failure to receive such additional financings or to find such
business partners could have a material adverse effect upon our financial
condition and our ability to continue to operate.

         If we need additional financing, we cannot assure you that it will be
available on favorable terms, if at all. If we need funds and cannot raise them
on acceptable terms, we may not be able to:


                                       14
<PAGE>



         o        sustain our business operations;
         o        execute our growth plan;
         o        take advantage of future opportunities, including
                  acquisitions, as feasible;
         o        respond to customers and competition.

         We have adopted a new business plan to develop this company and there
is no assurance that we will be able to successfully implement our new business
plan. We recently adopted a new business plan to develop this company from a
single product distribution company into a convergence technology company with a
broad base of product offerings. As such, we have only a limited operating
history on which to base an evaluation of our new business and prospects. These
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stage of transition,
particularly companies in new and rapidly evolving markets, such as the
convergence technology market. There can be no assurance that our business plan
will be feasible or that we will be able to successfully transition into the
convergence technology market. In July 2001, we brought in a new management team
to implement our new business plan. There can be no assurance that the new
management team will be able to achieve the strategic objectives of our new
plan.

         We anticipate launching commercial distribution of our products upon
receipt of $3,500,000 and there is no assurance that we will obtain sufficient
funds to implement such launch. As of the date of this Report, we have not
launched commercial distribution of our products. We anticipate commencing such
launch upon receipt of $3,500,000 in financing. While we expect to receive
funding from PCHL and are also actively seeking financing from third party
sources, there can be no assurance that we will be able to raise $3,500,000. Our
failure to receive such additional financings could have a material adverse
effect upon our ability to launch our products and thus our financial condition
and our ability to continue to operate.

         PCHL may become entitled to control the management of the company if we
form a joint venture with PCHL. There is no assurance that PCHL will agree to
implement our new business plan or that it will be able to do so successfully.
If we form a joint venture with PCHL and PCHL elects to convert its interest in
the joint venture into 65% of our issued and outstanding Common Stock (on a
fully diluted basis), PCHL will be entitled to appoint 4 of the 7 members of our
board of directors. As such, PCHL will be able to control our management and
operations. There is no assurance that PCHL will desire to achieve our strategic
objectives or to implement our business plan. There is no assurance that PCHL
will be able to successfully implement our business plan even if it elects to
adopt our plan.

         PCHL is our major creditor and our flexibility to operate our business
may be constrained by the requirements of our credit facility. On April 8, 2002,
we obtained a secured loan up to a maximum of $480,000. The terms of our credit
facility require us to obtain the prior consent of PCHL before we engage in
certain specified actions such as incurring certain indebtedness, making certain
investments or distributions, making certain acquisitions, making certain
capital expenditures or causing a change in control of us. If we are unable to
obtain PCHL's consent, we will be unable to take certain actions and our
business may suffer. In addition, the loan documents confer additional rights on
PCHL in the event of a default, which could cause us to suffer adverse financial
and business consequences.


         We anticipate relying on several principal products as the primary
source of our revenues for the foreseeable future. We believe that most of our
revenues will depend on the commercial success of our PC-E PDA, the flexible
keyboard, the flexible keyboard II, and, upon carrier acceptance, the PC-EPhone
Products. If revenues from the sale of these products fail to meet expectations,
our other business activities will likely not be able to compensate for this
shortfall. We obtained the distribution rights to the PC-EPhone 1.0 and the PC-E
PDA through a long-term distribution agreement with Cyberbank. We obtained the
distribution rights to the flexible keyboard through a long-term distribution
agreement with Aidiicom. We have not performed certain of our obligations under
these distribution agreements. We cannot be certain as to our ability to perform
these obligations in the near future. We believe that Aidiicom has also failed
to perform certain of its obligations under our distribution agreement. Under
the agreements, Cyberbank and Aidiicom have the right to terminate their
agreements with us in the event of our failure to perform our obligations. In
the event that Cyberbank or Aidiicom commences legal action, although we believe
that we have valid claims to preserve our rights under the agreements, there can
be no assurances as to the resolution of these matters. Furthermore, if we elect
to enforce our rights under the agreements, there can be no assurances that as
to the results that may be attained under the laws of South Korea or Canada, as
applicable. If Cyberbank or Aidiicom elect to terminate their distribution
agreements with us, our business, financial condition and results of operations
would be materially and adversely affected.


                                       15
<PAGE>


         The launch of certain of our PC-EPhone Products may be delayed if
Cyberbank does not obtain the appropriate approvals from the government and
wireless carriers. Cyberbank may elect not to proceed with carrier acceptance of
the PC-EPhone 1.0, one of our key products, depending on the cost of finishing
the development of the PC-EPhone 2.0 GSM/GPRS or any subsequent iterations of
the PC-EPhone Products, the amount of financing that we will be able to obtain
and general market conditions. If we do not launch the PC-EPhone 1.0 by October
31, 2002, Cyberbank and we intend to abandon the launch of the PC-EPhone 1.0 and
proceed with the launch of the PC-EPhone 2.0 GSM/GPRS. The PC-EPhone 2.0
GSM/GPRS is currently in development and we anticipate that we will need to
obtain approximately $1,000,000 to continue additional development of the
device. Cyberbank and we anticipate introducing the PC-EPhone 2.0 GSM/GPRS for:
(i) acceptance by the appropriate governmental agencies by December 31, 2002;
and (ii) carrier acceptance shortly after receipt of the appropriate government
approvals. There is no assurance that Cyberbank and we will be able to obtain
carrier acceptance of PC-EPhone 1.0 and PC-EPhone 2.0 GSM/GPRS or government
approvals of the PC-EPhone 2.0 GSM/GPRS. If we abandon the PC-EPhone 1.0, there
can be no assurance that we will be able to launch the PC-EPhone 2.0 GSM/GPRS.
If we fail to launch the PC-EPhone 2.0 GSM/GPRS or there is a delay in the
launch of the device, our operations and financial condition may be materially
and adversely affected.

         We have not entered into a written agreement regarding the rights to
and the distribution of the flexible keyboard II, one of our key products. The
intellectual property rights and the terms of distribution of the flexible
keyboard II, one of our key products in development, are subject to an oral
agreement between SSC and us. As cash flow permits, we intend to enter into a
written agreement to memorialize the oral agreements between the parties. If a
dispute arises between the parties prior to entering into such written
agreement, there can be no assurances as to the resolution of these disputes or
the results that may be attained under these circumstances. If we are unable to
establish our rights to the intellectual property underlying the flexible
keyboard II, our financial condition and results of operations may be materially
and adversely affected.

         We are a distributor, do not manufacture our products and are dependent
on third parties for products to distribute. We are parties to long-term
distribution agreements with Cyberbank and Aidiicom for the distribution of our
products. We do not manufacture any of the products that we distribute and our
distribution rights vary in scope and duration by product. We obtain all
finished products from Cyberbank and other third party manufacturers. While we
intend to develop, alone or in conjunction with Cyberbank or other manufacturers
updates and new products in the future, we are currently dependent on third
parties for products to distribute. If our agreements with our manufacturing
partners are terminated, we will not have products to distribute and our results
of operations and financial condition would be severely harmed.

         All of our products are developed based on technology owned by third
parties and we depend on third parties to develop new products. The technology
underlying the PC-EPhone Products and other products distributed by us are owned
by Cyberbank, SSC or other third parties. We also rely on third party technology
in updating and developing our products. We currently co-develop the flexible
keyboard II with SSC and anticipate co-developing additional products with our
manufacturers in the future. These co-developed technologies will be owned, in
part or in whole, by us. Our ability to release, sell, develop and update these
products could be seriously harmed if we are unable to license such third party
technology, the third party technology is not delivered to us in a timely manner
or contains errors or defects which are not discovered and fixed prior to
release of the products and we are unable to obtain alternative technology or
alternative technology on favorable terms to use in our products. Our inability
to obtain alternative technology or alternative technology on favorable terms
could result in damage to our reputation as well as lost revenues and diverted
development resources.

         We may not be able to deliver wireless access if we do not obtain
approval from wireless carriers. In order to utilize the telecommunication and
wireless Internet capabilities of the PC-EPhone Products, users will be required
to purchase wireless services from third party vendors. The future success of
our PC-EPhone Products substantially depends on its acceptance by the wireless
carriers. As of the date of this Report, we have not obtained carrier approval


                                       16
<PAGE>


for our PC-EPhone Products. There can be no assurance that we will obtain such
approval, or that wireless services for the PC-EPhone Products will be available
from third parties on terms attractive to consumers. If we fail to obtain such
carrier approval or obtain wireless access on terms attractive to consumers, our
results of operations and financial condition could be materially and adversely
affected. The wireless networks of the carriers differ in the geographic
coverage, capacity, affordability, reliability and security. Additionally, many
international wireless carriers may use different standards and transmit data on
different frequencies than domestic wireless carriers. As such, we are likely to
incur expenses related to the redesign of certain portions of our software and
hardware. Our products may be subject to a lengthy certification process with
each wireless carrier with whom we seek to enter into a relationship. These
certification requirements could delay the offering of wireless products and
services into certain domestic and international markets. Consequently, our
ability to enter and expand the market for our PC-EPhone Products, and therefore
our results of operations, could suffer.

         All of our revenues currently come from a limited number of customers,
and any decrease in revenues from any of our customers could harm our results of
operations. All of our revenues are derived from a limited number of customers.
We expect that a significant portion of our revenues will continue to depend on
sales of products to a small number of customers. Any downturn in the business
from these customers could seriously harm our revenues and results of
operations.

         We depend on sole source suppliers for certain components and elements
of our products and our production would be materially harmed if these suppliers
are not able to meet our demand on a cost effective basis and alternative
sources are not available. The products that we distribute contain components,
including memory chips, liquid crystal displays, touch panels and
microprocessors, that are procured from a variety of suppliers. Some components,
such as the middleware software developed by Cyberbank that is required to
interface the Windows operating system of our PC-EPhone Products with its
cellular telephone capacities and the Windows operating system, come from sole
source suppliers. Alternative sources are not currently available for all of
these sole source components. With respect to the middleware software from
Cyberbank, we expect that we will continue to license such software with
Cyberbank. We also intend to enter into joint development arrangements with
Cyberbank in the future. If Cyberbank or a joint developer fails to develop the
software in a timely fashion or at all, we may not be able to deliver certain
features in our products as expected or we could be required to expend
unexpected development costs to develop the software ourselves or to use cash to
obtain it from another third party. As a result, our product introductions could
be delayed or our offering of features could be reduced, which could affect our
operating results. Our ability to release next generation versions of our
products would be seriously harmed if this third party software is not available
in a timely fashion, which could result in the decreased demand for our products
and damage to our reputation as well as lost revenues and diverted development
resources. Furthermore, Cyberbank or the joint developer may improperly use or
disclose the software, which could adversely affect our competitive position. If
Cyberbank or our manufacturing partners are unable to obtain sole source
components from the sole suppliers or an alternative source or if the price for
an alternative source is prohibitive, our ability to distribute products, and
thus our financial condition and operations, would be seriously harmed.

         We rely on third party manufacturers to manufacture our handheld
devices, and our reputation and results of operations could be adversely
affected by our inability to control their operations. We outsource all of our
manufacturing to our development partners Cyberbank and SSC that, in turn,
contract with third parties, to fulfill such manufacturing obligations. We
depend on these third party manufacturers to produce sufficient volume of our
products in a timely fashion and at satisfactory quality levels. We also rely on
our third party manufacturers to place orders with suppliers for the components
they need to manufacture our products. If our third party manufacturers fail to
produce quality products on time and in sufficient quantities, our reputation
and results of operations would suffer. If they fail to place timely and
sufficient orders with suppliers, our results of operations would suffer.

         Our reliance on third parties exposes us to the following risks:

         o unexpected increases in manufacturing costs;
         o less ability to rapidly adjust build plans in response to changing
           demand forecasts;
         o interruptions in shipments if one of our manufacturers is unable to
           complete production;
         o less ability to control quality of finished device products;
         o less ability to control delivery schedules;
         o unpredictability of manufacturing yield;
         o potential lack of adequate capacity; and
         o potential inability to control component availability and purchase
           commitments.



                                       17
<PAGE>


         Our products are manufactured in Korea and other areas overseas. Our
distribution facilities are located in California. As a result, additional
lead-time will be required to move products to customers. If we are shipping
products near the end of the quarter, this extra time could result in us not
meeting anticipated shipment volumes that quarter, which may negatively impact
our results of operations.

         Disruption in air transportation as a result of the terrorist attacks
in the United States in September 2001 and further enhanced security measures in
response to the attacks may cause transportation delays and increases in our
costs for both receipt of inventory and shipment of products to our customers.
If these types of disruptions continue or increase, our results of operations
could be adversely impacted.

         We use third parties to provide significant operational and
administrative services, and our ability to satisfy our customers and operate
our business will suffer if the level of services does not meet our
requirements. We use third parties to provide services such as customer service,
data center operations and desktop computer support, and facilities services. We
also intend to rely on third parties to repair our products and provide
technical support. Should any of these third parties fail to deliver an adequate
level of service, our reputation and business could suffer.

         We intend to rely on distributors, retailers, and resellers to sell our
products, and disruptions to these channels would adversely affect our ability
to generate revenues from the sale of our handheld devices. We may not be able
to retain or attract a sufficient number of qualified distributors, retailers
and resellers. Our distributors, retailers and resellers may sell products
offered by our competitors. If our competitors offer our distributors, retailers
and resellers more favorable terms or have more products available to meet their
needs, those distributors, retailers and resellers may de-emphasize or decline
to carry our products or carry our competitors' products instead. Further,
distributors, retailers and resellers may not recommend, or continue to
recommend, our products. If we are unable to maintain successful relationships
with distributors, retailers and resellers or to expand our distribution
channels, our business will suffer.

         When we reduce the prices of our products to our distributors,
retailers and resellers, we may have to compensate them for the difference
between the higher price they paid to buy their inventory and the new lower
prices. In addition, like other manufacturers, we are exposed to the risk of
product returns from distributors, retailers and resellers, either through their
exercise of contractual return rights or as a result of our strategic interest
in assisting them in balancing inventories.

         Because we plan to sell our products primarily to distributors,
retailers, and resellers, we may become subject to many risks, including risks
related to their inventory levels and support for our products. The current
economic environment is impacting many of our prospective distributors,
retailers and resellers. The economic downturn could cause these distributors,
retailers or resellers to modify their business practices, such as payment terms
or inventory levels, which could in turn negatively impact our balance sheet or
results of operations. If we are unable to supply our distributors, retailers
and resellers with sufficient levels of inventory to meet customer demand, our
sales could be negatively impacted.

         Distributors, retailers and traditional resellers experience
competition from Internet-based resellers that distribute directly to end-user
customers, and there is also competition among Internet-based resellers. We also
intend to sell our products directly to end-user customers from our Website in
the future as financing permits. These varied sales channels could cause
conflict among our channels of distribution, which could seriously harm our
revenues and results of operations.

         If we are unable to compete effectively with existing or new
competitors, our resulting loss of competitive position could result in price
reductions, fewer customer orders, reduced margins and loss of market share. We
compete in the handheld device and convergent technologies markets. The markets
for these products and services are highly competitive and we expect competition
to increase in the future. Some of our competitors or potential competitors have
significantly greater financial, technical and marketing resources than we do.
These competitors may be able to respond more rapidly than us to new or emerging
technologies or changes in customer requirements. They may also devote greater
resources to the development, promotion and sale of their products than we do.
For example, several of these competitors sell or license server, desktop and/or
laptop computing products in addition to handheld computing products and may


                                       18
<PAGE>


choose to market and sell or license their handheld products at a discounted
price or give them away for free with their other products. These competitors
also may have longer and closer relationships with the senior management of
enterprise customers who decide what products and technologies will be deployed
in their enterprises. Moreover, these competitors may have larger and more
established sales forces calling upon potential enterprise customers and
therefore could contact a greater number of potential customers with more
frequency. Consequently, these competitors could have a better competitive
position than we do, which could result in potential enterprise customers
deciding not to choose our products and services, which would adversely impact
our business, financial condition and results of operations.

         We expect our competitors to continue to improve the performance of
their current products and services and to introduce new products, services and
technologies. If the products and services of our competitors are accepted, the
demand for products based on our technologies could decrease. Software layer
technologies, such as Java, might reduce our ability to attract software
developers and differentiate our products. Successful new product introductions
or enhancements by our competitors, or increased market acceptance of competing
products, such as RIM devices or devices offered by our competitors, such as
Palm, Handspring and Sony, could reduce the sales and market acceptance of our
products and services, cause intense price competition or make our products
obsolete. To be competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer support. We cannot be
sure that we will have sufficient resources to make these investments or that we
will be able to make the technological advances necessary to be competitive.
Increased competition could result in price reductions, fewer customer orders,
reduced margins and loss of market share. Our failure to compete successfully
against current or future competitors could seriously harm our business,
financial condition and results of operations.

         If we fail to develop and introduce new products and services timely
and successfully, we will not be able to compete effectively and our ability to
generate revenues will suffer. We operate in a highly competitive, quickly
changing environment, and our future success depends on our ability to develop
and introduce new products and services that our customers and end users choose
to buy. If we are unsuccessful at developing and introducing new products and
services that are appealing to end users with acceptable prices and terms, our
business and operating results would be negatively impacted because we would not
be able to compete effectively and our ability to generate revenues would
suffer.

         The development of new products and services can be very difficult and
requires high levels of innovation. The development process is also lengthy and
costly. If we fail to anticipate our end users' needs and technological trends
accurately or are otherwise unable to complete the development of products and
services in a timely fashion, we will be unable to introduce new products and
services into the market to successfully compete. We cannot assure you that we
will be able to introduce new products on a timely or cost-effective basis or
that customer demand for our products will meet our expectations. Demand for our
products could be adversely affected if it is discovered that our products do
not interoperate fully with new operating systems that may be developed, and
additional development and technical support resources could be required to fix
any incompatibilities which arise that could adversely affect our results of
operations.

         We believe that the sales and marketing life cycle of our handheld
products is generally 12 to 24 months or less. As such, we must:

         o continue to develop updates to our existing products and services or
           our existing products and services will quickly become obsolete;
         o manage the timing of new product introductions so that we minimize
           the impact of customers delaying purchases of existing products in
           anticipation of new product releases;
         o manage the timing of new product introductions to meet seasonal
           market demands;
         o manage the levels of inventories to minimize inventory write-offs;
           and
         o adjust the prices of our products and services over the course of
           their life cycles in order to increase or maintain customer demand
           for these products and services.



                                       19
<PAGE>


         If we do not correctly anticipate demand for our products, we could
have costly excess production or inventories or we may not be able to secure
sufficient quantities or cost-effective production of our handheld devices. The
demand for our products depends on many factors and is difficult to forecast, in
part due to the market for our products being relatively new, variations in
economic conditions and relatively short product life cycles. As we introduce
and support additional handheld device products and as competition in the market
for our products intensifies, we expect that it will become more difficult to
forecast demand. Significant unanticipated fluctuations in demand could
adversely impact our financial results and cause the following problems in our
operations:

         o    If forecasted demand does not develop, we could have excess
              production resulting in higher inventories of finished products
              and components, which would use cash and could lead to write-offs
              of some or all of the excess inventories, increased returns and
              price promotion actions each of which could result in lower
              revenue or lower gross margins. In addition, we may also incur
              certain costs, such as fees for excess manufacturing capacity and
              cancellation of orders and charges associated with excess and
              obsolete materials and goods in our inventory, which could result
              in lower margins and increased cash usage.

         o    If we do not correctly anticipate declines in demand, our future
              results of operations, liquidity and capital resources may be
              impacted. If demand increases beyond what we forecast, we may have
              to increase production at our third party manufacturers. We depend
              on our suppliers to provide additional volumes of components and
              those suppliers might not be able to increase production rapidly
              enough to meet unexpected demand or may choose to allocate
              capacity to other customers. Even if we are able to procure enough
              components, our third party manufacturers might not be able to
              produce enough of our devices to meet the market demand for our
              products. The inability of either our manufacturers or our
              suppliers to increase production rapidly enough could cause us to
              fail to meet customer demand.

         o    Rapid increases or decreases in production levels could result in
              higher costs for manufacturing, supply of components and other
              expenses. These higher costs could lower our profits. Furthermore,
              if production is increased rapidly, manufacturing yields could
              decline, which may also lower our profits.

         Our operating results may be subject to fluctuations and seasonality,
and if we fail to meet the expectations of securities analysts or investors, our
share price may decrease significantly. Our operating results will be difficult
to predict. Our future quarterly operating results may fluctuate significantly
and may not meet our expectations or those of securities analysts or investors.
If this occurs, the price of our stock would likely decline. Factors that may
cause fluctuations in our operating results include the following:

         o    Seasonality. Consumer buying traditionally is weaker in the first
              and third quarters of each fiscal year. We anticipate our revenues
              to fluctuate accordingly.

         o    Economic Conditions. Demand for our products and services by
              consumers, individual business users as well as by enterprise
              customers is affected by economic conditions. In the current
              economic environment, demand is difficult to predict and revenue
              could fluctuate significantly from our forecasts. The terrorist
              attacks in the United States that occurred in September 2001 add
              further uncertainty to worldwide economic forecasts, including
              both end-user and enterprise demand.

         o    Revenue Mix and Pricing. Our profit margins may differ among the
              products and services offered. In addition, the product mix and
              sales prices of our device products may affect profit margins in
              any particular quarter. The product mix and sales prices of our
              device products in a particular quarter will depend, in part, on
              the timing of new product introductions and the relative demand
              for different products in our product offerings. From time to
              time, we may offer price protection and other pricing and
              promotion programs to our resellers in connection with reductions
              in the prices of certain of our products, which may result in
              lower gross margins. We cannot anticipate with certainty when we
              will need to take these pricing and promotion actions, and our
              profit margins will fluctuate from quarter to quarter depending on
              the timing of such actions. In addition, as our business evolves
              and the mix of revenues from devices, licenses and services varies
              from quarter to quarter, our operating results will likely
              fluctuate.



                                       20
<PAGE>


         o    New Product Introductions and Transitions. As we introduce new
              products and services, the timing of these introductions will
              affect our quarterly operating results. We may have difficulty
              predicting the timing of new product and service introductions and
              the user acceptance of these new products and services. If
              products and services are introduced earlier or later than
              anticipated, or if user acceptance is unexpectedly high or low,
              our quarterly operating results may fluctuate unexpectedly. In
              addition, we cannot predict the timing of new product and service
              introductions from our competitors or the level of market
              acceptance they will achieve. As a result, if a competitor
              introduces a product, users may delay purchasing our products
              while they wait for the release of our competitor's product or
              purchase our competitor's product instead of ours, which would
              cause our quarterly operating results to fluctuate unexpectedly.

         o    Use of Purchase Orders with Customers. We intend to enter into
              long-term purchase contracts with our customers. If we are unable
              to obtain these long-term contracts, we may be required to enter
              into one-time purchase orders. If we rely on one-time purchase
              orders, we will not be able to predict with certainty incoming
              purchase orders, decreases in orders or failure to fulfill orders,
              which in turn, may cause our operating results to fluctuate.

         Demand for our products is partially dependent upon support from third
party software and hardware developers. Decisions by customers to purchase our
handheld device products, as opposed to competitive product offerings, are
sometimes based on the availability of third party software, hardware,
accessories and other expansion capabilities. In the future, we believe that in
addition to our efforts to develop products, which provide expansion
capabilities to handheld devices, the level of support from third party
developers will become increasingly important. Because many of these third party
developers are small companies, their operations and financial condition could
be adversely affected by negative general economic conditions. Our operating
results could suffer if third party developers cease to develop software or
hardware for our products or focus their efforts on developing software or
hardware for products offered by our competitors, especially if we are unable to
offer attractive software, hardware, accessories and expansion capabilities.

         Our products may contain errors or defects, which could result in the
rejection of our products and damage to our reputation, as well as lost
revenues, diverted development resources and increased service costs and
warranty claims. Our products are complex and must meet stringent user
requirements. We must develop our software and hardware products quickly to keep
pace with the rapidly changing handheld device market. Products and services as
sophisticated as ours are likely to contain undetected errors or defects,
especially when first introduced or when new models or versions are released.
Our products may not be free from errors or defects after commercial shipments
have begun, which could result in the rejection of our products, damage to our
reputation, lost revenues, diverted development resources and increased customer
service and support costs and warranty claims. Any of these results could harm
our business. There have been reports of computer viruses and security gaps
impacting handheld device operating systems. These viruses and security gaps and
publicity about them may adversely impact sales of our products. In particular,
if anti-virus protection and solutions for security gaps which users deem to be
adequate are not developed to combat these viruses and security gaps, this could
harm our business.

         If we fail to adequately evolve our systems and processes in a changing
business environment, our ability to manage our business and results of
operations may be negatively impacted. Our ability to successfully offer our
products and implement our business plan in a rapidly evolving market requires
an effective planning and management process. We expect that we will need to
continue to improve our financial and managerial controls, reporting systems and
procedures. If we fail to evolve our systems and processes, our ability to
manage our business and results of operations may be negatively impacted. We use
the Internet to communicate information. Interruptions in Internet availability
and functionality could adversely impact our operation and results of
operations.

         Our reputation and ability to generate revenues will be harmed if
demand for our Internet services exceeds our telecommunications and network
capacity. We may from time to time experience increases in our Internet services
usage, which exceed our available telecommunications capacity and the capacity
of our third party network servers. As a result, users may be unable to register
or log on to our service, may experience a general slow-down in their Internet
access or may be disconnected from their sessions. Excessive user demand could
also result in system failures of our third party network servers' networks.
Inaccessibility, interruptions or other limitations on the ability to access our
service due to excessive user demand, or any failure of our third party network
servers to handle user traffic, could have an adverse effect on our reputation
and our revenues.



                                       21
<PAGE>



         If the security of our Website is compromised, our reputation could
suffer and customers may not be willing to use our services, which could cause
our revenues to decline. We intend to provide customer, sales support and
e-commerce services through our Website as funding permits. A significant
barrier to widespread use of electronic commerce sites and services sites is
concern for the security of confidential information transmitted over public
networks. Despite our efforts to protect the integrity of our Website, a party
may be able to circumvent our security measures and could misappropriate
proprietary information or cause interruptions in our operations and damage our
reputation. Any such action could negatively affect our customers' willingness
to engage in online commerce with us or purchase wireless services from us,
which could harm our revenues and results of operations. In addition, we may be
required to expend significant capital and other resources to protect against
these security breaches or to alleviate problems caused by these breaches.

         We may not be able to maintain and expand our business if we are not
able to hire, retain, integrate and motivate sufficient qualified personnel. Our
future success depends to a significant extent on the continued contribution of
our key executive, technical, sales, marketing, supply chain and administrative
personnel. It also depends on our ability to expand, integrate and retain our
management team. The loss of services of key employees could adversely affect
our business, operating results or financial condition. Further, our Common
Stock price per share has been, and may continue to be, extremely volatile. When
our Common Stock price is less than the exercise price of stock options granted
to employees, turnover may increase, which could harm our results of operations
or financial condition. If we fail to retain, hire and integrate qualified
employees and contractors, we will not be able to maintain and expand our
business. In addition, we must carefully balance the size of our employee base
with our anticipated revenue base. If our revenue or attrition levels vary
significantly, our results of operations or financial condition could be
adversely affected.

         The intellectual property underlying the majority of our products are
owned by our manufacturing partners and third parties, and our manufacturing
partners have not obtained patents covering the products distributed by us in
the territories of the United States and Canada. Except for the rights to the
flexible keyboard II, which will be jointly owned by SSC and us, we do not own
the patents, trademarks and other intellectual property of the products that we
distribute. As such, we do not control the protection and enforcement of such
intellectual property rights. If our manufacturing partners and the owners of
the intellectual property fail to protect or to enforce their intellectual
property rights successfully, we could be precluded from distributing these
products. Additionally, our manufacturing partners have not obtained patents for
the products distributed by us for the territories of the United States and
Canada. As a result, our manufacturing partners may not be able to protect and
enforce its intellectual property rights in the United States and Canada. Under
these circumstances, our competitive position, results of operation and
financial condition could be materially and adversely affected. Our
manufacturing partners and owners of such intellectual property may fail to
detect infringement and may lose competitive position in the market before they
do so. In addition, competitors may design around the protected intellectual
property or develop competing technologies. Intellectual property rights may
also be unavailable or limited in some foreign countries, which could make it
easier for competitors to capture market share.

         Third parties may claim in the future that our manufacturing partners
or we are infringing their intellectual property, and we could suffer
significant litigation expenses or be prevented from selling our products if
these claims are successful. In the course of our business, we may receive
claims of infringement or otherwise become aware of potentially relevant patents
or other intellectual property rights held by other parties. Third parties may
claim that we, our manufacturers or customers are infringing or contributing to
the infringement of their intellectual property rights, and we may be found to
infringe or contribute to the infringement of those intellectual property rights
and require a license to use those rights. We may be unaware of intellectual
property rights of others that may cover some of our technology, products and
services.

         Any litigation regarding patents or other intellectual property could
be costly and time-consuming, and divert our management and key personnel from
our business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. As
distributors of our products, we may be limited in the actions that we may take
to address these matters and we may be required to rely on our-manufacturing
partners to protect the intellectual property underlying our products. There can
be no assurance that measures taken by our manufacturing partners would be
adequate or effective. Claims of intellectual property infringement might also
require us to enter into costly royalty or license agreements or indemnify our
customers or our sub-distributors. There is no assurance that we will be able to
resolve any claims on terms acceptable to us, or at all. We also may be subject
to significant damages or injunctions against development and sale of our
products.



                                       22
<PAGE>


         If third parties infringe our intellectual property, we may expend
significant resources enforcing our rights or suffer competitive injury. Our
success with respect to the flexible keyboard II depends in large part on our
proprietary technology. We rely on a combination of patents, copyrights,
trademarks and trade secrets, confidentiality provisions and licensing
arrangements to establish and protect our proprietary rights. If we fail to
protect or to enforce our intellectual property rights successfully, our
competitive position could suffer, which could harm our operating results.

         We intend to file patent and trademark registration applications with
respect to our flexible keyboard II and any other products that we may in the
future develop and own. Competitors may challenge the validity or scope of these
patent applications or trademark registrations. In addition, these patents may
not provide us a significant competitive advantage. We may be required to spend
significant resources to monitor and police our intellectual property rights. We
may not be able to detect infringement and may lose competitive position in the
market before we do so. In addition, competitors may design around our
technology or develop competing technologies. Intellectual property rights may
also be unavailable or limited in some foreign countries, which could make it
easier for competitors to capture market share.

         Our future results could be harmed by economic, political, regulatory
and other risks associated with international sales and operations. Since we
intend to sell our products worldwide and our manufacturing occurs primarily in
Asia, our business is subject to risks associated with doing business
internationally. We anticipate that revenues from international operations will
represent an increasing portion of our total revenues over time. In addition,
several of the facilities where our devices are manufactured and distributed are
located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including:

         o    changes in foreign currency exchange rates;
         o    changes in a specific country's or region's political or economic
              conditions, particularly in emerging markets;
         o    trade protection measures and import or export licensing
              requirements;
         o    potentially negative consequences from changes in tax laws;
         o    difficulty in managing widespread sales and manufacturing
              operations;
         o    difficulty in managing a geographically dispersed workforce in
              compliance with diverse local laws and customs; and
         o    less effective protection of intellectual property.

         We are subject to changes in demand for our products resulting from
exchange rate fluctuations that make our products relatively more or less
expensive in international markets. If exchange rate fluctuations occur, our
business could be harmed by decreases in demand for our products or reductions
in gross margins.

         We may pursue strategic acquisitions and investments, which could have
an adverse impact on our business if unsuccessful. We may consider acquisition
or consolidation opportunities that could provide us with additional products or
services. Acquisitions could result in difficulties assimilating acquired
operations and products, and result in the diversion of capital and management's
attention away from other business issues and opportunities. Integration of
acquired companies may result in problems related to integration of technology
and management teams. We may not successfully integrate operations, personnel or
products that we have acquired or may acquire in the future. If we fail to
successfully integrate acquisitions, our business could be materially harmed. In
addition, our acquisitions may not be successful in achieving our desired
strategic objectives, which would also cause our business to suffer. These
transactions may result in the diversion of capital and management's attention
away from other business issues and opportunities.



                                       23
<PAGE>


         Business interruptions could adversely affect our business. Our
operations and those of our suppliers and customers are vulnerable to
interruption by fire, earthquake, power loss, telecommunications failure,
terrorist attacks, wars and other events beyond our control. Our facilities and
those of our suppliers and customers in the State of California may be subject
to electrical blackouts as a consequence of a shortage of available electrical
power. Such electrical blackouts could disrupt the operations of our affected
facilities and those of our suppliers and customers. Any such losses or damages
incurred by us could have a material adverse effect on our business.

         We may be subject to product liability or other claims incidental to
operating a business and we are not covered by insurance. Currently, we have
obtained directors and officers liability insurance. We do not have property and
general liability insurance, professional liability insurance, business
interruption insurance and other insurance coverage typically obtained by
operating businesses. We intend to obtain such coverage in amounts deemed
adequate by management when cash flow permits. There is no assurance that we
will be able to achieve the cash flow necessary to obtain insurance coverage, or
that such coverage will be sufficient for our needs. If we become subject to a
claim prior to obtaining such policies, or if we become subject to a claim in
amounts greater than our policy coverage, our financial condition may be
materially adversely affected.

Risks Related to the Securities Markets and Ownership of Our Common Stock
-------------------------------------------------------------------------

         Our Common Stock price may be subject to significant fluctuations and
volatility. There is currently a limited public market for the Common Stock.
Holders of our Common Stock may, therefore, have difficulty selling their Common
Stock, should they decide to do so. Among the factors that could affect our
stock price are:

         o    quarterly variations in our operating results;
         o    changes in revenues or earnings estimates or publication of
              research reports by analysts;
         o    speculation in the press or investment community;
         o    strategic actions by us or our competitors, such as new product
              announcements, acquisitions or restructuring;
         o    actions by institutional shareholders;
         o    general market conditions; and
         o    domestic and international economic factors unrelated to our
              performance.

         In addition, the stock markets in general, and the markets for high
technology stocks in particular, have experienced high volatility that has often
been unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our Common Stock.

         Provisions in our charter documents and Nevada law may delay or prevent
acquisition of us, which could decrease the value of your shares. Our Articles
of Incorporation and bylaws and Nevada law contain provisions that could make it
harder for a third party to acquire us without the consent of our board of
directors. Our board of directors has the right to issue preferred stock without
shareholder approval, which could be used to dilute the stock ownership of a
potential hostile acquirer and, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of us. Nevada law also
imposes some restrictions on mergers and other business combinations between us
and any holder of 10% or more of our outstanding Common Stock. The inclusion of
the "anti-takeover" provisions in our Articles of Incorporation may delay, deter
or prevent a takeover of us which the shareholders may consider to be in their
best interests, thereby possibly depriving holders of our securities of certain
opportunities to sell or otherwise dispose of their securities at above-market
prices, or limit the ability of shareholders to remove incumbent directors as
readily as the shareholders may consider to be in their best interests.

         Disclosure Relating to Low-Priced Stocks. Our Common Stock is currently
listed for trading in the Over-The-Counter Market quoted on the NASD Electronic
Bulletin Board, or the Bulletin Board, which is generally considered to be a
less efficient market than markets such as NASDAQ or other national exchanges,
and which may cause difficulty in conducting trades and difficulty in obtaining
future financing. Further, our securities are subject to the "penny stock rules"
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The penny stock rules apply to non-NASDAQ
companies whose Common Stock trades at less than $5.00 per share or which have
tangible net worth of less than $5,000,000 ($2,000,000 if we have been operating
for three or more years). Such rules require, among other things, that brokers
who trade "penny stock" to persons other than "established customers" complete
certain documentation, make suitability inquiries of investors and provide
investors with certain information concerning trading in the security, including
a risk disclosure document and quote information under certain circumstances.
Many brokers have decided not to trade "penny stock" because of the requirements
of the penny stock rules and, as a result, the number of broker-dealers willing


                                       24
<PAGE>


to act as market makers in such securities is limited. In the event that we
remain subject to the "penny stock rules" for any significant period, there may
develop an adverse impact on the market, if any, for our securities. Because our
securities are subject to the "penny stock rules," investors will find it more
difficult to dispose of our securities. Further, for companies whose securities
are traded on the Over-The-Counter Market, it is more difficult: (i) to obtain
accurate quotations, (ii) to obtain coverage for significant news events because
major wire services, such as the Dow Jones News Service, generally do not
publish press releases about such companies, and (iii) for companies whose
shares are traded on in the Over-The-Counter Market to obtain needed capital.

         Control by Principal Stockholders. Two of our principal shareholders,
including Cyberbank, directors and executive officers and their affiliates
control the voting power of approximately 28.1% of the outstanding Common Stock.
As a result of such Common Stock ownership, such persons will be in a position
to exercise significant control with respect to our affairs and the election of
directors. Furthermore, if we form a joint venture with PCHL and PCHL elects to
convert its joint venture holdings into 65% of the outstanding and issued shares
of our Common Stock (on a fully diluted basis), PCHL will be in a position to
exercise significant control with respect to our affairs. PCHL will also be
entitled to designate 4 of the 7 members on our board of directors.

         Certain Registration Rights. In connection with certain sales of our
securities, we agreed to register shares of our Common Stock for sale in
accordance with the registration requirements of the Securities Act of 1933, as
amended, or the Securities Act. None of the currently issued and outstanding
Common Stock is the subject of future registration statements pursuant to the
terms of such agreements. Currently outstanding options, warrants and
convertible debentures issued to certain consultants and employees to purchase
up to 435,000 shares of Common Stock are either the subject of current
registration statements or have certain registration rights. Any such
registration statement may have a material adverse effect on the market price
for our Common Stock resulting from the increased number of free trading shares
of Common Stock in the market. There can be no assurances that such registration
rights will not be enforced or that the enforcement of such registration rights
will not have a material adverse effect on the market price for the Common
Stock.

         Shares Eligible for Future Sale; Issuance of Additional Shares. Future
sales of shares of Common Stock by our shareholders and us could adversely
affect the prevailing market price of the Common Stock. There are currently
12,898,074 shares of Common Stock, which are free trading shares or are eligible
to have the restrictive legend removed pursuant to Rule 144(k) promulgated under
the Securities Act. Further, up to 3,980,000 shares underlying certain
convertible debentures may be the subject of future registration statements
pursuant to the terms of certain agreements between us and certain of our
shareholders. Sales of substantial amounts of Common Stock in the public market,
or the perception that such sales may occur, could have a material adverse
effect on the market price of the Common Stock. Pursuant to our Articles of
Incorporation, we have has the authority to issue additional shares of Common
Stock and Preferred Stock. The issuance of such shares could result in the
dilution of the voting power of the currently issued and outstanding Common
Stock.

         Lack of Dividends on Common Stock. We have paid no dividends on our
Common Stock to date and there are no plans for paying dividends on the Common
Stock in the foreseeable future. We intend to retain earnings, if any, to
provide funds for the expansion of our business.

         Limitations on Director Liability. Our Articles of Incorporation
provides, as permitted by governing Nevada law, that our directors shall not be
personally liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director, with certain exceptions. In addition, our Articles
of Incorporation and Bylaws provide for mandatory indemnification of directors
and officers to the fullest extent permitted by Nevada law. Further, we have
entered into indemnification agreements with all of our executive officers and
directors, and some of our employees. These agreements may discourage
shareholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by shareholders
on behalf of us against a director.

         Transactions with Affiliates; Conflicts of Interest. We have entered
into certain financial agreements with certain affiliates. Our management
believes that these agreements were negotiated at arms' length. However, the
enforcement of these agreements may create conflicts of interests in the event
of a dispute between us and any such parties. Although our management intends to
use its best efforts to mitigate any such conflicts of interests, there can be
no assurances that our management will be able to mitigate such conflicts of
interest successfully.



                                       25
<PAGE>


Item 2.  Description of Properties.
-----------------------------------

         We lease office space located at 5375 Mira Sorrento Place, Suite 290,
San Diego, California 92121, which serves as our principal executive offices.
The lease commenced on August 1, 2001, and expires 12 months thereafter. We pay
a monthly base rent of $8,455.

         We also occupy office space located at 837 West Hastings Street, Suite
207, Vancouver, Canada V6C-1B6, pursuant to an oral agreement between us and the
owner, which is an affiliate of Carlos Lau, a principal shareholder. We pay no
rent.

Item 3.  Legal Proceedings.
---------------------------

         FutureCom. We received a demand letter dated June 13, 2001, from
FutureCom Global, Inc., or FutureCom. The demand letter relates to a Tri-Party
Agreement by and among us, FutureCom and Cyberbank Corp. dated February 9, 2001
and a related Subdistributor Agreement between FutureCom and us, dated November
15, 2000. The demand letter, among other things, seeks a full refund of all
monies paid with respect to 1,000 units of personal digital assistants ordered
from Cyberbank, in the amount of approximately $800,000. We are investigating
our rights and obligations with respect thereto. Based on the information
currently available to us, we are unable to evaluate the likelihood of an
unfavorable outcome, if FutureCom should commence a legal proceeding against us
with respect to this dispute. If FutureCom elects to commence a legal proceeding
against us, we intend to vigorously defend against such legal proceeding.

         Euromerica. We have been sued in the Supreme Court of British Columbia.
The title of the case, filed on or about June 26, 2001, is Euromerica Capital
Group, Inc. v. PC-EPhone Canada Enterprises, Inc., d/b/a PC- EPhone, Inc.,
PC-EPhone, Inc., Douglas Yee and Negar Towfigh, Supreme Court of British
Columbia, Vancouver Registry No. S013585. The Further Amended Statement of Claim
filed on January 25, 2002, alleges that Euromerica entered into a contract with
us, the terms of which were partly oral and partly in writing, whereby
Euromerica would provide us with technical analysis, a combined press campaign
concept and investor relations for the German market place and dissemination
services in Germany. Euromerica alleges that we breached an agreement by failing
to make payments to Euromerica in the sum of $39,910. We have filed a responsive
pleading denying liability and raising affirmative defenses, and we have also
filed a Counterclaim against Euromerica seeking declaratory relief and damages.
We intend to vigorously defend against the Further Amended Statement of Claim
and to pursue the claims stated in our Counterclaim.

         Except as set forth above, we are not a party to any material
litigation and is not aware of any pending or threatened litigation that could
have a material adverse effect on our business, operating results or financial
condition.

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

         No matters were submitted to a vote of our security holders during the
year ended December 31, 2001.


                                     PART II
Item 5.  Market for Common Equity and Related Stockholder Matters.
         --------------------------------------------------------

         As of May 1, 2002, our authorized capital stock consisted of 50,000,000
shares of Common Stock, par value $0.001 per share, or the Common Stock, and
1,000,000 shares of preferred stock, par value $0.01 per share, or the Preferred
Stock. As of May 1, 2002, there were issued and outstanding 16,957,174 shares of
Common Stock and options and warrants to purchase 1,430,000 shares of Common
Stock, of which 342,500 are exercisable as of the date of this Report. Further,
we may be obligated to issue up to an additional 3,980,000 shares of Common
Stock in connection with certain convertible subordinated debentures issued to
Cyberbank and other investors.



                                       26
<PAGE>


         Our Common Stock is quoted on the Bulletin Board under the symbol
"PCPH." The first trade of our Common Stock on the Bulletin Board occurred on
April 4, 2000. Since November 21, 2000, our Common Stock has also been listed on
the third segment of the Frankfurt Stock Exchange under the trading symbol "NL1"
and its WKN number is 589 864.

         The following table sets forth the quarterly high and low closing sale
prices for the Common Stock for the periods indicated below, based upon
quotations between dealers, without adjustments for stock splits, dividends,
retail mark-ups, mark-downs or commissions, and therefore, may not represent
actual transactions:

                                                      High              Low
                                                      ----              ---
Year Ending December 31, 2002

1st Quarter                                           $0.67             $0.205

Year Ended December 31, 2001

4th Quarter                                           $0.86             $0.37
3rd Quarter                                           $2.10             $0.34
2nd Quarter                                           $6.125            $2.75
1st Quarter                                           $6.531            $5.625

Year Ended December 31, 2000

4th Quarter                                           $6.469            $5.00
3rd Quarter                                           $5.063            $3.50
2nd Quarter (April 4 - June 30, 2000)                 $10.125           $0.75


         The closing sale price of the Common Stock on May 1, 2002, was $0.16.

         Our transfer agent is Computershare Investor Services located at 350
Indiana Street, Suite 800, Golden, Colorado 80401, (303) 262-0600.

Dividend Policy
---------------

         We have not declared or paid any dividend since inception. We do not
anticipate that any dividends will be declared or paid in the future.

Recent Issuances of Unregistered Securities
-------------------------------------------

         During the year ended December 31, 2001, we issued unregistered
securities to the persons and in the transactions set forth below. We believe
that all of the foregoing issuances were made in transactions exempt under
Section 4(2) of the Securities Act.

         $550,000 Debenture Offering. On August 8, 2001, we closed a
subordinated convertible debenture offering for a total aggregate amount of
$550,000. The debentures bear interest at rate of 6% per annum payable on a
quarterly basis, until conversion or their maturity date, August 8, 2002. The
holder of the debentures may voluntarily convert the unpaid principal and
accrued interest on the debentures at $0.50 per share. We may also demand
conversion of the debentures at $0.25 per share, if our Common Stock closes at
or above $3.75 per share for ten consecutive trading days. However, if our
Common Stock closes at above $5.75 per share for ten consecutive trading days,
we may demand conversion at $0.50 per share. We have agreed to file a
registration statement covering the shares underlying the debentures after the
date of the earlier of (a) the conversion of all the debentures, or (b) the
maturity date. Douglas Yee, our Chief Financial Officer and cousin to Carlos
Lau, who is one of our principal shareholders, purchased $50,000 of the
debentures. Our employees are holders of $167,500 of the debentures. Carlos Lau
and his brother, Jorge Lau Yook, hold $66,250 and $100,000 of the debentures,
respectively.



                                       27
<PAGE>


         Cyberbank Debenture. On September 28, 2001, Cyberbank agreed to
purchase a minimum of three subordinated convertible debentures in the amount of
$150,000 each for an aggregate minimum purchase price of $450,000 on each of
October 15, 2001, November 1, 2001 and December 1, 2001. Cyberbank also has the
option of purchasing a subordinated convertible debenture of up to the amount of
$250,000. As of November 8, 2001, Cyberbank had purchased debentures in the
aggregate principal amount of $190,000. The debentures as negotiated mature on
November 8, 2002, or on such earlier date as may be permitted pursuant to the
debentures upon an event of default. The debentures bear no interest, unless we
default on the terms of such debentures, in which case any amounts owing would
bear interest of 10% per annum from the date of default until repayment or such
time as the event of default is cured. The holder of the debentures may convert
the debentures into shares of our Common Stock at a price of $0.50 per share at
any time prior to the maturity date. We have agreed to file a registration
statement covering the Common Stock underlying the debentures after the date of
the earlier of (a) the conversion of all of the debentures or (b) the maturity
date. We have not obtained the letters of credit and purchase orders for the
PC-EPhone 1.0 as required under this debenture. We anticipate renegotiating the
terms of the debentures, if we implement our proposed business plan with PCHL.

         $3.00 Offering. On April 30, 2001, we closed an offering of 108,333
shares of our Common Stock to three accredited investors at a purchase price of
$3.00 per share for gross proceeds $325,000 and net proceeds of $319,750. We
paid $5,250 as finder's fees to Global Securities Inc., a registered broker
dealer. On April 30, 2001, the closing sale price of our Common Stock was $5.88
per share.

         $0.50 Offering. On November 16, 2001, we sold 300,000 shares of our
Common Stock to an accredited investor at a purchase price of $0.50 per share.
On November 16, 2001, the closing sale price of our Common Stock was $0.80 per
share.

         Transactions with Consultants. On April 23, 2002, we issued 10,000
shares of restricted Common Stock and options to purchase 40,000 shares of our
Common Stock, at an exercise price of $2.00 per share and an expiration date of
September 17, 2007, to a consultant pursuant to an agreement dated July 18,
2001, in consideration for certain investment banking, finders and other
services performed by the consultant during the period commencing on July 18,
2001 and ending on September 17, 2001. We may be obligated to pay a bonus of up
to $100,000 if we obtain equity financing through the efforts of the consultant.
We may elect not to receive investment banking services from the consultant upon
fifteen (15) days notice. We have not paid any additional compensation to the
consultant with respect to the receipt of equity financing through this
consultant's efforts.

         On April 23, 2002, we issued 95,135 shares of our Common Stock to Aware
Financial USA, Inc., for certain investor relations services rendered during the
period commencing January 1, 2002, and ending on March 31, 2002, pursuant to an
agreement dated January 1, 2002. We have agreed to issue an additional 44,053
shares of our Common Stock to Aware Financial USA for services rendered during
the period commencing April 1, 2002 and ending on April 30, 2002. This agreement
was terminated effective April 30, 2002.

         On July 25, 2001, we issued 11,539 shares of our Common Stock as
repayment of debt in the amount of $9,000 for certain services rendered by a
consultant during the period commencing on June 1, 2001 to June 30, 2001. On
July 25, 2001, the closing sale price of our Common Stock was $0.83 per share.

         During 2001, we issued 11,539 shares of our Common Stock and granted
other options to various consultants to purchase up to 435,000 shares of our
Common Stock at a weighted average exercise price of $1.93 per share. In the
first quarter of 2002, we issued no shares of our Common Stock and granted
options to various consultants to purchase up to 60,000 shares of our Common
Stock at a weighted average exercise price of $0.50 per share.

         Directors, Officers and Employees. During the year ended December 31,
2001, we issued no shares of our Common Stock and granted options to purchase up
to 1,095,000 shares of Common Stock at a weighted average exercise price of
$0.50 per share, as compensation to certain of our directors, executive officers
and employees. In the first quarter of 2002, we issued no shares of our Common
Stock and granted options to various directors, executive officers and employees
to purchase up to 35,000 shares of our Common Stock at a weighted average
exercise price of $0.50 per share.



                                       28
<PAGE>


         Creditors. On April 11, 2002, one of our creditors agreed to convert
our obligations under a promissory note in the principal amount of $100,000 into
220,000 shares of Common Stock and 100,000 Common Stock purchase warrants at an
exercise price of $0.50 per share. 50,000 of the warrants vest on April 11, 2003
and 50,000 warrants vest on April 11, 2004. The warrants expire on April 12,
2004. On April 11, 2002, the closing sale price of our Common Stock was $0.235
per share.

         On November 16, 2001, one of our creditors agreed to convert $102,500
of our debt obligations into 205,000 shares of Common Stock at a conversion
price of $0.50 per share. On November 16, 2001, the closing sale price of our
Common Stock was $0.80 per share.

         On December 31, 2001, one of our creditors agreed to convert $90,000 of
our debt obligations into 180,000 shares of Common Stock at a conversion price
of $0.50 per share. On December 31, 2001, the closing sale price of our Common
Stock was $0.50 per share.

Item 6.  Management's Discussion and Analysis or Plan of Operation.
         ---------------------------------------------------------

         Certain statements in this Annual Report on Form 10-KSB, or the Report,
are "forward-looking statements." These forward-looking statements include, but
are not limited to, statements about the plans, objectives, expectations and
intentions of PC-EPhone, Inc., a Nevada corporation and its subsidiaries
(collectively referred to in this Report as "we," "us" or "our") and other
statements contained in this Report that are not historical facts.
Forward-looking statements in this Report or hereafter included in other
publicly available documents filed with the Securities and Exchange Commission,
or the Commission, reports to our stockholders and other publicly available
statements issued or released by us involve known and unknown risks,
uncertainties and other factors which could cause our actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. Such future results are based upon
management's best estimates based upon current conditions and the most recent
results of operations. When used in this Report, the words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed under
"Risk Factors."

         The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and related notes included elsewhere
in this Report.

Overview of Business Plan
-------------------------

         We are a convergence technology company with distribution rights to
several products manufactured by third parties, including the "PC-EPhone 1.0,"
our handheld computer products, such as the PC-E PDA and the MIA Pocket PC, and
the flexible keyboard. We were originally formed to explore and develop oil and
gas properties. On August 18, 2000, we abandoned the oil and gas exploration
business and began to pursue opportunities in the wireless convergent technology
market. On November 6, 2000, we obtained the distribution rights to the
PC-EPhone 1.0 and focused on distributing the PC-EPhone 1.0 in the United States
and Canada.

         In 2001, we adopted a new business plan to develop this company into a
convergence technology company with a broad base of convergence technology
product offerings. On July 1, 2001, we hired David Meltzer, our Chief Executive
Officer, to implement our new business plan.

         Under our new business plan, we intend to market our products to the
following three markets: (i) hardware and accessories; (ii) applications; and
(iii) networks. We are relying on the sales of our hardware, accessories and
software applications integrated into our handheld computer devices to generate
revenues in the near future. We anticipate launching our wireless products and
generating revenues from wireless networks if we receive government approval and
carrier acceptance of our current and future wireless products.



                                       29
<PAGE>


         Although we have made discrete sales of products to our
sub-distributors in the United States and Israel for marketing and testing
purposes, we have not launched distribution of any of our products, as of the
date of this Report and have made very limited sales of our products. We intend
to commence distribution of our products, other than the PC-EPhone Products,
upon receipt of at least $3,500,000 dollars in financing, and, in the case of
the PC-EPhone Products, upon receipt of carrier acceptance and governmental
approvals, where applicable. In anticipation of furthering our business plan as
a convergence technology company, we have developed relationships with network
operators and application providers. We are also in the process of co-developing
certain products with our manufacturing partners. We do not manufacture our own
products and rely upon independent third parties to manufacture our products.

         On March 27, 2002, we entered into an agreement with PCHL whereby we
would agree to form a joint venture with PCHL's wholly owned subsidiary, WCL.
PCHL is a telecommunications, electrical design and distribution company based
in Ireland. If formed, the joint venture entity would distribute our products on
a worldwide basis, subject to certain exclusions. We would own 15% of the joint
venture entity. The remaining 85% would be owned by PCHL.

         Upon formation of the joint venture, we would agree to contribute all
of our rights and obligations under any future distribution agreements that we
enter into with Cyberbank or SSC for the territories of Europe, the Middle East,
Africa and China. For a six-month period following the formation of the joint
venture, PCHL would have an option to convert all of its interest in the joint
venture into a fully diluted 65% of our issued and outstanding Common Stock at
the time of conversion. Upon conversion, PCHL would be entitled to appoint 4 of
the 7 members on our board of directors and WCL and the joint venture entity
would become our wholly owned subsidiary.

         Under our agreement with Cyberbank, we have agreed to purchase an
annual minimum of 500,000 units of the PC-EPhone 1.0. Additionally, we have
agreed to place two binding purchase orders for a total of $25,300,000, to be
paid with cash of $2,000,000 on May 21, 2001, and letters of credit totaling
$23,300,000. We have not made the $2,000,000 payment. In addition, we have
issued $550,000 principal amount of convertible debentures, which mature in
August 2002 and $190,000 of subordinated convertible debentures, which mature in
November 2002, or on such earlier date as may be permitted pursuant to the
debentures upon an event of default. We have outstanding $142,000 of unsecured
loans bearing interest at the rate of 4.37% per annum and $398,087 of unsecured,
non-interest bearing loans payable on demand, as of the date of this Report.
Further, as of May 1, 2002, we owed approximately US $160,000 with respect to
the bridge loan facility with PCHL. The principal amount of the loan accrues
interest at a rate of 7% per annum, and is secured by a lien on our assets. The
note matures 90 days after termination of our letter of intent with PCHL, or the
date that the parties execute and deliver definitive agreements regarding the
described joint venture transaction, whichever occurs earlier.

         We have had very limited income from our new business operations. In
order to implement our business plan, launch the distribution of our products,
provide the prospect of future revenues and repay our outstanding debt, we will
need significant amounts of financing or business partners who will be able to
provide us with the necessary financing. We anticipate that we will need to
obtain $3,500,000 in order to launch the commercial distribution of our
products. Our failure to receive such additional financings or to find such
business partners could have a material adverse effect upon our financial
condition and our ability to continue to operate.

         In addition, our PC-EPhone 1.0 product has not received network carrier
approval and our PC-EPhone 2.0 GSM/GPRS has not received government or network
carrier approval for commercialization. Even if we are able to obtain financing
and launch our products, recent economic downturns in the general economy, and
particularly in the wireless communications industry, reflect trends that may
have an adverse effect on our ability to implement our business plan.

Results of Operations
---------------------

         Results of Operations for the Years Ended December 31, 2001 and 2000.
We generated sales of $3,984 and $872,000 during the years ended December 31,
2001 and 2000, respectively, which related to sales of sample devices of the
PC-EPhone 1.0 and other products, including MIAs and accessories. We made all of
our sales in 2000 to our former subdistributor and all of our sales in 2001 to
our current subdistributors and to end-user customers. The decrease in sales in
2001 related to the termination of our relationship with a former subdistributor
in 2001.



                                       30
<PAGE>


         Cost of sales decreased to $3,620 during the year ended December 31,
2001 from $800,000 during the year ended December 31, 2000. Cost of sales during
the years ended December 31, 2001 and 2000 primarily related to the cost of
purchasing sample devices and other accessories from our manufacturers.

         Selling, general and administrative expenses during the year ended
December 31, 2001 increased to $2,125,152 from $465,077 during the year ended
December 31, 2000. The increase primarily related to the change of our business
plan at the end of 2000 and the related building of our infrastructure to enable
us to implement our new business plan to commercialize our products. This change
in selling, general and administrative expenses in 2001 from 2000 primarily
included increases in: (i) marketing and travel expenses necessary to promote
our PC-EPhone Products, including our attendance in 2001 at various electronics
trade shows in the United States and Europe and the purchase of test devices and
accessories for potential customers of our products; (ii) fees and non-cash
expenses associated with the granting of options to consultants related to the
development of distribution networks for our products and investor relations;
(iii) salaries and related costs associated with a larger executive and
marketing staff to develop and promote new products, establish distribution
networks for our products and seek to obtain network carrier approvals for our
products; (iv) overhead expenses arising from our expanded infrastructure and
staff; and (v) legal and accounting expenses related to new business operations,
financings and public reporting obligations.

         Amortization of distribution rights increased to $1,318,604 during the
year ended December 31, 2001 from $219,767 during the year ended December 31,
2000. These amounts related to the amortization of our distribution rights
obtained from Cyberbank.

         Net interest expense during the year ended December 31, 2001 was
$516,359, as compared to net interest income of $1,156 for the year ended
December 31, 2000. Net interest expense during the year ended December 31, 2001
primarily related to the beneficial fixed conversion features of our
subordinated convertible debentures issued in August 2001.

         During the year ended December 31, 2000, we recognized a gain on
settlement of debts with certain of our trade creditors and shareholders of
$18,008, and also incurred exploration and development expenses of $21,960 and a
write-off of oil and gas property, which expenses related to our former oil and
gas exploration business operations. These items were non-recurring during the
year ended December 31, 2001.

         As a result of the foregoing, we incurred a net loss of $3,959,751, or
$0.24 per share, during the year ended December 31, 2001, as compared to a net
loss of $688,640, or $0.06 per share, during the year ended December 31, 2000.
We incurred a loss from operations of $3,443,392 during the year ended December
31, 2001, as compared to a loss from operations of $612,844 during the year
ended December 31, 2000.

         Liquidity and Capital Resources. We have historically financed our
operations through working capital provided from operations, private placements
of equity and debt securities and loans. In 2001, we received proceeds of
$757,500 through private placements of debt and equity securities and received
approximately $765,087 from advances payable ($232,500 of which were converted
into convertible debentures). We have had very limited income from our new
business operations.

         In 2000 and 2001, we issued an aggregate of 408,333 shares of our
Common Stock resulting in net proceeds of $469,750.

         In August 2001, we issued convertible debentures to certain persons,
including our directors, executive officers and a principal shareholder
resulting in net proceeds of $550,000, of which $232,500 was converted from
advances payable. These convertible debentures mature in August 2002.

         In November 2001, we issued $190,000 of subordinated convertible
debentures to Cyberbank. These convertible debentures mature in November 2002,
or on such earlier date as may be permitted pursuant to the debentures upon an
event of default. Cyberbank agreed to purchase an additional $510,000 of the
debentures, but has not made payments to us in a timely manner under the
agreement.



                                       31
<PAGE>


         In November 2001, one of our creditors agreed to convert $102,500 of
our debt obligations into 205,000 shares of Common Stock at a conversion price
of $0.50 per share. In December 2001, one of our creditors agreed to convert
$90,000 of our debt obligations into 180,000 shares of Common Stock at a
conversion price of $0.50 per share. In April 2002, we agreed to issue 220,000
shares of Common Stock and warrants to purchase up to 100,000 shares of Common
Stock in settlement of a debt obligation in the principal amount of $100,000,
plus accrued interest on such amount.

         In April 2002, we entered into a bridge loan facility with PCHL to
provide us with loans of up to the maximum principal amount of US $480,000,
payable by PCHL in monthly increments of US $160,000 during the period from
April to June 2002. The promissory note accrues interest at a rate of 7% per
annum, secured by a lien on our assets and is convertible into shares of our
Common Stock only upon the occurrence and continuance of an event of default.
The note matures 90 days after termination of our letter of intent with PCHL, or
the date that the parties execute and deliver definitive agreements regarding
the described joint venture transaction, whichever occurs earlier. As of the
date of this Report, we have received US $160,332 under the bridge loan
facility.

         At December 31, 2001, the ratio of current assets to current
liabilities was 0.05 to 1.00 compared to 0.42 to 1.00 at December 31, 2000. As
of December 31, 2001, we had a working capital deficit of $1,650,987 and an
accumulated deficit of $4,916,887.

         Cash and cash equivalents and short-term investments were $4,807 as of
December 31, 2001, as compared to $81,780 as of December 31, 2000. This decrease
was primarily attributable to net cash used in operations and investing
activities, net of cash provided by financing activities, during 2001.

         As of December 31, 2001, we had borrowings in the aggregate amount of
$1,200,087 As of December 31, 2000, we had borrowings in the aggregate amount of
$120,000. The increase in borrowings related to increases in advance payables
and the issuance of the convertible debentures in 2001.

         Net cash used in operating activities was $1,543,153 and $115,055 for
the years ended December 31, 2001 and 2000, respectively.

         Net cash used in operating activities during the year ended December
31, 2001 primarily consisted of net losses and increases in receivables and
prepaid expenses and deposits, offset by depreciation of property and equipment
and amortization of our distribution rights related to the PC-EPhone products,
interest related to the beneficial fixed conversion features of our convertible
debentures, allowances for bad debts, increases in accounts payable and accrued
expenses and the payment in our securities (including common stock and options)
of fees for services by consultants.

         Net cash used in operating activities during the year ended December
31, 2000 primarily consisted of net losses, gain on settlement of certain trade
debts and increases in note receivables and prepaid expenses and deposits,
offset by depreciation of property and equipment and amortization of our
distribution rights related to the PC-EPhone products, increases in accounts and
notes payable and write-off of oil and gas properties.

         Net cash used in investing activities was $57,010 and $27,324 for the
years ended December 31, 2001 and 2000, respectively. In the year ended December
31, 2001, we utilized $34,821 to acquire property and equipment for our new
business operations. We also incurred $22,189 in legal costs in connection with
a potential acquisition. In the year ended December 31, 2000, we utilized
$27,324 to acquire property and equipment for our new business operations.

         Net cash provided by financing activities was $1,522,587 and $219,750
during the years ended December 31, 2001 and 2000, respectively. In the year
ended December 31, 2001 we received $507,500 from the proceeds of two
convertible note financings in August and November 2001, $765,087 from the
proceeds of certain unsecured, non-interest bearing loans payable on demand
($232,500 of which were converted into convertible debentures) and $250,000 from
the proceeds of sales of our Common Stock. In the year ended December 31, 2000,
we received $219,750 from the proceeds of sales of our Common Stock.



                                       32
<PAGE>


         Our consolidated financial statements filed with this Report include an
explanatory paragraph in the accompanying related report of our independent
auditors, which states that our net loss and negative cash flow from operations
in 2001, and our accumulated deficit, as of December 31, 2001, among other
matters, raise substantial doubt about our ability to continue as a going
concern.

         Our ability to meet our operating and capital requirements and expand
our business operations is currently dependent on financing from external
sources. There can be no assurance that changes in our marketing, research and
development plans or other changes affecting our operating expenses and business
strategy will not result in the expenditure of such resources before such time
or that we will be able to develop profitable operations prior to such date, or
at all, or that we will not require additional financing at or prior to such
time in order to continue operations. There can be no assurance that additional
capital will be available on terms favorable to us, if at all. To the extent
that additional capital is raised through the sale of additional equity or
convertible debt securities, the issuance of such securities could result in
additional dilution to our stockholders. Moreover, our cash requirements may
vary materially from those now planned because of results of marketing, product
testing, changes in the focus and direction of our marketing programs,
competitive and technological advances, the level of working capital required to
sustain our planned growth, litigation, operating results, including the extent
and duration of operating losses, and other factors. In the event that we are
not able to secure such additional financing or we experience the need for
additional capital, and are not able to generate capital from financing sources
or from future operations, management may be required to modify, suspend or
discontinue our business plan, which would have a material adverse effect on our
business prospects and financial condition.

Impact of Inflation
-------------------

         We have not operated in a highly inflationary period, and our
management does not believe that inflation has had a material effect on sales or
expenses.

Recently Issued Accounting Pronouncements
-----------------------------------------

         In June 2001, the Financial Accounting Standards Board, or FASB,
approved Statement of Financial Accounting Standards, or SFAS, No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 142
requires companies to cease amortizing goodwill on December 31, 2001. Any
goodwill resulting from acquisitions completed after June 30, 2001 will not be
amortized. We did not have any goodwill as assets in 2001 or 2000. SFAS No. 142
also establishes a new method of testing goodwill and other intangible assets
for impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The adoption of SFAS No. 142 will result in the
discontinuation of amortization of goodwill. We will be required to test
intangible assets for impairment under the new standard beginning in 2002, which
could have an adverse effect on our future results of operations if an
impairment to our intangible assets occurs. The net book value of intangible
assets at December 31, 2001 was $7,911,629. Amortization of the distribution
rights to certain of the PC-EPhone products, our only intangible asset, for 2001
and 2000 was $1,318,604 and $219,767, respectively.

         In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability associated with an asset retirement obligation be recognized in the
period in which it is incurred, with the associated retirement costs capitalized
as part of the carrying amount of the long-lived asset, and subsequently
depreciated over its useful life. The adoption of SFAS No. 143 is not
anticipated to have a material impact on our financial position or results of
operations.

         In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a single
accounting model based on the framework set forth in SFAS No. 121 for long-lived
assets to be disposed of and clarifies certain issues related to SFAS No. 121.
SFAS No. 144 supersedes SFAS No. 121 and APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." We are required to adopt SFAFS No. 144 for fiscal year 2003.
However, its early application is permitted. The adoption of SFAS No. 144 is not
anticipated to have a material impact on our financial position or results of
operations.



                                       33
<PAGE>


Critical Accounting Policies
----------------------------

         Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements require management to
make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expense and disclosures at the date of the financial
statements. On an on-going basis, we evaluate our estimates, including, but not
limited to, those related to revenue recognition, accounts receivables,
inventories and impairment of intangibles. We use authoritative pronouncements,
historical experience and other assumptions as the basis for making estimates.
Actual results could differ from those estimates. We believe that the following
critical accounting policies affect our more significant judgments and estimates
in the preparation of our consolidated financial statements.

         Revenue Recognition. Revenue from product sales is recognized when the
product has been shipped, and collection is reasonably assured. We do not allow
products to be returned by our distributors.

         Inventory. We will write down our inventory, if necessary, by
estimating the potential for future loss based on a variety of factors,
including the quantity of particular items, their prospect for replacement or
obsolescence and the difference between cost and market value. If actual market
conditions were to be less favorable than those projected by management,
inventory write-downs would be required.

         Allowance for Doubtful Accounts. Accounts and other receivables are
reduced by an allowance for amounts that may become uncollectible in the future.
From time to time, our clients dispute the amounts due to us, and, in other
cases, our clients experience financial difficulties and cannot pay on a timely
basis. In certain instances, these factors ultimately result in uncollectible
accounts. The determination of the appropriate reserve needed for uncollectible
accounts involves significant judgment. A change in the factors used to evaluate
collectibility could result in a significant change in the reserve needed. Such
factors include changes in the financial condition of our customers as a result
of industry, economic or customer specific factors.

         Intangibles. Our balance sheet includes intangible assets, which affect
the amount of future period amortization expense and possible impairment expense
that we will incur. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and operational
performance of our business. As of December 31, 2000 and 2001, we had $9,230,233
and $7,911,629, respectively, of intangibles, accounting for 98% of our total
assets at each of the respective dates. The determination of the value of such
intangible assets requires management to make our estimates and assumptions that
affect our consolidated financial statements.


                                       34
<PAGE>


Item 7.  Financial Statements.

         The financial statements required by this Item 7 are included elsewhere
in this Report and incorporated herein by this reference.


                                              PC-EPHONE, INC. AND SUBSIDIARIES
                                                                      CONTENTS
                                                             December 31, 2001

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


                                                                       Page

INDEPENDENT AUDITOR'S REPORTS                                        F-2 - F-3

CONSOLIDATED FINANCIAL STATEMENTS

       Consolidated Balance Sheet                                    F-4 - F-5

       Consolidated Statements of Operations                            F-6

       Consolidated Statements of Comprehensive Income                  F-7

       Consolidated Statements of Shareholders' Equity               F-8 - F-9

       Consolidated Statements of Cash Flows                        F-10 - F-11

       Notes to Consolidated Financial Statements                   F-12 - F-29




                                      F-1
<PAGE>



                          INDEPENDENT AUDITOR'S REPORT

Board of Directors and Shareholders
PC-EPhone, Inc. and subsidiaries


We have audited the accompanying consolidated balance sheet of PC-EPhone, Inc.
and subsidiaries as of December 31, 2001, and the related consolidated
statements of operations, comprehensive income, shareholders' equity, and cash
flows for the year 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 PC-EPhone, Inc. and
subsidiaries as of December 31, 2001, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, during the year ended December 31, 2001, the Company
incurred a net loss of $3,959,751, and it had negative cash flows from
operations of $1,543,153. In addition, the Company had an accumulated deficit of
$4,916,887 as of December 31, 2001. These factors, among others, as discussed in
Note 2 to the financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.


/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
-------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP

Los Angeles, California
April 10, 2002



                                      F-2
<PAGE>



-------------------------------------------------------------------------------
TERRY AMISANO LTD.                                            AMISANO HANSON
KEVIN HANSON, C.A.                                        CHARTERED ACCOUNTANTS


                          INDEPENDENT AUDITORS' REPORT

To the Stockholders,
PC-EPhone, Inc.
(formerly Newlands Oil & Gas Inc.)

We have audited the accompanying consolidated statements of operations,
comprehensive income, shareholders' equity and cash flows of PC-EPhone, Inc.
(formerly Newlands Oil & Gas Inc.) for the year ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
United States of America. Those standards require that we plan and perform an
audit to obtain reasonable assurance 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 audit provides a reasonable basis for our
opinion.

In our opinion, these consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of their
operations and their cash flows for the year December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements referred to above have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the December 31, 2000 financial statements, the Company's
ability to continue as a going concern is dependent upon its ability to raise
capital from shareholders or other sources to sustain operations. These factors,
along with the Company's lack of an established source of revenue and other
matters as set forth in Note 1, raise substantial doubt that the Company would
be able to continue as a going concern. The financial statements did not include
any adjustments that might result from the outcome of this uncertainty.

Vancouver, Canada                                        /s/ AMISANO HANSON
February 9, 2001                                         Chartered Accountants





750 WEST PENDER STREET, SUITE 604                 TELEPHONE:       604-689-0188
VANCOUVER CANADA                                  FACSIMILE:       604-689-9773
V6C 2T7                                           E-MAIL:         amishan@telus





                                      F-3
<PAGE>



                                               PC-EPHONE, INC. AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEET
                                                              December 31, 2001

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


                                     ASSETS

<TABLE>
<CAPTION>
        <S>                                                                        <C>
Current assets
     Cash                                                                  $         4,807
     Other receivables                                                              13,007
     Prepaid expenses and deposits                                                  68,419
                                                                           ----------------
         Total current assets                                                       86,233

Note receivable - officer, net of allowance of $20,000                                   -
Property and equipment, net                                                         48,564
Distribution rights, net of accumulated amortization of $1,538,371               7,911,629
Other assets                                                                        22,189
                                                                           ---------------
                  Total assets                                             $     8,068,615
                                                                           ===============
</TABLE>




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

                                      F-4
<PAGE>





                                               PC-EPHONE, INC. AND SUBSIDIARIES
                                                     CONSOLIDATED BALANCE SHEET
                                                              December 31, 2001
-------------------------------------------------------------------------------


                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
             <S>                                                                <C>
Current liabilities
     Accounts payable                                                   $        435,966
     Accrued expenses                                                            101,167
     Advances payable, including $120,000 to related parties                     360,087
     Note payable                                                                100,000
     Subordinated convertible notes payable, including $450,000
         to related parties                                                      740,000
                                                                        ----------------
              Total current liabilities                                        1,737,220
                                                                        ----------------
Commitments and contingencies

Shareholders' equity
     Preferred stock, $0.01 par value
         1,000,000 shares authorized
         no shares issued and outstanding                                              -
     Common stock, $0.001 par value
         50,000,000 shares authorized
         16,467,039 shares issued and outstanding                                 16,467
     Additional paid-in capital                                               11,032,112
     Committed common stock                                                      199,100
     Accumulated other comprehensive income                                          603
     Accumulated deficit                                                      (4,916,887)
                                                                        ----------------
              Total shareholders' equity                                       6,331,395
                                                                        ----------------
                   Total liabilities and shareholders' equity           $      8,068,615
                                                                        ================
</TABLE>




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

                                      F-5
<PAGE>



                                              PC-EPHONE, INC. AND SUBSIDIARIES
                                         CONSOLIDATED STATEMENTS OF OPERATIONS
                                              For the Years Ended December 31,
------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                  <S>                                                                  <C>                <C>
                                                                                      2001               2000
                                                                                ---------------    -----------------
Sales                                                                           $         3,984    $        872,000

Cost of sales                                                                             3,620             800,000
                                                                                ---------------    -----------------
Gross profit                                                                                364              72,000
                                                                                ---------------    -----------------
Operating expenses
     General and administrative expenses                                              2,125,152             465,077
     Amortization of distribution rights                                              1,318,604             219,767
                                                                                ---------------    -----------------
         Total operating expenses                                                     3,443,756             684,844
                                                                                ---------------    -----------------
Loss from operations                                                                 (3,443,392)           (612,844)
                                                                                ---------------    ----------------
Other income (expense)
     Interest income                                                                      3,150               1,156
     Interest expense                                                                  (519,509)                  -
     Gain on settlement of debts                                                              -              18,008
     Exploration and development                                                              -             (21,960)
     Write-off of oil and gas property                                                        -             (73,000)
                                                                                ---------------    ----------------
      Total other income (expense)                                                     (516,359)            (75,796)
                                                                                ---------------    ----------------
Net loss                                                                        $    (3,959,751)   $       (688,640)
                                                                                ===============    ================
Basic and diluted loss per share                                                $         (0.24)   $          (0.06)
                                                                                ===============    ================
Basic and diluted weighted-average shares outstanding                                16,205,974          11,386,749
                                                                                ===============    ================
</TABLE>




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

                                      F-6
<PAGE>




                                               PC-EPHONE, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                               For the Years Ended December 31,
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                 <S>                                               <C>                <C>
                                                                  2001               2000
                                                            ---------------    ----------------
Net loss                                                    $    (3,959,751)   $       (688,640)

Other comprehensive income
     Foreign currency translation adjustment                            603                   -
                                                            ---------------    ----------------
         Comprehensive loss applicable to common
              shareholders                                  $    (3,959,148)   $       (688,640)
                                                            ===============    ================
</TABLE>










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

                                      F-7
<PAGE>




                                               PC-EPHONE, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                               For the Years Ended December 31,

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

<TABLE>
<CAPTION>
          <S>                   <C>         <C>           <C>          <C>        <C>           <C>            <C>           <C>
                                                                                            Accumulated
                                                                                             Other
                                Common Stock          Additional   Common Stock Committed    Compre-
                          ------------------------    Paid-in      ---------------------     hensive      Accumulated
                           Shares        Amount       Capital        Shares      Amount      Income         Deficit        Total
                          ----------  -----------  --------------  ----------  ---------   -----------   ------------   -----------
Balance, December
   31, 1999               10,047,167  $    10,047  $      140,661           -  $       -   $        -    $  (268,496)   $  (117,788)
Issuance of common
   stock for
     Debt settlement
       agreements          2,500,000        2,500         247,500                                                           250,000
     Acquisition of
       distribution rights 3,500,000        3,500       9,446,500                                                         9,450,000
     Cash                     75,000           75        224,925                                                            225,000
Stock offering costs                                       (5,250)                                                           (5,250)
Net loss                                                                                                    (688,640)      (688,640)
                          ----------  -----------  --------------  ----------  ---------   -----------   ------------   -----------
Balance, December
   31, 2000               16,122,167       16,122      10,054,336           -          -            -       (957,136)     9,113,322
Issuance of common
   stock for
     Accounts payable
       settlement
       agreement              11,539           12           8,988                                                             9,000
     Cash                    333,333          333         249,667                                                           250,000
Issuance of stock
   options for services
   rendered                                               212,721                                                           212,721
Interest from fixed
   conversion features
   of convertible
   notes payable                                          506,400                                                           506,400
</TABLE>






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

                                      F-8
<PAGE>



                                               PC-EPHONE, INC. AND SUBSIDIARIES
                                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                               For the Years Ended December 31,

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

<TABLE>
<CAPTION>
         <S>                   <C>            <C>          <C>           <C>         <C>        <C>             <C>           <C>
                                                                                            Accumulated
                                                                                             Other
                               Common Stock          Additional   Common Stock Committed     Compre-
                          -----------------------     Paid-in      ---------------------     hensive      Accumulated
                           Shares        Amount       Capital        Shares      Amount      Income         Deficit        Total
                          ----------  -----------  --------------  ----------  ---------   -----------   ------------   -----------
Shares of common
   stock committed
   for conversion of
   debt                                    $                 $        385,000  $ 192,500   $             $             $    192,500
Shares of common
   stock committed for
   services rendered                                                   10,000      6,600                                      6,600
Change in cumulative
   foreign currency
   translation
   adjustment                                                                                      603                          603
Net loss                                                                                                   (3,959,751)   (3,959,751)
                          ----------  -----------  --------------  ----------  ---------   -----------   ------------   -----------
Balance, December
   31, 2001               16,467,039  $    16,467  $   11,032,112     395,000  $ 199,100   $       603   $ (4,916,887) $  6,331,395
                          ----------  -----------  --------------  ----------  ---------   -----------   ------------   -----------
</TABLE>





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

                                      F-9
<PAGE>




                                               PC-EPHONE, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                               For the Years Ended December 31,

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

<TABLE>
<CAPTION>
                  <S>                                                                 <C>                <C>
                                                                                      2001               2000
                                                                                ---------------    ----------------
Cash flows from operating activities
     Net loss                                                                   $    (3,959,751)   $       (688,640)
     Adjustments to reconcile net loss to net cash
         used in operating activities
              Depreciation of property and equipment                                     10,141               3,440
              Amortization of distribution rights                                     1,318,604             219,767
              Options issued for services rendered                                      212,721                   -
              Common stock committed for services rendered                                6,600                   -
              Interest on fixed conversion features                                     506,400                   -
              Allowance for bad debt                                                     20,000                   -
              Gain on settlement of debts                                                     -             (18,008)
              Write-off of oil and gas property                                               -              73,000
              (Increase) decrease in
                  Accounts receivable                                                         -               3,734
                  Other receivables                                                     (13,007)                  -
                  Prepaid expenses and deposits                                         (33,403)            (35,016)
                  Note receivable                                                             -             (20,000)
              Increase (decrease) in
                  Accounts payable                                                      287,375             219,168
                  Accrued expenses                                                      101,167                   -
                  Notes payable                                                               -             127,500
                                                                                ---------------    ----------------
                      Net cash used in operating activities                          (1,543,153)           (115,055)
                                                                                ---------------    ----------------
Cash flows from investing activities
     Purchase of property and equipment                                                 (34,821)            (27,324)
     Other assets                                                                       (22,189)                  -
                                                                                ---------------    ----------------
                      Net cash used in investing activities                             (57,010)            (27,324)
                                                                                ---------------    ----------------
Cash flows from financing activities
     Proceeds from advances payable                                                     765,087                   -
     Proceeds from convertible notes payable                                            507,500                   -
     Proceeds from sale of common stock                                                 250,000             219,750
                                                                                ---------------    ----------------
                      Net cash provided by financing activities                       1,522,587             219,750
                                                                                ---------------    ----------------
Cumulative translation adjustment                                                           603                  -
                                                                                ---------------    ----------------
                           Net increase (decrease) in cash                              (76,973)             77,371
Cash, beginning of year                                                                  81,780               4,409
                                                                                ---------------    ----------------

Cash, end of year                                                               $         4,807    $         81,780
                                                                                ===============    ================
</TABLE>




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

                                      F-10
<PAGE>



                                               PC-EPHONE, INC. AND SUBSIDIARIES
                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
                                               For the Years Ended December 31,

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


                                                           2001          2000
                                                       -----------   ----------
Supplemental disclosures of cash flow information

     Interest paid                                     $     8,318   $        -
                                                       -----------   ----------

     Income taxes paid                                 $         -   $        -
                                                       -----------   ----------


Supplemental schedule of non-cash investing and financing activities During the
year ended December 31, 2001, the Company:

o    converted accounts payable for $9,000 into 11,539 shares of common stock.

o    committed to issue 385,000 shares of common stock for the conversion of
     advances payable for $192,500.

o    converted advances payable of $232,500 into convertible notes payable

o    committed to issue 10,000 shares of common stock as payment for services
     rendered valued at $6,600.

During the year ended December 31, 2000, the Company:

o    issued 2,500,000 shares of common stock at $0.10 per share as settlement of
     notes payable totaling $86,000 and accounts payable totaling $164,000.

o    issued 3,500,000 shares of common stock at $2.70 per share as consideration
     for the acquisition of distribution rights valued at $9,450,000.


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

                                      F-11
<PAGE>





                                                PC-EPHONE, INC. AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                               December 31, 2001
--------------------------------------------------------------------------------


NOTE 1 - ORGANIZATION AND LINE OF BUSINESS

         PC-EPhone, Inc. was incorporated in Nevada on June 17, 1998 as Newlands
         Oil & Gas, Inc. On December 15, 2000, its name was changed to
         PC-EPhone, Inc. PC-EPhone, Inc.'s common shares trade on the NASD
         Over-the-Counter Bulletin Board in the United States.

         PC-EPhone, Inc. holds the exclusive distribution rights in the United
         States and Canada for a wireless handheld device that can be used to
         perform Internet, personal computer, cellular phone, and organizer
         functions (the "PC-EPhone").


NOTE 2 - GOING CONCERN

         The accompanying financial statements have been prepared in conformity
         with generally accepted accounting principles which contemplate
         continuation of the Company (as defined in Note 3) as a going concern.
         However, during the year ended December 31, 2001, the Company incurred
         a net loss of $3,959,751, and it had negative cash flows from
         operations of $1,543,153. In addition, the Company had an accumulated
         deficit of $4,916,887 as of December 31, 2001. These factors raise
         substantial doubt about the Company's ability to continue as a going
         concern.

         Recovery of the Company's assets is dependent upon future events, the
         outcome of which is indeterminable. Successful completion of the
         Company's development program and its transition to the attainment of
         profitable operations is dependent upon the Company achieving a level
         of sales adequate to support the Company's cost structure. In addition,
         realization of a major portion of the assets in the accompanying
         balance sheet is dependent upon the Company's ability to meet its
         financing requirements and the success of its plans to sell its
         products. The financial statements do not include any adjustments
         relating to the recoverability and classification of recorded asset
         amounts or amounts and classification of liabilities that might be
         necessary should the Company be unable to continue in existence.


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation
         ---------------------------
         The consolidated financial statements include the accounts of
         PC-EPhone, Inc. and its wholly owned subsidiaries, PC-EPhone Ltd. (a
         Bermuda company), PC-eSolutions, Inc. (a Delaware corporation), and
         PC-EPhone Canada Enterprises Inc. (a British Columbia, Canada
         company)(collectively, the "Company"). All significant inter-company
         accounts and transactions are eliminated in consolidation.



                                      F-12
<PAGE>



NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Revenue Recognition
         -------------------
         Revenue from product sales is recognized when the product has been
         shipped and collection is reasonably assured. The Company does not
         accept product returns from its distributors.

         For the year ended December 31, 2001, five sub-distributors and
         customers accounted for 34%, 23%, 20%, 13%, and 10% of the Company's
         sales. At December 31, 2001, there were not any accounts receivable due
         from these sub-distributors. For the year ended December 31, 2000, one
         sub-distributor accounted for 100% of the Company's sales. At December
         31, 2000, there were not any accounts receivable due from this
         sub-distributor.

         Comprehensive Income
         --------------------
         The Company utilizes Statement of Financial Accounting Standards
         ("SFAS") No. 130, "Reporting Comprehensive Income." This statement
         establishes standards for reporting comprehensive income and its
         components in a financial statement. Comprehensive income as defined
         includes all changes in equity (net assets) during a period from
         non-owner sources. Examples of items to be included in comprehensive
         income, which are excluded from net income, include foreign currency
         translation adjustments, minimum pension liability adjustments, and
         unrealized gains and losses on available-for-sale securities.

         Cash and Cash Equivalents
         -------------------------
         For purposes of the statements of cash flows, the Company considers all
         investments purchased with original maturities of three months or less
         to be cash equivalents.

         Property and Equipment
         ----------------------
         Property and equipment are stated at cost. Depreciation is provided
         using the straight-line method over estimated useful lives as follows:

            Office furniture and equipment                          5 years
            Computer equipment                                      4 years

         Web site development costs are expensed as incurred.

         Distribution Rights
         -------------------
         Distribution rights are recorded at the fair value of the non-cash
         consideration paid for these rights. The Company provides for
         amortization on a straight-line basis over the term of the distribution
         agreement (86 months).



                                      F-13
<PAGE>


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Impairment of Long-lived Assets
         -------------------------------
         The Company reviews its long-lived assets for impairment whenever
         events or changes in circumstances indicate that the carrying amount of
         an asset may not be recoverable. Recoverability of assets to be held
         and used is measured by a comparison of the carrying amount of the
         assets to future net cash flows expected to be generated by the assets.
         If the assets are considered to be impaired, the impairment to be
         recognized is measured by the amount by which the carrying amount
         exceeds the fair value of the assets.

         Fair Value of Financial Instruments
         -----------------------------------
         The Company measures its financial assets and liabilities in accordance
         with generally accepted accounting principles. For certain of the
         Company's financial instruments, including cash, other receivables,
         accounts payable, accrued expenses, and advances payable, the carrying
         amounts approximate fair value due to their short maturities. The
         amounts shown for note receivable and notes payable also approximate
         fair value because current interest rates offered to the Company for
         debt of similar maturities are substantially the same.

         Foreign Currency Translation
         ----------------------------
         Assets and liabilities of foreign subsidiaries are translated into
         United States dollars at fiscal year-end exchange rates. Income,
         expense, and cash flow items are translated at weighted-average
         exchange rates prevailing during the fiscal year. The resulting
         currency translation adjustments are recorded as a component of
         accumulated other comprehensive income within shareholders' equity.

         Advertising Expense
         -------------------
         The Company expenses advertising in the period the service was
         incurred. For the years ended December 31, 2001 and 2000, advertising
         expense was approximately $5,414 and $0, respectively.

         Income Taxes
         ------------
         The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
         requires the recognition of deferred tax assets and liabilities for the
         expected future tax consequences of events that have been included in
         the financial statements or tax returns. Under this method, deferred
         income taxes are recognized for the tax consequences in future years of
         differences between the tax bases of assets and liabilities and their
         financial reporting amounts at each year-end based on enacted tax laws
         and statutory tax rates applicable to the periods in which the
         differences are expected to affect taxable income. Valuation allowances
         are established, when necessary, to reduce deferred tax assets to the
         amount expected to be realized. The provision for income taxes
         represents the tax payable for the period and the change during the
         period in deferred tax assets and liabilities.




                                      F-14
<PAGE>


NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Loss Per Share
         --------------
         The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
         share is computed by dividing loss available to common shareholders by
         the weighted-average number of common shares outstanding. Diluted loss
         per share is computed similar to basic loss per share except that the
         denominator is increased to include the number of additional common
         shares that would have been outstanding if the potential common shares
         had been issued and if the additional common shares were dilutive.
         Common equivalent shares are excluded from the computation if their
         effect is anti-dilutive.

         The following potential common shares have been excluded from the
         computation of diluted net loss per share for all periods presented
         because the effect would have been anti-dilutive:

<TABLE>
<CAPTION>
                              <S>                                           <C>               <C>
                                                                            For the Year Ended
                                                                                 December 31,
                                                                     -----------------------------------
                                                                           2001               2000
                                                                     ---------------    ----------------
             Options outstanding under the Company's stock
                 option plans                                              1,355,000                   -
             Warrants issued in conjunction with a distribution
                 agreement with Cyberbank                                          -           2,500,000
             Convertible notes payable                                     1,480,000                   -
</TABLE>

         Estimates
         ---------
         The preparation of financial statements 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
         revenue and expenses during the reporting period. Actual results could
         differ from those estimates.

         Recently Issued Accounting Pronouncements
         -----------------------------------------
         In June 2001, the Financial Accounting Standards Board ("FASB") issued
         SFAS No. 141, "Business Combinations." This statement addresses
         financial accounting and reporting for business combinations and
         supersedes Accounting Principles Board ("APB") Opinion No. 16,
         "Business Combinations," and SFAS No. 38, "Accounting for
         Pre-Acquisition Contingencies of Purchased Enterprises." All business
         combinations in the scope of this statement are to be accounted for
         using one method, the purchase method. The provisions of this statement
         apply to all business combinations initiated after June 30, 2001. Use
         of the pooling-of-interests method for those business combinations is
         prohibited. This statement also applies to all business combinations
         accounted for using the purchase method for which the date of
         acquisition is July 1, 2001 or later. The Company does not expect
         adoption of SFAS No. 141 to have a material impact, if any, on its
         financial position or results of operations.



                                      F-15
<PAGE>



NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         Recently Issued Accounting Pronouncements (Continued)
         -----------------------------------------
         In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
         Intangible Assets." This statement addresses financial accounting and
         reporting for acquired goodwill and other intangible assets and
         supersedes APB Opinion No. 17, "Intangible Assets." It addresses how
         intangible assets that are acquired individually or with a group of
         other assets (but not those acquired in a business combination) should
         be accounted for in financial statements upon their acquisition. This
         statement also addresses how goodwill and other intangible assets
         should be accounted for after they have been initially recognized in
         the financial statements. It is effective for fiscal years beginning
         after December 15, 2001. Early application is permitted for entities
         with fiscal years beginning after March 15, 2001, provided that the
         first interim financial statements have not been issued previously. The
         Company does not expect adoption of SFAS No. 142 to have a material
         impact, if any, on its financial position or results of operations.

         In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
         Retirement Obligations." This statement applies to legal obligations
         associated with the retirement of long-lived assets that result from
         the acquisition, construction, development, and/or the normal operation
         of long-lived assets, except for certain obligations of lessees. This
         statement is not applicable to the Company.

         In August 2001, the FASB issued SFAS No. 144, "Accounting for the
         Impairment or Disposal of Long-Lived Assets." This statement addresses
         financial accounting and reporting for the impairment or disposal of
         long-lived assets. This statement replaces SFAS No. 121, "Accounting
         for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
         Disposed of," the accounting and reporting provisions of APB No. 30,
         "Reporting the Results of Operations - Reporting the Effects of
         Disposal of a Segment of a Business, and Extraordinary, Unusual, and
         Infrequently Occurring Events and Transactions," for the disposal of a
         segment of a business, and amends Accounting Research Bulletin No. 51,
         "Financial Statements," to eliminate the exception to consolidation for
         a subsidiary for which control is likely to be temporary. The Company
         does not expect adoption of SFAS No. 144 to have a material impact, if
         any, on its financial position or results of operations.


NOTE 4 - NOTE RECEIVABLE - OFFICER

         At December 31, 2001, the Company maintained a note receivable from an
         officer. The note receivable is unsecured, non-interest-bearing, and
         due on demand. At December 31, 2001, the outstanding balance was fully
         reserved.




                                      F-16
<PAGE>




NOTE 5 - PROPERTY AND EQUIPMENT

         Property and equipment at December 31, 2001 consisted of the following:

                  Office furniture and equipment                $       28,549
                  Computer equipment                                    33,596
                                                                --------------
                                                                        62,145
                  Less accumulated depreciation                         13,581
                                                                --------------
                      Total                                     $       48,564
                                                                ==============

         Depreciation expense was $10,141 and $3,440 for the years ended
         December 31, 2001 and 2000, respectively.


NOTE 6 - DISTRIBUTION RIGHTS

         Cyberbank Corp.
         ---------------
         By a distribution agreement dated November 6, 2000 and amended February
         8, 2001 with Cyberbank Corp. ("Cyberbank"), a Korean Corporation,
         PC-EPhone Ltd. was granted the exclusive right to market, distribute,
         and sell the PC-EPhone within the United States and Canada. On April
         12, 2002, the distribution rights were transferred to PC-EPhone, Inc.,
         the Nevada corporation.

         In consideration for these rights, the Company issued 3,500,000 shares
         of common stock valued at $2.70 per share to Cyberbank for total
         non-cash consideration of $9,450,000. As a condition for maintaining
         the rights, PC-EPhone Ltd. must purchase from Cyberbank a minimum of
         500,000 units annually upon Cyberbank receiving written approval for
         the product by the United States Federal Communications Commission,
         which occurred on April 27, 2001. The Company also granted Cyberbank
         warrants entitling Cyberbank to acquire 2,500,000 shares of common
         stock at $3.20 per share. These warrants were exercisable during the
         period from November 1, 2001 to December 31, 2001. In addition,
         PC-EPhone Ltd. agreed to issue two binding purchase orders to Cyberbank
         for a total of $25,300,000 to be paid with cash of $2,000,000 and
         letters of credit totaling $23,300,000. As of December 31, 2001, the
         Company has not paid the $2,000,000 cash obligation that was due on May
         21, 2001. The warrants expired on December 31, 2001 without being
         exercised.

         The term of this agreement ends December 31, 2007, but will
         automatically renew from year to year unless terminated earlier in
         accordance with the distribution agreement. The Company is currently
         renegotiating the distribution agreement. In September 2001, Cyberbank
         submitted an application to a wireless carrier to obtain wireless
         access for the PC-EPhone 1.0 on the carrier's networks. Cyberbank is
         still proceeding with the acceptance process.



                                      F-17
<PAGE>


NOTE 6 - DISTRIBUTION RIGHTS (Continued)

         Cyberbank Corp. (Continued)
         ---------------
         By a warrant agreement dated November 6, 2000, Cyberbank granted the
         Company warrants to purchase common stock at a price of $223.54 per
         share. The warrants were exercisable during the period from November 1,
         2001 to December 31, 2001. The number of Cyberbank warrants to be
         issued to the Company is to be determined based on the following:

          o    If the average trading price of the Company's common stock is
               greater than or equal to $6 per share, 35,789 Cyberbank warrants
               will be issued.

          o    If the average trading price of the Company's common stock is
               less than $6 per share, then the number of Cyberbank warrants
               will be determined by multiplying 35,789 times the average
               trading price divided by $6.

         The average trading price of the Company's common stock means the
         average trading price of the common stock of the Company for the 20
         trading days prior to November 1, 2001, which is determined based on
         the closing price on each trading day. The warrants expired on December
         31, 2001 without being exercised.

         FutureCom Global, Inc.
         ----------------------
         By a sub-distributor agreement dated November 15, 2000 with FutureCom
         Global, Inc. ("FutureCom"), PC-EPhone Ltd. granted FutureCom the
         exclusive right to market, distribute, and sell the PC-EPhone within
         the United States and Canada.

         As a condition of maintaining these rights, FutureCom was required to
         purchase from PC-EPhone Ltd. a minimum of 250,000 units quarterly once
         Cyberbank had received written approval for the product by the United
         States Federal Communications Commission, which occurred on April 27,
         2001. FutureCom had also agreed to issue two binding purchase orders to
         PC-EPhone Ltd. for a total of $25,300,000 to be paid with cash of
         $2,000,000 and letters of credit totaling $23,300,000. The term of this
         agreement ends December 31, 2007, but will automatically renew from
         year to year.

         On February 9, 2001, the Company, Cyberbank, and FutureCom entered into
         a tri-party agreement that clarified some of the terms of the
         contractual relationships among the three companies.

         On July 5, 2001, FutureCom's rights and obligations were terminated.


NOTE 7 - ADVANCES PAYABLE

         Advances payable at December 31, 2001 were unsecured,
         non-interest-bearing, and due on demand. $120,000 of the balance is
         payable to a company that is controlled by a shareholder of the
         Company.



                                      F-18
<PAGE>



NOTE 8 - NOTE PAYABLE

         Note payable at December 31, 2001 was unsecured, bearing interest at
         12% per annum, and due on June 30, 2001. In April 2002, the note
         payable was converted into 220,000 shares of common stock and warrants
         to purchase 100,000 shares of common stock at an exercise price of
         $0.50 per share. 50,000 of the warrants vest on April 11, 2003, and
         50,000 vest on April 11, 2004. All of the warrants expire on April 12,
         2004.


NOTE 9 - SUBORDINATED CONVERTIBLE NOTES PAYABLE

         August 2001
         -----------
         During August 2001, the Company issued nine convertible promissory
         notes in exchange for $550,000, of which $450,000 was received from a
         director, two shareholders, a relative of a shareholder, and three
         employees of the Company and of which $232,500 was converted from
         advances payable. No sales commissions or underwriting discounts were
         paid in connection with the offering. The convertible promissory notes
         bear interest at 6% per annum, with interest due in November 2001,
         February 2002, and May 2002, and principal and unpaid interest are due
         at maturity in August 2002. The notes are convertible at the option of
         the holder at any time before maturity into shares of the Company's
         common stock at a conversion price of $1.25 per share during the first
         six months after the issuance of the notes and at a rate of $0.50 per
         share during the subsequent six-month period until the notes mature. If
         the Company's common stock trades for 10 consecutive trading days above
         $3.75 per share, the Company can demand conversion of the notes at 50%
         of the conversion price in effect at that time. If the Company's common
         stock trades for 10 consecutive trading days above $5.75 per share, the
         Company can demand conversion of the notes at the conversion price in
         effect at that time. The Company is in default on the February 2002
         interest payment; however, it has obtained waivers from all lenders
         extending payment to May 2002. The notes are subordinate to the bridge
         loan from Process Control (Holdings) Limited dated April 8, 2002.

         In accordance with generally accepted accounting principles, the
         difference between the lowest conversion price and the Company's stock
         price on the date of issuance of the notes is considered to be interest
         expense. It is to be recognized in the statement of operations during
         the period from the issuance of the debt to the time at which the debt
         first becomes convertible. In connection with the issuance of the
         notes, the Company recognized $495,000 as interest expense in the
         statement of operations for the year ended December 31, 2001.

         November 2001
         -------------
         On November 8, 2001, the Company received bridge financing from
         Cyberbank in the amount of $190,000 in the form of a subordinated
         convertible debenture (the "Cyberbank Debenture") providing for a total
         aggregate amount of up to $700,000 to the Company to be received as
         follows: $150,000 on or before October 15, 2001, $150,000 on or before
         November 1, 2001, up to $250,000 on or before November 15, 2001, and
         $150,000 on or before December 1, 2001.



                                      F-19
<PAGE>



NOTE 9 - SUBORDINATED CONVERTIBLE NOTES PAYABLE (Continued)

         November 2001 (Continued)
         -------------
         The Cyberbank Debenture as currently negotiated matures in one year
         from the date of receipt of the funds and is non-interest-bearing
         unless the Company defaults on one of the terms of the Cyberbank
         Debenture, in which case any amounts owing would bear interest at 10%
         per annum from the date of default until repayment, or such time as the
         event of default is cured. In addition, an event of default permits
         Cyberbank to demand full repayment of the debenture immediately. The
         funds are voluntarily convertible by Cyberbank into the Company's
         common stock at a price of $0.50 per share at any time before the
         Cyberbank Debenture matures. The Company cannot force conversion. To
         date, the Company has received $190,000 from Cyberbank. In December
         2001, the Company defaulted on the Cyberbank debenture. The Cyberbank
         Debenture is subordinate to the bridge loan from Process Control
         (Holdings) Limited dated April 8, 2002.

         In accordance with generally accepted accounting principles, the
         difference between the conversion price and the Company's stock price
         on the date of issuance of the notes is considered to be interest
         expense. It is to be recognized in the statement of operations during
         the period from the issuance of the debt to the time at which the debt
         first becomes convertible. In connection with the issuance of the
         notes, the Company recognized $11,400 as interest expense in the
         statement of operations for the year ended December 31, 2001.


NOTE 10 - COMMITMENTS AND CONTINGENCIES

         Leases
         ------
         The Company leases its offices and facilities through a lease expiring
         in August 2002 with monthly rent of $8,455. Rent expense was $53,630
         and $5,229 for the years ended December 31, 2001 and 2000,
         respectively.

         Employment Agreements
         ---------------------
         The Company has entered into a two-year employment agreement with its
         Chief Executive Officer, expiring July 1, 2003. The agreement
         automatically renews and will continue to remain in effect for
         successive two-year periods, unless terminated by either party pursuant
         to the terms of the employment agreement. Future minimum payments under
         this agreement at December 31, 2001 were as follows:

                   Year Ending
                  December 31,
                  ------------

                      2002                                   $        410,400
                      2003                                            205,200
                                                             ----------------
                      Total                                  $        615,600
                                                             ================



                                      F-20
<PAGE>


NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

         Employment Agreements (Continued)
         ---------------------
         In addition, the Chief Executive Officer was granted 485,000 options
         under the Company's Stock Option Plan. 65,000 of the options vest at
         the grant date with 35,000 options vesting every three months
         thereafter. The options have an exercise price of $0.50 and expire on
         September 17, 2007. The Chief Executive Officer will also receive stock
         options equal to 3% of all new common share issuances by the Company to
         a maximum of 720,000 stock options. The exercise price will be equal to
         the fair market value of the Company's common stock on the date of
         grant of the options by the Board of Directors, and the options expire
         six years from the date of grant. The Chief Executive Officer has
         waived his right to all options to be issued to him related to new
         common share issuances by the Company.

         Product Development Technology and Co-Development of New Technology
         -------------------------------------------------------------------
         In a joint venture agreement with Aidiicom Technologies Ltd.
         ("Aidiicom"), a British Columbia corporation, the Company obtained (i)
         the exclusive right to market, distribute, and sell the AIDII Pocket PC
         and any future products and related accessories within North America,
         (ii) the non-exclusive right to market, distribute, and sell the AIDII
         Pocket PC and any future products and related accessories in the rest
         of the world, and (iii) will be able to private label the products and
         the accessories. The Company has the exclusive right to modify and
         develop the licensed technology for exploitation in North America. Any
         future products that are jointly developed by the Company and Aidiicom
         will be jointly owned by both parties. Aidiicom is controlled by a
         shareholder of the Company.

         During the year ended December 31, 2001, the Company agreed to purchase
         20,000 units. From January 1, 2002 to June 30, 2002, the Company is
         required to purchase 60,000 units. The minimum purchase requirements
         increase up to 150,000 units for the six-month period ending June 30,
         2004. After June 30, 2004, the minimum purchase requirements will be
         agreed upon between the parties. To date, the Company has purchased
         approximately 100 units from Aidiicom.

         The agreement with Aidiicom terminates on the earlier of (a) June 30,
         2004, (b) the day on which the agreement is terminated in accordance
         with its provisions, or (c) the day on which Aidiicom's primary
         distribution agreement is terminated.

         On September 30, 2001, the Company entered into a six-month license
         agreement with Wicom Networks Corp. ("Wicom"), a British Columbia
         corporation, to provide 802.11a Access Points, Application Specific
         Integrated Circuit ("ASIC") Chips, Personal Computer Memory Card
         International Association ("PCMCIA") cards, and wireless Internet phone
         systems (with video) as they become available. Wicom is controlled by a
         shareholder of the Company.




                                      F-21
<PAGE>



NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

         Product Development Technology and Co-Development of New Technology
         (Continued)
         -------------------------------------------------------------------
         The Company has the option to obtain a two-year license to Wicom's
         electronic chip technology (the "WCT"). The Company will (i) pay a
         royalty of 10% of all gross revenue generated by the Company derived
         from the sale of use of the WCT and (ii) receive worldwide distribution
         rights with exclusive rights in the United States and Canada. The
         Company may exercise its option upon the fulfillment, or continuing
         fulfillment, of the following conditions:

         (a)      The Company provides management and administrative services to
                  Wicom at no cash cost to Wicom for a period commencing on the
                  effective date and terminating on the later of (i) March 31,
                  2002 or (ii) the termination date of the WCT license; and

         (b)      The Company purchases from Wicom 2,000,000 shares of Wicom's
                  common stock at $1 per share on the following basis: 1,000,000
                  shares on or before December 31, 2001, another 500,000 shares
                  on or before February 15, 2002, and the remaining 500,000
                  shares on or before March 31, 2002.

         Upon exercise or deemed exercise of the license option by the Company,
         the Company will grant warrants to Wicom to purchase up to 2,000,000
         shares of the Company's common stock at an exercise price of $1.25 per
         share for a period of two years from the exercise date of the
         agreement. The exercise date means the actual date of payment in
         connection with the purchase of the final 500,000 shares of Wicom's
         common stock on or before March 31, 2002. To date, the Company has not
         made any purchases of Wicom's common stock. The six-month license and
         the option for a two-year license expired in April and March 2002,
         respectively. The Company is in negotiations with Wicom to enter into a
         new license arrangement.

         In conjunction with Seoul Systems Co., Ltd. ("SSC"), a Korean
         corporation, the Company is developing a flexible keyboard that will
         approach the size of a standard desktop keyboard. SSC and the Company
         will jointly own the intellectual property rights to this flexible
         keyboard.



                                      F-22
<PAGE>


NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)

         Litigation
         ----------
         The Company received a demand letter dated June 13, 2001, from
         FutureCom Global, Inc. ("FutureCom"). The demand letter relates to a
         Tri-Party Agreement among the Company, FutureCom, and Cyberbank, dated
         February 9, 2001, and a related Sub-distributor Agreement between
         FutureCom and the Company, dated November 15, 2000. The demand letter,
         among other things, seeks a full refund of all monies paid with respect
         to 1,000 units of personal digital assistants ordered from Cyberbank in
         the amount of approximately $800,000. The Company is investigating its
         rights and obligations with respect thereto. Based on the information
         currently available, the Company is unable to evaluate the likelihood
         of an unfavorable outcome if FutureCom commenced a legal proceeding
         against the Company with respect to this dispute. The Company intends
         to vigorously defend itself if a legal proceeding is commenced.

         The Company has been sued in the Supreme Court of British Columbia. The
         title of the case, filed on or about June 26, 2001, is Euromerica
         Capital Group, Inc. v. PC-EPhone Canada Enterprises Inc., d/b/a
         PC-EPhone, Inc., PC-EPhone, Inc., Douglas Yee and Negar Towfigh,
         Supreme Court of British Columbia, Vancouver Registry No. S013585. The
         Further Amended Statement of Claim filed on January 25, 2002, alleges
         that Euromerica entered into a contract with the Company, the terms of
         which were partly oral and partly in writing, whereby Euromerica would
         provide the Company with technical analysis, a combined press campaign
         concept, and investor relations for the German market place and
         dissemination services in Germany. Euromerica alleges that the Company
         breached an agreement by failing to make payments to Euromerica in the
         sum of $39,910. The Company has filed a responsive pleading denying
         liability and raising affirmative defenses, and the Company has also
         filed a Counterclaim against Euromerica seeking declaratory relief and
         damages. The Company intends to vigorously defend itself against the
         Further Amended Statement of Claim and to pursue the claims stated in
         its Counterclaim. The Company has entered into indemnification
         agreements with Douglas Yee and Negar Towfigh for their actions as
         directors of the Company

         Except as set forth above, the Company is not a party to any material
         litigation and is not aware of any pending or threatened litigation
         that could have a material adverse effect on its business, operating
         results or financial condition.


NOTE 11 - SHAREHOLDERS' EQUITY

         Common Stock
         ------------
         During the year ended December 31, 2001, the Company completed the
         following transactions:

         o     Issued 333,333 shares of common stock for proceeds of $250,000.

         o     Converted accounts payable for $9,000 into 11,539 shares of
               common stock.



                                      F-23
<PAGE>


NOTE 11 - SHAREHOLDERS' EQUITY (Continued)

         Common Stock (Continued)
         ------------

         o     Committed to issue 385,000 shares of common stock for the
               conversion of advances payable for $192,500.

         o     Committed to issue 10,000 shares of common stock as payment for
               services rendered valued at $6,600.

         During the year ended December 31, 2000, the Company completed the
         following transactions:

         o     Committed to issue 75,000 shares of common stock for proceeds of
               $219,750, net of offering costs of $5,250. On February 17, 2001,
               the Company issued the 75,000 common shares.

         o     Issued 2,500,000 common shares at $0.10 per share as settlement
               of loans payable totaling $86,000 and accounts payable totaling
               $164,000.

         o     Issued 3,500,000 common shares at $2.70 per share as
               consideration for the acquisition of distribution rights valued
               at $9,450,000.

         Warrants
         --------
         During the year ended December 31, 2001, there were share purchase
         warrants outstanding entitling the holder the right to purchase
         2,500,000 common shares of the Company at $3.20 per share. These
         warrants were exercisable from November 1, 2001 to December 31, 2001
         and expired on December 31, 2001 without being exercised.

         Stock Options
         -------------
         On August 13, 2001, the Board of Directors approved the adoption of a
         non-qualified and incentive stock option plan, which was amended on
         December 7, 2001 (the "2001 Plan"). The 2001 Plan is intended to
         provide incentives to key employees, officers, directors, agents,
         consultants, and advisors of the Company who provide significant
         services to the Company. There are options available for grant under
         the Plan up to 10% of the issued and outstanding shares of the Company.
         The exercise price will be determined by the plan administrator, but
         will not be less than 100% of the fair market value of the common stock
         on the date of grant for both incentive stock options and non-qualified
         stock options.




                                      F-24
<PAGE>



NOTE 11 - SHAREHOLDERS' EQUITY (Continued)

         Stock Options (Continued)
         -------------
         During the year ended December 31, 2001, the Board of Directors granted
         385,000 non-qualified stock options to certain consultants for services
         to be rendered over the next one to two years. Vesting for 105,000 of
         the options is 25% upon each annual anniversary of the grant date, for
         55,000 the vesting is 64% by December 31, 2001 and 9% each July 1 over
         the next four years, for 25,000 the vesting is 25% on grant and 25% in
         February, May, and August 2001, and for 200,000 the vesting is 12.5%
         upon grant and 12.5% on each subsequent May, August, November, and
         February over the next three years.


         Since no dollar amount was agreed-upon for the services to be rendered,
         the options were valued using the Black-Scholes option-pricing model.
         The Company recorded consulting expense of $212,721 during the year
         ended December 31, 2001 for the value of these options.

         The following summarizes the stock option transactions under the 2001
         Plan:

<TABLE>
<CAPTION>
                            <S>                                           <C>             <C>
                                                                                       Weighted-
                                                                                        Average
                                                                     Stock Options      Exercise
                                                                      Outstanding        Price
                                                                     ------------    --------------

                  Outstanding, December 31, 2000                                -    $            -
                      Granted                                           1,530,000    $         0.91
                      Expired                                             (12,500)   $         3.00
                      Canceled                                           (162,500)   $         3.00
                                                                  ---------------
                           Outstanding, December 31, 2001               1,355,000    $         0.66
                                                                  ===============
                           Exercisable, December 31, 2001                 205,000    $         1.11
                                                                  ===============
</TABLE>

         The weighted-average remaining contractual life of the options
         outstanding at December 31, 2001 is 5.52 years.





                                      F-25
<PAGE>



NOTE 11 - SHAREHOLDERS' EQUITY (Continued)

         Stock Options (Continued)
         -------------
         The exercise prices for the options outstanding at December 31, 2001
         ranged from $0.50 to $3.00, and information relating to these options
         is as follows:

<TABLE>
<CAPTION>
                 <S>                  <C>             <C>           <C>              <C>               <C>
                                                                                    Weighted-        Weighted-
                                                                  Weighted-          Average          Average
                                                                   Average           Exercise         Exercise
              Range of               Stock          Stock        Remaining           Price of         Price of
               Exercise            Options         Options       Contractual         Options           Options
                 Prices        Outstanding       Exercisable       Life            Outstanding       Exercisable
         -------------------   -----------     ---------------------------------  -----------      ----------------
         $              0.50       1,265,000           155,000         5.7 years  $         0.50   $           0.50
         $         0.51-3.00          90,000            50,000         3.2 years  $         2.56   $           3.00
                              --------------   ---------------
                                   1,355,000           205,000
                              ==============   ===============
</TABLE>

         The Company has adopted only the disclosure provisions of SFAS No. 123,
         "Accounting for Stock-Based Compensation." It applies APB Opinion No.
         25, "Accounting for Stock Issued to Employees," and related
         interpretations in accounting for its plans and does not recognize
         compensation expense for its stock-based compensation plans other than
         for restricted stock and options issued to outside third parties. If
         the Company had elected to recognize compensation expense based upon
         the fair value at the grant date for awards under its plan consistent
         with the methodology prescribed by SFAS No. 123, the Company's net loss
         and loss per share would be increased to the pro forma amounts
         indicated below for the year ended December 31, 2001:


                  Net loss
                      As reported                             $     (3,959,751)
                      Pro forma                               $     (4,001,824)
                  Basic loss per common share
                      As reported                             $          (0.24)
                      Pro forma                               $          (0.25)


         The fair value of the employees' options was estimated at the date of
         grant using the Black-Scholes option-pricing model with the following
         weighted-average assumptions: dividend yield of 0%; expected volatility
         of 100%; risk-free interest rate of 3.3%, and expected life of four
         years. The weighted-average fair value of options granted during the
         year ended December 31, 2001 was $0.24.




                                      F-26
<PAGE>



NOTE 11 - SHAREHOLDERS' EQUITY (Continued)

         Stock Options (Continued)
         -------------
         For options granted to employees during the year ended December 31,
         2001 where the exercise price was greater than the stock price at the
         date of the grant, the weighted-average fair value of such options was
         $0.24 and the weighted-average exercise price of such options was
         $0.50. No options were granted to employees during the year ended
         December 31, 2001 where the exercise price was less than the stock
         price at the date of grant and no options were granted to employees
         during the year ended December 31, 2001, where the exercise price was
         equal to the stock price at the date of the grant.

         The Black-Scholes option valuation model was developed for use in
         estimating the fair value of traded options that have no vesting
         restrictions and are fully transferable. In addition, option valuation
         models require the input of highly subjective assumptions including the
         expected stock price volatility. Because the Company's employee stock
         options have characteristics significantly different from those of
         traded options, and because changes in the subjective input assumptions
         can materially affect the fair value estimate, in management's opinion,
         the existing models do not necessarily provide a reliable single
         measure of the fair value of its employee stock options.


NOTE 12 - INCOME TAXES

         The tax effects of temporary differences that give rise to deferred
         taxes at December 31, 2001 were as follows:

                  Deferred tax assets
                      State net operating loss carryforwards       $    227,163
                      Federal net operating loss carryforwards        1,110,967
                      Accrued salary                                     31,637
                      Contribution carryover                             26,515
                                                                   ------------
                  Total gross deferred tax assets                     1,396,282
                  Less valuation allowance                            1,396,282
                                                                   ------------
                           Net deferred tax assets                 $          -
                                                                   ============

         The valuation allowance increased by approximately $1,013,000 and
         $383,000 during the years ended December 31, 2001 and 2000,
         respectively. All other deferred tax assets were immaterial. No
         provision for income taxes for the years ended December 31, 2001 and
         2000 is required since the Company incurred losses during such years.
         At December 31, 2001, the Company had approximately $3,507,000 in
         federal net operating loss carryforwards and $2,705,000 in state net
         operating loss carryforwards attributable to losses incurred since the
         Company's inception that may be offset against future taxable income
         through 2011 and 2021, respectively.




                                      F-27
<PAGE>



NOTE 12 - INCOME TAXES (Continued)

         Income tax expense was $0 and differs from the amounts computed by
         applying the United States federal income tax rate of 34% to loss
         before income taxes as a result of the following at December 31, 2001:
<TABLE>
<CAPTION>
                            <S>                                                                   <C>
             Computed "expected" tax benefit                                                           34.0%
             Increase in income taxes resulting from change in the beginning-
                 of-the-year balance of the valuation allowance for deferred
                 tax assets allocated to income tax expense                                           (39.6)
             State income taxes, net of federal benefit                                                 5.8
             Other                                                                                     (0.2)
                                                                                              --------------
                      Total                                                                               -%
                                                                                              ==============
</TABLE>

NOTE 13 - RELATED PARTY TRANSACTIONS

         During the years ended December 31, 2001 and 2000, the Company has
         incurred charges by directors, companies with directors or officers in
         common with the Company, or shareholders owning greater than 10% of the
         Company as follows:

<TABLE>
<CAPTION>
                                    <S>                                               <C>                 <C>
                                                                                      2001               2000
                                                                                ---------------    ----------------
                  Cost of sales -  Cyberbank                                    $             -    $        800,000
                  General and administrative expenses
                      Consulting                                                        395,000             167,500
                      Rent                                                                    -               2,739
                  Exploration and development                                                 -              21,960
                  Gain on settlement of debts                                                 -             (17,538)
                  Write-off of oil and gas property                                           -              73,000
                                                                                ---------------    ----------------
                           Total                                                $       395,000    $      1,047,661
                                                                                ===============    ================
</TABLE>
         At December 31, 2001, amounts owed to various employees for expense
         reimbursements totaling $24,351 was included in accounts payable.


NOTE 14 - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

         The Company recorded a charge of $495,000 for the value of the
         beneficial conversion feature related to the convertible promissory
         notes issued by the Company in August 2001.





                                      F-28
<PAGE>




NOTE 15 - SUBSEQUENT EVENTS

         Joint Venture Agreement
         -----------------------
         On March 27, 2002, the Company entered into an agreement with Process
         Control (Holdings) Limited ("PCHL") which contemplates the formation of
         a joint venture with Whitelite Communications Ltd. ("WCL"), a
         corporation organized under the laws of the Republic of Ireland and a
         wholly owned subsidiary of PCHL. If formed, the joint venture entity
         would distribute the Company's products on a worldwide basis, subject
         to certain exclusions described below. The Company would own 15% of the
         joint venture entity and the remaining 85% would be owned by PCHL.

         Upon formation of the joint venture, the Company would agree to
         contribute all of its rights and obligations under any future
         distribution agreements that it enters into with Cyberbank or SSC for
         the territories of Europe, the Middle East, Africa, and China. For a
         six-month period following the formation of the joint venture, PCHL
         would have an option to convert all of its interest in the joint
         venture into a fully diluted 65% of the Company's issued and
         outstanding common stock at the time of conversion. Upon conversion,
         PCHL would be entitled to appoint four of the seven members on the
         Company's Board of Directors, and WCL and the joint venture entity
         would become the Company's wholly owned subsidiaries. Either party may
         terminate this agreement upon written notice.

         In connection with the agreement with PCHL, PCHL recently placed an
         order with SSC for 35,000 units of a flexible keyboard for distribution
         in the territories of Europe, China, the Middle East, and Africa. PCHL
         also posted a letter of credit in the amount of $673,450 on March 5,
         2002 in connection with this purchase. If the joint venture is formed,
         the keyboards and the proceeds from the sale of the keyboards will be
         contributed to the joint venture entity. If the joint venture is not
         formed, PCHL will retain possession of the flexible keyboards and be
         entitled to distribute them in the territories of Europe, China, the
         Middle East, and Africa.

         PCHL and the Company have entered into letters of intent with SSC,
         whereby SSC agreed to grant to the proposed joint venture entity the
         exclusive, worldwide distribution rights to certain products
         manufactured or developed by SSC that enhance or expand the Company's
         current product offerings. PCHL and the Company have also entered into
         a letter of intent with Cyberbank whereby Cyberbank agreed to grant to
         the proposed joint venture entity the exclusive, worldwide (excluding
         Australia, Korea and Japan) distribution rights to the PC-E PDA and the
         PC-EPhone 2.0 GSM/GPRS.




                                      F-29
<PAGE>



NOTE 15 - SUBSEQUENT EVENTS (Continued)

         Joint Venture Agreement (Continued)
         -----------------------

         On April 8, 2002, the Company entered into a bridge loan facility with
         PCHL to provide the Company with bridge financing up to the maximum
         principal amount of $480,000, payable by PCHL in monthly increments of
         $160,000 during the period from April to June 2002. The Company
         executed a promissory note that is secured by a lien on the Company's
         assets.

         The shares issuable under the promissory note are subject to certain
         demand and piggyback registration rights. No sales commissions or
         underwriting discounts were paid in connection with the offering. The
         convertible promissory note bears interest at 7% per annum, and
         principal and unpaid interest are due within 90 days of either entering
         into a definitive joint venture agreement or the termination of
         negotiations regarding the joint venture. The notes are convertible at
         the option of the holder into shares of the Company's common stock at a
         conversion price of $0.192 per share only upon the occurrence and
         continuance of an event of default as defined in the bridge loan
         agreement. The Company has received $160,272 under this agreement.

         Consulting Services
         -------------------
         On January 1, 2002, the Company entered into an agreement with a
         consultant to provide investor relations services and sponsor the
         Company's participation at its investor conferences. The monthly fee
         for such services is $10,000, payable in shares of the Company's
         restricted common on a monthly basis. To date, the Company was
         obligated to issue 95,135 shares of its common stock to the consultant.

         Note Payable to Related Party
         -----------------------------
         On January 15, 2002, a shareholder loaned the Company $142,000, bearing
         interest at a rate of the London Inter-Bank Offering Rate, plus 2
         points for a total of 4.37% simple interest per annum. The note is due
         on demand and is unsecured.




                                      F-30
<PAGE>




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

         Change of Accountants. On February 25, 2002, we dismissed Amisano
Hanson, Chartered Accountants, or Amisano Hanson, from its position as our
principal independent accountants. The decision to dismiss Amisano Hanson as our
principal independent accountants was approved by our Board of Directors on
February 22, 2002.

         In connection with our audits for the two (2) most recent fiscal years
ended December 31, 2000 and 1999, and for the period from June 17, 1998
(inception), to December 31, 1998, and for the subsequent interim period from
January 1, 2001 to February 25, 2002, there were no disagreements between


                                       35
<PAGE>


Amisano Hanson and us, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
~disagreements, if not resolved to the satisfaction of Amisano Hanson, would
have caused Amisano Hanson to make reference in connection with its report for
the related periods with respect to the subject matter of the disagreement.

         The audit reports of Amisano Hanson in our consolidated financial
statements, as of and for the fiscal years ended December 31, 2000 and 1999, and
for the period from June 17, 1998 (inception) to December 31, 1998, included a
statement that such audit reports expressed doubt regarding our ability to
continue as a going concern. Except as set forth in the immediately preceding
sentence, such audit reports did not otherwise contain any adverse opinion or
disclaimer of opinion, nor were they otherwise qualified or modified as to
uncertainty, audit scope or accounting principles.

         Engagement of New Accountants. On February 22, 2002, we engaged Singer
Lewak Greenbaum & Goldstein LLP, or Singer Lewak, to serve as our principal
independent accountants. Prior to engaging Singer Lewak, neither we nor anyone
on our behalf, consulted Singer Lewak regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered regarding our financial statements.

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

         The following table sets forth information regarding our current
directors and executive officers:

Name                      Age    Position
----                      ---    --------

David C. Meltzer          34     Director, President and Chief Executive Officer
Douglas Yee               33     Director and Chief Financial Officer
Negar Towfigh             29     Secretary
Don-Gil Park              43     Director
Se-Yup Choi               38     Director

         David Meltzer. David Meltzer joined us as our President on June 25,
2001. He has served as a director since July 5, 2001. From June 2000 to July
2001, he was the Director of Sales at Everypath, Inc., a wireless solution
platform company. From November 1998 to April 2001, he was the CEO of Global Web
Video, based in San Diego, California. From September 1993 to June 2000, he held
various sales and sales management positions at West Group, a Thompson
Corporation, a leading legal research and services company based in Eagan,
Michigan. Mr. Meltzer obtained his Bachelor of Arts degree from Occidental
University in 1990 and his Juris Doctorate degree from the Tulane University
School of Law in 1993.

         Douglas Yee. Mr. Yee is our Chief Financial Officer and a director.
Mr. Yee has served as our Chief Financial Officer since June 25, 2001 and our
director since September 12, 2000. He served as our President from September 12,
2000 to June 25, 2001. He is a cousin of Carlos Lau, a principal shareholder.
From 1997 to June 2000, he served as the Director of Finance of Conor Pacific
Environmental Technologies Inc. From 1996 to 1997, he served as the Treasurer
and Corporate Controller of Triton Mining Corporation. All these companies are
or were listed on the Toronto Stock Exchange ("TSE"). Mr. Yee is a Chartered
Accountant and graduated with honors from the University of British Columbia in
1990 with a Bachelor of Commerce in Accounting.

         Negar Towfigh. Ms. Towfigh is our Secretary and a director of our
Canadian subsidiary. Ms. Towfigh served as one of our directors from February
16, 1999 through July 24, 2001. From August 13, 1999 to the present, she served
as the Corporate Secretary of First Goldwater Resources Inc. From November 30,
2000 to the present, she served as a director of First Goldwater Resources Inc.
From May 4, 2000 to the present, she has served as a director of Habanero
Resources Inc. From October 14, 1999 to April 30, 2002, she also served as its
Vice President and Secretary. Ms. Towfigh runs her own consulting firm, where
she specializes in structuring and consulting with ~start-up companies. Ms.
Towfigh graduated from the University of British Columbia with a Bachelor of
Commerce in Finance in 1995.


                                       36
<PAGE>


         Don-Gil Park. Mr. Park has served as our director since March 29, 2001
From June 2000 to the present, Mr. Park has served as the Senior Executive
Director with Cyberbank. From September 1994 to June 2000, Mr. Park worked in
the Human Resources Development Center, Marketing and Sales, and Knowledge
Management divisions of SK Telecom, a telecom carrier. Mr. Park graduated from
the Korea University in Seoul, Korea with a Bachelor of Economics in 1984.

         Se Yup Choi. Mr.Choi was appointed to our board of directors on
March 6, 2002. Since October 1999, Mr. Choi has served as the General Manager of
Overseas Marketing for Cyberbank for the territories of the United States,
China, South America, Australia and Europe. From December 1989 to October 1999,
he was the Manager of International Marketing of Electronic Goods/Machinery &
Plant of Samsung Corporation. Mr. Choi graduated from the Sogang University of
Seoul, Korea with a Bachelor of Science degree in electronic engineering in
February 1990.

         Each of Jaekil Song and Terrence King resigned from his position as one
of our directors, effective March 6, 2002 and April 2, 2002 respectively.

         There are no family relationships between any of our directors and
officers.

         Section 16(a) of the Exchange Act requires our directors, executive
officers and beneficial holders of more than 10% of our Common Stock to file
with the Commission initial reports of ownership and reports of changes in
ownership and reports of changes in ownership of such equity securities of the
company. As of the date of this Report, we believe that all reports needed to be
filed have been filed in a timely manner for the year ended December 31, 2001,
except as set forth below.

         Cyberbank was required to file a Form 4 in connection with the receipt,
on September 17, 2001, by Young-Sun Cho, the president of Cyberbank, of options
to purchase 50,000 shares of our Common Stock at an exercise price of $0.50 per
share, and its purchase, in February 2001, of 11,100 shares of our common stock
in a non-issuer transaction. As of the date of this Report, Cyberbank has not
yet filed a Form 4 covering the grant of options to Mr. Cho and the purchase of
such 11,100 shares.

Item 10. Executive Compensation.
         -----------------------

Summary Compensation Table
--------------------------

         The following table sets forth certain information concerning
compensation of certain of our executive officers, including our Chief Executive
Officer and all executive officers, or the Named Executives, whose total annual
salary and bonus exceeded $100,000, for the years ended December 31, 2001, 2000
and 1999:

<TABLE>
<CAPTION>
             <S>                   <C>          <C>          <C>        <C>           <C>          <C>      <C>         <C>
                                         Annual Compensation                     Long Term Compensation Awards        Payouts
                                                                                                                       All
                                                                      Other                    Securities             other
                                                                     annual       Restricted   Underlying   LTIP      Compen
                                                                     Compen        Stock       Options/     Payouts   sation
Name and Principal Position        Year    Salary($)    Bonus ($)    sation($)     Awards($)    SARs(#)     ($)        ($)

David C. Meltzer (1)               2001     205,200            0     45,000            0        485,000      0        5,451
Douglas Yee (2)                    2001           0            0     90,000            0        300,000      0          0
                                   2000           0            0     22,500            0              0      0          0
Graeme Sewell (3)                  2000           0            0     24,000            0              0      0          0
                                   1999           0            0     30,000            0              0      0          0
Allen Sewell (4)                   2000           0            0     32,000            0              0      0          0
                                   1999           0            0     40,000            0              0      0          0
</TABLE>


                                       37
<PAGE>


1.  Mr. Meltzer began serving as our Chief Executive Officer and President June
     25, 2001. From May 15, 2001 to July 1, 2001, Mr. Meltzer was a consultant
     for us and received $45,000 for services rendered as a consultant. We have
     also purchased life and disability insurance policies for the benefit of
     Mr. Meltzer at a cost of $5,451. We have deferred $145,350 of his salary
     that is due and payable for the period commencing on December 15, 2001, to
     and including the date of this Report.
2.   Mr. Yee is our Chief Financial Officer. Mr. Yee served as our President
     from September 12, 2000 to June 25, 2001. He joined us September 12, 2000,
     as one of our directors. We have deferred $33,750 of his compensation that
     is due and payable for the period commencing on December 15, 2001, to and
     including the date of this Report.
3.   Mr. Graeme Sewell served as our Interim President from August 18, 2000 to
     September 12, 2000. He joined us January 18, 1999, as one of our directors.
4.   Mr. Allen Sewell served as our President and Director from June 17, 1998 to
     August 18, 2000. He joined us June 17, 1998, as one of our directors.


Employment Agreement
--------------------

         David Meltzer. Effective July 1, 2001, we entered into a two-year
employment agreement with David C. Meltzer to serve as our Chief Executive
Officer. Unless otherwise terminated, the employment agreement automatically
renews for consecutive 2-year periods. Mr. Meltzer's base salary is $410,400 per
year. Mr. Meltzer was granted options to purchase 485,000 shares of our Common
Stock at an exercise price of $0.50 per share. Options to purchase 65,000 shares
vested immediately upon the execution of the agreement and options to purchase
35,000 shares vest every three months thereafter. Full vesting occurs in three
years. As of the date of this Report, 170,000 options have vested under the
agreement.

         If we terminate Mr. Meltzer other than for cause, we will be obligated
to pay Mr. Meltzer a termination fee as follows: (i) if termination occurs
during the first 12 months of the employment period, a lump sum payment equal to
the next (6) months base compensation in effect as of the effective date of such
termination; and (ii) if termination occurs after the first 12 months of the
employment period, a lump sum payment equal to the next twelve (12) months base
compensation in effect at the date of notice of the termination plus payment of
all bonuses payable as of such date. All equity instruments that would otherwise
vest and become exercisable during the 12 months following the notice of
termination will accelerate and fully vest. Mr. Meltzer shall have one year
after the termination of his employment agreement to exercise such options (but
in no event beyond the stated expiration date of the options). If Mr. Meltzer is
terminated following a change in control, he will receive within ten (10)
calendar days of notice of such termination, a lump sum payment equivalent to
the next twenty-four (24) months salary, plus reimbursement of any and all
expenses incurred, payment in full of any and all prospective annual bonus
payments with respect to the next succeeding twenty-four months, and all of such
equity instruments granted therein, including any other options authorized by
the board of directors, which options will immediately vest upon such change in
control. Mr. Meltzer will have one year after the termination of his employment
to exercise such options (but in no event beyond the stated expiration date of
the options). A "change in control" under the agreement means: (i) the
acquisition by any person or group of persons of beneficial ownership of
fifty-one percent (51%) or more of the sum of the amount of the shares of our
Common Stock then outstanding, plus any shares which may be issued pursuant to
the conversion or exercise of all outstanding options, rights or warrants; or
(ii) the sale of all or substantially all of our assets.

         We have deferred $145,350 of Mr. Meltzer's salary that is due and
payable for the period commencing on December 15, 2001, to and including the
date of this Report.



                                       38
<PAGE>



Option/SAR Grants Table
-----------------------

         The following table sets forth certain information concerning grants of
stock options to certain of our executive officers, including the Named
Executives for the year ended December 31, 2001:

<TABLE>
<CAPTION>
         <S>              <C>               <C>           <C>              <C>                <C>              <C>
                                                                                            Potential Realizable
                                                                                              Value at Assumed
                                                                                              Annual Rate of
                                                                                          Stock Price Appreciation
                           Individual Grants                                                 For Option Term (1)
------------------- -------------------------------- -------------- ----------------- ---------------------------------

         (a)             (b)              (c)             (d)             (e)               (f)               (g)
                      Number of       % of Total
                      Securities     Options/SARs
                      Underlying      Granted to      Exercise Or
                     Options/SARs    Employees In     Base Price    Expiration Date
         Name        Granted (#)      Fiscal Year    ($/Share) (1)        (1)              5% ($)            10% ($)
------------------- --------------- ---------------- -------------- ----------------- ---------------- ----------------
David C. Meltzer       485,000           32.2%           $0.50      September 17,  2007       $82,473         $187,104
Douglas Yee            300,000           19.9%           $0.50      September 17, 2007        $50,014         $115,734
</TABLE>

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


1.   This chart assumes a market price of $0.50 for the Common Stock, the
     closing market price for our Common Stock as of December 31, 2001, as the
     assumed market price for the Common Stock with respect to determining the
     "potential realizable value" of the shares of Common Stock underlying the
     options described in the chart, as reduced by any lesser exercise price for
     such options. Further, the chart assumes the annual compounding of such
     assumed market price over the relevant periods, without giving effect to
     commissions or other costs or expenses relating to potential sales of such
     securities. Our Common Stock has a very limited trading history. These
     values are not intended to forecast the possible future appreciation, if
     any, price or value of the Common Stock.



Option Exercises and Year-End Values
------------------------------------

      The following table sets forth information with respect to the exercised
and unexercised options to purchase shares of Common Stock for certain of the
Named Executives held by them at December 31, 2001:


<TABLE>
<CAPTION>
     <S>                  <C>                     <C>                  <C>                             <C>
                                                               Number of Securities
                     Shares Acquired on                        Underlying Unexercised         Value of Unexercised
Name                 Exercise             Value Realized(1)    Options at December 31, 2001   In the Money(2)
----                 --------             -----------------    ----------------------------   -------------------

David C. Meltzer      0                     0                    485,000                           0
Douglas Yee           0                     0                    300,000                           0
</TABLE>
-----------------

(1)   Represents an amount equal to the number of options multiplied by the
      difference between the average of the closing bid and asked prices for the
      Common Stock on the date of exercise and any lesser exercise price.

(2)  Represents an amount equal to the number of options multiplied by the
     difference between the average of the closing bid and asked prices for the
     Common Stock on December 31, 2001 ($0.50 per share) and any lesser exercise
     price.

2001 Stock Option Plan
----------------------

         General. Our Board of Directors adopted the 2001 Stock Option Plan on
August 13, 2001. The 2001 Stock Option Plan was subsequently amended on December
7, 2001 and on May 1, 2002. As of the date of this Report, our shareholders have


                                       39
<PAGE>


not approved the 2001 Stock Option Plan. We have reserved for issuance
thereunder an aggregate of 5,000,000 shares of Common Stock. As of the date of
this Report, we have granted 1,430,000 options under the 2001 Stock Option Plan.
The 2001 Stock Option Plan provides for the grant to our employees of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or the Code, and for the grant to employees and consultants of
non-statutory stock options.

          A description of the 2001 Stock Option Plan is set forth below. The
description is intended to be a summary of the material provisions of the 2001
Stock Option Plan and does not purport to be complete.

         The general purposes of the 2001 Stock Option Plan are to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to our employees and consultants and to promote
the success of our business. It is intended that these purposes will be effected
through the granting of stock options, which may be either "incentive stock
options" as defined in Section 422 of the Code or non-statutory stock options.

         The 2001 Stock Option Plan provides that options may be granted to our
employees (including officers and directors who are employees) and consultants,
or of any of our parents or subsidiaries. Incentive stock options may be granted
only to employees. An employee or consultant who has been granted an option may,
if otherwise eligible, be granted additional options.

         Administration of and Eligibility under 2001 Stock Option Plan. The
2001 Stock Option Plan, as adopted, provides for the issuance of options to
purchase shares of Common Stock to our officers, directors, employees,
independent contractors and consultants and those of our subsidiaries as an
incentive to remain in the employ of or to provide services to us. The 2001
Stock Option Plan authorizes the issuance of incentive stock options, or ISOs,
non-qualified stock options, or NSOs, and stock appreciation rights, or SARs, to
be granted by a committee to be established by the Board of Directors, to
administer the 2001 Stock Option Plan, or if no such committee is established,
then by the Board of Directors, either of which will consist of at least two
non-employee directors, as such term is defined under Rule 16b-3 of the Exchange
Act, and shall qualify as outside directors, for purposes of Section 162(m) of
the Code.

         Subject to the terms and conditions of the 2001 Stock Option Plan, the
committee will have the sole authority to: (a) determine the persons, or
optionees, to whom options to purchase shares of Common Stock and SARs will be
granted, (b) determine the number of options and SARs to be granted to each such
optionee, (c) determine the price to be paid for each share of Common Stock upon
the exercise of each option and the manner in which each option may be
exercised, (d) determine the period within which each option and SAR will be
exercised and any extensions thereof, (e) determine the type of stock options to
grant (f) interpret the 2001 Stock Option Plan and award agreements under the
2001 Stock Option Plan, and (g) determine the terms and conditions of each such
stock option agreement and SAR agreement which may be entered into between us
and any such optionee.

         All of our officers, directors and employees, and those of our
subsidiaries and certain of our consultants and other persons providing
significant services to us will be eligible to receive grants of options and
SARs under the 2001 Stock Option Plan. However, only our employees are eligible
to be granted ISOs.

         Stock Option Agreements. All options granted under the 2001 Stock
Option Plan will be evidenced by an option agreement or SAR agreement between us
and the optionee receiving such option or SAR. Provisions of such agreements
entered into under the 2001 Stock Option Plan need not be identical and may
include any term or condition, which is not inconsistent with the 2001 Stock
Option Plan and which the committee deems appropriate for inclusion.

         Incentive Stock Options. Except for ISOs granted to shareholders
possessing more than ten percent (10%) of the total combined voting power of all
classes of our securities to whom such ownership is attributed on the date of
grant, or Ten Percent Stockholders, the exercise price of each ISO must be at
least 100% of the fair market value of our Common Stock, based on the closing
sales price of our Common Stock, as determined on the date of grant. ISOs
granted to Ten Percent Stockholders must be at an exercise price of not less
than 110% of such fair market value.


                                       40
<PAGE>


         Each ISO must be exercised, if at all, within 10 years from the date of
grant, but, within 5 years of the date of grant in the case of ISO's granted to
Ten Percent Stockholders.

         An optionee of an ISO may not exercise an ISO granted under the 2001
Stock Option Plan, so long as such person holds a previously granted and
unexercised ISO.

         The aggregate fair market value (determined as of time of the grant of
the ISO) of the Common Stock with respect to which the ISOs are exercisable for
the first time by the optionee during any calendar year shall not exceed
$100,000.

         Non-Qualified Stock Options. The exercise price of each NSO will be
determined by the committee on the date of grant. We have undertaken not to
grant any non-qualified stock options under the 2001 Stock Option Plan at an
exercise price less than 85% of the fair market value, based on the closing
sales price of the Common Stock, on the date of grant of any non-qualified stock
option under the 2001 Stock Option Plan.

         The exercise period for each NSO will be determined by the committee at
the time such option is granted, but in no event will such exercise period
exceed 10 years from the date of grant.

         Stock Appreciation Rights. Each SAR granted under the 2001 Stock Option
Plan will entitle the holder thereof, upon the exercise of the SAR, to receive
from us, in exchange therefore, an amount equal in value to the excess of the
fair market value of the Common Stock on the date of exercise of one share of
Common Stock over its fair market value on the date of grant (or in the case of
an SAR granted in connection with an option, the excess of the fair market of
one share of Common Stock at the time of exercise over the option exercise price
per share under the option to which the SAR relates), multiplied by the number
of shares of Common Stock covered by the SAR or the option, or portion thereof,
that is surrendered.

         SARs will be exercisable only at the time or times established by the
committee. If an SAR is granted in connection with an option, the SAR will be
exercisable only to the extent and on the same conditions that the related
option could be exercised. The committee may withdraw any SAR granted under the
2001 Stock Option Plan at any time and may impose any conditions upon the
exercise of an SAR or adopt rules and regulations from time to time affecting
the rights of holders of SARs.

         Limit to Options Granted under the 2001 Stock Option Plan. Under
Section 162(m) of the Code, which was enacted in 1993, the deductibility for
federal income tax purposes of compensation paid to our Chief Executive Officer
and the four other most highly compensated executive officers who receive salary
and bonus in excess of $100,000 in a particular year is limited to $1,000,000
per year per individual. For purposes of this legislation, compensation expense
attributable to stock options and SARs would be subject to this limitation
unless, among other things, the option plan under which the options and SARs is
granted includes a limit on the number of shares with respect to which awards
may be made to any one employee in a fiscal year. Such a potential compensation
expense deduction could arise, for example, upon the exercise by one of these
executive of a non-statutory option, i.e., an option that is not an incentive
stock option qualifying for favorable tax treatment, or upon a disqualifying
disposition of stock received upon exercise of an incentive stock option.

         In order to exclude compensation resulting from options granted under
the 2001 Stock Option Plan from the $1,000,000 limit on deductibility, the Board
of Directors has approved a provision in the 2001 Stock Option Plan which will
place a 300,000 share limit on the number of options that may be granted under
the 2001 Stock Option Plan to an employee in any fiscal year. This limit is
subject to appropriate adjustment in the case of stock splits, reverse stock
splits and the like. The purpose of this provision, which is intended to comply
with Section 162(m) of the Code and the regulations thereunder, is to preserve
our ability to deduct in full any compensation expense related to stock options.

         Termination of Option and Transferability. In general, any unexpired
options and SARs granted under the 2001 Stock Option Plan will terminate: (a) in
the event of death or disability, pursuant to the terms of the option agreement
or SAR agreement, but not less than 6 months or more than 12 months after the
applicable date of such event, (b) in the event of retirement, pursuant to the
terms of the option agreement or SAR agreement, but no less than thirty (30)
days or more than 3 months after such retirement date, or (c) in the event of
termination of such person other than for death, disability or retirement, until
90 days after the date of such termination. However, the committee may in its
sole discretion accelerate the exercisability of any or all options or SARs upon
termination of employment or cessation of services.



                                       41
<PAGE>


         The options and SARs granted under the 2001 Stock Option Plan generally
will be non-transferable, except by will or the laws of descent and
distribution, except that the committee may permit additional transfers, on a
~general or specific basis, and may impose conditions and limitations on any
such transfers, including transfers to certain members of the optionee's
immediate family or certain of their related entitles.

         Adjustments Resulting from Changes in Capitalization. The number of
shares of Common Stock reserved under the 2001 Stock Option Plan and the number
and price of shares of Common Stock covered by each outstanding option or SAR
under the 2001 Stock Option Plan will be proportionately adjusted by the
committee for any increase or decrease in the number of issued and outstanding
shares of Common Stock resulting from any stock dividends, split-ups,
consolidations, recapitalizations, reorganizations or like event.

         Termination of Options and SAR's on Merger, Reorganization or
Liquidation. In the event of our merger, consolidation or other reorganization,
in which we are not the surviving or continuing corporation (as determined by
the committee) or in the event of our liquidation or dissolution, all options
and SAR's granted under the 2001 Stock Option Plan will terminate on the
effective date of the merger, consolidation, reorganization, liquidation or
dissolution, unless there is an agreement with respect to such event, which
expressly provides for the assumption of such options and SAR's by the
continuing or surviving corporation.

         Amendment or Discontinuance of Stock Option Plan. The Board of
Directors has the right to amend, suspend or terminate the 2001 Stock Option
Plan at any time. Unless sooner terminated by the Board of Directors, the 2001
Stock Option Plan will terminate on August 13, 2011, the 10th anniversary date
of the effectiveness of the 2001 Stock Option Plan.

Limitation on Directors' Liabilities; Indemnification of Officers and Directors
-------------------------------------------------------------------------------

         Our Articles of Incorporation and Bylaws designate the relative duties
and responsibilities of our officers, establish procedures for actions by
directors and shareholders and other items. Our Articles of Incorporation and
Bylaws also contain extensive indemnification provisions, which will permit us
to indemnify our officers and directors to the maximum extent provided by Nevada
law. Pursuant to our Articles of Incorporation and under Nevada law, our
directors and officers are generally not liable to us or our shareholders for
damages as a result of any act or failure to act in his capacity as a director
or officer unless it is proven that: (i) the act or failure to act of such
officer or director constituted a breach of his fiduciary duties; and (ii) his
breach of those duties involve intentional misconduct, fraud or a knowing
violation of law.

         We have adopted a form of indemnification agreement, which provides the
indemnitee with the maximum indemnification allowed under applicable law. Since
the Nevada statutes are non-exclusive, it is possible that certain claims beyond
the scope of the statute may be indemnifiable. The indemnification agreement
provides a scheme of indemnification, which may be broader than that
specifically provided by Nevada law. It has not yet been determined, however, to
what extent the indemnification expressly permitted by Nevada law may be
expanded, and therefore the scope of indemnification provided by the
indemnification agreement may be subject to future judicial interpretation.

         The indemnification agreement provides that we are to indemnify an
indemnitee, who is or was a party or becomes a party or is threatened to be made
a party to any threatened, pending or completed action or proceeding whether
civil, criminal, administrative or investigative by reason of the fact that the
indemnitee is or was one of our directors, officers, key employees or agents. We
are to advance all expenses, judgments, fines, penalties and amounts paid in
settlement incurred by the indemnitee in connection with the investigation,
defense, settlement or appeal of any civil or criminal action or proceeding as
described above. The indemnitee is to repay such amounts advanced only if it
shall be ultimately determined that he or she is not entitled to be indemnified
by us. Any award of indemnification to an indemnitee, if not covered by
insurance, would come directly from our assets, thereby affecting a
shareholder's investment.



                                       42
<PAGE>


         Except for the claim involving Euromerica, there is no pending
litigation or proceeding involving an indemnitee where indemnification would be
required or permitted under the indemnification agreements.

Termination of Employment and Change of Control Agreements
----------------------------------------------------------

         Except for the compensation plans covering David C. Meltzer, we have no
compensatory plans or arrangements which relate to the resignation, retirement
or any other termination of any of our executive officers or key employees, a
change in our control or a change in any such executive officer's or key
employee's responsibilities following a change in control.

Directors' and Officers' Liability Insurance
--------------------------------------------

         We have obtained directors' and officers' liability insurance with a
$2,000,000 limit of liability. The policy period expires on June 1, 2002. We
intend to renew such policy or obtain comparable coverage after the expiration
of such policy.

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

         The following table sets forth information regarding beneficial
ownership of our Common Stock as of May 1, 2002:

         o    each shareholder who is known by us to own beneficially 5% or more
              of our Common Stock;
         o    each of our directors and each of the officers named in Item 10 -
              "Directors and Executive officers of the Registrant," or the Named
              Executives, of this Report; and
         o    all of our directors and executive officers as a group.

<TABLE>
<CAPTION>
                                 <S>                                   <C>                <C>
                                                                                   Percentage of
                                                             Number of Shares      Shares Beneficially
             Name and Address Of Beneficial Owner (1)      Beneficially Owned      Owned (1)
          -------------------------------------------      ------------------      -------------------
          David C. Meltzer(2)                                         170,000         *
          Douglas Yee (3)                                             600,000         3.52%
          Don-Gil Park (4)                                                  0         *
          Se Yup Choi (4)                                                   0         *
          Carlos Lau (5)                                              756,073         4.42%
          Cyberbank Corp. (6)                                       3,891,100         22.44%
          All directors and officers as a group (5 persons) (7)       838,000         4.86%
</TABLE>
-----------

*        Less than 1%.

(1)      Beneficial ownership is determined in accordance with the rules of the
         SEC. Shares of Common Stock subject to options or warrants currently
         exercisable or exercisable within 60 days of May 1, 2002, are deemed
         outstanding for computing the percentage ownership of the shareholder
         holding the options or warrants, but are not deemed outstanding for
         computing the percentage ownership of any other shareholder. Unless
         otherwise indicated in the footnotes to this table, we believe
         shareholders named in the table have sole voting and sole investment
         power with respect to the shares set forth opposite such shareholder's
         name. Unless otherwise indicated, the officers, directors and
         shareholders can be reached at our principal offices. Percentage of
         ownership is based on 16,957,174 shares of Common Stock outstanding as
         of May 1, 2002.

(2)      Includes options to purchase up to 485,000 shares of Common Stock,
         170,000 of which have vested as of the date of this Report. Options to
         purchase 35,000 shares of our Common Stock vest every three months and
         full vesting occurs June 30, 2004. The options expire on September 17,
         2007. Mr. Meltzer's address is 5375 Mira Sorrento Place, Suite 290, San
         Diego, California 92121.


                                       43
<PAGE>


(3)      Includes 500,000 shares of restricted Common Stock and $50,000 of
         debentures, which are convertible into 100,000 shares of restricted
         Common Stock at a conversion price of $0.50 per share. Does not include
         options to purchase up to 300,000 shares of Common Stock granted
         September 17, 2001. The options vest in equal increments on each of
         September 17, 2002, 2003, 2004, and 2005. The options expire on
         September 17, 2007. Mr. Yee's address is 837 West Hastings Street,
         Suite 207, Vancouver, Canada V6C-1B6.

(4)      Does not include options granted each of Messrs. Park and Choi to
         purchase 25,000 shares of Common Stock at an exercise price of $0.50
         per share each. The options vest annually in equal increments on each
         of September 17, 2002, 2003, 2004 and 2005. The options expire on
         September 17, 2007. Messrs. Park and Choi have been designated to our
         board of directors by Cyberbank pursuant to the terms of our
         distribution agreement with Cyberbank. Mr. Park is a Senior Executive
         Director of Cyberbank Mr. Choi is the General Manager of Overseas
         Marketing for Cyberbank. Cyberbank beneficially owns 3,880,000 shares
         of our Common Stock. Messrs. Park and Choi may be deemed to
         beneficially own the shares owned by Cyberbank. The address for each of
         Messrs. Park and Choi is Cyberbank Corp., 18th Floor, Mirae Bldg.,
         1306-6, Seocho-dong, Seocho gu, Seoul, 137-855, Korea.

(5)      We are aware that: (i) Mr. Lau owns 623,573 freely tradable shares of
         our Common Stock registered in his name and $66,250 of debentures,
         which are convertible into 132,500 shares of restricted Common Stock at
         a conversion price of $0.50 per share; and (ii) 1,250,000 shares of
         restricted Common Stock are registered in the names of the members of
         Mr. Lau's immediate family or their affiliates. Members of Mr. Lau's
         immediate family also hold $100,000 of debentures, which are
         convertible into 200,000 restricted shares of Common Stock at a
         conversion price of $0.50 per share.

(6)      Includes 3,500,000 shares of Common Stock and $190,000 of debentures,
         which are convertible into 380,000 shares of restricted Common Stock at
         a conversion price of $0.50 per share and 11,100 shares of Common Stock
         held in trust for Cyberbank's employees. Does not include options to
         purchase 50,000 shares of our Common Stock issued to Young-Sun Cho, the
         president of Cyberbank. The address for Cyberbank is Cyberbank Corp.,
         18th Floor, Mirae Bldg., 1306-6, Seocho-dong, Seocho gu, Seoul,
         137-855, Korea.

(7)      Includes 641,231 shares of Common Stock, options to purchase up to
         190,000 shares of Common Stock and $50,000 of debentures, which are
         convertible into 100,000 shares of restricted Common Stock at a
         conversion price of $0.50 per share. Does not include options to
         purchase 700,000 shares of Common Stock at an exercise price of $0.50,
         which options have not yet vested.




                                       44
<PAGE>


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

         Transactions with Cyberbank
         ---------------------------

          On November 6, 2000, Cyberbank granted to us the exclusive right to
market, distribute and sell the PC-EPhone 1.0 in the United States and Canada
and a right of first refusal to acquire the marketing, distribution and sales
rights for (a) any future products on an exclusive basis within the United
States and Canada; and (b) future products on a non-exclusive basis for the
remaining countries worldwide on terms mutually agreeable to the parties. Our
distribution rights terminate on December 31, 2007, unless extended by mutual
agreements, or earlier terminated in accordance with the terms of the
distribution agreement. In consideration for such distribution rights, we issued
to Cyberbank 3,500,000 shares of our Common Stock and granted warrants to
purchase up to 2,500,000 shares of Common Stock at a purchase price of $3.20 per
share. On December 31, 2001, Cyberbank allowed its warrants to expire without
exercise. The distribution agreement entitled Cyberbank to appoint nominees to
our Board of Directors representing a minimum of 40% of such Board of Directors
during the term of this agreement. If Cyberbank's nominees constitute less than
40% of our Board of Directors, other than by reason of resignation of
Cyberbank's nominees or the failure of Cyberbank to provide nominees, for
continuous period of more than 60 days, then Cyberbank will be entitled to
terminate this Agreement. As of the date of this Report, Cyberbank designees
comprise 2 of our 4 directors.

         On September 28, 2001, Cyberbank agreed to purchase a minimum of three
subordinated convertible debentures in the amount of $150,000 each for an
aggregate minimum purchase price of $450,000 on each of October 15, 2001,
November 1, 2001 and December 1, 2001. Cyberbank also has the option of
purchasing a subordinated convertible debenture of up to the amount of $250,000.
As of November 8, 2001, Cyberbank had purchased debentures in the aggregate
principal amount of $190,000. The debentures as negotiated mature on November 8,
2002, or on such earlier date as may be permitted pursuant to the debentures
upon an event of default. The debentures bear no interest, unless we default on
the terms of such debentures, in which case any amounts owing would bear
interest of 10% per annum from the date of default until repayment or such time
as the event of default is cured. The holder of the debentures may convert the
debentures into shares of our Common Stock at a price of $0.50 per share at any
time prior to the maturity date. We have agreed to file a registration statement
covering the Common Stock underlying the debentures after the date of the
earlier of (a) the conversion of all of the debentures or (b) the maturity date.
We have not obtained the letters of credit and purchase orders for the PC-EPhone
1.0 as required under this debenture. We anticipate renegotiating the terms of
the debentures, if we implement our proposed business plan with PCHL.

         On September 17, 2001, we granted Young-Sun Cho, the president of
Cyberbank, options to purchase 50,000 shares of our Common Stock at an exercise
price of $0.50 per share. The options vest annually in equal increments on each
of September 17, 2002, 2003, 2004 and 2005. The options expire September 17,
2007. The options granted to Mr. Cho may be deemed to be beneficially owned by
Cyberbank.

         Transactions with Carlos Lau and His Affiliates
         -----------------------------------------------

         We have entered into several transactions with Carlos Lau, a principal
shareholder, and certain of his affiliates, including Wicom and Aidiicom. There
are certain disputes between Mr. Lau and us regarding these transactions. Mr.
Lau alleges that we owe him and his affiliated entities an aggregate of
approximately $448,772 with respect to certain agreements under which he or his
affiliates were to provide services or products to us. We are in the process of
negotiating a resolution of these disputes.

         We entered into a six-month license agreement with Wicom Networks
Corp., a British Columbia corporation, or Wicom, an entity affiliated with
Carlos Lau, a principal shareholder, to provide 802.11a and 802.11b Access
Points, and Application Specific Integrated Circuit, or ASIC Chips, Personal
Computer Memory Card International Association, or PCMCIA cards and wireless
Internet phone systems (with video), as they become available. This license has
expired. We are in the process of negotiating an extension of this license.

         On January 15, 2002, Mr. Lau loaned us the principal amount of
$142,000, bearing interest at a rate of 4.37% simple interest per annum. We are
in discussions with Mr. Lau regarding the repayment of the loan.



                                       45
<PAGE>


                                     PART IV

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

A.   Financial Statements
     --------------------

         Consolidated balance sheets of PC-EPhone, Inc. and its
         subsidiaries as of December 31, 2001, and the related
         consolidated statements of operations, comprehensive income,
         shareholders' equity and cash flows for each of the years
         ended December 31, 2001 and 2000.

B.   Reports on Form 8-K
     -------------------

         We did not file any Current Reports on Form 8-K during the
         quarterly period ended December 31, 2001.

C.   Other Exhibits
     --------------

    2.1     Letter Agreement dated November 7, 2000, between the Company and
            Peace for the New Millennium Ltd., pursuant to which the Company
            acquired Peace for the New Millennium Ltd. (1)
    3(i)    Articles of Incorporation including all amendments thereto. (1)
    3(ii)   Bylaws (2)
    10.1    Distribution Agreement dated November 6, 2000, between the Company
            and Cyberbank Corp. (3)
    10.2    Warrants Agreement dated November 6, 2000, between the Company and
            Cyberbank Corp. (1)
    10.3    Letter Agreement dated February 8, 2001, between the Company and
            Cyberbank Corp. (3)
    10.4    Letter dated April 12, 2002, from Cyberbank Corp.
    10.5    Joint Venture Agreement dated 2001, between the Company and Aidiicom
            Technologies Ltd.
    10.6    Subdistributor Agreement dated as of November 15, 2000, between the
            Company and FutureCom Global, Inc. (1)
    10.7    Tri-Party Agreement dated February 9, 2001, among the Company,
            Cyberbank Corp. and FutureCom Global, Inc. (3)
    10.8    Credit Agreement dated April 8, 2002, among the Company, PC-EPhone
            Ltd., PC-EPhone Canada Enterprises, Inc., PC-eSolutions and Process
            Control (Holdings) Limited.
    10.9    Convertible Promissory Note dated April 8, 2002, by the Company in
            favor of Process Control (Holdings) Limited.
    10.10   Registration Rights Agreement dated April 8, 2002, between the
            Company and Process Control (Holdings) Limited.
    10.11   Stock Pledge Agreement dated April 8, 2002, among the Company,
            PC-EPhone Ltd., PC-EPhone Canada Enterprises, Inc., PC-eSolutions
            and Process Control (Holdings) Limited.
    10.12   Security Agreement dated April 8, 2002, among the Company, PC-EPhone
            Ltd., PC-EPhone Canada Enterprises, Inc., PC-eSolutions and Process
            Control (Holdings) Limited.
    10.13   Form Indemnification Agreement
    10.14   Employment Agreement dated July 1, 2001, between the Company and
            David C. Meltzer
    10.15   Letter dated April 9, 2002 from David Meltzer
    10.16   2001 Stock Option Plan
    16.1    Letter re: Change in Certifying Accountant of Amisano Hanson
            Chartered Accountants, dated March 25, 2002.(4)

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


                                       46
<PAGE>


          (1)      Incorporated by reference from our report on Form 10-KSB/A
                   filed on June 8, 2001.
          (2)      Incorporated  by reference  from the Form 10-SB filed by
                   Newlands Oil and Gas, Inc. on June
                   11, 1999.
          (3)      Incorporated by reference from our report on Form 10-KSB/A
                   filed on February 7, 2002.
          (4)      Incorporated by reference from our report on Form 8-K/A filed
                   on March 26, 2002.


                       DOCUMENTS INCORPORATED BY REFERENCE

         We are currently subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549; at its New York
Regional Office, 233 Broadway, New York, NY 10279; and at its Chicago Regional
Office, 175 W. Jackson Boulevard, Suite 900, Chicago, IL 60604, and copies of
such materials can be obtained from the Public Reference Section of the
Commission at its principal office in Washington, D.C., at prescribed rates. In
addition, such materials may be accessed electronically at the Commission's site
on the World Wide Web, located at http://www.sec.gov. We intend to furnish our
shareholders with annual reports containing audited financial statements and
such other periodic reports as we may determine to be appropriate or as may be
required by law.




                                       47
<PAGE>


                                    SIGNATURES
         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                      PC-EPHONE, INC.


     Dated:  May 13, 2002             By:  /s/ David C. Meltzer
                                          ---------------------
                                          David C. Meltzer
                                          Chief Executive Officer, President and
                                          Director



                                   SIGNATURES
         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated below.



                                      PC-EPHONE, INC.


     Dated:  May 13, 2002             By:  /s/ David C. Meltzer
                                          ---------------------
                                          David C. Meltzer
                                          Chief Executive Officer, President and
                                          Director


     Dated:  May 13, 2002             By:  /s/ Douglas Yee
                                          ----------------
                                          Douglas Yee
                                          Chief Financial Officer and Director


     Dated:  May 13, 2002             By: :  /s/ Don-gil Park
                                            -----------------
                                          Don-gil Park
                                          Director



     Dated:  May 13, 2002             By: :  /s/ Se Yup Choi
                                            ----------------
                                          Se Yup Choi
                                          Director